It can be tempting for businesses to continue a commercial relationship after a contract has expired without putting in place a formal extension or new agreement. Parties are often busy dealing with day-to-day matters or perhaps unwilling to ‘rock the boat’. However, the recent copyright infringement case of SoftLanding v KDP [2010] EWHC 326 (TCC) demonstrates the uncertainty, and the dire consequences, which can result.
SoftLanding contracted with KDP to develop some software. In return for royalties, KDP granted SoftLanding an exclusive three-year licence to market its products under a standard end-user licence. SoftLanding agreed to provide maintenance services to end-users and KDP agreed to provide SoftLanding with access to the software source code for this purpose. The contract contained terms prohibiting assignment without KDP’s consent and transferring the software copyright to SoftLanding in the event the agreement was terminated because KDP had ceased its business.
The licence expired, but the parties continued their business relationship as before.
Trouble began brewing when SoftLanding assigned its maintenance obligations (under the now expired KDP contract) to Unicom without KDP’s consent. It became clear to KDP that SoftLanding (and Unicom after it) had not been paying sufficient royalties and had contracted with end-users on terms different to those which the parties had agreed. Despite this, KDP continued to allow access to its source code so that Unicom could meet SoftLanding’s maintenance obligation.
The relationship between KDP and SoftLanding/Unicom became strained and KDP threatened to withdraw access to the source code. On the basis of this, SoftLanding demanded transfer of the copyright and source codes in the software due to KDP’s “termination”. KDP declined and SoftLanding brought proceedings for breach of contract, in which KDP counterclaimed.
His Honour Judge David Wilcox was tasked with determining on what contractual basis the parties’ relationship had continued after the original agreement expired. The court decided, in particular, that:
- SoftLanding remained entitled to sell the software on the terms of the agreed end-user licence, however, its licence to do so was no longer exclusive; and
- assignment was still prohibited without KDP’s written consent.
The court held the requirement to transfer copyright and source code to SoftLanding on termination for KDP ceasing business was not implied after expiry. In any event, it felt that KDP had not ‘ceased business’ and termination would not have been available even if this term had been implied.
As a result, the court decided that SoftLanding’s claim for breach of contract failed. It had no entitlement to the software copyright or source code. KDP’s counterclaim, however, succeeded. SoftLanding had failed to comply with its royalty obligations and had supplied the software on unauthorised terms to end-users. SoftLanding was also found to have infringed KDP’s copyright. To make matters worse, the court decided the case merited exceptional sanctions and, amongst other things, SoftLanding was ordered to pay damages including 100% of the income it had received from supplying software under the unauthorised end-user licences.
This case clearly highlights the dangers of working to expired contracts. SoftLanding brought proceedings against KDP on the basis of a term which the court ultimately chose not to imply into the post-expiry contract.
Claire Purkiss is a Trainee Solicitor currently sitting in Bristows’ Commercial IP and IT practices; and James Brunger is an Associate Solicitor in Bristows’ Commercial IP and IT practices. He focuses primarily on IP transactions, IT transactions, e-commerce and data protection and privacy matters.
