Psychometric Services v Merant International

Out-Law Guide | 02 Nov 2007 | 8:31 am | 7 min. read

A purchaser of IT systems sought to obtain the source code to those systems when the relationship with its supplier broke down. Without the source code the claimant would have been unable to continue with its business and would have gone into liquidation; there were also contractual terms supporting the assertion that the claimant was entitled to the source code. The source code was awarded to the claimant, and the importance of ensuring access to source code emphasised.

Psychometric Services Limited v Merant International Limited

  • [2002] FSR 147 (Ch 2001)

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Facts

The Claimant company, Psychometric Services Limited ('PSL'), provided psychometric testing services for companies to assess job candidates.  In 1999 PSL wanted to expand its services by enabling candidates to complete its tests from a home computer via the internet. 

PSL approached Merant who quoted £195,000 to develop the websites.  Accordingly a contract was entered into on 20 October 1999 between the parties.  Under the contract Merant's fees were capped at £195,000.  However, during the project the parties agreed that the work required of Merant far exceeded that which was originally anticipated.  The parties therefore signed a Variation Letter on 10 March 2000 removing the £195,000 cap.  During the course of the project Merant received over £700,000 from PSL.  Merant claimed that PSL owed a further £960,000. 

PSL had secured three clients for its websites, notably Stepstone.  The Stepstone contract value was in excess of £14m.  PSL displayed the potential to be a market leader and highly profitable.  PSL's ability to fulfil this potential was however impaired as its websites were not operating properly.  It was agreed between the parties that the software contained defects and needed additional work to remedy these defects.  The number of and seriousness of these defects and their cause were however disputed by the parties. 

Although it was vital to PSL's business that these defects be remedied quickly, PSL had lost faith in Merant's ability and wanted to employ another software developer to further develop and perfect the software.  To do this PSL required the source code for the software. 

PSL had neither realisable assets nor spare funds.  PSL was reliant on its ability to use the websites if its business was to survive.  The parties agreed that the likely outcome of PSL not receiving the source code would be that PSL would go into liquidation. 

PSL made an application for an interim injunction to compel Merant to provide a copy of the source code.  PSL claimed that it had a contractual right to the source code.  Merant denied this and argued that PSL was attempting to obtain software which it had ordered but not yet paid for.  Merant further maintained that retaining the source code was the only way in which PSL would be persuaded to pay this outstanding sum.

PSL argued that the balance of convenience favoured the grant of the relief sought.  Merant denied this and relied on Zockoll Group Ltd v Mercury Communications Ltd  [1998] FSR 354 (which cited Nottingham Building Society v Eurodynamics Systems Plc  [1993] FSR 468) to support its contention that PSL had failed to justify the drastic relief sort.

The relevant contractual clauses referred to by Laddie J were the following:

'Work Product  Defined as the software deliverables and/or documentation developed hereunder and delivered to Company under a Project Designation.

Ownership(a) Consultant hereby assigns to Company right, title and interest in and to the Work Product delivered hereunder, except with respect to any Consultant Intellectual Property (as defined below).

The Consultant Intellectual Property was defined as intellectual property developed by Merant prior to or independently of the contract.

PSL will undertake that MERANT will be its sole supplier of web development services for a period of 2 years from the date of delivery of this project. … For absolute clarity, in the unlikely event of PSL being dissatisfied with MERANT's work, payment of the lesser of price of work performed or £195,000 plus VAT will discharge PSL of this obligation to MERANT and PSL may then proceed with an alternate supplier.'

MERANT will assign to PSL or its successors an irrevocable, non-exclusive, world-wide royalty-free licence to use and internally distribute copies of the source code and to prepare derivative works based in all the licensed materials.  The licensed materials are for PSL's internal business use only and are not authorised for repackaging, re-sale, or any other commercial use or distribution.'

Judgment

Laddie J considered the merits of PSL's contractual right to the source code.  The Judge emphasised that it was not necessary for him to reach a final conclusion on this issue.  He did however proceed to give his opinion on the merits of PSL's contractual claim. 

The Judge did not accept PSL's claim to be entitled to the source code under the contractual provisions defining 'work product' and 'ownership' of the work product.  The term 'work product' was defined as 'software deliverables', but 'software deliverables' was undefined in the contract.  According to the Judge, in a normal software development context, "software deliverables" would include the object code but not the source code.  Therefore the source code could only be called a software deliverable if there was some other term in the contract to provide a copy of the source code.

A clause which did strengthen PSL's contractual claim was the clause defining 'Long Term Commitment'.  Under this clause Merant would be the sole supplier of web development services to PSL for two years but if PSL were dissatisfied with Merant's work and if PSL had paid £195,000 then it would be entitled to shorten this period of two years and use an alternative supplier.  According to the Judge this clause would not make commercial sense if PSL had satisfied the two conditions but were not entitled to the source code, because, without the source code, no further development would be possible. 

The next clause considered was the clause defining 'Ownership of Source Code'.  In the Judge's opinion this clause strongly supported PSL's contractual claim to the source code.

For the purposes of the application the Judge proceeded on the basis that PSL's contractual claim to the source code was arguable.  The Judge then considered where the balance of convenience lay.

As mentioned previously Merant referred the Judge to the Zockoll case.   However, the Judge was not convinced that this case added much by way of guidance as the relief sought in the present case amounted to nothing more than an order for delivery up and contained none of the features which make courts reluctant to grant such relief.  The Zockoll case did however  emphasize the primary consideration of finding the course which is likely to involve the least risk of injustice following final judgment, as in all cases dealing with interlocutory relief. 

The Judge found that the least risk of injustice involved granting the injunction and providing PSL with a copy of the source code.  The following factors weighed heavily in the Judge's reasoning.  If PSL were refused the source code it would almost certainly go into liquidation.  This would seriously affect PSL, its employees, its backers and its customers.  It would be a significant injustice if, at trial, it was found that PSL was entitled to the source code.  Furthermore, in such circumstances PSL's potential damages would be unquantifiable.  This had to be compared with Merant's position.  Merant had given notice of termination and was only interested in recovering the outstanding £960,000.  There was no risk to employees or third parties.  If after granting the injunction it was found that PSL was not entitled to the source code, this would not involve a significant injustice to Merant.  For Merant, the worst case scenario if PSL obtained the source code was that Merant would not be paid, thus incurring a loss of £960,000.  If PSL were not given the source code it would likely go into liquidation and Merant would not be paid, thus again incurring a loss of £960,000.  There would therefore be no additional risk of loss for Merant if the injunction was granted.  In fact, the only way in which Merant would have any chance of recovering these sums would be if PSL obtained the source code, remained in business and hopefully acquired the resources to meet any obligations owed to Merant.  The Judge dismissed the suggestion that PSL should provide any security to Merant as PSL simply did not have the available resources to provide this.

Commentary

This case was decided in 2001 but was only reported more recently.  The Judge did not create new law in granting the injunction.  This case does however emphasize the importance of issues concerning access to source code for both customer and software developer. 

Often, the parties will enter into an Escrow Agreement whereby a copy of the source code will be deposited with a third party, and the third party will release that copy to the customer on the occurrence of a specified event or events.  The most common (and usually uncontroversial) example is the liquidation of the supplier.

Far more controversial is the extent to which the customer should have access to the source code if the parties fall into dispute, for example about the quality of the supplier's work.  The customer may be heavily reliant on the system, as PSL was, so that, without the source code, the customer's business is badly damaged, ruined even.  The supplier, on the other hand, will recognise that his commercial leverage over the customer is largely conditional on preventing the customer from having access to the source code.

Where the parties are in dispute about the quality of the supplier's work, resolving that dispute at a technical level is often a drawn out process.  Proceedings to trial may take more than a year, which is plainly far too long for a customer like PSL to wait, hence its application in these proceedings.  

Of course, every case will turn on its facts, and an important point in this case was the apparent strength of PSL's claim to a contractual right to the source code.  As the Judge said, this is not usually the position.  Given this, and the balance of convenience between granting and refusing access to the source code, it is not surprising that the Judge decided that PSL should have access.  Yet the case does raise some difficult issues about how the financial standing of the parties will impact upon the court's approach.  The Judge considered that PSL's perilous state made the reasons for granting the injunction all the more compelling.  In practical terms there is little doubting the logic behind this, and the Judge seems to have concluded that Merant's best chance of getting paid involved keeping PSL alive.  Yet, from Merant's point of view, this loss at the interlocutory stage represents a very significant blow to its commercial position.  On the judge's reasoning, PSL may not have been entitled to the source code had it been a more substantial and financially robust organisation. This raises difficult questions about the extent to which a party's financial circumstances should be taken into account when determining entitlement to relief.