Facts
BMS developed and supplied computer software. The proceedings related to a BMS software package called ‘MillMaster’. MillMaster was used by animal feed companies for managing the production and supply of animal feed using feed mills.
AB Agri carried on the business of animal feed production at feed mills. On 4 November 1994, BMS licensed AB Agri to use MillMaster at its feed mills (the Licence). The key terms of the Licence were as follows:
5.2 The Licensee hereby undertakes to enter into a software technical support agreement in the form of the agreement annexed hereto on or before the Actual Delivery Date and to maintain such agreement as amended from time to time in effect throughout the duration of this agreement. In the event that the software technical support agreement is terminated for any reason whatsoever this agreement shall terminate forthwith and the provisions of Clause 16.3 shall apply …
16. Termination
16.1 This agreement shall.…expire on the tenth anniversary of the date hereof unless terminated prior to such date in accordance with the provisions set out below:
16.1.1 by the Licensee upon giving not less than twelve months’ written notice to the Company;
……
16.3 Within seven days of the termination of this agreement (howsoever and by whomsoever occasioned) the Licensee shall return all copies of the Licensed Programs, Program Specifications and New Releases in its possession to the registered office of the Company.
On the same day, AB Agri entered into a software technical support agreement as required by clause 5.2 of the Licence (the Support Agreement). The key terms of the Support Agreement were as follows:
9. Duration of agreement
This agreement shall continue until terminated in accordance with the provisions of Clause 11 below…
11. Termination
11.1 This agreement may be terminated:
11.1.1 by the Licensee upon giving not less than twelve months’ written notice to the Company;
……
11.3 Within seven days of the termination of this agreement (howsoever and by whomsoever occasioned) the Licensee shall return all copies of the Licensed Programs, Program Specifications and New Releases or fixes in respect of the same in its possession and supplied under the terms of this agreement to the registered office of the Company…’
By a variation agreement dated 20 December 2000 (the Variation Agreement) the parties made significant modifications to the Licence, including the following:
4. Software Licence
(a) The Program Licence will be extended to be a UK-wide perpetual licence usable on any processor or PC at all ABN UK operations including the compound animal feed operations of Cereal Industries as per the existing Agreement of 21 March 2000 up to a maximum aggregate annual tonnage of 2.45 million compound feed tonnes as defined in the Agreements.
11. Agreements
The parties agree that the current Agreements continue in full force and effect subject to these variations until such time as they are amended by any further variation Agreements.
On 19 December 2008, AB Agri gave notice to terminate the Support Agreement under clause 11.1.1 of the agreement. In its notice of termination, AB Agri claimed that although the Support Agreement had been terminated the Licence continued in full force and effect. BMS argued that the continuation of the Licence was conditional upon AB Agri continuing with the Support Agreement as set out in clause 5.2 of the Licence. The High Court was asked to determine whether or not the Licence had been terminated.
AB Agri argued that the grant to it of ‘a UK-wide perpetual licence’ under clause 4(a) of the Variation Agreement was incompatible with clause 5.2 of the Licence. Therefore, it argued, according to clause 11 of the Variation Agreement, Clause 4(a) of the Variation Agreement superseded and removed clause 5.2 of the Licence. It was open to AB Agri to ‘decouple’ the operation of the Licence and the Support Agreement.
BMS’ response was that Clause 4(a) of the Variation Agreement was not incompatible with the continuation in effect of Clause 5.2 of the Licence. It argued that, by virtue of Clause 11 of the Variation Agreement, Clause 5.2 of the Licence continued to have effect and that the Licence and Support Agreement could not be decoupled. When AB Agri terminated the Support Agreement it also, by operation of Clause 5.2 of the Licence, automatically terminated the Licence.
The question for the court was did use of the word ‘perpetual’ override the termination provisions in the Licence, including clause 5.2?
Judgment
Mr Justice Sales in the High Court preferred the BMS interpretation. He held that the word ‘perpetual’ could carry different shades of meaning. It could mean ‘never ending’ (in the sense of incapable of being brought to an end) or it could mean ‘operating without limit of time’ (so as, in the context of Clause 4(a) of the Variation Agreement, to grant a licence of indefinite duration, but subject to any contractual provisions governing termination of the Licence). Mr Justice Sales preferred the latter interpretation of the word ‘perpetual’ in the context of Clause 4(a) of the Variation Agreement. Use of the word ‘perpetual’ did not override the termination provisions but operated subject to them.
Adopting this interpretation, there was no incompatibility between Clause 4(a) and Clause 5.2. The Licence was perpetual but subject to the termination provisions in the agreement. This meant that Clause 5.2 continued to have effect. Therefore, when AB Agri terminated the Support Agreement it also terminated the Licence.
Mr Justice Sales reasons for reaching this conclusion included:
- Clause 11 of the Variation Agreement and the words ‘will be extended’ in Clause 4(a) made it clear that the parties intended the same Licence to be in place after the variation, albeit modified in some respects. In particular, they indicated that the parties intended the modified Licence to be subject to the same termination provisions. The reasonable inference from this was that the parties also intended Clause 5.2 (which was a termination provision) to continue to have effect.
- If the parties had intended to delete the termination provisions in the Licence it was natural to suppose that they would have made that intention clear in the Variation Agreement rather than leaving it to be inferred from the use of the vague term ‘perpetual’. The parties would have needed to use ‘clear and explicit’ language to indicate this. There was no such language in the Variation Agreement.
- There was a ‘clear continued commercial need’ for the termination provisions in the Licence to operate since otherwise there would be no mechanism to bring ongoing, potentially onerous obligations in the Licence to an end.
- Clause 11.3 of the Support Agreement created a link between the continuance of the Support Agreement and the Licence. An obligation to return all copies of the software on termination of the Support Agreement was not consistent with the argument that the Licence would continue in effect. Practically, the Licence could not continue.
Outcome
It is tempting to think that this is an unusual decision. In fact, it is consistent with how ‘perpetual’ is used in many software licences in practice. The decision highlights that there are two generally understood meanings of ‘perpetual’:
(1) an agreement which is never-ending, in the sense of incapable of being brought to an end; and
(2) an agreement which is of indefinite duration but is subject to any contractual termination provisions.
Many people assume that perpetual only ever means the former. In other contexts that may well be true but in the context of software licences ‘perpetual’ can have either meaning.
The message is that if you use ‘perpetual’ in a software licence you should draft so as to make it absolutely clear which of the two meanings it has. The risk otherwise is that the parties will end up in a relationship damaging dispute and, like the parties in this case, at the mercy of the courts, which may place an interpretation on ‘perpetual’ that the parties never intended.
Mike Butler is a partner and head of the IT practice at Hammonds LLP. Gillian Dennis is a Professional Support Lawyer in the Technology Group at Hammonds LLP.
