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

St Albans Council contracted with ICL to supply computer software for community charge collection. Faulty software overstated the local population by 2,966, causing the Council to set the charge too low and suffer significant revenue losses. The Court held ICL breached its contract and that limitation clauses failed the reasonableness test under the Unfair Contract Terms Act 1977.

Facts

St Albans City and District Council contracted with International Computers Limited (ICL) in December 1988 for the supply of a computerised system (COMCIS) to manage Community Charge collection. The contract required ICL to provide a system meeting all statutory requirements for registration, billing, collection and financial management of the Community Charge.

The software supplied contained a defect which caused the total relevant population figure extracted on 4th December 1989 to be overstated by 2,966 persons (97,384.7 instead of 94,418.7). This erroneous figure was used when calculating the Community Charge rate in February 1990, resulting in the charge being set too low. The Council consequently suffered significant financial losses totalling £1,314,846, comprising reduced Community Charge receipts (£484,000), increased precept payments to Hertfordshire County Council (£1,795,000 net of adjustments), reduced revenue support grant, and interest losses.

Issues

Contractual Obligations and Breach

The key issue was whether ICL was under a contractual obligation to supply software capable of accurately completing the statutory population return by the required date, and whether ICL breached that obligation.

Implied Terms

Whether, in the absence of express terms, the contract was subject to implied terms as to fitness for purpose.

Limitation of Liability

Whether ICL’s standard terms limiting liability to £100,000 satisfied the requirement of reasonableness under the Unfair Contract Terms Act 1977.

Damages

Whether the Council could recover damages for losses that were subsequently recouped from chargepayers in the following year.

Judgment

The Court of Appeal upheld the trial judge’s finding that ICL was in breach of contract. Lord Justice Nourse held that clause 1.1 of the Council’s Statement of User Requirements created an express contractual obligation requiring ICL to provide a system capable of meeting all statutory requirements, including those arising from subsequent amendments to the Local Government Finance Act 1988.

Sir Iain Glidewell addressed whether computer software could be classified as ‘goods’ for the purposes of implied terms. He distinguished between the tangible disc containing a program and the intangible program itself, concluding that while a defective disc sold or hired would attract implied terms under the Sale of Goods Act 1979, a program transferred without any tangible medium would not. However, he held that the common law would imply a term that the program be reasonably fit for its intended purpose.

On the limitation clause, the Court applied the test from George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd, treating the trial judge’s finding with utmost respect. The Court upheld the finding that ICL’s limitation clause did not satisfy the reasonableness requirement under the Unfair Contract Terms Act 1977, as the Council had dealt on ICL’s written standard terms of business.

Damages

The Court distinguished between two categories of loss. The £685,000 net additional payments to the County Council were recoverable as damages since these were payments the Council would not have had to make but for ICL’s breach. However, the £484,000 in reduced Community Charge receipts was not recoverable because this sum had been recouped from chargepayers in 1991/92. Applying the principle from Parry v Cleaver that the distinction between recoverable and non-recoverable receipts depends on their intrinsic nature, the Court held that the 1991/92 addition was intrinsically the same as the 1990/91 shortfall.

Implications

This case established important principles regarding software contracts and the application of the Unfair Contract Terms Act 1977 to limitation clauses in IT contracts. It confirmed that standard limitation clauses may not satisfy the reasonableness requirement, particularly where there is inequality of bargaining power. The case also provided guidance on when computer software may attract implied terms as to quality and fitness for purpose, distinguishing between transfers involving tangible media and those involving only intangible programs. The decision remains significant for the assessment of damages where losses have been partially recouped from third parties.

Verdict: Appeal allowed in part. The trial judge's findings on liability were upheld, but the damages award was reduced by £484,000 (plus associated interest for 1991/92) on the grounds that this sum had been recouped from chargepayers. ICL remained liable for £685,000 net plus interest losses for 1990/91.

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