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Rowan Turrall
Rowan Turrall,
SENIOR ASSOCIATE - SOLICITOR
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A cautionary tale for software suppliers
14 April 2015

AFD Software Limited v ZIP Address Ltd [2015] is a cautionary tale from the Chancery Division in which the judge's assessment of what was said during a sales call left the claimant software supplier with £12million less than it was seeking.

The facts

The defendant was a supplier of software to car dealers and needed software which would enable it to access the Royal Mail database of post codes to replace existing software which it was using and which cost it about £2,500 per year. It did some research on the internet and decided that the claimant, AFD, possibly offered a suitable product.

The defendant contacted AFD by telephone, explained its business and what it wanted to use the software for and was told that the claimant's product, Postcode Internet ("PCI") was suitable. AFD offered to send a CD containing PCI to the defendant for it to try. Having found the software was satisfactory the defendant contacted AFD again to confirm the price, to say that it wished to purchase a licence and to ask for an invoice to be sent. A pro forma invoice was sent and paid and immediately afterwards the claimant issued an invoice, a document entitled AFD Postcode Internet License Certificate and a copy of the PCI product.

Fast forward several years and AFD asked the defendant for information about its use of PCI. The defendant provided the information requested and as a result AFD decided the use was outside the licence terms and rendered an invoice for £12million plus VAT.

The defendant stopped using the software straightaway and found an alternative supplier of similar software which cost a few thousand pounds per year. Unsurprisingly it refused to pay AFD's invoice and AFD issued proceedings for copyright infringement or damages for breach of contract. The judge described the proceedings as engaging "possible pitfalls in following a licensor's recommendation". The case hinged on what had been discussed by the parties during the initial sales call between Mr Johnson of the claimant and Mr Flaherty of the defendant.

The arguments

AFD argued firstly that Mr Flaherty had misled it about the use which it intended to make of the software and that it only recommended PCI because it was misled. Alternatively it argued that Mr Johnson had misunderstood the defendant's requirements and that the recommendation to use PCI was based on a false premise. Further, AFD argued that the contract containing the licence terms was not made until the defendant accepted AFD's written licence terms. Accordingly it contended that because the licence terms did not permit the use of the software being made by the defendant, the defendant was liable for damages for breach of copyright and/or breach of contract.

The defendant's position was that Mr Flaherty had truthfully described the use it wanted to make of the software, was told by Mr Johnson that PCI was suitable for that use and relied on that representation, regardless of any small print that might have been in the contract. There was also an argument about whether the contract had been concluded before the defendant had notice of or had accepted the written licence terms.

The decision

The case turned on what was said during the initial sales call – a call that neither party's representative could specifically recall. Mr Johnson relied on a contemporaneous file note he had made together with an explanation of his usual practice during sales calls. Mr Flaherty relied on the fact that the object of the call was to find a substitute for the software which the defendant was previously using and that he understood the importance of explaining the use of the software to AFD so they could advise whether and if so, which of its products were appropriate. The judge preferred Mr Flaherty's evidence.

The relevant provision of the licence terms stated:

"This license does NOT permit the use or display of [PCI] on Intranet sites, private websites, websites not your own, nor for access to [PCI] from your computers."

AFD argued that the licence permitted use of the PCI software only on "public Internet Websites" but the use made of the software by the defendant on its website was not a public Internet website. The judge found that Mr Johnson did not explain to Mr Flaherty that PCI could only be used on "public Internet Websites" and what the term meant in the context of the licence. Mr Flaherty said that he assumed the defendant could use the software in the way they did because he had explained to Mr Johnson what they wanted to use the software for and he had recommended it. He thought that was enough and admitted that he did not read the licence terms in detail.

The judge found that the defendant relied on the recommendations made by AFD during the sales call and that it was reasonable for them to rely on those recommendations. He also found that the defendant had changed its position to its detriment as a result. It could have gone to alternative suppliers at roughly the same price it was paying its previous supplier if it was not satisfied that AFD could offer what it needed.

The judge concluded that it was an infringement of copyright to use software without the consent of the copyright owner. In this case he found that Mr Johnson had given AFD's consent for the defendant to use the software for the applications which Mr Flaherty had inquired about. In relation to the effect of the licence terms he went on to say:

"I do not think that consent is withdrawn by the what is now established practice of clicking acceptance to (usually) long form terms and conditions whenever software is downloaded or similar unless there is some unambiguous statement to that effect to which attention is properly drawn. There was no such statement in this case."

The judge therefore found that AFD had failed to establish liability for infringement of copyright. He noted in his concluding remarks that in any event, the sums claimed by the AFD were grossly inflated and were likely to have seriously hampered settlement attempts.

Conclusion

The case is a useful reminder of the need to ensure that sales staff check precisely what the intended use of software is and to alert potential customers to any restrictions on licensed use.

For more information about the issues in this article or to find out more about how the Dispute Resolution team can help you please contact Rowan Turrall on 0118 952 7206 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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