Rubicon v United Paints

Out-Law Guide | 14 Nov 2007 | 7:02 pm | 6 min. read

The Court of Appeal held that a contract to supply an IT system was breached by installing a time-lock device in that system, on the ground of breach of the warranty to give quiet possession.

Rubicon Computer Systems Limited v United Paints Limited (2000) 2 TCLR 453

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Facts

In October 1988, Rubicon sold a computer system to UP for £57,264.88 to replace an ageing system.  It was delivered on 20 December and £45,879.88 was paid on the following 15 February 1989.  The balance was withheld as a result of a dispute about whether or not Rubicon had to transfer data from the old system to the new one.

A further payment was made in April 1989, but £8,748.86 was still outstanding.  In April or May 1989 someone from Rubicon (who still had access to the system) put a device in UP’s system to prevent it working if the device were activated (a time lock).  This was in fact activated on 6 June 1989, and the computer system was rendered useless.  UP’s solicitors on 8 June accepted the breach as ending the contract, requested the purchase price back and offered the system for collection by Rubicon.

Rubicon did not tell UP what it had done until 27 July and said the action had been taken because of UP’s failure to pay the outstanding price.  The dispute resulted in a standoff, with UP refusing to pay the balance and Rubicon refusing to deactivate the time lock. When Rubicon deactivated the time lock in March 1994, the system was obsolete.

Judgment

Rubicon had supplied a system in accordance with the terms of the agreement, as it had supplied a system that was capable of functioning in a reasonable manner for a reasonable period of time.

The Court of Appeal also applied section 12(2)(b) of the Sale of Goods Act 1979, which provides for an implied term that the buyer “will enjoy quiet possession of the goods except so far as it may be disturbed by the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known”.

The Court of Appeal had no difficulty in applying the ordinary rules that wrongful interference with goods by a seller after the property has passed constitutes a breach of the implied term that the buyer will be permitted quiet possession of the goods.  The fact that the buyer has an alternative remedy in tort for wrongful interference with goods made no difference.

It was axiomatic that a breach, to be repudiatory, had to go to the root of the contract or frustrate the commercial purpose of the venture.  Against Rubicon’s arguments that the time lock was easily removed, the Court of Appeal did not interfere with the trial judge’s finding of breach (admitted by Rubicon before the Court of Appeal) and that this was repudiatory in nature.  From there it flowed that UP had effectively accepted the breach as terminating the contract.

Damages were at least the return of the price paid.  Other items of loss might be claimable, such as a claim for loss of profit for the period the system was not working.  There was no such claim here, so there was equally no duty to mitigate, as the loss was exactly the same as the purchase price that had been paid.

Commentary

There are extremely few cases about the use of time locks, and it is fortunate that the Court of Appeal, in a case that otherwise was dealt with in a County Court and was a low-value claim, has had the chance to review the matter and explain the law in the area.  However, the brief judgment leaves many questions unanswered.

It is interesting that the Sale of Goods Act 1979 was applied without any discussion (apparently) of the applicability of that statute to the supply of a system consisting of hardware and software.  Presumably, as in the case of St. Albans v ICL, the Court of Appeal would proceed on the basis that, if the statute did not apply, since this was a transaction that did not fall within the strict words of the Act, equivalent common law warranties would apply (nineteenth century case law was the origin of the statute anyway).

It is also not clear from the judgment what the time lock did, and whether it affected just the software or the hardware, or both.   Nor was there any discussion of whether it was possible for UP to obtain any other software that would function on the hardware as supplied, or obtain different hardware for the software.  The judgment of the Court of Appeal is brief, and it is assumed that if the “system” stops working for any reason, this is a repudiation of the whole contract, for hardware and software.  Perhaps it may be possible to argue that a time lock that affected only the hardware would not in many cases be a repudiatory breach, certainly where the hardware was of an ordinary kind – PCs, for instance, that could be sourced from a multiplicity of vendors.  While the Court of Appeal stated that Rubicon had access to the system to put the time lock on, it is also not clear if that was physical access or remote access over a modem.

These are interesting questions, but the real problem with the case is the application of the implied term of quiet possession at all.  It is a clause that is often encountered in IT contracts, but no-one has really known the exact meaning of the phrase and what situations it might apply to.  There is surprisingly little case-law on the subject where the seller is the one that does the disturbing of the quiet possession.  Section 12(2) is, of course, part of the larger section in the Sale of Goods Act dealing with the duty to pass good title and give possession.  Section 12(2) itself deals with two matters, firstly the implied term that “the goods are free, and will remain free until the time when the property is to pass, from any charge or encumbrance not disclosed or known to the buyer before the contract is made”.  This deals with title fairly and squarely, and covers the situation where there is a sale of goods and the title in them only passes at some time after the contract is made.

The second part of section 12(2), relied on here by the Court of Appeal, entitles the buyer to quiet possession, “except so far as it may be disturbed by the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known”.

It may have been thought that the only sort of interference with quiet possession would have to be done by a third party, independent of the seller, however, there are a few cases where it was the seller.  In Empresa Exportadora de Azucar v Industria Azucera Nacional SA, the Playa Larga [1983] 2 Ll R 171, the Cuban state-owned sugar trading agency sold sugar to a Chilean buyer and sent some of the goods aboard the Playa Larga.  When General Pinochet overthrew the Allende regime, the Cuban authorites ordered the ship not to unload and this was held to be a breach of section 12(2)(b) resulting in an award of damages to the buyer.

Another example comes from the High Court of Australia in Healing (Sales) Property Limited v Inglis Electrix Property Limited [1968] 121 CLR 584.  In this case the seller wrongfully re-took possession of the goods and sought to re-sell them to third persons.  This was held to be a breach of the implied warranty of quiet possession.  The Australian High Court rejected there the argument that the implied term was not intended to cover tortious action by the seller, for which the buyer had a separate remedy.

Both these cases related to physical possession and the seller doing something physically to deprive the buyer of it. The problem with this case is that Rubicon’s actions had no effect on UP’s possession, what was affected was UP’s use of the goods.  Applying a time lock having the effect of rendering the computer useless is perhaps an extreme example, but might the reasoning of the Court of Appeal not be extended to other situations?  For example, would there be a breach of the implied term where the seller was dilatory in providing training or support services, thereby rendering the system equally useless?  It might be important.  Support might be under a separate contract: failure to support might give the buyer a right under that support contract, whereas what might really be desired was a way of bringing the main supply contract to an end.

In conclusion, it is submitted that the Court of Appeal, possibly in its anxiety to provide a remedy to UP, has extended the meaning of quiet possession to an unacceptable degree.  It is submitted that the real concern of section 12 is with title and physical possession.  The real purpose was to give the buyer a remedy if it transpired that some other person had some sort of charge over the goods sold, or if the seller was not entitled to sell at all.  It was not, it is submitted, intended to give the buyer a continuing warranty that they will be able, without the seller interfering, to get full use out of the goods following delivery.