9 June 2011 | Douglas Mathie
What is meant by 'satisfactory quality' in the context of a public sector software contract? And what warranties apply?
In March the High Court issued its judgement in the case of London Borough of Southwark v IBM UK Ltd. At its core was a dispute about whether third-party software that IBM re-sold to Southwark was any good.
Notably the relevant software was not an IBM product. However, Southwark didn’t buy the software directly from the software house that developed the software because the authority was trying to avoid public procurement rules. As readers will know, those rules require a public sector purchaser of certain goods to advertise in the OJEU and hold a formal open competition.
Instead, Southwark purchased the software through IBM using the G-Cat framework (a precursor to the Buying Solutions arrangements). These are framework agreements where a UK-wide public sector central purchasing body holds a competition (including an OJEU advert) in line with procurement rules. The “winners” of that competition are put on an approved suppliers list/panel and the public sector can buy from suppliers on that list either without any further formal competition, or after a mini-competition involving suppliers on the list.
The resulting contract was a bit of a mess. It consisted of:
a) a “fill in the blanks” front sheet for the deal specific information;
b) the standard G-Cat purchase terms; and
c) the software developer’s standard licence terms.
There was no clause setting prevalence among these documents. So it wasn’t clear which document would prevail if they all said different things – which, of course, they did.
Once the judge worked out which bits of the contract were relevant he had to consider what an express warranty of “satisfactory quality” from IBM to Southwark meant in the context of the procurement.
His first point was that “satisfactory quality” is not the same as meeting the specific customer’s requirements. It’s something less than that. In fact the judge equated “satisfactory quality” with “it substantially complies with its specification”. This is quite a surprising, and pro-supplier, decision.
Also, in the context of deciding what (if any) implied warranties (as opposed to expressed warranties) were relevant, the judge stated that the UK Sale of Goods Act can apply to a software licence if there is a transfer of ownership of a tangible item such as a disk or a manual to the purchaser. As a result the warranties that are implied by that Act can be implied into the contract. This is consistent with the St Albans v ICL case from the mid-90s, but to my mind is irrelevant because most contracts will (or at least, should) exclude implied warranties.
Finally, in the context of the Unfair Contract Terms Act the judge decided that the exclusions of implied quality warranties terms in the contract was reasonable largely because the parties were of equal bargaining strength and both had legal representation. Good. I don’t like it when courts re-write contracts.
☛ Douglas Mathie is a partner in the technology, information and outsourcing group at Brodies
