SAM Business Systems Ltd v Hedley & Company
| Jurisdiction | England & Wales |
| Judgment Date | 19 December 2002 |
| Neutral Citation | [2002] EWHC 2733 (TCC) |
| Docket Number | Case number: HT No. 01 175 |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Date | 19 December 2002 |
[2002] EWHC 2733 (TCC)
IN THE HIGH COURT OF JUSTICE
TECHNOLOGY AND CONSTRUCTION COURT
Technology and Construction Court
St Dunstans House
His Honour Judge Bowsher Q.C.
Case number: HT No. 01 175
Peter Susman Q.C. and Terry Bergin with him for the plaintiffs (Stanley Jacobs Solicitors)
Richard Mawrey Q.C. and Geraint Webb with him for the defendants (Rawsthorns Solicitors)
Dates of Trial:14, 15, 16, 17, 21, 22, 23, 24, 28, 29, 30, October, 6 November, 2002
I direct that no further note or transcript be made of this judgment
Introduction
The claimants are suppliers of computer software. The defendants are stockbrokers.
This action concerns the supply of software to the defendants for use in their business. The claimants claim money alleged to be due to them for that supply. The defendants counterclaim substantial damages for alleged defects in what was supplied. Because both claim and counterclaim hinge on those alleged defects, it has been agreed that the defendants should open the action.
I shall refer to the claimants as SAM and to the defendants as Hedley's.
Hedley's is a small firm of Lancashire stockbrokers practising in Blackburn, Preston and Southport. At the relevant time there were three partners, Anthony Hedley, Timothy Scott and Nicholas Baldwin. It handled the business of individual and corporate clients both in general stockbroking and in financial products such as PEPs and ISAs. At the time of the contract with SAM, Hedley's had some 10,000 clients on its books of whom some 2,000 could fairly be described as "active". Some transactions between the parties have been carried out by Pendle Investments Limited, Hedley's service company. The parties agree that Pendle should be treated as Hedley's agent and in this judgment I shall refer to anything done by Pendle as done by Hedley's.
Hedley's used to handle their stockbroking business with a system known as ANTAR. Hedley's did not have an IT department or specialist IT employees. The staff used their old ANTAR system competently but they did not know how to use a mouse.
Rather late in the day, in mid 1999, Hedley's formed the belief that ANTAR was not Year 2000 compliant (i.e. that it would not work once dates were inserted into it for 1 January 2000 onwards). As it turned out, that belief may have been unduly alarmist but both parties have proceeded on the assumption that it was correct. In any event, there were good reasons for Hedleys to change their system. ANTAR was an old DOS based, or "Green screen", system operated by keyboard strokes and not a mouse operated Windows based application. Moreover, the suppliers had a very small customer base and seemed to be unlikely to be able to update the system. It is important that when Hedleys contacted SAM in 1999 they both assumed that it was essential that Hedleys should have a new computer system working before 1 January, 2000. However, although ANTAR employed rather old fashioned technology, it was relatively sophisticated and would perform many functions, such as the application of Stamp Duty and Corporate actions automatically. Hedley's complain that these functions were not done as well by the system provided by SAM.
Sometimes, particularly when an avowed aim of the Board of a company is to produce savings by redundancies, the introduction of a computer system is resisted by the staff. There was no such resistance in this case. Hedley's and its staff wanted the system to work.
SAM is a small software company whose only product is its software known as InterSet. InterSet is a ready-made package of software modules made by SAM for stockbrokers and others (such as Banks) dealing in stocks and shares in administering their "back-office" systems. Those systems include processing and settling transactions in buying and selling shares, accounting for clients' money, and communicating with CREST, the UK computerised settlement system for the securities industry. Buying InterSet is not as simple as going into a shop and buying a shrink wrapped package, but it is not a bespoke system. The customer can make choices between certain modules and certain services, but it is sold as a developed system.
SAM claim £310,509.84 plus interest for balances alleged to be due for licence fee, post-installation maintenance and other services after a voluntary reduction of about £91,000. Hedley's have already paid SAM £184,605.32. In pre-sales representations, SAM told Hedley's that the system would cost no more than £180,000 and that there was a "money back guarantee in the event that a system proves unacceptable for the customer's purposes".
Hedley's counterclaim damages now, after some changes, set at £789,658.44 plus interest including all sums paid to SAM, increased cost of working, write-offs, fines and additional charges, mitigation costs, and loss of profits.
History
On 7 and 9 July, 1999, SAM responded to an enquiry by sending two letters to Hedley's. On 7 September, 1999. SAM gave a demonstration of InterSet. On 18 October, 1999, Hedley's signed a Licence Agreement and a Maintenance Agreement. Over the weekend of 18 and 19 December, 1999, InterSet was commissioned at the Blackburn office of Hedley's for "Go-Live" on 20 December, 1999.
Immediately after Go-Live, serious problems were apparent, many of which were fixed, some speedily. Hedley's continued to use InterSet but problems continued to arise. In January 2001, Hedley's decided to cease using InterSet and instead to "outsource" their back office to Pershings. Hedley's did not tell SAM of that decision until 8 February, 2001. On 21 May, Hedley's went live with Pershings. On 1 June, 2001, the Claim Form was issued starting this action. On 30 July, 2001 Hedley's Defence and Counterclaim was served, later amended.
By paragraph 37 of the Defence and Counterclaim, Hedley's pleaded:
"By reason of the misrepresentations and the breaches of the licence and maintenance agreements, Hedley's were entitled to rescind the two agreements alternatively to reject the system alternatively to treat the agreements as having been repudiated by SAM. In or about June, 2001, Hedley's duly rescinded the agreements and/or rejected the system and/or accepted SAM's repudiation of the agreements. Alternatively by this defence, Hedley's rescind the agreements and/or reject the system and/or accept SAM's repudiation of the agreements."
It is notable that by their Defence, Hedley's do not identify a specific letter or conversation by which rescission, rejection, or acceptance of repudiation was effected. In the light of the dates I have mentioned in the previous paragraph of this judgment, the reference in paragraph 37 to June 2001 must be a mistake.
At the trial, and in closing submissions, counsel for Hedley's identified a fax message dated 8 February, 2001 as the act by which Hedley's rejected InterSet.
I have set out a very selective narrative from the history by way of introduction to show the unusual nature of the claim by Hedley's for return of everything paid to SAM after using InterSet for 16 or 17 months. To do justice to the cases of both parties, it is necessary to consider the history in greater detail and I shall return to the narrative later. First, I must consider the contracts between the parties.
The Contracts
Hedley's rely on representations made before contract by SAM. Hedley's submit that those representations were incorporated into the contract.
Hedley's expected and were encouraged by SAM to expect that what they were getting was a product at least as sophisticated as the now obsolescent ANTAR.
On 7 July, 1999, Hedley's, without the advice of a consultant, approached SAM. The same day, Mr. Whitehouse of SAM sent to Hedley's a brochure describing InterSet and making great claims for it.
The brochure included the following:
"InterSet has been designed from the outset to be the complete Book Entry Transfer settlement system for CREST, for the CGO [the Central Gilts Office settlement system] and for international usage. It is already in use at two of the UK's four high street banks."
Counsel for Hedley's comments that InterSet may well have worked for High Street banks; the problem was that it may not have been geared for small firms with no IT department. The evidence was that it was in use at only one stockbroking firm.
The point has frequently been made during the trial that InterSet works well elsewhere (and I have received evidence from stockbrokers, Hoodless Brennan to that effect) and accordingly it is said, if it did not work for Hedley's there must be something wrong with Hedley's method of working. That line of argument has prompted me to ask, (a) if it is a tried and tested system, why when supplied to Hedley's did it have admitted bugs? (b) what is the difference between a bug and a defect? Mr. Peter Susman Q.C. concealed any annoyance he may have felt when I returned to these questions more than once and he promised to answer them in his closing submissions but witnesses were not asked by him to deal with the questions, which I regard as questions of fact. In his closing speech, Mr. Susman Q.C. relied on some dicta of Staughton L.J. in Saphena Computing Limited v. Allied Collection Agencies Limited [1995] FSR 616 at 652. However, in that case, the court was dealing with an undeveloped system which was sold with bugs "warts and all". Staughton L.J. referred to expert evidence that in a bespoke system bugs were inevitable. However, in another case of a bespoke system, St. Albans City v. International Computers Limited [1996] 4 All ER 481 Nourse L.J. said at page 487, "Parties who agree respectively to supply and acquire a system recognizing that it is still in the course of...
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