Software firms take flaws into own hands

An Appeal Court decision against ICL leaves software companies liablefor errors in their software

Software developers have much to fear from a precedent-setting judgement in the Appeal Court at the end of last month. Britain's second highest court has created a series of new contractual rights for users at the expense of software developers, setting the scene for a field day for lawyers.

The judges rejected an appeal by ICL against a u1.3 million High Court judgement that overturned liability limitation clauses in the supplier's contract with St Albans City and District Council.

St Albans bought poll tax software from ICL in 1988, but errors in the code meant that the council lost u685,000 in government grants, and collected u484,000 less in poll tax than it should have.

The council had signed a contract with ICL that included liability limitation clauses which capped damages at u100,000. But the council successfully argued that the clauses were unreasonable.

The decision is important because the clauses were overturned under the Unfair Contract Terms Act 1977, which does not apply where standard terms and conditions (Ts&Cs) are altered by negotiation. ICL was caught out because the liability limitation clauses were unchanged from its standard Ts&Cs. The judges therefore held that the clauses remained standard terms - even though they were actually discussed during negotiations.

'The Appeal Court effectively said that something can remain standard, even if it has been discussed for hours. In future, this means that suppliers are going to have to look again at the way they deal with liability limitation and exclusion clauses,' said Robert McCallough, a partner at City law firm Masons, which prepared ICL's appeal.

The judges added that where software requirements are influenced by legislation - such as local government or tax-specific applications - delivery deadlines created by legislation introduced after a supplier signs a contract will overrule any previous deadlines set in the contract.

This situation can only be avoided by a supplier if it explicitly states otherwise in its contract.

Another important effect of the judgement is that software is governed by the 'fit for purpose' principle that underpins legislation including the Sale of Goods Act 1979 as well as the Supply of Goods and Services Act 1982.

While the judges said that legally software is not goods per se, packaged software counts as goods for the purposes of the 1979 and 1982 acts. More importantly, the judges added that where software is installed as part of a development contract, it is not classified as goods but is nevertheless subject to an unwritten 'implied term' under which it must be 'reasonably fit for the purpose' for which it is intended.

This is a potentially explosive change. Before the St Albans case, the law recognised that software was flawed by its very nature. In general, case law simply demanded only that bugs not fatally ruin an application, and that they be recognised and fixed in reasonable time. Introducing 'fit for purpose' criteria into software law means that a far more restrictive and demanding legal obligation has entered the arena.

In particular, software developed for groups of clients will have to meet the full needs of every single client under the 'fit for purpose' rule, something which will add immensely to development costs.

Of course, those software houses that have any legal sense at all are going to get around the problem by introducing restrictive clauses in existing and new contracts. But that is something their users might not like - and something that will add a fortune to the industry's legal bill.

As well as introducing restrictive clauses as a result of the St Albans ruling, suppliers will have to spend many more hours making user requirements more clearly definable.

'From an engineering point of view, it is difficult to see how error-free software can ever be constructed,' said Rob Wirszycz, director general of the Computing Services and Software Association. 'That means that if software is going to be treated as goods in future, vendors are going to have to be far less flexible about accepting user requirements that are vague or badly defined. The problem is that most user specifications are actually quite weak.'

Taken together , the changes introduced by the St Albans case mean a lot of rewriting of contracts and user specifications if software houses are going to avoid being sucked into open-ended commitments or risk unlimited liability.

'There is now going to be even greater pressure on suppliers to negotiate contracts, and for those negotiations to result in changes to individual clauses,' said Alistair White, a barrister who acts as the local government commercial manager for ICL. 'The onus will also be on suppliers to make sure that software specifications are absolutely watertight.

'If there's going to be a requirement for everything to be buttoned down, that is going to add to bid costs. Overall, there is going to be some hefty consultancy and a few legal conferences on the back of this case.

It's not going to do the lawyers any harm at all.'

One crumb of comfort for ICL was that the Appeal Court judges cut the High Court award by u484,000, which should leave ICL some u600,000 better off after interest is added.

ICL has until October to consider making an appeal.