St Albans City and District Council v ICL [1996] EWCA Civ 1296 (26 July 1996)

The Council suffered a £1.3m loss from faulty software supplied by ICL, which miscalculated the local population. The court found ICL's contractual liability limit of £100,000 was unreasonable under the Unfair Contract Terms Act 1977 and held ICL liable.

Facts

St Albans City and District Council (‘the Council’) contracted with International Computers Limited (‘ICL’), a substantial software company, for the supply of a computer system to be used in the administration of its Community Charge register. A fault in the software, which was intended to provide a reliable population figure, caused the population of the district to be overstated. This error resulted in the Council setting a Community Charge that was too low, leading to a loss of revenue of £1,217,398 and increased borrowing costs. ICL’s contract, which was based on its standard written terms of business, contained a clause (Clause 9) which purported to limit ICL’s total liability for any claim arising from the contract, whether in contract or tort, to a maximum of £100,000.

Issues

The Court of Appeal had to determine several key legal issues:

1. Whether there was an implied term in the contract that the software would be reasonably fit for the Council’s specified purpose, which depended on whether the provision of software on a disk constituted a sale of ‘goods’ under the Sale of Goods Act 1979 or a supply of services under the Supply of Goods and Services Act 1982.
2. Whether the limitation of liability clause, limiting ICL’s liability to £100,000, was reasonable under the Unfair Contract Terms Act 1977 (‘UCTA’).
3. The correct assessment of damages for the loss suffered by the Council.

Judgment

The Court of Appeal, with Sir Iain Glidewell delivering the leading judgment, dismissed ICL’s appeal. The court upheld the trial judge’s decision that ICL was fully liable for the Council’s losses.

Implied Term as to Fitness for Purpose

Sir Iain Glidewell considered the question of whether software constitutes ‘goods’. While not providing a definitive answer, he indicated a clear preference for treating software supplied on a physical medium as goods. He reasoned:

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 computer disc, would in my opinion be ‘goods’ within the meaning of the Sale of Goods Act 1982.

However, the court found it unnecessary to resolve the issue definitively. It held that whether the contract was for the sale of goods or the supply of services, a term was to be implied by statute that the software would be reasonably fit for the known purpose of calculating the correct population figure for the Community Charge. ICL was in breach of this term.

Reasonableness of the Limitation Clause

This was the central issue of the case. The court applied the ‘reasonableness test’ as set out in section 11 of UCTA 1977, considering the guidelines in Schedule 2. The court found the £100,000 limitation clause to be unreasonable for several reasons:

• Bargaining Power: The parties were of unequal bargaining power. The Council had little choice but to accept ICL’s standard terms of business.
• Insurance: ICL was a substantial company with liability insurance cover of £50 million, whereas the Council, as a local authority, was expected to be its own insurer. It was considered reasonable for the supplier (ICL) who could insure against the risk to bear it.
• Practicality: The potential loss was significantly greater than the £100,000 limit, a fact which should have been apparent to ICL given the nature of the software’s function.

Sir Iain Glidewell concluded that the trial judge was correct in his assessment, stating that a term limiting liability to £100,000 in these circumstances was unreasonable.

Damages

The court upheld the trial judge’s calculation of damages, affirming that the Council’s loss was the direct result of the faulty software. It rejected ICL’s arguments that the Council could have recouped its losses in subsequent years, finding that the loss of precept revenue in the specific financial year was a real and quantifiable loss.

Implications

The decision in St Albans v ICL is a leading authority on the application of the Unfair Contract Terms Act 1977 to limitation of liability clauses, particularly in commercial contracts between parties of unequal bargaining strength. It establishes that even in a business-to-business context, standard-form limitation clauses may be struck down as unreasonable where one party is large and well-insured and imposes its terms on a customer who stands to suffer a significant loss. The case also contains important, though not conclusive, judicial discussion on the legal classification of computer software as ‘goods’ for the purposes of statutory implied terms.

Verdict: The appeal by ICL was dismissed. The court upheld the High Court’s decision that the limitation of liability clause was unreasonable and that ICL was liable for the Council’s full losses.

Source: St Albans City and District Council v ICL [1996] EWCA Civ 1296 (26 July 1996)