When is your software not your software?
“Everything will be fine” or “we have a good relationship with our supplier” or “I have it all in an email” are stock responses from clients on hearing from their lawyers the importance of putting in place a clear written agreement. If you’ve exchanged letters or emails with your supplier and have a good relationship, why would you need to go to the trouble and expense of preparing a legal agreement? Failing to do so could be a false economy and have adverse consequences.
Yet another case of “I told you so” (for lawyers anyway), hit the headlines when the High Court told Clearsprings Management Limited that they had no ownership rights in a system which the Judge, Mr Christopher Lloyd QC, described as an “electronic embodiment of Clearsprings’ operating procedures”.
In early 2000, Clearsprings engaged Businesslinx Limited to develop a web based database by which Clearsprings could report to the Home Office on the accommodation services it provides to asylum seekers. Work commenced on the basis of a letter outlining in broad terms the work to be carried out and the fees to be paid. The letter formed the basis for the contractual arrangements but was only in general terms. The letter did not specify in any detail the exact requirements of Clearsprings and nor did it contain any of the usual contractual protections. Ultimately, this led to misunderstandings and disagreement.
By far the biggest dispute was over the ownership of the intellectual property rights in the system. Not only did Clearsprings want to own the intellectual property in the system as it was a reflection of its operating procedures but also because it saw an opportunity to license the software to other businesses that had a similar commercial need. This would have allowed Clearsprings to control use of the system and prevent use by its competitors. It would also open up potential new revenue streams.
The key issues arising from the case are as follows:
- Was there an express term in the agreement between the parties transferring ownership of the intellectual property rights in the system to Clearsprings?
- In the absence of such an express term, would the Court imply a term to this effect?
The Court accepted that there was an agreement in principle that Clearsprings would own the intellectual property in the system but the terms on which this would happen were not fully spelt out. For there to be a legally binding agreement, there needs to be a “meeting of minds”. This means that both parties need to be in total agreement as to the terms of any transfer of ownership of intellectual property. Because the transfer was still subject to further negotiations on the precise nature of the terms transferring ownership, the Court found that there was no agreement on the issue of ownership. In other words, the parties were not in total agreement as to the terms of any transfer.
In this situation, the Court may imply a term in to the contract to deal with the intellectual property issue as the parties have failed to provide for this expressly. The Court will not rewrite an agreement but will only imply terms to give effect to the parties intention and to give “business efficacy” to an agreement. It was always intended by the parties that Clearsprings should have rights to use the system even though the parties failed to specify the exact scope of those rights in a binding agreement. A Court will therefore imply a term in to the contract between Clearsprings and BusinessLinx to give effect to this intention. The difficulty is in determining the scope of the rights to be granted. Should there be an implied licence or an implied right to transfer ownership?
It is well recognised that where a client engages the services of an independent contractor to perform work which involves the creation of a copyright work, the circumstances may be such that there will be implied into the contract an agreement that the contractor will transfer to the client copyright in the work created. Where the circumstances do not justify the implication of an obligation to transfer ownership, the law may nevertheless require the implication of a licence, whether exclusive or otherwise, and on such terms as may be necessary to make sense of the commercial bargain between the parties. The default position is that the contractor is entitled to retain ownership in the copyright. The mere fact of commissioning alone is not enough to entitle the client to copyright. There must be other factors present to justify the implication of an obligation to transfer copyright.
The Court will only do the minimum necessary to secure rights to use the system. In this case, the Court found that Clearsprings did not need to own the system in order to be able to use the system and, therefore, a licence was sufficient. Having decided that a licence is appropriate, the Court has to determine the scope of the licence. Clearsprings argued that if the Court rejected its submission that it should own the system, then it should be entitled to an exclusive licence with the right to grant sub-licences. In practical terms, this would be the same as owning the system as Clearsprings would have been able to prevent competitors using the system and would also have been able to earn revenue through sub-licensing. Again, the Court re-iterated that the scope of the licence should only be the minimum necessary to use the system. Granting exclusivity and the right to sub-license went too far as these rights were not necessary to use the system. All that Clearsprings was entitled to was a non-exclusive, perpetual and royalty free licence to use the system.
It is common for developers to re-use software routines that were developed for different clients. The Court had regard to this industry practice in coming to its decision and accepted that in future projects BusinessLinx should be free to use routines that were developed for the system unless a particular routine would make use of ClearSprings' confidential and proprietary information. Implying a term that transferred ownership or granted an exclusive licence would be contrary to this practice. This practice was a significant factor in the Court reaching its decision.
Clearly, this represents a lost opportunity for Clearsprings and a potential windfall for BusinessLinx even though BusinessLinx had originally indicated its willingness to transfer intellectual property in the system.
Is there anything Clearsprings could have done differently in order to have avoided this expensive mistake happening:
(i) Put in place a clear written agreement;
This is particularly important in relation to IT projects as they can be subject to delay and cost overruns. Inevitably, this was the issue that crystallised the dispute between Clearsprings and BusinessLinx over intellectual property ownership. The project was delayed and the costs were spiralling. Indeed, the project was never actually completed. It is therefore crucial to build into any contract with a developer safeguards to protect against delay and cost overrun. For example, this could include penalties for late delivery.
Moreover, for copyright in software to be transferred, there needs to be a transfer in writing. It is not enough for someone to agree orally to transfer ownership. Consider also whether you actually need to own the software. Usually, developers are insistent on being able to re-use software developed for other clients. In many cases, it may be sufficient to put in place restrictions on developers not to licence the developed software to competitors. If you are going to include such restrictions, then these need to be drafted carefully to be effective.
(ii) Scope the project carefully and realistically;
It needs to be clear exactly what the developer is delivering and at what price. Again, this should be set out in writing. The timetable for delivering a project needs to be realistic.
(iii) Ensure the agreement is signed prior to the developer commencing work;
Often developers start work before a contract is agreed and signed. Where possible, this should be avoided. Once the developer has started work there is less incentive to agree to unfavourable terms. Indeed, it can be in the developers interest to stall and not actually agree a contract. If developers do start work before a contract is agreed, make sure it is signed as quickly as possible. In the case of Clearsprings, its consultants recommended that a contract be put in place and even provided a form which included provisions transferring ownership in the system. However, Clearsprings failed to get this contract signed.
(iv) Consider alternative forms of dispute resolution.
With the best will in the world, disputes do from time to time occur. Litigation can be expensive and so consider alternative means of resolving disputes. It relation to IT projects, the use of independent experts is quite common. Inevitably, this should be cheaper and less time consuming than using the Courts. Moreover, experts may possess technical expertise in relation to the software industry that a High Court judge may not have. Mediation is also another popular method of resolving disputes involving IT projects.
Although it’s easy to be wise after the event, the case illustrates that the benefit of putting in place a written agreement far outweighs the cost of doing so and risks if things go wrong. No lawyer wants to be an “I told you so”.