Michael Douglas QC and Ben Pilling consider what terms are of concern, or likely to be applied into, contracts relating to IT. They review the case law and given particular attention to the lessons to be drawn from Anglo Group v Winther Brown.
Implied terms can be the salvation of the poorly drafted contract, rendering an agreement workable which might otherwise have led to chaos. They can frustrate a party’s efforts to impose its own carefully constructed terms and conditions on a contract. Anxious contract draftsmen devote extraordinary degrees of effort to excluding all possible implied terms, with varying degrees of success.
The law of negligence taught us that, even if we do not have to love our neighbour, we should avoid harming him. The law of contract has taught us, however, that we can be quite rude to our neighbour (for these purposes an ‘officious bystander’) if he starts meddling in our negotiations and suggesting terms that are so obvious that we would not think it necessary to include them.
This is the orthodox justification of implied terms. They are said to constitute ‘an obvious but unexpressed part of the agreement between the parties’ (per Vinelott J. in London Borough of Merton v Leach (32) BLR 151 at p76. Even more succinctly, a term is implied because ‘without it the contract will not work’ (per Lord Wilberforce in Liverpool City Council v Irwin [1977] AC 239). The fullest expression of the requirements for implication is to be found in BP Refinery (Western Post) Pty Limited v Shire of Hastings [1978] 52 AGLR 20 at p26 where Lord Simon of Glaisdale stated:
‘For a term to be implied the following conditions (which may overlap) must be satisfied:
1. It must be reasonable and equitable;
2. It must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
3. It must be so obvious that “it goes without saying”;
4. It must be capable of close expression;
5. It must not contradict any express term of the contract.’
After a time, many ‘high level’ implied terms have come to be simply imposed as a general rule of law in all contracts or all contracts of a certain type. As Lord Diplock put it in Photo Production v Securicor Limited [1980] AC 827 such terms are ‘those which, by judicial consensus over the years or by Parliament in passing a statute, have been regarded as obligations which a reasonable businessman would realise that he was accepting when he entered into a contract of a particular kind’.
The implied terms most likely to affect computer contracts are those governing (i) quality, (ii) standard of performance, (iii) particular attributes/applications and (iv) co-operation between the parties.
Quality
Section 14 of the Sale of Goods Act 1979 implies terms as to satisfactory quality and fitness for purpose into contracts for the sale of goods where the seller sells in the course of a business. Section 4 of the Supply of Goods and Services Act 1982 implies terms as to merchantability and fitness for purpose into other contracts for the transfer of goods where the supplier acts in the course of a business (eg contracts for work and materials, into which category a computer contract may well fit).
Contracts for the supply or development of software will not fall within these statutory provisions for two reasons. First, software is almost invariably licensed rather than sold or transferred to the customer. A software licence is not a contract to which either statute applies. Secondly, in both of these statutes, ‘goods’ are defined as personal chattels (s61 of the 1979 Act; s18 of the 1982 Act). The codes, formulae or intellectual concepts which together constitute a program cannot be described as chattels and are therefore not ‘goods’.
It by no means follows that all computer contracts will escape the provisions of the two statutes. Hardware obviously falls within the definition of goods and is sold or transferred to the customer. Further, contracts for the sale or supply of equipment or even whole systems may nevertheless be categorised as contracts for the sale or supply of goods, even though software is an important part of what is delivered. For example a CD or any other disk will fall within the definition of goods. A person purchasing a disk on which, for whatever reason, the software is defective, will be entitled to complain that the goods purchased are not of satisfactory quality or fit for their purpose. At a more general level, it would appear that a computer system as a whole, including hardware and software, can amount to goods for the purposes of one or other of the above acts: see the decision of Rogers J in Toby Constructions Products Pty Limited v Computa Bar (Sales) Pty Limited [1983] 2 NSWLR 48.
Thus, although software itself does not constitute goods, if software is incorporated as an integral part of any article or equipment which does fall within the meaning of goods, a contract for the sale or transfer of such article or equipment in the course of business will attract the statutory implied terms. Defects in the software on which the proper functioning of the article or equipment depends may render that article or equipment as a whole unsatisfactory, unmerchantable or unfit for purpose.
Where statute does not apply, a court will nevertheless imply a term as to quality into a computer contract. In St Albans City and District Council v International Computers Limited [1996] 4 All ER 481, Sir Iain Glidewell stated that a contract for the supply of computer software will, in the absence of any term to the contrary, be subject to an implied term at common law that the software will be reasonably fit for its intended purpose (ie reasonably capable of achieving that purpose).
The main distinction between the term which common law will imply and the terms which statute will imply lies in the extent to which such terms can be excluded. Whether an exemption clause is sufficient to exclude the operation of a term implied at common law is simply a question of construction. To exclude a term implied by statute will mean, even in a contract between commercial parties, that the test of reasonableness has to be satisfied (s2(2) of the Unfair Contract Terms Act 1977 (UCTA)).
In consumer contracts, however, any distinction between common law and statutory implied terms is irrelevant. By virtue of the Unfair Terms in Consumer Contract Regulations 1999 (SI 1999/2083) a ‘seller or supplier’ simply describes a person ‘who . is acting for purposes relating to his trade, business or profession’. The protections afforded to the consumer do not depend on whether the subject matter of the contract is ‘goods’ or ‘services’ or whether the legal rights which an exclusion purports to restrict arise by virtue of common law or statute. In consumer contracts falling within the Regulations, an unfair term (eg one which inappropriately excludes or limits the rights of the consumer vis-à-vis the seller or supplier) is simply not binding on the consumer (reg8(1)).
Standard of performance
By Section 13 of the Supply of Goods and Services Act 1982 it is provided that:
‘In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill’.
Section 16 of the 1982 Act goes on to provide that, subject to UCTA, this duty can be ‘negatived or varied by express agreement, or by the course of dealing between the parties’. However, an express term does not negative the implied term ‘unless inconsistent with it’.
Breach of a contractual obligation to carry out a service with reasonable care and skill is equivalent to a liability in negligence (for the purposes of UCTA this is expressly acknowledged in s1(1) of that Act).
Occasionally a tension may arise between, on the one hand, the term as to reasonable care implied by s13 of the 1982 Act and the terms as to quality implied either by statute or by common law. If the product delivered is of appropriate quality (or for that matter, of unsatisfactory quality) does the term as to reasonable care have any relevance? This issue is primarily relevant to damages and has tended to arise in the context of terms restricting the recovery of damages for breach. For example, in Pegler v Wang [2000] BLR 218 there was a term excluding liability for indirect, special or consequential loss ‘in connection with or arising out of the supply, functioning or use of the hardware, the software or the services’. In The Salvage Association v Cap Financial Services [1995] FSR 654 there was a term under which the supplier undertook to remedy free of charge ‘any faulty work arising from a serious failure to exercise . skills which is reported within one month after acceptance .’ and it was further provided that this liability ‘shall be in lieu of any warranty or condition of any kind, express or implied, statutory or otherwise relating to anything supplied or work done under or in connection with the contract’. In both of these cases, the court held that the contractual restriction on remedies only applied to loss or damage arising after delivery/acceptance of the system but did not cover damages for failure to comply with implied (or express) terms as to care and skill which occurred prior to delivery or where delivery never took place at all.
Specific attributes or applications
This category concerns essentially fact-dependent issues which vary from contract to contract, for example whether it was an implied term that a particular program should be compatible with the customer’s existing accounting or business processes or whether it was an implied term that the program would present some category of information in a particular way. In deciding whether or not to imply a term, the courts will have regard to the principles outlined in the introductory section above. In such a fact-sensitive area, the process through which the court goes is closely analogous to that of pure contractual construction. The court will look at all the terms of the contract, the surrounding circumstances and the overall commercial purpose of the contract in order to ascertain the parties’ presumed intentions or what, if any, obvious answer to the issue in question presents itself. This process is sometimes called ‘factual implication’ and resort to precedent will yield only the general principles already referred to, but not any individual answers.
Co-operation between the parties
In Barque Quilpue Limited v Brown [1904] 2 QB 261, Vaughan Williams LJ stated:
‘There is an implied contract by each party that he will not do anything to prevent the other party from performing a contract or to delay him in performing it. I agree that generally such a term is by law imported into every contract’.
In London Borough of Merton v Leach (1985) 52 BLR 151, Vinelott J expressed the view that: ‘It is difficult to conceive of a case in which this duty could be wholly excluded’. This duty, expressed in negative terms, is uncontroversial. Indeed, were it open to one party actively to prevent the other from performing his obligations, it is questionable whether the transaction could properly be described as a contract at all.
A more positive aspect of this duty originates in the speech of Lord Blackburn in Mackay v Dick [1881] 6 AC 251:
‘Where in a written contract it appears that both parties have agreed that something should be done which cannot effectively be done unless they both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing although there may be no express words to that effect’.
In London Borough of Merton v Leach, Vinelott J. described this duty as ‘a duty to do whatever is necessary in order to enable a contract to be carried out’.
In Mona Oil Equipment Co v Rhodesia Railways [1949] 2 All ER 1014, Devlin J reminded us of the need to confine the implication of such a duty to circumstances where it is reasonably necessary to enable the other party to perform his obligations:
‘I can think of no term that can properly be implied other than one based on the necessity for co-operation. It is no doubt true that every business depends for its smooth working on co-operation, but in the ordinary business contract, and apart of course from express terms, the law can enforce co-operation only in a limited degree – to the extent that it is necessary to make the contract workable’.
What have to be identified, therefore, are those contracts or those circumstances arising under a contract in which one party is entitled to insist that the other co-operates on the basis that, without such co-operation, he cannot properly perform his own obligations. If, without co-operation, he can fulfil his own contractual obligations, then there is no necessity to imply such a term.
In the context of construction contracts the need for the employer to co-operate with the contractor is well-established. Examples of the practical application of such an obligation are to be found in the duty of the employer to give possession of the site or to give such access to it as is required to enable the works to be carried out, to obtain building permits to enable work to proceed lawfully, to appoint an architect, to give sufficient details and instructions for the execution of the works or to nominate sub-contractors in good time.
Because of the nature of computer contracts, particularly those that require either the adaptation of a standard system or the development of a fully bespoke system, the courts have shown a willingness to take a flexible view of the implementation process. Thus, in Saphena Computing Limited v Allied Collection Agencies Limited [1995] FSR 616 Staughton LJ stated:
‘Software is not a commodity which is delivered once, only once, and once and for all, but which will necessarily be accompanied by a degree of testing and modification. Naturally it could be expected that the supplier will carry out those tasks. He should have both the right and a duty to do so.’.
Whilst it is not to be taken as justifying the supply of non-functioning software (see per Nourse LJ in St Albans), this statement does recognise an important reality. In many mercantile contracts, everything revolves around the supply on a particular date of a particular product conforming to a particular standard, in the manufacture and/or supply of which the customer plays no part. A computer contract typically involves a complex analysis of the customer’s requirements and the way in which software can be fitted, adapted or designed to meet those requirements, for the purposes of which analysis there is a two-way flow of information. Implementation takes place over a period of time. In the course of implementation, problems will come to light which one or other of the parties may not have entirely foreseen or appreciated. Priorities of the customer may change, changes may occur in the business, different solutions to practical problems may suggest themselves. However tightly drawn the contract, it will simply not be possible to define all the various possible circumstances which may arise and with which the parties, on the ground, have to deal. Staughton LJ implies, without expressing it fully, that there is an obligation of co-operation. Otherwise the statement that the supplier should have the ‘right’ and the ‘duty’ to test and modify is a term which could not be enforced.
This requirement of co-operation has been more clearly voiced in Anglo Group Plc v Winther Brown & Co. Limited [2000] 72 Con LR 118. In that case (at p142), HHJ Toulmin CMG QC stated ‘It is well understood that the design and installation of a computer system requires the active co-operation of both parties’. The contract with which he was dealing was, in fact, a contract for the supply of a standard computer system in which, not untypically, problems arose with bugs, changes of mind on the part of the client, and as to whether the program as supplied should cater for the client’s existing working practices or whether, on the contrary, the client was obliged to adapt its working practices to make the computer system work optimally. The judge, having recorded that there were bound to be aspects of the system which did not immediately fulfil the customer’s needs and that there would have to be a period of discussion between the customer and the supplier to see how problems could be resolved, stated that there was a need for active co-operation between the two and that ‘the duty of co-operation.extends to the customer accepting where possible reasonable solutions to problems that have arisen’.
He went on to state:
‘In relation to a contract for the supply of a standard computer system it is an implied term that:
(a) the purchaser communicates clearly any special needs to the supplier,
(b) the purchaser takes reasonable steps to ensure that the supplier understands those needs,
(c) 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,
(d) the supplier takes reasonable steps to ensure that the purchaser is trained in how to use the system,
(e) the purchaser devotes reasonable time and patience to understanding how to operate the system,
(f) 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.’
This exposition is so far the most ambitious judicial attempt to define the scope of the duty to co-operate in a computer supply contract. However, one of the curiosities of the judgment is that, having taken the trouble to enunciate these implied terms, the judge scarcely applied them in his resolution of the issues. In many cases, he simply found that the complaints of the customer were not made out or in the alternative that they had caused no loss. However, there were three instances in which he might have been expected to have recourse to his list of implied terms but did not. There was, for example, a dispute about whether EDI should have been supplied to the customer by a certain date. The judge found that the supplier was under an obligation to provide EDI ‘within a reasonable time after it had received the information which it needed before EDI could be supplied’ (p146). In deciding this issue, he simply held, as a matter of construction, that the supplier’s duty to supply was conditional on the receipt of that information. Accordingly, the supplier could not be in breach of contract until such time as the information had been supplied. The judge did not rely on any implied obligation on the part of the customer to provide the necessary information. In relation to another component of the software package, the judge decided that there was no (express) agreement by the supplier that it would be responsible for training. He made no mention of any implied term as to training or why it did not apply. On a third issue, a problem was encountered about the way in which the software dealt with over-deliveries. The supplier had been asked whether the system could handle over-deliveries and had answered that it could. However, the customer’s accounting methods and procedures were different from those adopted by most businesses and the customer had not explained to the supplier what his own system for dealing with over-deliveries was. The judge held that it was unreasonable of the customer not to adapt its business practices to the computer, which reflected the practice widely adopted. However, he did not treat this as an example of a breach of one of his six implied terms (eg that there was an obligation on the part of the customer to make clear to the supplier what his special needs were) but rather relied on a conventional analysis, stating that ‘in contractual terms I do not accept that there was an implied term that [the program] would be able to carry out the reconciliation between GRN [goods received notes] and the purchase invoices using WB’s system’.
Does the fact that HHJ Taulmin, whilst perhaps adopting the spirit of his implied terms, nevertheless did not actually resort to them, suggest that their validity or utility is open to doubt?
If one analyses the implied terms individually, it seems doubtful that they will constitute the last word on this topic. Taking them each in turn:
(a) If the purchaser does not communicate adequately to the supplier any special requirements that he has, the consequence is likely to be that no obligation to meet that requirement will be held to have been assumed by the supplier. The test of agreement is objective, and if the words or descriptions used by the purchaser are insufficiently clear then, objectively, agreement by the supplier to meet special requirements will not be established. No doubt the contract will run more smoothly if the purchaser makes his special requirements crystal clear but this is not, as Devlin J pointed out in Mona Oil (above), a reason for implying an obligation into a contract. The customer cannot complain about the absence of some particular feature if he has not brought the requirement for that feature clearly to the attention of the supplier. But the inability to complain in such circumstances does not need to be explained by reference to an implied obligation to state the requirement clearly. Rather, an unexpressed requirement simply does not fall within the scope of the supplier’s obligations.
(b) The taking of steps to ensure that the supplier understands the purchaser’s requirements is simply a reflection or refinement of the first obligation and the comments already made apply.
(c) The supplier’s response to the purchaser’s stated requirements merely determines, to use the language of contract formation, whether the supplier ‘accepts’ the obligation to meet the requirements or whether he makes a ‘counter-offer’ of some other or lesser alternative. Once again, we are dealing with issues of contractual interpretation rather than issues which require resort to implied terms.
(d) Training is normally something in relation to which the supplier undertakes express, often quite detailed, obligations and for which he is entitled to payment. It is difficult to support the proposition that, as a matter of law, there is in ‘a contract’ (which, given the generality of the statement, means in every contract) for the supply of a standard computer system an implied obligation to provide training, although it can be accepted that some form of basic explanation or instruction is likely to be necessary, and therefore implied as an obligation, in most cases.
(e) Time spent by the purchaser in understanding how to operate the system will assist the purchaser in obtaining the maximum benefit from it. But the statement that it is, as a proposition of general law, the contractual obligation of the purchaser to devote time and energy to the task (sounding presumably in damages if it is breached) is open to question. As the corollary of an obligation on the part of the supplier to explain, instruct or train, such a term may be acceptable but, if the supplier’s obligation is only to provide reasonable explanation or instruction, the necessity for implying an obligation on the part of a purchaser is open to doubt.
(f) The obligation to work together to achieve solutions to problems is the most general but also the least controversial of the judge’s implied terms. The duty to co-operate (where necessary) ought to involve co-operation in overcoming problems which, in general rather than specific terms, were foreseeably likely to arise in the course of implementation (this assumes, of course, that the appearance of such problems is not in itself evidence of a prior breach of contract).
HHJ Toulmin was nevertheless right to point out that computer supply contracts are contracts which do in many instances require the co-operation of the parties and that, where the successful implementation of such a contract cannot be achieved without co-operation, the common law will imply a term that each party will co-operate with the other in order to enable the contract to be carried out. Without attempting to be exhaustive, it is suggested that the following are examples of the application of this more general implied term.
The supplier will:
1. inform the purchaser as soon as reasonably practicable and in sufficient detail of all information which he reasonably requires for the purposes of implementing the contract and/or installing, developing, modifying or remedying the system to be supplied
2. in so far as necessary, instruct and/or explain to the purchaser’s staff and/or those in the purchaser’s organisation who need to understand, how the system operates and how to use it
3. inform the purchaser as soon as reasonably practicable of all problems encountered in the course of implementation
4. use his best endeavours to overcome any such problems and consult and co-operate with the purchaser in those endeavours.
The purchaser will:
1. make available all such information, including information about the purchaser’s working and business practices as the supplier reasonably requires in order to meet the purchaser’s requirements under the contract
2. allow the supplier (or any sub-contractor engaged by the supplier) access to the purchaser’s premises for the purposes of installation, development, modification, remedial work, instruction or training of personnel
3. allow the supplier to have reasonable and sufficient contact with staff who are or will be using the software/hardware being supplied so as to enable the supplier to instruct, explain to (and where necessary train) such staff how the system operates and how to use it.
4. co-operate with the supplier in overcoming any problems (not amounting to a breach of contract on the part of the supplier) which arise in the implementation or use of the system including the acceptance of reasonable solutions or ‘work-arounds’ proposed by the supplier
5. in the event of any change of requirement on the purchaser’s part, give notice of such change as soon as reasonably practicable and provide a sufficient explanation and/or sufficient detail about the change to enable the supplier to meet the requirement in so far as he reasonably can.
Conclusion
In legal terms, computer contracts are a late arrival on the scene. They have played almost no part in shaping the implied terms to which they find themselves subject. Perhaps because of that, the draftsmen of many computer contracts start with the positive aim of avoiding as many of the established implied terms as they can. However, those involved in computer projects, and the litigation which arises from them, know from experience that particular difficulties arise from them which require legal solutions going beyond the words on the page of the contract. There is no doubt that the implied term is one of the key devices which the courts will use to address these difficulties, and that over the course of time a body of case law will be developed in which the implied terms most suitable for various types of computer contract will be refined. The judgment of HHJ Toulmin in Anglo Group is a useful starting point for this exercise, but it is only the starting point. As with the development of the law on implied terms in other areas of commercial activity, this aspect of computer law will develop incrementally as more and more IT cases come before the courts.
Michael Douglas QC and Ben Pilling are barristers and members of the IT Group at 4 Pump Court, Temple London EC47 7AN (www.4pumpcourt.com) and may be contacted through their clerks via e-mail at chambers@4pumpcourt.com.
