Facts
Given the importance of some of the parts of the judgment, the
statement of facts will be kept to a minimum to allow consideration
of the judgment.
Thus, stating the facts briefly, Winther Brown & Co Limited
(WB) bought a computer system from BML (Office Computers) Limited
(BML), financing the purchase through a lease taken out with Anglo
Group plc (Anglo).
WB was a distributor and reseller of wooden and carved moulding
and other such decorative items. BML markets a software package
called Charisma, which covers many aspects of business
operations, such as sales order processing, stock purchase, stock
control, credit control and other such, fairly standard,
matters. Anglo is a well known finance company.
The acquisition of the system went through a standard process –
WB issued a fairly vague list of requirements, against which BML
proposed its Charisma product. Discussions took place over some
time (from July to December 1995) and there were presentations,
demonstrations and more technical discussions as well. BML was not
the only supplier approached by WB.
The implementation was troublesome. Go-live had originally
been set for July 1996, which was achieved, but was quickly
followed by complaints about “limitations” on the system, lists of
issues were produced. There were undoubtedly problems in
amongst the points made by WB, and while some of these were being
actioned by BML, it did take some time to do so.
Things came to a head in January 1997 when, following the
appointment by WB of FMC, a firm of consultants, WB sent a letter
listing the most serious problems. Matters escalated from there
until WB purported to terminate the agreements with Anglo and BML
in April 1997.
Judgment
Experts
Judge Toulmin first considered the role of experts in litigation
under the new rules of procedure. He propounded some rules,
emphasising the need for independence and integrity on the part of
the experts. This meant co-operation in meeting and trying to
narrow the issues and also being ready to change one’s opinion, in
the light of new evidence, or after considering the other side’s
opinion.
In this case, Judge Toulmin applied this approach to the experts
for WB, provided by FMC, including one Keith Salmon of FMC.
FMC had already received adverse comments in a previous case
(Gretton v British Millerain Co Ltd (1998)unreported). Judge
Toulmin reviewed Mr. Salmon’s evidence in this case and looked at
comments earlier made by him in a paper in 1995. In that paper, Mr.
Salmon had claimed that his duty as an expert “was simply to help
my client win his case on the facts as defined in the statement of
claim on truthful expert evidence that I had compiled, examined and
presented – nothing more”. Mr. Salmon also wrote that an expert did
not have to be impartial “as demonstrated by the fact that if asked
the same question by either party he would give the same answer”.
Judge Toulmin also reviewed the evidence given by Mr. Salmon in
evidence on the duties, as perceived by him, of an expert.
Judge Toulmin simply found that Keith Salmon “failed to conduct
himself in the manner to be expected of an expert witness”. This
finding extended to the quantum witness provided by FMC, one Mr.
Martin. In the result, the judge found himself unable to rely on
their evidence in support of WB as independent expert evidence.
Implied terms
Judge Toulmin commenced by stating that it was “well understood”
that the design and installation of a computer system requires the
active co-operation of both parties (paragraph 125 of the
transcript). This extends to the customer accepting where possible
reasonable solutions to problems that have arisen (paragraph 127 of
the transcript). If the matters are unimportant or relatively
unimportant, each party must act reasonably, consistent with its
rights.
Judge Toulmin spelled out six aspects of the implied term in a
contract for the supply of a standard computer system (paragraph
128 of the transcript):
- the purchaser must communicate any special needs to the
supplier
- the purchaser must take reasonable steps to ensure that the
supplier understands those needs
- the supplier must communicate to the purchaser whether those
precise needs can be met and how – if they cannot be met precisely,
appropriate options must be given
- the supplier must take reasonable steps to ensure that
the purchaser is trained in how to use the system
- the purchaser must devote reasonable time and patience to
understanding how to operate the system
- the purchaser and supplier must work together to resolve the
problems which will almost certainly occur.
BML’s performance
Looking at the overall performance of BML, Judge Toulmin made a
number of important findings to the effect that the system, as
supplied, performed the functions to be expected of it: it was a
suitable computerised telesales, order processing, stock control
and accounting system which would provide comprehensive management
information.
Judge Toulmin also looked at the large number of individual
complaints made by WB. Some of these were said to be major, and
others minor in themselves, but taken together could be seen as
serious failings.
Taken shortly, the judge did not find any liability on the part
of BML, although there were some areas where it appears from the
findings of fact that BML was strictly in breach of its
obligations. For example, Judge Toulmin’s findings at paragraph 170
of the transcript were that a certain action caused a screen to
lock, which BML “got around” by training WB’s staff not to do the
things that might cause the lock-up. Judge Toulmin found that even
if the training did not solve the problem, it was only a relatively
minor matter since it did not cause the whole system to crash. In
other matters, Judge Toulmin seemed to take the line that the
system as supplied did have a defect, but the WB had not pursued
BML vociferously enough, and if it had, BML would have done
something about it – see for example paragraph 181 of the
transcript dealing with allegations of incorrect figures in credit
notes and other documents.
Repudiation
Judge Toulmin rehearsed the basic law in this area. He cited
Hong Kong Fir Shipping Co v. Kawasaki Kisen Kaisha [1962] 2 QB 26 –
effectively that the victim of a breach of contract has to show
that he has been deprived of substantially the whole benefit he
contracted to obtain. This can be cumulative – as in Lep Air
Services v Rolloswin Limited [1972] AC 331, where Lord Diplock took
account of the cumulative effect of the failures to perform to
conclude that there was a failure to provide to the creditor
substantially the whole benefit that it was the intention of the
parties that he should get.
In the light of his findings as to BML’s performance, Judge
Toulmin found that there was not a repudiatory breach, in spite of
the fact that BML’s response had in some cases been slow. As
to the few matters of genuine complaint, WB was under a duty to
co-operate with BML to sort them out.
Damages
WB had to choose between a claim for loss of profits or a claim
for wasted expenditure. At a late stage in the trial WB elected for
loss of profits. This need to make an election is based on Anglia
Television v Reed [1972] 1 QB 60. On the facts, Judge Toulmin did
not find any loss of profit.
The claim for additional cost of staff was rejected – it was a
claim for wasted expenditure and could not be made at the same time
as a claim for loss of profits. In the light of the judge’s other
findings, Judge Toulmin was not prepared to make any award under
this head “doing the best he could” for those few areas where he
had found faults in the system as supplied.
Judge Toulmin also rejected the costs of and associated with the
acquisition of the replacement system and also found that there was
“software betterment” since the new system was not standard (so
that WB could not claim for improvements in the replacement
system).
The contract with Anglo
In the light of the judge’s findings of fact, there was no issue
whether Anglo was liable for breach of contract.
Judge Toulmin looked at section 9 of the Supply of Goods and
Services Act 1982, which provides that in a contract for hire of
goods there is no implied warranty about the quality or fitness for
purpose of the goods bailed. However, by section 9(4) there is an
implied term of fitness for purpose where the goods are hired in
the course of a business and the bailee makes known to the bailor
or a credit broker the purposes for which the goods are
required. By section 9(6), this implied condition will not
apply where the bailee does not rely on or it was unreasonable to
rely on the skill or judgment of the bailor or credit-broker.
Anglo by its standard terms excluded liability for the quality
of the goods. Judge Toulmin considered that this was reasonable
under section 7(2) of the Unfair Contract Terms Act 1977. According
to Judge Toulmin, WB had a right of recourse against BML, it did
not have to obtain its finance from Anglo, it was aware of the
terms and accepted them. While the system was standard,
implementation required considerable input on WB’s part. Anglo had
not been involved in the negotiations. Judge Toulmin also held that
the exclusion of consequential loss was reasonable.
Commentary
Judge Toulmin’s comments in this decision will come as no little
surprise to lawyers after his findings in South West Water v ICL.
As in South West Water, there is little in the way of citation of
authorities for the conclusions reached, but the conclusions are
nonetheless striking. As the summary of the judgment has shown, the
case looked at a number of areas. The area which will be of most
interest to lawyers involved in the IT industry will be Judge
Toulmin’s comments on the user’s duties of co-operation and this
commentary will look at that aspect in particular. Indeed, already,
the learned judge’s comments are becoming widely quoted by
suppliers in the context of computer disputes with their users.
On a straight reading of the judgment, it appears that Judge
Toulmin was restricting his comments to supplies of standard
software – paragraph 128 of the transcript clearly limits the
implied terms to “a contract of the supply of a standard computer
system”. Elsewhere in his judgment (talking about the replacement
system) he compares a standard system with a non-standard one,
clearly stating that a non-standard system gives a user the chance
to acquire a better system, one more closely matched to its precise
requirements.
In this sense, the learned judge seems to approach the question
of standard software almost as a second-best option, one where
compromise by the user, even to the extent of having to give up
contractual entitlements, is a necessity. This may be true,
but there are other difficulties with the judgment.
There were clearly terms and conditions applying to the supply
of the system, they are mentioned in the judgment at paragraph 129,
where Judge Toulmin holds that BML’s terms of business are similar
to the implied terms he holds to apply. However, the exact terms of
business are not quoted in the judgment and we cannot know what
they are. In any event, they are dismissed from further
consideration. Judge Toulmin simply stated:
“It is sufficient for the purposes of
this judgment to hold that the terms set out above are incorporated
into this contract. It is not necessary to consider whether
BML’s own terms are unfair in so far as they go further.”
This is surprising on two counts. Firstly, it seems
extraordinary that implied terms can be so easily incorporated into
an agreement, where there are already similar terms. It has always
been axiomatic in the common law that terms are not implied except
for certain very precise grounds. Secondly, it remains
unclear how terms can be implied across existing terms.
Again, it has always been axiomatic that the existence of express
terms shows that the parties have, as it were, fully stated their
views on the subject, and that there is no room for implied terms
to qualify what is already there. Perhaps a third point could be
added: Judge Toulmin goes on to say that consideration of the
fairness or otherwise of BML’s terms is therefore unnecessary.
It might be asked how such terms could be regarded as unfair,
even potentially. Such terms would, after all, only set out the
obligations of the user which the judge has already regarded as
essential at least for the supply of standard software. None of
this seems to fall foul of anything in the Unfair Contract Terms
Act 1977, or of any other rule of law relating to the “fairness” of
contracts.
This leads to a further point. Why are contracts for the supply
of a standard system to be regarded as something so fundamentally
different from contracts for a bespoke system? Is the limitation so
deliberate that it was intended to indicate that similar implied
terms could not apply to bespoke systems?
This conclusion would be strange. Looking at bespoke systems
development, such projects are all about co-operation between the
parties. It will, of course, depend on the methodology used by the
supplier: rarely will a project now be conducted according to what
may be termed the “traditional life cycle” – specify everything
exhaustively at first, then go on to more and more detailed
specifications. Almost inevitably nowadays, some sort of method
will be used that equates more or less to either a “waterfall”
technique (such as SSADM) or RAD or some variant of it (such as
DSDM). In such cases, the need for implied terms (in the absence of
express terms) requiring co-operation and even compromise are all
the more compelling. Indeed, without such co-operation, such
projects are impossible.
A further and rather strange aspect of the judgment is the way
in which defects were found to exist but which sounded in no
damages. A particularly important example seemed to be under the
heading in the transcript “Unit of Measure” (starting at paragraph
177). There were undoubtedly bugs, which gave rise to incorrect
figures. Such incorrect stock figures (stock purchased in meters
rather than feet) caused WB to take stock out manually and re-enter
it (a work around) from October 1996 to February 1997. It seems
that such errors as these should be capable of calculation in terms
of additional staff or management time required to perform the
manual stock take. In reality, it is errors in software like this
that are most destructive of a user’s confidence in the software.
If credit notes and stock checks cannot be trusted to contain the
right figures (even to contain the right unit of measurement) that
can create a considerable headache in terms of the overhead of
double-checking every document even to ensure that it does not
contain, as Judge Toulmin put it, “obvious errors”.
The next difficulty will be applying this to individual
situations. Judge Toulmin said at paragraph 127 of the
transcript:
“The duty of co-operation in my view
extends to the customer accepting where possible reasonable
solutions to problems that have arisen. In the case of unimportant
or relatively unimportant items that have been promised and cannot
be supplied each party must act reasonably, consistent, of course,
with its rights.”
It is not clear what this means. If something has been
promised, absent anything in the agreement, that is a breach of
contract sounding in damages. If it is unimportant it would mean
that it could not be a ground for termination. However, there is
now the possibility, again absent anything in the agreement, for
the user’s rights to be, as it were, suppressed in favour of some
obligation to take something else. Taking something else might be
part of the duty to mitigate, but that is different again. It is
hard to see how an obligation to take something different from what
had been promised can be implied against the express terms of the
promise. Furthermore, how can a party act reasonably and consistent
with its rights? What if a party exercises its rights in
circumstances that are unreasonable? Is there to be implied some
penalty on a party because that party insists on strict compliance
with the bargain?
While much of what the learned judge says is to be welcomed, and
will be welcomed by IT lawyers, there is much in the judgment that
is left unanswered and we will have to wait to see how Judge
Toulmin’s dicta are applied in practice.
