The two parties are both subsidiaries of US-basedcorporations and are well-known providers of e-commerce software. The disputebetween them relates to the supply of such software. It is ongoing but,following a trial on a preliminary issue in July last year and the appeal heardin December, there has been resolution on some issues at least.
The point of greatest interest at the trial and theissue which was the subject of the appeal related to the interpretation of acontractual obligation said to last ‘in perpetuity’.
Facts
The two key agreements are a Value Added ResellerSoftware Licensing Agreement dated 19 August 1996 and the Addendum thereto dated29 December 1997 (‘the VAR Agreement’). They concern the licensing, supportand maintenance of a range of multi-platform electronic data interchange (EDI)software packages known as Atlas EDI. The software enables businesses tocommunicate with each other by computer and its efficient and continuousoperation is of great importance to its users. Harbinger was not a party to theAgreement but it was common ground between the parties that it had succeeded tothe rights and liabilities of the other main signatory, having acquired thatcompany.
By the Agreement, GE was able to license its customersto use the Atlas software, acting as a value added reseller.
Harbinger terminated the Agreement by notice dated 30December 1998 expiring on 31 December 1999.
Under the VAR Agreement, Harbinger agreed to complywith certain support and maintenance obligations. Harbinger claimed that by itsnotice of termination not only would its obligations to supply Atlas EDIsoftware end but so would its obligations to support and maintain that software.Harbinger sought a declaration that it was not obliged to continue providingsupport and maintenance after 31 December 1999. Alternatively, it argued, it wasentitled to terminate its support and maintenance obligations after the passageof a reasonable period of time after 31 December 1999; it contended that oneyear would be a reasonable period in the circumstances.
GE relied on the express terms of the Agreement and, inparticular, on clause 10 of the VAR Agreement which provided that:
‘[Harbinger] will provide support and maintenance in perpetuity in return for an annual payment…’ (emphasis added).
GE argued that the primary and natural meaning of theclause as a simple matter of grammar was that the obligation in questioncontinued indefinitely for as long as the annual payment upon which it wasconditional was made. The words ‘in perpetuity’ were strong words and didnot allow any other construction. Further, this natural meaning was supported bysound commercial reasons and the overall structure of the VAR Agreement.Harbinger’s response was that the words ‘in perpetuity’ were strong wordsbut they were the wrong words.
First Instance
The preliminary issue was heard before His Honour JudgeThornton in the Technology & Construction Court in July of last year. Thequestion for determination on the support and maintenance issue was phrased asfollows:
Is Harbinger obliged by the terms of the Agreement to provide support and maintenance, in accordance with and as defined by the Agreement, to GE after the end of 31 December 1999? If so, are there any limits – and, if so, what – to the time for which Harbinger is obliged to do so?
The judge rejected the argument that the obligation didnot survive termination. The Agreement effectively provided that it shouldsurvive. The first part of the question was therefore answered in GE’s favour.The second part proved more problematic.
HH Judge Thornton dismissed any literal interpretationof the phrase on the basis that that would flout business common sense. In doingso, he relied on the oft-cited Investors Compensation Scheme Limited v WestBromwich Building Society [1998] 1 WLR 896. He commented that, in dismissingthe literal interpretation, it did not mean that the words should be ignored,nor could they be substituted with a phrase which would seem to be objectivelyreasonable. Rather the judge sought to identify the meaning which the partiesthemselves intended and which could be gleaned from the commercial circumstancessurrounding and contained within the Agreement. In doing so, he rejected bothGE’s suggestion and that of Harbinger.
In reaching this conclusion, the judge focussed on apro forma contract exhibited to the Agreement which was an example of the typeof contract which GE might enter into with its customers. Under this contract,GE’s customers were contractually entitled to receive support and maintenancebut the obligation to provide such services could be terminated by GE on noticeafter a certain period of time. From the contract, the judge concluded that GEwas contractually entitled to terminate its support and maintenance obligationswithin a maximum period of two years from 31 December 1999, ie by 31 December2001. By implication from these provisions, Harbinger’s obligation underclause 10 of the Agreement would continue only until the expiry of the minimumperiod of notice required under the sample customer contract, ie to 31 December2001.
Commentary
The judge’s inventive interpretation of the phrase‘in perpetuity’ sparked some concern in the computer industry where thatphrase is commonly used to emphasise the longevity of an obligation. Could thosewith the benefit of such obligations no longer rely on the straightforward andno doubt intended wording of such clauses? It is not a phrase which parties to acontract use lightly and, as the Court of Appeal later accepted, the partyoffering a service in perpetuity might well devise commercial advantage over itscompetitors by agreeing to undertake a long-term commitment to its customers. Itwould be grossly unfair if that party could later evade its freely assumedresponsibilities.
The Investors Compensation Scheme case does notof course introduce a new mode of contractual interpretation which permits thecourt to revisit clearly worded agreements. It accepts that one looks at whatmust have been the mutual understanding of the parties taking into account thebackground facts. Only in extreme cases, should the court substitute its view ofbusiness common sense for the true meaning of the words of a commercialcontract. Here, the words were clear and unambiguous; the parties appreciatedtheir significance at the time (indeed, GE submitted evidence from the ManagingDirector of the original contracting party in which he confirmed that ‘inperpetuity’ was a standard term of his company’s contracts and that heunderstood the implications and importance of the obligation) and, in short, theissue was whether GE or Harbinger should have the right to terminate support.
The judgment allowed GE to provide its customers withsupport and maintenance to the end of 2001. It did not, however, go far enough.GE appealed.
The Court of Appeal
The Court of Appeal accepted that, if it were necessaryto impose a time limit on the support and maintenance obligation, then thejudge’s conclusion was a workable solution. However, it was not necessary toimpose any time limit. The words ‘in perpetuity’ made it clear that supportand maintenance extended beyond the termination of the Agreement. The Court ofAppeal found that, equally clearly, the obligation was not subject to any timelimit. This does not mean that the obligation continued literally forever. As GEhad pointed out, customers would purchase replacement software. Once thathappened, the annual fees would stop being paid and the obligation to providesupport and maintenance would end.
Commentary
This must be the right answer. GE had been keen toprotect its goodwill with its customers in fighting the proceedings and inbringing the appeal. It could not, as a matter of commercial good sense, haveterminated its obligations to its customers as soon as the opportunity arose asHH Judge Thornton suggested. To do so would have damaged its business and itscustomer base. There may have been a right to terminate in the sample contractappended to the Agreement but it was not a right which GE wished to exercise -and the sample contract was just that: a sample.
The decision, however, has a wider impact than on GEand its customers. The Court of Appeal’s judgment supports a plaininterpretation where the meaning of the words is clear on the face of thecontract. Those who have the benefit of an obligation which is to be provided‘in perpetuity’ can take comfort.
