Clearsprings v BusinessLinx

Out-Law Guide | 02 Nov 2007 | 8:31 am | 4 min. read

A look at implied terms in a software licence in the context of rights to use and resell the software.

Clearsprings Management Limited v (1) BusinessLinx Limited and (2) Mark Hargreaves PMCLR February 2006

  • [2005] EWHC 1487
  • (2006) FSR 3

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Facts

Clearsprings Management Limited (the Claimant) brought an action against BusinessLinx Limited (the Defendant) concerning the nature and extent of the copyright that the Claimant had acquired in a web-based database system designed and developed by the Defendant. The Claimant provided accommodation and related services to asylum seekers and commissioned the Defendant, a software company, to design and develop a web-based database system.

It was intended that the software would be tailored to the requirements of the Claimant's business and the Claimant provided information to the Defendant regarding its operating procedures for that purpose. The system that was developed was known as Clearsprings Management Information System (CMIS). It was common ground between the parties that copyright subsisted in CMIS and the first owner of the copyright was the Defendant. It later transpired that the Claimant wished to sell the software to third parties.

The Claimant contended that this had always been its intention, of which the Defendant had been fully aware. To this end the Claimant argued that there was an implied term in the contract that the Defendant would assign all existing and future copyrights in the system to the Claimant, or at least grant the Claimant an exclusive licence which was perpetual, irrevocable and royalty-free and which would allow the Claimant to distribute and sub-licence the system to third parties.

The Defendant asserted that there was no such implied term. It argued that any such implied term or licence would restrict it from using parts of the source code incorporated in the database that were wholly unrelated or consequential to the Claimant's management and operating procedures.The Defendant accepted that the Claimant had a royalty-free, perpetual and irrevocable licence to use the system in its own business but said that this licence was non-exclusive and that it did not include the right to sub-licence to third parties.

Judgment

The judge first turned his mind to the law on equitable ownership of copyright and implied terms and said that in some circumstances it is implied that the supplier will assign the copyright to the customer. He went on to state that if the circumstances did not justify such an implication, the law may imply a licence on such terms as would be necessary to give business efficacy to the contract.

The judge referred to the nine propositions set out by Lightman J in Robin Ray v Classic FM PLC [1998] FSR 622 which were accepted by both sides:

1. the supplier retains copyright unless there is an express or implied term to the contrary;

2. the contract may provide an express term;

3. commissioning of the work is insufficient in itself for the customer to acquire copyright;

4. the law governing the implication of terms is set out in BP Refinery (Westernport) Pty Ltd v The President Councillors and Ratepayers of the Shire of Hastings (1978) 52 A.L.J.R 20 at 26, which states that for a term to be implied the following 5 conditions must be satisfied:

(a)it must be reasonable and equitable;
(b)it must be necessary to give business efficacy to the contract;
(c)it must be so obvious that “it goes without saying”;
(d)it must be capable of clear expression; and
(e)it must not contradict any express term of the contract;

5. a minimalist approach is vital, in that an implication may only be made if it is necessary and then only what is necessary and no more;

6. if the need can be satisfied by a licence or assignment of a licence then only this will be granted;

7.the individual facts of the case should be considered, such as necessity of the licence, price paid and intention of the parties;

8. the ambit of the licence must be the minimum required; and

9. the licence must be limited to the joint contemplation of the parties at the date of the contract.

The judge concluded from these 9 principles that whether a term could be implied was entirely dependant on the circumstances of the individual case. The judgment details fully the witness accounts of both sides regarding the intention and knowledge of the parties at the time of the contract. The judge made no secret of the fact that he did not lay much credence in the credibility of the Claimant’s witnesses. The Claimant claimed that the Defendant was always fully aware that the Claimant intended to re-sell the software, referring to several meetings and an undated document. The judge gave short shrift to these claims.

The circumstances in this case were that the database was an electronic embodiment of the Claimants’ operating procedures and to that end it was necessary to imply a term in the contract preventing the Defendant from making use of the database in its entirety. The facts did not however require that a term needed to be implied to give the Claimant an exclusive licence in the copyright. An implied term to such an extent would restrict the Defendant from using the generic and underlying parts of the source code that were not attributable in any way to the Claimant. The only terms necessary to give the contract business efficacy were a licence for the Claimant to use the software for the purposes of its business and a restriction on the Defendant making use of the information about the Claimants’ operating procedures. The judge concluded that sub-licensing the software to third parties had not been contemplated and that, at the time of the contract, the parties did not know that the Claimant intended to licence the software to others. It followed that it was not necessary to imply a term permitting such re-selling. The Claimant had, by implication, a non-exclusive personal licence under the copyright in the CMIS system with no right to sub-licence. The licence was perpetual, irrevocable and royalty-free and the Claimant was entitled under the licence to repair, maintain and upgrade the system in accordance with the requirements of its business.

Commentary

This case provides a neat round up of the law in relation to the implication of copyright terms although the judgment is heavily focused on the judge's opinion of the characters of the witnesses. This may be simply inevitable in a case that turns on the word of one person against that of another. Clearsprings does not provide new law in relation to the acquisition of copyright but in fact serves as a distinct reminder that software contracts need to set out clearly and unambiguously the rights that a commissioning party requires. Customers need to consider their business plans and intentions for the future before entering into software development contracts with suppliers and suppliers need to consider precisely what they may be giving away.