Out-Law / Your Daily Need-To-Know

Ansys v Lim

Out-Law Guide | 02 Nov 2007 | 8:31 am | 5 min. read

When a software company terminated a distribution agreement, licence fees received by the distributor from the end users after the date of termination were not held in trust for the software company, but were received by the distributor in its own right, subject to an ongoing implied obligation on the distributor to make payments to the software company.

Ansys Inc v Lim Thuan Khee and Tan Tiat Eng

  • [2001] ECDR 34. 87

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Facts

Ansys Inc (Ansys), a US company, was the sole owner of certain software.  Under an international distribution agreement dated 1 December 1994 (“the 1994 agreement”), Ansys authorised Structures and Computers Ltd (“SCL”) to distribute the software in the UK and the Netherlands and to enter into tri-partite standard licence agreements (“the licences”) between Ansys, SCL and the licensee.  Ansys terminated the 1994 Agreement as of 31 December 1996. 

During the period of the agreement the licence fees payable under the licences were payable to SCL in its own right and SCL had no obligation to account for those fees to Ansys.  Instead, pursuant to clause 2.3 of the 1994 Agreement, SCL was obliged to make what were termed “licence payments” to Ansys.  This obligation was not contingent on SCL receiving payment from the licensee; SCL had an obligation to make the licence payments even if no licence fee was received from the licensee.  In practice the licence payments were around 65% of the sums received from the licensees; the 35% balance was retained by SCL as remuneration for the work in selling the licence, training the licensees and providing support and maintenance.

The claim was centred around the question of what happened to those monies paid by licensees to SCL after termination of the 1994 Agreement (“the 1997 licence fees”).  Ansys contended that after termination SCL was not entitled to invoice the licensees for licence fees and any monies received were received by SCL as trustee for Ansys.  On this basis Ansys alleged that the respondents, who were the officers of SCL, were constructive trustees to the extent that they assisted in the misappropriation of the funds representing those licence fees.

The respondents contended that the position post-termination was no different from that during the currency of the main agreement and that any claim Ansys might have had was one for a claim in debt against SCL.

Judgment

The appeal was made by the claimant from the decision of Park J which held that the Defendants were not constructive trustees since no constructive trust was created.  This was decided on the basis that the contracts between the parties dealt with the position concerning licence fees (admittedly not perfectly) and therefore ownership did not need to be determined by reference to other areas of law such as the law of trusts.

Waller LJ agreed substantially with the decision by Park J, holding that the 1994 Agreement did not provide that on its termination the licences would also come to an end or that they would be automatically novated to a new distributor, thereby removing SCL from the relationship.  Therefore, post-termination, the licensees remained under the obligation to pay licence fees to SCL.  Pursuant to Clause 2.3 SCL did not have an obligation to account to Ansys for the licence fees received, i.e., the licence fees were not “held for” Ansys.  Instead, SCL’s obligation, which was wholly unconnected with the receipt of monies, was to make licence payments.  As a result, Ansys claim against the Respondents as constructive trustees failed.

Waller LJ continued that, whereas Parker J had found that SCL’s obligation under the 1994 Agreement to pay the licence payments to Ansys continued after termination of the 1994 Agreement, he did not consider that correct.  This was because clause 2.3 was not expressly stated to survive termination.  Nevertheless, an obligation did exist for SCL to continue to make licence payments to Ansys on that basis of (1) an implied term, i.e., the continued collection of the licence fees by SCL carried with it an ongoing obligation to make the licence payments required in the 1994 Agreement; or (2) Ansys being entitled to a restitutionary remedy to prevent SCL being unjustly enriched.

Commentary

This is an interesting case, and the first instance decision was reported in an earlier edition of Masons CLR.

The case highlights the problems that face lawyers drafting contracts (“umbrella agreements”) which allow the creation of separate, new, third party contracts, and the importance of paying particular attention to the termination provisions.

In this situation the umbrella agreement (the 1994 Agreement) was validly terminated by Ansys.  However the wording of the agreement was silent as to the effect of termination on the contracts created beneath the umbrella agreement.  As a result those contracts did not automatically come to an end or, more favourably, novate to a new distributor, but continued on the same terms as before with the licensees being obliged to pay licence fees to SCL.

The 1994 Agreement attempted to deal with the effect of termination on the licences by a loosely drafted “co-operation” clause as follows:

"In the event of termination or expiration of this Agreement for any reason, Ansys and [SCL] will work co-operatively together and with any new distributor appointed for the Territory to transfer purchase orders, license agreements, and any Support obligations and to resolve any other issue which may arise from the termination or expiration of this Agreement.  If [SCL] has not materially breached any provisions of this Agreement and has paid all amounts owed to Ansys, Ansys and [SCL] will negotiate in good faith to determine an equitable payment to [SCL].  Such payment will be equal to a portion of the lease and maintenance fees collected during the twelve (12) month period immediately following the Termination Date for licences entered into by [SCL] and Ansys on or before the Termination Date.”

The Court of Appeal judge held that the wording was not language of assignment nor did it place an embargo on SCL from collecting fees pending the conclusion of the co-operation, i.e. the clause did no divest SCL of its contractual entitlement to collect fees, nor did it change the character of the licence fees collected into trust monies.

Termination clauses within umbrella agreements must be clearly drafted to identify what happens to those third party contracts upon termination.  Waller LJ suggested some wording for the 1994 agreement:

“(i) all licence agreements would be transferred to a new distributor;
(ii) between termination and the finding of a new distributor all fees would be collected for the benefit of Ansys and the new distributor, and all obligations of SCL under the licence agreements would be carried out by Ansys;
(iii) a payment would be made to SCL of a specific proportion of the fees collected over the 12 months from termination or as fixed by some independent third party.”

It is interesting to note that because clause 10.3 of the 1994 Agreement (obliging SCL to make licence payments) was not stipulated to survive termination, Waller LJ considered it strongly arguable by SCL that an obligation to make licence payments to Ansys no longer existed (even though it validly received licence fees).  This again emphasises the importance of drafting clear provisions relating to the effect of termination, and the need to carefully identify which provisions will survive termination of the agreement.  It is clear that the Court will not provide ready assistance to ensure that certain provisions of the agreement will survive, even if doing so renders the contract a commercial absurdity.

Nevertheless, despite the judge stating that the Court would not re-write the contract, the judge did decide that an implied term possibly existed whereby SCL was under a continuing obligation to make licence payments to Ansys.  Alternatively, if there was no such implied term, SCL was prevented from retaining the licence payments on the basis of unjust enrichment.

The case identified that the termination of the 1994 Agreement meant that SCL could no longer “sell” licences to end-users.  However, termination had no effect on the position vis-à-vis those licences already in existence; the existing licences continued regardless of the termination of the 1994 Agreement.