The Court of Appeal has upheld the recent High Court decision in Softlanding Systems, Inc v KDP Software Ltd & anor [2010]. The High Court had rejected Softlanding’s claim that KDP was in breach of its contractual obligations by failing to supply the required technical support post termination, and granted an injunction in favour of KDP, restraining Softlanding and its acquirer, Unicom, from using KDP’s software.
Background
Softlanding, a US software company, developed a software product called Turnover, which was used to control the transfer of computer programs from development to the live environment. KDP, a UK software company, developed two software products, Set/Turn and Documentor (the products), which could be used in conjunction with, and would enhance, Turnover’s value and utility.
In 1995 the parties entered into two agreements on essentially the same terms (the 1995 agreements), granting Softlanding the exclusive right to market the products in return for a royalty on the gross price obtained from end users.
The following provisions of the 1995 agreements were key to the dispute:
- Softlanding’s end-user licence and service agreements (end-user agreements) had to be in an agreed form. They imposed various maintenance obligations on Softlanding that were dependent on it having access to the source code of the products.
- Twice each year, Softlanding had to submit accurate written reports of its activities to KDP, including a listing by identity and date of all executed end-user agreements.
- KDP was obliged to provide technical support and ongoing development to ensure the software was ‘viable’ and ‘current’.
- Either party could terminate for convenience on six months’ notice. Where KDP terminated for convenience, Softlanding was permitted to continue to license and support the products, and KDP was obliged to provide Softlanding with the source code.
- KDP was entitled to terminate if Softlanding breached a ‘material obligation’ that it failed to cure within 14 days’ notice. In such circumstances, Softlanding had to return all copies of the products and accompanying materials to KDP, and had no right of access to the source code.
- Neither party could assign without the prior written consent of the other.
Although the 1995 agreements expired on 6 December 1998, KDP permitted Softlanding to continue to enter into end-user agreements on the same terms as per the 1995 agreements.
Dispute
In September 2006 Softlanding was acquired by Unicom. On 1 January 2007 Softlanding purported to assign its right to enter into end-user agreements to Unicom, without obtaining KDP’s consent.
During this period, KDP became concerned that Softlanding was failing to make full and prompt payments to KDP. Correspondence between the parties ensued between January 2007 and May 2008, in which KDP requested details of the end-user agreements entered into and the prices charged by Softlanding.
On 6 June 2008 KDP’s solicitors issued a formal request for:
- a ‘complete and accurate written report’ of Softlanding’s activities, including details of end-user agreements; and
- copies of the executed end-user agreements.
This letter was intended to constitute formal notice that KDP considered Softlanding to be in breach of its contractual obligations and provided Softlanding with 14 days to provide the requested documents to remedy the breach.
The letter also addressed KDP’s concern that it was not receiving the full fees due – the allegation was that Softlanding had failed to properly account for the appropriate percentage of the gross price obtained from each end user because Softlanding had deducted agents’ fees.
Softlanding refused to supply the documents requested by KDP. Accordingly, KDP served notice of termination on 4 July 2008.
Softlanding issued proceedings seeking damages from KDP on the basis of KDP’s breach of contract. Softlanding’s argument centred on the fact that KDP’s obligation to provide technical support survived termination and that KDP’s failure to supply the source code for the products was a breach of that obligation. If this was not correct, Softlanding would inevitably be unable to fulfil its maintenance obligations under the end-user agreements.
The judge, HHJ Wilcox, rejected Softlanding’s claims for several reasons, holding that KDP’s termination of the agreement arose from Softlanding’s breach of its material obligations. KDP was not obliged to provide the source code to Softlanding in such circumstances. Moreover, the judge stated that, in any event, Softlanding had no right to the source code given that it had assigned its obligations under the end-user agreements, albeit unlawfully. The judge also rejected Softlanding’s argument that a fixed-fee arrangement was in place, which superseded Softlanding’s original obligations to pay royalties.
KDP successfully counterclaimed, requesting an injunction restraining Softlanding and/or Unicom from infringing KDP’s copyright in the products, and seeking damages for breach on the grounds that:
- Softlanding had not complied with its obligations to declare and account for end-user transactions;
- Softlanding had entered into end-user agreements that were not in the agreed form (the non-compliant end-user agreements permitted intermediaries to distribute and license the products);
- Softlanding had purported to assign rights to Unicom without KDP’s consent; and
- Unicom had infringed KDP’s copyright by entering into unauthorised end-user agreements.
The judge also overturned an interim mandatory injunction, obliging KDP to temporarily provide Softlanding with the source code on the grounds that:
- Softlanding’s claims were baseless;
- there was material non-disclosure; and
- evidence originally submitted was misleading.
Court of Appeal Decision
Softlanding appealed against the High Court’s decision. Although it raised several issues, the two key questions for the Court of Appeal were whether the judge’s following conclusions were correct:
- that KDP was entitled to terminate as a result of Softlanding’s breach of a material obligation; and
- KDP was entitled to ongoing royalties, rather than there being a fixed-fee arrangement.
On the question of termination, the Court of Appeal held that Softlanding’s failure to provide accurate reports was a breach of a material obligation. The Court considered that KDP was entitled to receive details of Softlanding’s pricing policy, the licence and maintenance fees actually paid by end users, and any deductions made by way of costs and expenses incurred by agents or distributors. Such information was necessary for KDP to verify that Softlanding was complying with its contractual payment obligations.
On the question of the fixed-fee arrangement, the Court of Appeal held that it would only reverse a finding of fact where the judge was plainly wrong. In this instance, Softlanding had not adduced sufficient evidence that a fixed-fee arrangement was in place and was unable to demonstrate that KDP’s evidence denying such arrangements was dishonest.
Comment
It is interesting to note the judge’s finding that Softlanding’s failure to provide accurate written reports of its activities constituted a breach of one of its ‘material obligations’. Although obligations to pay are fundamental requirements of a contract, in this instance the judge considered that the recipient’s ability to verify the accuracy of payments due to it was of similar significance. Some may regard audit and reporting rights as mere mechanics of an agreement, but Softlanding demonstrates their fundamental importance in agreements where they are necessary to establish payment obligations.
By Andrew Shindler, partner, and Bryony Compson, associate, SJ Berwin LLP.
E-mail: andrew.shindler@sjberwin.com;