London Borough of Southwark v IBM UK Ltd was a 2011 judgment of the Technology and Construction Court in London on a council’s claim against IBM over software for a master data management (MDM) project. IBM had supplied Southwark with Arcindex, a product of another company, Orchard, under Orchard’s own licence terms. When the project was abandoned, Southwark sued. Mr Justice Akenhead dismissed the claim, holding among other things that the contract was not a sale of goods because what Southwark acquired was “in effect a licence from Orchard to Southwark to use the software”.[1]
Background
In 2006 Southwark, a large London borough with its own IT department, set out to build an MDM system that would link records about people and properties held in several separate council systems. It procured software and consultancy from IBM under three contracts: one for IBM WebSphere software licences and maintenance, one for consultancy services, and one, dated 2007-02-09, for Arcindex (the “Arcindex Contract”). The software and services were supplied from late 2006 to about June 2007 and abandoned by Southwark in the second half of 2007.[1]
The Arcindex Contract was an order under the government ICT goods and services model terms, which public-sector bodies could use under a framework agreement with IBM. The order said IBM “will supply the following Third Party Software: Orchard’s arcindex … under Orchard’s Software Licence Term’s defined in Appendix A” for a one-time charge of GBP 57,000, with Orchard providing implementation services and support. Clause 7.1 said that Southwark’s right to use the software “shall be determined solely by the License granted by the vendor to you”. Clause 7.2 said warranties relating to the program “are the responsibility of the vendor”, that “There are no additional IBM warranties”, and that implied conditions of merchantability or fitness for purpose were excluded. Orchard’s licence granted “a non-exclusive perpetual licence”, warranted performance against a specification, stated that the software “has not been prepared to meet [the customer’s] individual requirements”, and kept “Title, copyright and all other proprietary rights” with Orchard.[1]
The dispute
Southwark first claimed about GBP 2.5 million for misrepresentation, collateral warranty, negligence and breach of contract. During the trial it abandoned all of these except breach of the Arcindex Contract, relying on the express “satisfactory quality” term in the model conditions and, by a late amendment, on section 14 of the Sale of Goods Act 1979. Only two complaints about the software remained: its handling of possible matches between records and the lack of effective restriction of access to screens. IBM said it had acted as a conduit for Orchard’s software, which Southwark had chosen and evaluated itself.[1]
Decision or outcome
Judgment was given for IBM on 2011-03-17.[1]
What IBM promised. The court found that no one at IBM had recommended Arcindex as suitable and that Southwark’s team had investigated the product and “knew exactly what Arcindex could and would provide”. The satisfactory quality term in the model conditions applied, but it was to be judged against the order, Orchard’s licence and its specification. “If parties to a contract such as this have spelt out what the software must do or be, it will be satisfactory if it achieves what the contract dictates it should.” There was no room for an implied term that the software would suit Southwark’s purposes.[1]
No sale of goods. The Sale of Goods Act did not apply because there was no transfer of property. What IBM provided was a licence from Orchard to use the software; Orchard kept title and all proprietary rights, could require the copies to be returned or destroyed on termination, and restricted who could use and modify the software. The judge added, obiter, that in principle software could be “goods”, but “If, as here, it is simply a licence to use that is being granted albeit for a money consideration, there may be no transfer of property.”[1]
Reasonableness. Even if the implied terms had applied, the exclusions would have satisfied the reasonableness test under the Unfair Contract Terms Act 1977: the parties were of broadly equal bargaining strength, Southwark could have contracted with Orchard directly, it had negotiated the terms with lawyers involved, and it had chosen the framework terms.[1]
Breach and causation. On the expert evidence the court found no material breach on the two remaining complaints, and in any event was not satisfied that either complaint caused Southwark’s decision to abandon the software.[1]
Significance for software licensing and SAM practice
Large customers often buy software from a reseller or systems integrator rather than from the publisher, and public bodies often buy through framework agreements. This judgment shows what that can mean when the software disappoints: the reseller’s obligations were limited to supplying the publisher’s licence and passing through the publisher’s warranty, and the licence itself kept ownership with the publisher, which took the contract outside the statutory sale of goods regime. See IBM licensing and software licence.[1]
Lessons learned
- When a reseller supplies third-party software under the publisher’s licence, its own warranties may be limited to passing through the publisher’s; negotiate direct warranties if you need them. The court noted that “There was nothing to stop Southwark from getting direct warranties from Orchard”.[1]
- A licence to use software, with title retained by the licensor, is unlikely to be a sale of goods, so statutory quality and fitness terms may not apply. The Sale of Goods Act was held not to apply because there was no transfer of property.[1]
- Write the functional requirements into the contract or its specification; quality is judged against what the contract says the software must do. Satisfactory quality was measured against Orchard’s licence and its specification, and no written requirements had been given to IBM.[1]
- Customers that select and evaluate software themselves will find it hard to show they relied on the supplier’s judgment. Southwark’s own team had chosen Arcindex after demonstrations and documentation.[1]