Contracts involving computer software do not fit easily into the established legal categories of contracts. It is often not easy to know, therefore, whether the contract is subject to the implied obligations for quality and fitness for purpose of either the Sale of Goods Act 1979 or Part I of the Supply of Goods and Services Act 1982 (both as amended 1994).

Where the contract is for the supply of software only, the important issue is whether the software on its own constitutes goods within the meaning of the acts. Although the acts define goods widely, the definition does not include non-physical items such as intellectual property rights.

The matter has been considered recently in St Albans City and District Council v International Computers Ltd 1996 (although it was not strictly necessary to do so for the purposes of the decision). There, Sir Ian Glidewell in the Court of Appeal distinguished between the intangible computer program itself and the disk onto which it had been encoded. In his opinion, the disk was clearly goods, while the intangible program of itself was not.

However, if a program intended to instruct a computer to achieve a particular function had been encoded onto a disk, then the disk, including its program, should be considered together as goods.

If, therefore, the program was defective, the sale or hiring of the disk breached what quality and fitness for purpose requirement of the relevant act. But this depended on the disk being sold or hired.

However, the St Albans case was a little unusual in that the disk was not sold or hired - the program was transferred by ICL into the computer from the company’s disk. Sir Ian concluded that, as the program itself was not goods within the statutory definition, there was no sale or transfer of goods within the meaning of the acts and therefore there were no statutory implied terms as to quality or fitness.

But, one might say, those implied terms had originally been developed in common law, and is it not reasonable to imply similar terms by analogy into a contract of the kind now being considered - namely, for the transfer of a computer program without the transfer of a disk or other tangible object?

But a term is considered to be implied only if the parties must have intended it to form part of their contract (as a provision “that went without saying”). On the wording of the contract, Sir Ian found an implied term that the program was to be reasonably capable of achieving the intended purpose.

Interestingly, he did not consider the contract was for services under Part II of the Supply of Goods and Services Act. Had he done so, the issue would have been whether ICL’s obligations were only those implied by section 13 to exercise reasonable skill and care, or whether ICL had to meet the higher standard of fitness imposed by section 16. The latter seems more likely, given the wording of the contract, even though there was a strong development element to the software.

The lesson here for purchasers is to get the software supplied on disk and not have it installed by the supplier or provided by modem.

Where the contract is for both hardware and software together as a complete system, then, provided the software has already been developed so it can be described as “off-the-shelf”, the contract is for the supply of goods. In Toby Construction Products v Computa Bar Sales, decided in 1989, it was the already developed nature of the software that told most with the judge.

He referred to the software as “in a sense mass produced” and said the comparison was not with a one-off painting of a picture but with “a mass produced print of a painting”. The reference is to Robinson v Graves 1935, in which it was decided that the contract for a painting of a picture is one for services since the essence of the contract is in the skill of the artist.

Would the position be different if the software was specifically developed to meet the particular requirements of the purchaser? In US courts, it has been decided that the contract is for the sale of goods if the services element is “merely incidental or collateral to the sale of goods”. Conversely, American cases suggest that where the essence of the contract lies in the skill and effort that needs to be put into the development of the software, and the supply of the standard hardware is incidental, the contract as regards the software is encoded onto a disk.

Whether the distinction between off-the-shelf and specially developed software would be followed in England is unclear. The point was not specifically argued in the St Albans case and must be regarded as still open.

As pointed out by Lord Justice Staughton in Saphena Computing Ltd v Allied Collection Agencies Ltd in 1989, even if there is an implied obligation of fitness for purpose, software is not necessarily a commodity which is handed over and delivered once and for all at one time. It may have to be tested and modified, and it would not be a breach of contract to deliver software in the first instance with a defect in it. There has to be feedback and reassessment, and it is part of the supplier’s duty to test and modify the software as first supplied so it does become reasonably fit for purpose.

The moral of all this for purchasers is not to rely on implied terms but to ensure that the contract sets out expressly the obligations of the supplier and avoids expressions such as “the supplier uses all reasonable skill and care to ensure that...”, which limit the supplier’s liability to that of negligence.

SM

Peter Marsh and Frank Griffiths are associates at project strategy and contract management consultancy FGA Ltd (0116 279 3383)