Anglo v Winther

Out-Law Guide | 02 Nov 2007 | 8:31 am | 12 min. read

A purchaser of a standard software package, as opposed to a bespoke solution, was held to be under an implied duty to co-operate with the software supplier so as to achieve as good a fit to the purchaser’s requirements as possible.  The purchaser was also under an obligation to modify its expectations so as to accept reasonable solutions to problems that arose.

Anglo Group Plc v Winther Brown & Co Limited and BML (Office Computers) Limited

  • [2000] 72 Con LR 118 (TCC). 343

  • ITCLR 559

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Facts

Given the importance of some of the parts of the judgment, the statement of facts will be kept to a minimum to allow consideration of the judgment.

Thus, stating the facts briefly, Winther Brown & Co Limited (WB) bought a computer system from BML (Office Computers) Limited (BML), financing the purchase through a lease taken out with Anglo Group plc (Anglo).

WB was a distributor and reseller of wooden and carved moulding and other such decorative items. BML markets a software package called Charisma, which covers many aspects of  business operations, such as sales order processing, stock purchase, stock control, credit control and other such, fairly standard, matters.  Anglo is a well known finance company.

The acquisition of the system went through a standard process – WB issued a fairly vague list of requirements, against which BML proposed its Charisma product. Discussions took place over some time (from July to December 1995) and there were presentations, demonstrations and more technical discussions as well. BML was not the only supplier approached by WB.

The implementation was troublesome.  Go-live had originally been set for July 1996, which was achieved, but was quickly followed by complaints about “limitations” on the system, lists of issues were produced.  There were undoubtedly problems in amongst the points made by WB, and while some of these were being actioned by BML, it did take some time to do so.

Things came to a head in January 1997 when, following the appointment by WB of FMC, a firm of consultants, WB sent a letter listing the most serious problems. Matters escalated from there until WB purported to terminate the agreements with Anglo and BML in April 1997.

Judgment

Experts

Judge Toulmin first considered the role of experts in litigation under the new rules of procedure.  He propounded some rules, emphasising the need for independence and integrity on the part of the experts.  This meant co-operation in meeting and trying to narrow the issues and also being ready to change one’s opinion, in the light of new evidence, or after considering the other side’s opinion.

In this case, Judge Toulmin applied this approach to the experts for WB, provided by FMC, including one Keith Salmon of FMC.  FMC had already received adverse comments in a previous case (Gretton v British Millerain Co Ltd (1998)unreported). Judge Toulmin reviewed Mr. Salmon’s evidence in this case and looked at comments earlier made by him in a paper in 1995. In that paper, Mr. Salmon had claimed that his duty as an expert “was simply to help my client win his case on the facts as defined in the statement of claim on truthful expert evidence that I had compiled, examined and presented – nothing more”. Mr. Salmon also wrote that an expert did not have to be impartial “as demonstrated by the fact that if asked the same question by either party he would give the same answer”. Judge Toulmin also reviewed the evidence given by Mr. Salmon in evidence on the duties, as perceived by him, of an expert.

Judge Toulmin simply found that Keith Salmon “failed to conduct himself in the manner to be expected of an expert witness”. This finding extended to the quantum witness provided by FMC, one Mr. Martin. In the result, the judge found himself unable to rely on their evidence in support of WB as independent expert evidence.

Implied terms

Judge Toulmin commenced by stating that it was “well understood” that the design and installation of a computer system requires the active co-operation of both parties (paragraph 125 of the transcript). This extends to the customer accepting where possible reasonable solutions to problems that have arisen (paragraph 127 of the transcript). If the matters are unimportant or relatively unimportant, each party must act reasonably, consistent with its rights.

Judge Toulmin spelled out six aspects of the implied term in a contract for the supply of a standard computer system (paragraph 128 of the transcript):

  1. the purchaser must communicate any special needs to the supplier
  2. the purchaser must take reasonable steps to ensure that the supplier understands those needs
  3. the supplier must communicate to the purchaser whether those precise needs can be met and how – if they cannot be met precisely, appropriate options must be given
  4.  the supplier must take reasonable steps to ensure that the purchaser is trained in how to use the system
  5. the purchaser must devote reasonable time and patience to understanding how to operate the system
  6. the purchaser and supplier must work together to resolve the problems which will almost certainly occur.

BML’s performance

Looking at the overall performance of BML, Judge Toulmin made a number of important findings to the effect that the system, as supplied, performed the functions to be expected of it: it was a suitable computerised telesales, order processing, stock control and accounting system which would provide comprehensive management information.

Judge Toulmin also looked at the large number of individual complaints made by WB. Some of these were said to be major, and others minor in themselves, but taken together could be seen as serious failings.

Taken shortly, the judge did not find any liability on the part of BML, although there were some areas where it appears from the findings of fact that BML was strictly in breach of its obligations. For example, Judge Toulmin’s findings at paragraph 170 of the transcript were that a certain action caused a screen to lock, which BML “got around” by training WB’s staff not to do the things that might cause the lock-up. Judge Toulmin found that even if the training did not solve the problem, it was only a relatively minor matter since it did not cause the whole system to crash. In other matters, Judge Toulmin seemed to take the line that the system as supplied did have a defect, but the WB had not pursued BML vociferously enough, and if it had, BML would have done something about it – see for example paragraph 181 of the transcript dealing with allegations of incorrect figures in credit notes and other documents.

Repudiation

Judge Toulmin rehearsed the basic law in this area. He cited Hong Kong Fir Shipping Co v. Kawasaki Kisen Kaisha [1962] 2 QB 26 – effectively that the victim of a breach of contract has to show that he has been deprived of substantially the whole benefit he contracted to obtain. This can be cumulative – as in Lep Air Services v Rolloswin Limited [1972] AC 331, where Lord Diplock took account of the cumulative effect of the failures to perform to conclude that there was a failure to provide to the creditor substantially the whole benefit that it was the intention of the parties that he should get.

In the light of his findings as to BML’s performance, Judge Toulmin found that there was not a repudiatory breach, in spite of the fact that BML’s response had in some cases been slow.  As to the few matters of genuine complaint, WB was under a duty to co-operate with BML to sort them out.

Damages

WB had to choose between a claim for loss of profits or a claim for wasted expenditure. At a late stage in the trial WB elected for loss of profits. This need to make an election is based on Anglia Television v Reed [1972] 1 QB 60. On the facts, Judge Toulmin did not find any loss of profit.

The claim for additional cost of staff was rejected – it was a claim for wasted expenditure and could not be made at the same time as a claim for loss of profits. In the light of the judge’s other findings, Judge Toulmin was not prepared to make any award under this head “doing the best he could” for those few areas where he had found faults in the system as supplied.

Judge Toulmin also rejected the costs of and associated with the acquisition of the replacement system and also found that there was “software betterment” since the new system was not standard (so that WB could not claim for improvements in the replacement system).

The contract with Anglo

In the light of the judge’s findings of fact, there was no issue whether Anglo was liable for breach of contract.

Judge Toulmin looked at section 9 of the Supply of Goods and Services Act 1982, which provides that in a contract for hire of goods there is no implied warranty about the quality or fitness for purpose of the goods bailed. However, by section 9(4) there is an implied term of fitness for purpose where the goods are hired in the course of a business and the bailee makes known to the bailor or a credit broker the purposes for which the goods are required.  By section 9(6), this implied condition will not apply where the bailee does not rely on or it was unreasonable to rely on the skill or judgment of the bailor or credit-broker.

Anglo by its standard terms excluded liability for the quality of the goods. Judge Toulmin considered that this was reasonable under section 7(2) of the Unfair Contract Terms Act 1977. According to Judge Toulmin, WB had a right of recourse against BML, it did not have to obtain its finance from Anglo, it was aware of the terms and accepted them. While the system was standard, implementation required considerable input on WB’s part. Anglo had not been involved in the negotiations. Judge Toulmin also held that the exclusion of consequential loss was reasonable.

Commentary

Judge Toulmin’s comments in this decision will come as no little surprise to lawyers after his findings in South West Water v ICL. As in South West Water, there is little in the way of citation of authorities for the conclusions reached, but the conclusions are nonetheless striking. As the summary of the judgment has shown, the case looked at a number of areas. The area which will be of most interest to lawyers involved in the IT industry will be Judge Toulmin’s comments on the user’s duties of co-operation and this commentary will look at that aspect in particular. Indeed, already, the learned judge’s comments are becoming widely quoted by suppliers in the context of computer disputes with their users.

On a straight reading of the judgment, it appears that Judge Toulmin was restricting his comments to supplies of standard software – paragraph 128 of the transcript clearly limits the implied terms to “a contract of the supply of a standard computer system”. Elsewhere in his judgment (talking about the replacement system) he compares a standard system with a non-standard one, clearly stating that a non-standard system gives a user the chance to acquire a better system, one more closely matched to its precise requirements.

In this sense, the learned judge seems to approach the question of standard software almost as a second-best option, one where compromise by the user, even to the extent of having to give up contractual entitlements, is a necessity.  This may be true, but there are other difficulties with the judgment.

There were clearly terms and conditions applying to the supply of the system, they are mentioned in the judgment at paragraph 129, where Judge Toulmin holds that BML’s terms of business are similar to the implied terms he holds to apply. However, the exact terms of business are not quoted in the judgment and we cannot know what they are.  In any event, they are dismissed from further consideration.  Judge Toulmin simply stated:

“It is sufficient for the purposes of this judgment to hold that the terms set out above are incorporated into this contract.  It is not necessary to consider whether BML’s own terms are unfair in so far as they go further.”

This is surprising on two counts.  Firstly, it seems extraordinary that implied terms can be so easily incorporated into an agreement, where there are already similar terms. It has always been axiomatic in the common law that terms are not implied except for certain very precise grounds.  Secondly, it remains unclear how terms can be implied across existing terms.  Again, it has always been axiomatic that the existence of express terms shows that the parties have, as it were, fully stated their views on the subject, and that there is no room for implied terms to qualify what is already there. Perhaps a third point could be added: Judge Toulmin goes on to say that consideration of the fairness or otherwise of BML’s terms is therefore unnecessary.

It might be asked how such terms could be regarded as unfair, even potentially. Such terms would, after all, only set out the obligations of the user which the judge has already regarded as essential at least for the supply of standard software. None of this seems to fall foul of anything in the Unfair Contract Terms Act 1977, or of any other rule of law relating to the “fairness” of contracts.

This leads to a further point. Why are contracts for the supply of a standard system to be regarded as something so fundamentally different from contracts for a bespoke system? Is the limitation so deliberate that it was intended to indicate that similar implied terms could not apply to bespoke systems?

This conclusion would be strange. Looking at bespoke systems development, such projects are all about co-operation between the parties. It will, of course, depend on the methodology used by the supplier: rarely will a project now be conducted according to what may be termed the “traditional life cycle” – specify everything exhaustively at first, then go on to more and more detailed specifications. Almost inevitably nowadays, some sort of method will be used that equates more or less to either a “waterfall” technique (such as SSADM) or RAD or some variant of it (such as DSDM). In such cases, the need for implied terms (in the absence of express terms) requiring co-operation and even compromise are all the more compelling.  Indeed, without such co-operation, such projects are impossible.

A further and rather strange aspect of the judgment is the way in which defects were found to exist but which sounded in no damages. A particularly important example seemed to be under the heading in the transcript “Unit of Measure” (starting at paragraph 177). There were undoubtedly bugs, which gave rise to incorrect figures. Such incorrect stock figures (stock purchased in meters rather than feet) caused WB to take stock out manually and re-enter it (a work around) from October 1996 to February 1997. It seems that such errors as these should be capable of calculation in terms of additional staff or management time required to perform the manual stock take. In reality, it is errors in software like this that are most destructive of a user’s confidence in the software. If credit notes and stock checks cannot be trusted to contain the right figures (even to contain the right unit of measurement) that can create a considerable headache in terms of the overhead of double-checking every document even to ensure that it does not contain, as Judge Toulmin put it, “obvious errors”.

The next difficulty will be applying this to individual situations. Judge Toulmin said at paragraph 127 of the transcript:

“The duty of co-operation in my view extends to the customer accepting where possible reasonable solutions to problems that have arisen. In the case of unimportant or relatively unimportant items that have been promised and cannot be supplied each party must act reasonably, consistent, of course, with its rights.”

It is not clear what this means.  If something has been promised, absent anything in the agreement, that is a breach of contract sounding in damages. If it is unimportant it would mean that it could not be a ground for termination. However, there is now the possibility, again absent anything in the agreement, for the user’s rights to be, as it were, suppressed in favour of some obligation to take something else. Taking something else might be part of the duty to mitigate, but that is different again. It is hard to see how an obligation to take something different from what had been promised can be implied against the express terms of the promise. Furthermore, how can a party act reasonably and consistent with its rights? What if a party exercises its rights in circumstances that are unreasonable? Is there to be implied some penalty on a party because that party insists on strict compliance with the bargain?

While much of what the learned judge says is to be welcomed, and will be welcomed by IT lawyers, there is much in the judgment that is left unanswered and we will have to wait to see how Judge Toulmin’s dicta are applied in practice.