England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(Mr Justice Scott Baker)

		Royal Courts of Justice Strand London WC2
		Friday, 26th July 1996

Friday, 26th July 1996

LORD JUSTICE NOURSE: On 3rd October 1994, in a judgment reserved after a ten day trial in July of that year, Mr Justice Scott Baker awarded the plaintiffs, St. Alban's City and District Council, damages of £1,314,846 against the defendant, International Computers Ltd., and judgment was entered accordingly. The basis of the award was that the defendant had breached its contract to supply the plaintiffs with a computer system to be used in their collection of community charge by providing faulty software which significantly overstated the relevant population of their area and thus caused them to suffer a loss of revenue. The defendant now appeals to this court.

The judge's judgment is reported at [1995] FSR 686. All references to the judgment are references to it in that report. The material facts and many of the judge's findings are set out between pp.688 and 696. It is unnecessary to restate them at length, although reference will necessarily be made to them in the course of dealing with the arguments advanced in this court.

The essence of the problem was that the faulty software caused the total figure for the relevant population of the plaintiffs' area extracted from the computer on 4th December 1989 to be stated at 97,384.7, whereas it ought to have been 94,418.7. Thus there was an overstatement of 2,966. That meant that when, at the end of February 1990, the plaintiffs came to calculate the amount needed to defray their budgeted expenditure, they proceeded on the footing that they had a larger number of chargepayers to call on than they in fact had. So they set the charge at a lower figure than they would have done had they known the true number. In the result, their community charge receipts for the year 1990/91 were £484,000 less than they ought to have been.

That was not the plaintiffs' only loss. They suffered a small reduction (£14,000) in revenue support grant. Their real and substantial additional loss was in having to pay an extra £1,795,000 by way of precept to the Hertfordshire County Council, which was only partially offset by a reduced contribution to the "safety net" (£259,000) and an increase in the receipt from the national non-domestic rate pool (£865,000).

The figures for the plaintiffs' loss, as agreed before the judge, were as follows:

	£
Increased precept to County Council	1,795,000
Reduced revenue support grant	14,000
Reduced contribution to "safety net"	(259,000)
Increased receipt from national non-domestic rate pool	(865,000)
Reduced Community Charge receipts	484,000
Total net income loss	1,169,000
Interest loss 1990/91	73,509
Interest loss 1991/92	72,377
Total	£1,314,846

The losses thus fell into two different categories. There was the £484,000 which the plaintiffs did not receive for community charge in 1990/91. There was also the extra £685,000 net which they had to pay out, i.e. £1,795,000 plus £14,000 less £259,000 and £865,000. The distinction between the two categories is of importance on the question of damages.

The issues argued before and decided by Mr Justice Scott Baker are summarised in the holdings which appear in the headnote to the report at pp. 687-688. In this court the defendant's appeal has been argued by Mr Conrad Dehn QC, who did not appear below. In an opening which lasted for nearly three and a half days he raised several new arguments, including one which went to the heart of the contract between the parties. Some of his arguments overlapped, particularly in relation to construction and breach on the one hand and causation, failure to mitigate and remoteness on the other. The convenient course is to take the various issues still in dispute, so far as practicable in the same order as the judge, and to deal with Mr Dehn's arguments as they affect each issue.

The first step is to identify the material terms of the contract into which the parties entered on 24th December 1988. This process is not as simple as might have been expected since the contract was expressed to consist not only of the plaintiffs' invitation to tender dated June 1988 and the defendant's tender dated 18th July 1988, but of seven other documents as well. I propose to refer only to those provisions which are directly material to the arguments advanced in this court.

The invitation to tender. Under the heading "Applications software - general requirements", the plaintiffs' invitation to tender stated that they required the development and replacement of a large number of systems. Reference was made to the various systems in order of priority, financial information and community charge being the two which were listed as priority one; see clause 3.2E. Under the sub-heading "Tried and tested software", it was stated that software should as far as possible be based on a package tried and tested in a local authority environment and that tailoring of software to meet requirements should be completed before installation and payment. The most important provision of the invitation to tender, indeed the contractual provision to which the arguments in this court were mainly directed, was contained in clause 1.1 of the "Community charge and non-domestic rates, Statement of user requirements" under the sub-heading "Introduction and objectives":

"The Council invites tenders from a pre-selected list of suppliers for the provision of a computerised system for Community Charge and Non-Domestic rates. This is necessary to cope with the requirements of the Local Government Finance Bill currently proceeding through Parliament. As the Bill has not yet received the Royal Assent, and a large number of Statutory Instruments/Regulations have still to be laid before Parliament, prospective suppliers will be expected to give a firm commitment to provide a system to cope with all the Statutory Requirements for registration, billing, collection and recovery and financial management of the Community Charge and Non-Domestic Rates; including Community Charge Rebates."

Clause 5 of that statement, under the sub-heading "Register content", noted that the legislative requirements were not yet complete, but stated that the 16 data items thereunder listed might be included in the requirements for the content of the register "subject to addition/amendment as a result of the continuing Parliamentary process". Clause 15 under the sub-heading "Collection fund" stated that payments out of that fund would include precepts issued to the charging authority, and non-domestic rating contributions.

The defendant's tender. Chapter 1 of the defendant's tender was entitled "Management summary". Under the sub-heading "The ICL solution" the products which were said to meet the plaintiffs' requirements were listed, including:

"COMCIS, a comprehensive solution for Community Charge being developed in conjunction with English Authorities ..."

In response to clause 3.6E of the invitation to tender (tried and tested software) it was stated that all applications software proposed had been tried and tested within Local Government environments:

"with the exception of Community Charge (under development)".

In the introduction to chapter 5 of the defendant's tender entitled "Community charge and non-domestic rates" it was stated that part of the defendant's very clear strategy in its development to community charge was:

"To develop a system using a 70 strong development team, which meets fully the legislative requirements, and which is easy to use and operate."

Later it was said that in summary the plaintiffs had the opportunity not only to implement the best system for community charge, but also:

"to input into the development process in order to be sure that this product meets your specific requirements."

In response to clause 5 of the plaintiffs' statement of user requirements (register content), the defendant's tender stated:

"The register will contain the data items necessary to meet at the very least the legal requirements plus any other fields the User Design Group deem advantageous. The system is planned to handle all debits.

All other requirements will be met."

Clause 9.5.7E stated that the defendant was unable to provide performance guarantees. Clause 10.6.2E stated:

"Implementation plans, due to changing legislation, are relatively fluid. However ICL is committed to provide a full system by April 1990 with the canvass register on stream in the last quarter of 1988. Individual plans are being produced as customers commit to the ICL solution."

The tender contained a statement headed "ICL statement", which stated that the defendant warranted that the equipment and programmes supplied would conform with their relevant product descriptions and would be of merchantable quality, but that:

"none of the statements contained in this document constitutes representations for which ICL can accept liability and St. Alban's must satisfy themselves that the equipment and programs are fit for the purpose to which they will be put."

The defendant's general conditions. The judge found that the contract incorporated the defendant's general conditions of contract for the supply of equipment, programmes and services (February 1985 edition). Clause 2 of those conditions provided that all equipment, programmes and services were supplied by description. Clause 3 granted the plaintiffs a licence under the defendant's patents, copyrights and other intellectual property rights to use the equipment, programmes and any items related to the provision of services, in the form and for the purpose for which they were supplied. Clause 9, headed "ICL's liabilities", provided, by subclause (a), that the defendant's liability for negligently causing injury to or the death of any person would be unlimited; and, by subclause (b), for negligently or otherwise being responsible for damage to or loss of any physical property would be limited to £250,000. Subclause (c) provided:

"In all other cases ICL's liability will not exceed the price or charge payable for the item of Equipment, Program or Service in respect of which the liability arises or £100,000 (whichever is the lesser). Provided that in no event will ICL be liable for:

(i) loss resulting from any defect or deficiency which ICL shall have physically remedied at its own expense within a reasonable time; or

(ii) any indirect or consequential loss or loss of business or profits sustained by the Customer; or

(iii) loss which could have been avoided by the Customer following ICL's reasonable advice and instructions."

Accepting the submissions which had been advanced on behalf of the plaintiffs by Mr Richard Mawrey QC, the judge held that the defendants were under an obligation to provide software that would maintain a reliable database of the names entered onto the Community Charge register, accurately count the names and accurately retrieve and display the figures resulting from the count; see p. 697.

The basic submission of Mr Dehn as to the construction of the contract, advanced for the first time in this court, was that the defendant agreed to supply a system which was to be fully operative by the end of February 1990, when the amount of the community charge would have to be set. It was a system, as the contractual provisions recognised, which until then would still be in course of development. Thus, except where the defendant had acted negligently, the plaintiffs had impliedly agreed to accept the software supplied, bugs and all. Mr Dehn relied on observations of Staughton LJ in Saphena Computing Ltd. v. Allied Collection Agencies Ltd. [1995] FSR 616, 652. Specifically, he submitted that the defendant was not contractually bound to provide software which would enable the correct figure to be extracted from the computer on 4th December 1989.

These submissions must be rejected. Parties who respectively agree to supply and acquire a system recognising that it is still in course of development cannot be taken, merely by virtue of that recognition, to intend that the supplier shall be at liberty to supply software which cannot perform the function expected of it at the stage of the development at which it is supplied. Moreover, and this is really an anterior point, the argument is concluded against the defendant by clause 1.1 of the plaintiffs' statement of user requirements which, having referred to the Bill that later became the Local Government Finance Act 1988, stated (I repeat):

"As the Bill has not yet received the Royal Assent, and a large number of Statutory Instruments/Regulations have still to be laid before Parliament, prospective suppliers will be expected to give a firm commitment to provide a system to cope with all the Statutory Requirements for registration, billing, collection and recovery and financial management of the Community Charge and Non-Domestic Rates; ..." (emphasis added).

Mr Dehn sought to avoid the clear impact of that provision and others to the like effect by arguing that the statutory requirements there referred to were only those derived from the 1988 Act and any statutory instruments or regulations made under it. He pointed to the fact that the Secretary of State's requirement that all charging authorities should make returns of their relevant populations on Form CCR1 not later than 8th December 1989 derived from amendments to the 1988 Act made by the Local Government and Housing Act 1989. In my view that is to put an altogether too narrow construction on the provision. What it clearly contemplated was that the system must meet the statutory requirements, many of them still unknown, whatever they might prove to be. On a common sense interpretation of clause 1.1, it would be immaterial whether those requirements arose under the 1988 Act in its original form or as amended by the 1989 Act.

I therefore agree with the judge that the defendant was under an express contractual obligation in the terms stated by him. Accordingly, once the defendant knew, soon after 2nd November 1989, that the Secretary of State had notified all charging authorities of his intention to require them to make a return of relevant population on Form CCR1 not later than 8th December 1989, it became under an express contractual obligation to supply the plaintiffs with software which would enable them accurately to complete the return by that date. On that footing, it becomes strictly unnecessary to consider whether the contract was subject to an implied term to the same effect. However, having had the advantage of reading in draft the judgment to be delivered by Sir Iain Glidewell, I would, like him and for the reasons he gives, have answered that question in the affirmative.

Having established the nature of the defendant's contractual obligation, I turn to the question of breach. At p. 697, the judge held that there was a plain breach of contract on the defendant's part because the COMCIS software produced erroneous figures for the population return to the Department. On the basis of his findings of fact, he held that the fault was that of the defendant and not the plaintiffs. His material findings were, first, that release 2036 was prepared for the statistics to be provided to the Department; secondly, that for some reason unknown 2036 was not delivered to the plaintiffs; thirdly, that 2037 was installed on 4th December 1989, after the figures had been extracted; see pp. 690 and 692.

Mr Dehn's submissions on this question covered much the same ground as his submissions on the construction of the contract. He added, however, that after 2037 had been installed on 4th December 1989 there was still time for a rerun of the figures which would have enabled the plaintiffs to get in a correct return by 8th December. I disagree. The judge's finding that the operation had in practice to be carried out over the weekend of 2nd/3rd December is unassailable. Moreover, the mere installation of 2037 on 4th December could not have put the plaintiffs on notice that the figures already extracted might be wrong. The judge was clearly right to hold that the contract had been breached in the manner stated by him.

The views already expressed also make it unnecessary to consider the plaintiffs' alternative case based on Mr Turton's negligent misrepresentation. The facts material to this matter are stated by the judge at pp. 691-692. His holding that there was a negligent misrepresentation appears at p. 697. Mr Dehn attacked the judge's decision both on the facts and in law. I remain unpersuaded that the decision was incorrect on either score.

At this point it is convenient to deal with two further, closely-linked, arguments of Mr Dehn's which were not advanced in the court below. First, he submitted that the plaintiffs had been at fault in not doing a rerun of the figures after release 2040 had been installed, as the judge found, on 11th December 1989. Secondly, he submitted that the plaintiffs ought in any event to have realised from a printout made on 9th February 1990 that the December figure was or might be wrong and ought not to have continued to act on it.

As to the first of these arguments, Mr Dehn was unable to satisfy me of any good reason for the plaintiffs' doing a rerun between 11th December and 9th February. There was nothing at that stage, any more than there had been on 4th December, to put them on notice that the figures on which they were working might be wrong. The second argument was effectively countered by the unchallenged evidence of Mr Emery, a principal registration assistant (finance department) with the plaintiffs. He said that his section carried out an account scan on 9th February 1990 which produced a total figure of 94,757. Suspecting that something was wrong, he spoke to Mr Thake of the defendant on the telephone, who indicated that he considered the figures to be incorrect. However, at a meeting in St. Albans on 15th February, Mr Thake said there would be a further release of software which would correct the error shown on 9th February, and that that would be produced in due course. In my view the plaintiffs were entitled to act on that assurance. I would therefore reject both these new arguments of Mr Dehn's.

Mr Dehn further submitted that when the printout made on 26th February 1990 produced a figure at variance with that returned on Form CCR1 in December, the plaintiffs ought then, if not before, to have realised that the December figure was or might be wrong and ought not to have continued to act on it. This matter was considered by the judge at p. 693. He concluded that, by acting as they did, the plaintiffs took the only practical course open to them. Mr Dehn submitted that that finding was against the weight of the evidence. Again I disagree and would reject the submission accordingly.

I turn to the question of damages, which was dealt with by the judge between pages 699 and 704. He explained the system which required the plaintiffs to maintain collection and general funds, the main payments required to be made into and out of the collection fund and the difference between the losses of £484,000 and £685,000. He had to deal with two arguments advanced on behalf of the defendant: first, that the plaintiffs did not themselves suffer loss as a consequence of any breach of contract or negligence on the part of the defendant; secondly, that any loss that the plaintiffs suffered was recouped from the 1991/92 chargepayers and therefore, in law, amounted to an irrecoverable loss.

The first of those arguments was rejected by the judge, in my view correctly. Assuming that it is right to say that the plaintiffs did not themselves suffer loss, I nevertheless regard it as clear that that is no bar to their recovery of damages. Although it would be incorrect, except in a broad sense, to describe a local authority as a trustee for the inhabitants of its area, it can only act in their interests. It must administer its funds for their benefit. Equally, it owes them a duty to get in, if necessary by action, all sums which are owed to it. Otherwise the inhabitants themselves, who are the ultimate source of its funds, will be out of pocket. So, although not strictly a trustee, a local authority has no less a capacity than a trustee to recover damages in circumstances such as these, broadly for the benefit of the inhabitants.

The judge also rejected the second argument. In doing so he made no distinction between the £685,000 and £484,000. I think that that must have been because the distinction between the two amounts was not urged on him as forcefully as it has been urged on us. In my view the distinction must be made. Once it is made, it is seen that the £685,000 is recoverable and the £484,000 is not. This is the most important and difficult question in the case. In the end I have come to a clear opinion in regard to each of the two amounts.

Authority apart, I would approach the matter in this way. If the software had not been faulty, the plaintiffs would not have had to pay out the £685,000. Having paid it out, they were unable to recover it from the county council or any other third party. They could only recover it, they were bound to recover it, from their chargepayers. Viewing the plaintiffs as having, for this purpose, the like capacity as a trustee for the chargepayers, I am in no doubt that they can recover the £685,000 from the defendant. Otherwise the chargepayers would be out of pocket.

The £484,000 stands on a different footing. Although Mr Mawrey argued to the contrary, I think that we can only work on the inference that if the software had not been faulty, the plaintiffs would have collected the £484,000 by way of an additional charge in 1990/91. Having not collected it, they were unable to recover it from any third party. They could only recover it, they were bound to recover it, from their chargepayers in 1991/92. In this instance, however, the chargepayers were under an obligation to pay in 1991/92 precisely what they ought to have paid but did not pay in 1990/91. Viewing the plaintiffs in the like capacity as before, I am in no doubt that they cannot recover the £484,000 from the defendant. The effect of the recovery would be to relieve the chargepayers of an obligation to which they were always subject or, if you prefer, to give them a bonus to which they were not entitled. They have not been out of pocket. The plaintiffs, on the other hand, are entitled to recover interest on the £484,000 for the year 1990/91.

The judge referred to authority on this question, in particular to Design 5 v. Keniston Housing Association Ltd. (1986) 34 BLR 92 and Linden Gardens Trust v. Lenesta Sludge Disposals Ltd. (1992) 57 BLR 57. He did not refer to Parry v. Cleaver [1970] AC 1 or to Palatine Graphic Arts Co. Ltd. v. Liverpool City Council [1986] 1 QB 335, no doubt because, as I understand it, those decisions were not cited to him. Had he been asked to consider them, it is well possible that he would have distinguished between the £685,000 and the £484,000.

I believe that the key observation in the authorities is to be found in the speech of Lord Reid in Parry v. Cleaver, at p. 15E-F:

"Surely the distinction between receipts which must be brought into account and those which must not must depend not on their source but on their intrinsic nature."

That observation was quoted by Glidewell LJ in Palatine Graphic Arts Co. Ltd. v. Liverpool City Council, at p. 344F-G and applied by this court in that case. Here, since the 1990/91 shortfall was an unintended subtraction from the 1990/91 charge which had to be made good by an equivalent addition to the 1991/92 charge, the two are intrinsically the same. As Mr Dehn well put it, the addition to the 1991/92 charge was not the result of benevolence or an accidental circumstance, but the very sum which, but for the defendant's breach of contract, would have been received from the chargepayers in 1990/91 and which the plaintiffs were required to obtain from them in 1991/92. Accordingly, the test propounded by the authorities leads to the same conclusion as that to which I would have come without them.

I come finally to the Unfair Contract Terms Act 1977. As I have said, the judge found that the contract incorporated the defendant's general conditions of contract for the supply of equipment, programmes and services (February 1985 edition). It has not been suggested that those conditions were not written standard terms of business for the purposes of the 1977 Act. The material provision was contained in clause 9(c) whose effect, if it stands, would be to limit the damages recoverable by the plaintiffs to £100,000.

So far as material, section 3 of the 1977 Act provides:

"(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term -

(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; ...

except insofar (as in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness."

So far as material, section 12 provides:

"(1) A party to a contract 'deals as consumer' in relation to another party if -

(a) he neither makes the contract in the course of a business nor holds himself out as doing so; ..."

By section 14 "business" is defined to include a profession and the activities of any government department or local or public authority. The requirement of reasonableness is dealt with in section 11.

The first question is whether, as between the plaintiffs and the defendant, the plaintiffs dealt as consumer or on the defendant's written standard terms of business within section 3(1). In the light of section 12(1)(a) and the definition of "business" in section 14, it is accepted on behalf of the plaintiffs that they did not deal as consumer. So the question is reduced to this. Did the plaintiffs "deal" on the defendant's written standard terms of business?

Mr Dehn submitted that the question must be answered in the negative, on the ground that you cannot be said to deal on another's standard terms of business if, as was here the case, you negotiate with him over those terms before you enter into the contract. In my view that is an impossible construction for two reasons: first, because as a matter of plain English "deals" means "makes a deal", irrespective of any negotiations that may have preceded it; secondly, because section 12(1)(a) equates the expression "deals as consumer" with "makes the contract". Thus it is clear that in order that one of the contracting parties may deal on the other's written standard terms of business within section 3(1) it is only necessary for him to enter into the contract on those terms.

Mr Dehn sought to derive support for his submission from observations of His Honour Judge Thayne Forbes QC (as he then was) in The Salvage Association v. CAP Financial Services Ltd. [1995] FSR 654, 671-672. In my view those observations do not assist the defendant. In that case the judge had to consider, in relation to two contracts, whether certain terms satisfied the description "written standard terms of business" and also whether there had been a "dealing" on those terms. In relation to the first contract he said, at p. 671:

"I am satisfied that the terms in question were ones which had been written and produced in advance by CAP as a suitable set of contract terms for use in many of its future contracts of which the first contract with SA happened to be one. It is true that Mr Jones felt free to and did negotiate and agree certain important matters and details relating to the first contract at the meeting of February 27, 1987. However, although he had read and briefly considered CAP's conditions of business, he did not attempt any negotiation with regard to those conditions, nor did he or Mr Ellis consider that it was appropriate or necessary to do so. The CAP standard conditions were terms that he and Mr Ellis willingly accepted as incorporated into the first contract in their predetermined form. In those circumstances, it seems to me that those terms still satisfy the description 'written standard terms of business' and, so far as concerns the first contract, the actions of Mr Jones and Mr Ellis constituted 'dealing' on the part of SA with CAP on its written standard terms of business within the meaning of section 3 of the 1977 Act."

It is true that the judge found that SA did not negotiate with CAP over the latter's standard terms and that he held that, in entering into the contract, SA dealt with CAP on those terms within section 3. I do not, however, read his observations as indicating a view that the "dealing" depended on the absence of negotiations. I think that even if there had been negotiations over the standard conditions his view would have been the same.

Mr Justice Scott Baker dealt with this question as one of fact, finding that the defendant's general conditions remained effectively untouched in the negotiations and that the plaintiffs accordingly dealt on the defendant's written standard terms for the purposes of section 3(1); see p. 706. I respectfully agree with him. The consequence of that finding is that the defendant cannot rely on clause 9(c) except in so far as it satisfies the requirement of reasonableness. Between pp. 707 and 711 the judge carefully considered that question and held that clause 9(c) did not pass that test.

In George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd. [1983] 2 AC 803, 816, Lord Bridge of Harwich, with whose speech the others of their Lordships agreed, said of the answer given by a judge of first instance to the question whether the requirement of reasonableness has been satisfied or not:

"There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong."

Adopting that approach to the answer given by Mr Justice Scott Baker in this case, and despite Mr Dehn's well-sustained argument to the contrary, I am certainly not satisfied that his decision proceeded upon some erroneous principle or was plainly and obviously wrong. Indeed, I believe that I would have given the same answer myself.

I therefore differ from the judge only on the single, but important, question of the recoverability of the £484,000. I would vary his order by reducing the award by that amount and the amount of the interest loss thereon during the year 1991/92, the plaintiffs being entitled to the amount of the interest loss for 1990/91. To that extent I would allow the appeal.

LORD JUSTICE HIRST: I agree.

SIR IAIN GLIDEWELL: I have read in draft the judgment prepared by Nourse LJ and, like Hirst LJ, I agree with him that Scott Baker J was right in concluding that I.C.L. were in breach of an express term of their contract with St. Albans, that in the alternative the contract was subject to an implied term as to the fitness for purpose of the COMCIS program of which I.C.L. were also in breach, and that they are not saved from the consequences of such breach by any terms of exclusion or limitation of liability in the contract. It follows that I agree with My Lords that I.C.L. are, as the Judge held, liable in damages to St. Albans. I too would therefore dismiss this part of the appeal.

However, before I turn to the subject of damages there is one aspect of the case on liability on which I wish to express my own opinion. This is the second issue to which I have already referred, namely, was the contract between the parties subject to any implied term as to quality or fitness for purpose, and if so, what was the nature of that term? Consideration of this question during argument led to discussion of a more general question, namely, "Is software goods?" To seek to answer this question, it is necessary first to be clear about the meaning of some of the words used in argument.

In his judgment, Scott Baker J adopted a description of a computer system which contains the following passage which I have found helpful:

"By itself hardware can do nothing. The really important part of the system is the software. Programs are the instructions or commands that tell the hardware what to do. The program itself is an algorithm or formula. It is of necessity contained in a physical medium.

A program in machine readable form must be contained on a machine readable medium, such as paper cards, magnetic tapes, discs, drums or magnetic bubbles."

In relation to COMCIS the property in the program i.e. the intangible "instructions or commands", remained with I.C.L. Under the contract, St. Albans were licensed to use the program. This is a common feature of contracts of this kind. However, in order that the program should be encoded into the computer itself, it was necessarily first recorded on a disc, from which it could be transferred to the computer. During the course of the hearing, the word "software" was used to include both the (tangible) disc onto which the COMCIS program had been encoded and the (intangible) program itself. In order to answer the question, however, it is necessary to distinguish between the program and the disc carrying the program.

In both the Sale of Goods Act 1979 s.61 and the Supply of Goods and Services Act 1982 s.18 the definition of "goods" is "includes all personal chattels other than things in action and money ...." Clearly a disc is within this definition. Equally clearly, a program, of itself, is not.

If a disc carrying a program is transferred, by way of sale or hire, and the program is in some way defective, so that it will not instruct or enable the computer to achieve the intended purpose, is this a defect in the disc? Put more precisely, would the seller or hirer of the disc be in breach of the terms as to quality and fitness for purpose implied by s.14 of the Sale of Goods Act and s.9 of the Act of 1982? Mr Dehn, for I.C.L., argues that they would not. He submits that the defective program in my example would be distinct from the tangible disc, and thus that the "goods" - the disc - would not be defective.

There is no English authority on this question, and indeed we have been referred to none from any Common Law jurisdiction. The only reference I have found is an article published in 1994 by Dr. Jane Stapleton. This is to a decision in Advent Systems Ltd. v. Unisys Corporation 925 F 2d 670 that software is a "good"; Dr Stapleton notes the decision as being reached "on the basis of policy arguments." We were referred, as was Scott Baker J, to a decision of Rogers J in the Supreme Court of New South Wales, Toby Construction Ltd. v. Computa Bar (Sales) Pty. Ltd. (1983) 2 NSWJR 48. The decision in that case was that the sale of a whole computer system, including both hardware and software, was a sale of "goods" within the New South Wales legislation, which defines goods in similar terms to those in the English statute. That decision was in my respectful view clearly correct, but it does not answer the present question. Indeed Rogers J specifically did not answer it. In expressing an opinion I am therefore venturing where others have, no doubt wisely, not trodden.

Suppose I buy an instruction manual on the maintenance and repair of a particular make of car. The instructions are wrong in an important respect. Anybody who follows them is likely to cause serious damage to the engine of his car. In my view the instructions are an integral part of the manual. The manual including the instructions, whether in a book or a video cassette, would in my opinion be "goods" within the meaning of the Sale of Goods Act, and the defective instructions would result in a breach of the implied terms in s.14.

If this is correct, I can see no logical reason why it should not also be correct in relation to a computer disc onto which a program designed and intended to instruct or enable a computer to achieve particular functions has been encoded. If the disc is sold or hired by the computer manufacturer, but the program is defective, in my opinion there would prima facie be a breach of the terms as to quality and fitness for purpose implied by the Sale of Goods Act or the Act of 1982.

However, in the present case, it is clear that the defective program 2020 was not sold, and it seems probable that it was not hired. The evidence is that in relation to many of the program releases an employee of I.C.L. went to St. Albans' premises where the computer was installed taking with him a disc on which the new program was encoded, and himself performed the exercise of transferring the program into the computer.

As I have already said, the program itself is not "goods" within the statutory definition. Thus a transfer of the program in the way I have described does not, in my view, constitute a transfer of goods. It follows that in such circumstances there is no statutory implication of terms as to quality or fitness for purpose.

Would the contract then contain no such implied term? The answer must be sought in the Common Law. The terms implied by the Sale of Goods Act and the Act of 1982 were originally evolved by the Courts of Common Law and have since by analogy been implied by the courts into other types of contract. Should such a term be implied in a contract of the kind I am now considering, for the transfer of a computer program into the computer without any transfer of a disc or any other tangible thing on which the program is encoded?

The basis upon which a court is justified in implying a term into a contract in which it has not been expressed is strict. Lord Pearson summarised it in his speech in Trollope & Colls Ltd. v. N.W. Metropolitan Regional Hospital Board (1973) 1WLR 601 at 609 when he said:

"An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract; it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them; it must have been a term that went without saying, a term which, though tacit, formed part of the contract which the parties made for themselves."

In my judgment a contract for the transfer into a computer of a program intended by both parties to instruct or enable the computer to achieve specified functions is one to which Lord Pearson's words apply. In the absence of any express term as to quality or fitness for purpose, or of any term to the contrary, such a contract is subject to an implied term that the program will be reasonably fit for i.e. reasonably capable of achieving the intended purpose.

In the present case if, contrary to my view, the matter were not covered by express terms of the contract, I would hold that the contract was subject to an implied term that COMCIS was reasonably fit for, that is, reasonably capable of achieving the purpose specified in the "Statement of User Requirements" in Chapter 5 of St. Alban's Invitation to Tender, and that as a result of the defect in release 2020 I.C.L. were in breach of that implied term.

I turn now to the issue of damages. When the Judge was considering whether the Plaintiffs' loss was irrecoverable as damages because it had already been recouped in 1991/92, he drew no distinction between the £685,000 and the £484,000. Moreover, it seems that he was not referred directly to the decision of this Court in Palatine Graphic Arts Ltd. v. Liverpool City Council (1986) 1QB 355 nor to the passages from the speech of Lord Reid in Parry v. Cleaver (1970) AC 1 quoted in the judgments in that case, especially the passage from page 15 which Nourse LJ has set out in his judgment.

Applying the principles derived from those authorities, I entirely agree with Nourse LJ that St. Albans suffered a loss of £685,000 which, with interest, must form part of the damages. As to the £484,000, however, St. Albans recouped their loss of this sum from their chargepayers in 1991/92. For the reasons given by Nourse LJ they are not entitled to recover the £484,000 as damages, but only the interest on that sum for one year.

To this limited extent I would allow the appeal.

Order: appeal allowed in part; all consequential matters to be dealt with at a hearing in October.