Suppliers having a hard time
I had a preliminary meeting with a relatively small IT supplier the other day. He was in dispute with a customer. Slightly unusually, in this case it was the customer who had succeeded in imposing all the right legal structure on the correspondence. References to implied terms, unfair contract terms, repudiatory breach and termination were masterfully deployed by an in-house lawyer who was clearly highly competent. But I was at least able to offer the client some comfort from the case discussed in this article and set ourselves up to hit back in a big way.
Vendors of computer systems and suppliers of software generally tend to have a hard time from the courts. Historically, the big IT cases have seen the judges tending towards customer protection. They accept that sellers can bamboozle buyers. They recognise that the dark arts of software engineering and the even darker arts of marketing create the potential for buying pigs in pokes. They therefore find new common-law obligations relating to software supply and they reach conclusions which undermine exclusion and limitation clauses. The cases in point include Salvage Association v CAP [1995] FSR 654 and St Albans DC v ICL [1996] 4 All ER 481. The apotheosis of the movement (for understandable reasons when you read the facts) came in Pegler v Wang (see vol 11, issue 1, p 29) where Wang’s abysmal performance resulted in major damages awards under numerous heads. The magnitude of the sums awarded appeared to be mitigated only by a judicial refusal to go ‘over the top’.
Why IT contracts are litigation-prone
IT contracts create the potential for dispute and litigation because of:
- the apparent imbalance of knowledge between vendor and purchaser
- the timescale under which projects are developed and managed
- the difficulties of understanding and defining functional requirements at the outset which inevitably change and evolve as the purchaser experiments with what he is getting and finds out what he really needs – in other words, the more you get, the more you want.
The case
However, those advising suppliers now have an interesting new weapon. This is the reported decision of His Honour Judge Toulmin CMG QC of 8 March 2000 in Anglo Group plc v Winther Brown & Co Limited and Another. The full text of the judgment is available from the Court Service Web Site (www.ccta.gov.uk).
The structure of the litigation was a claim by a finance company, Anglo, against the purchaser, Winther Brown Limited (WB). WB are a distributor and re-seller of wooden and carved mouldings and other decorative items. There were interesting issues relating to the finance company but the case was essentially a claim by WB that a computer company BML (Office Computers) Limited (BML) supplied a defective computer system, namely a business package called Charisma. This was a general standard business package to include processing of sales orders and enquiries, stock control, payments to suppliers and various other modules.
The judgment sets out the history of the relationship which is a relatively familiar one: initial optimism and goodwill followed by recriminations, carping and complaints. One significant factor to which the judge pointed was WB’s failure to employ a consultant to manage the project at the outset – they involved a consultancy, Financial Management Consultants Limited (FMC), only when the dispute had arisen. This organisation may well be familiar to computer lawyers: the case contains some interesting observations on their role and on the role of experts generally.
By way of examples, one of the factors which caused considerable dispute and dissent was an apparent inability of Charisma to work with the spreadsheet Supercalc as opposed to Excel. The judge reviewed the evidence in detail but concluded that any potential loss could have been prevented if the representatives of WB had consulted BML either to find out how Excel could have worked or to obtain an explanation of how Supercalc could be made to work with Charisma. The judge found, having examined over 50 separate complaints, that BML did perform substantially what it contracted to do under the contract. WB continued to use the system for nearly a year after its purported repudiation. BML made genuine efforts to meet WB’s complaints and WB was not justified in withdrawing its full co-operation in trying to find acceptable solutions to its problems. The judge made robust comments on allegations of increased staff expenditure, increased costs and wasted salaries.
As with all cases, if you seek to apply it as a precedent or bargaining counter, the detailed facts are relevant and it may be that this case can easily be distinguished in the future. However, for present purposes, it is important for computer lawyers to be aware of what the judge found. Among the facts relied on by the judge were: consultants could have been used, the list of requirements sent to BML at the outset was vague; WB was only interested in purchasing a packaged system rather than bespoke software; WB showed a lack of urgency in reporting apparently serious defects; there was a reluctance by WB to adapt its working practices to the standard system which it had purchased.
Six implied terms
As for the findings of law, in particular the six implied terms, I set them out here without omitting any of the reasoning or authority relied on by the judge. The judge said:
“…It is well understood that the design and installation of a computer system requires the active co-operation of both parties. The parties would have been prudent to reduce to writing precisely what special needs had been communicated to BML, precisely how it was agreed that they should be met and what follow-up procedures were to be undertaken, eg systematic noting of problems, review meetings etc. 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. In relation to a contract for the supply of a standard computer system it is an implied term that:
- the purchaser communicates clearly any special needs to the supplier
- the purchaser takes reasonable steps to ensure that the supplier understands those needs
- the supplier communicates to the purchaser whether or not those precise needs can be met and if so how they can be met. If they cannot be met precisely the appropriate options should be set out by the supplier
- the supplier takes reasonable steps to ensure that the purchaser is trained in how to use the system
- the purchaser devotes reasonable time and patience to understanding how to operate the system
- the purchaser and supplier work together to resolve the problems which will almost certainly occur. This requires active co-operation from both parties. If such co-operation is not present it is likely that the purchaser will not achieve the desired results from the system.
So this case certainly provides ammunition for suppliers and their advisers. Alluding to a scene from a well-known film, they have a hell of a time and it’s good they’re getting something.”
Other issues
The case also contained interesting analysis of issues of loss and damage, and the need to elect between loss of profits and wasted expenditure and the role of finance companies. It seems that finance companies can also take some comfort from the judgment.
Lessons to be learnt
The main lesson is of course that written records of complaints and attempts at co-operation are vital for all involved in the industry. No-one should be complacent: different facts will of course have different results.
Finally, the case contains some telling observations on the role of experts in IT cases. Those of us who have come across FMC on other matters may relish the justifiably savage comments of the judge on the nature of their expert evidence and the declared attitude of their consultant. Purchasers work with aggressive ‘claims consultants’ at their peril.
Richard Harrison is a partner at Laytons, solicitors. He can be contacted at richard.harrison@laytons.com
