Peter Bullock considers a landmark appeal ruling in IT law.

Peter Bullock is a partner in the IT department at Masons.

The Court of Appeal's judgment in St Albans v ICL is probably the most important IT law decision this decade. Three issues arise for those involved with commercial software development contracts.

First, the software under consideration was undergoing development and a defect caused loss to St Albans Council before the contractual delivery date. ICL was held liable and the court ruled software delivered must meet the functionality required at the time it is supplied, regardless of the contractual delivery date.

Second, in its printed conditions ICL sought to rely on clauses which (1) limited liability and (2) excluded the statutorily implied terms as to quality and fitness for purpose. After negotiations, the contract not only consisted of ICL's standard terms but included tendering documents and related papers. The printed terms incorporated additional conditions which St Albans required. Nonetheless, the court held that the council dealt on ICL's standard terms.

Thus the limitation clause was subject to the "reasonableness" test, pursuant to section 3 of the Unfair Contract Terms Act 1977 (UCTA). Unless the clause relied upon has been changed as a result of negotiations, UCTA will apply. If simple change to individual terms is the touchstone to the applicability of UCTA, suppliers may adopt a "multiple choice" solution to contract formation.

Third, in a non-consumer contract, if a piece of software is "goods", and not sui generis, section 6 of UCTA will subject a restriction of the supplier's statutorily implied terms as to quality or fitness for purpose to the reasonableness test. The judge, Sir Iain Glidewell, regarded a disk containing a program which is sold or hired as "goods", and if the program was defective, then it was "defective goods". So, whether a program is goods (and so subject to the Sale of Goods Act and UCTA) depends on the manner in which it is transferred. But here the software was merely licensed and St Albans did not receive a disk from ICL. The judge held that, in the absence of any express terms of quality or fitness for purpose, the contract is subject to an implied term that the program will be fit for purpose.

Although suppliers may try to draft around the statutes, even where the software is not goods (for example where it is downloaded from the Internet) there will be an implied term of fitness for purpose, unless there is a contrary term in the contract. Then, if the contrary term is "standard", it must be reasonable to be effective.