London Borough of Southwark v IBM UK Ltd

A contractual satisfactory-quality obligation is construed in its contractual context. Where the contract specifies what software must do, compliance with those specifications determines satisfactory quality. A general or common-purpose suitability obligation does not create a warranty that software meets undisclosed specific purposes, particularly where fitness for purpose is expressly excluded. A software licence does not necessarily involve a transfer of property in goods for the purposes of the Sale of Goods Act 1979. Software recorded on a physical medium may in principle be goods, but the statutory implied terms do not apply where the transaction transfers only a right to use the software. Contractual exclusions were reasonable under the Unfair Contract Terms Act 1977.

The claimant contracted with IBM for Websphere software, consultancy services and Orchard’s Arcindex software for a proposed master data management project. By trial, it relied only on the Arcindex contract and alleged that Arcindex was defective because it lacked an effective facility for potential matches and effective restriction of screen access.

The contract described Arcindex as third-party software, made Orchard responsible for software warranties, incorporated a satisfactory-quality warranty, and excluded implied fitness-for-purpose obligations. The court considered whether the Sale of Goods Act 1979 applied, whether the contractual exclusions were effective under the Unfair Contract Terms Act 1977, and whether either alleged deficiency constituted a contractual breach.

1. Construction of the contract. IBM supplied third-party software selected by Southwark after demonstrations and its own evaluation. Clause 7.2 made warranties relating to Arcindex Orchard’s responsibility and excluded additional IBM warranties and implied fitness-for-purpose obligations. The ICT conditions were nevertheless incorporated, including the warranty that the goods and services were of satisfactory quality.

2. Satisfactory quality had to be assessed by reference to the contractual specification in Appendices A and D. The contract did not warrant that Arcindex would meet undisclosed or specific individual requirements. The software was satisfactory if it performed what the contract required it to perform.

3. The Sale of Goods Act 1979 did not apply. The transaction granted a perpetual licence to use software while title, copyright and proprietary rights remained with Orchard. There was therefore no transfer of property in goods. The judge observed, obiter, that software transferred on a physical medium could in principle constitute goods.

4. Even if the statutory terms applied, their exclusion was reasonable under the Unfair Contract Terms Act 1977. The parties had broadly equal bargaining strength. Southwark had access to legal advice, negotiated the contractual terms, could have contracted directly with Orchard, and obtained the benefit of a framework contract with remedies for default.

5. Arcindex operated as described in its User Manual. Potential matches could be identified through successive matching passes or review of textual reports. QualityStage also supplied matching functionality. The alleged absence of an effective potential-matches facility therefore did not establish a breach.

6. Although Arcindex did not itself restrict screen access by user profile, Southwark failed to prove that this was a contractual requirement. The claim failed on liability. Judgment was entered for IBM and Southwark’s claim was dismissed.