UK: Software Development: The Dangers Of Staying Silent

Last Updated: 2 February 2006
Article by Creole Palmer

As a recent decision of the High Court illustrates, it is vital for customers to ensure that their software development contracts contain appropriate provisions dealing with intellectual property rights. Where an independent contractor is commissioned to develop software for a customer, but the contract is silent on the issue of ownership, the starting point at law is that the contractor, rather than its customer, will own the copyright in the developed software.

The ruling in Clearsprings Management Ltd v Businesslink Ltd (2005), a Chancery Division decision of Christopher Floyd QC, sitting as a deputy judge of the High Court, serves as an important reminder that if a customer wishes to own the copyright in the product of a software commission contract, or to have an exclusive licence to use the product, it is vital to include an express term stating so in the contract.

If an express term is not included, the law governing the implication of terms requires that not only must such an assignment or licence be reasonable and equitable, but it must be required to give business efficacy to the contract. This means that the mere fact the contractor has been commissioned to produce a product will not in itself be sufficient to entitle the customer to the copyright or an exclusive licence to the product.

In his judgment, Christopher Floyd QC makes it clear that each case will be decided on its particular facts. The facts of this case were as follows:

Facts and issues

Clearsprings provided accommodation and related services to asylum seekers; nearly all its turnover came from a contract with the National Asylum Support Service, a department of the Home Office. Apart from providing accommodation, Clearsprings was obliged to report certain information to the Home Office, for example dates of arrival and departure from the accommodation.

Businesslink was a small software development company which Clearsprings identified as a suitable contractor to develop its computer system. In particular, it wanted Businesslink to develop a web-based database system which would enable it to comply with its reporting requirements to the National Asylum Support Service. To this end, Clearsprings gave Businesslink information concerning its business practices, thus enabling Businesslink to create the CMIS computer system (CMIS) from its existing software.

It was conceded that Businesslink was the first owner of CMIS. However, in the course of the proceedings, the Court was required to determine what rights in law or equity, if any, Clearsprings had in CMIS. Clearsprings argued that it was an implied term of the contract between the parties that it would own the copyright by assignment, or that it would at least enjoy an exclusive, royalty free licence with a right to sub-license. Their arguments included the following:

  • Businesslink, during the course of negotiations, had agreed to assign the copyright of CMIS to them once it had been developed;
  • Clearsprings had expressly instructed Businesslink to write CMIS from scratch and not to use any pre-existing code from other Businesslink software; and
  • CMIS was an electronic embodiment of Clearsprings’ operating procedures and accordingly Businesslink was unable or could not have intended to exploit the joint work for their own benefit or indeed any distinct contribution of Clearsprings created in the course of the engagement.

Businesslink denied the existence of any preexisting agreement to assign the copyright of CMIS to Clearsprings. They accepted that Clearsprings had a licence to use CMIS in its own business. However, they argued that it should not be held to have implied or agreed to assign or grant an exclusive licence of the copyright, the effect of which would restrict Businesslink from making use of generic code incorporated in CMIS, which owed nothing to Clearsprings’ procedures.

The findings

The judge found the testimonies of Clearsprings’ witnesses regarding the first two points unreliable and unconvincing. In his view, even if Clearsprings had communicated a clear wish to acquire the copyright at a time when it was possible for such communication to become the basis for the implication of a term, it would not be a necessary implication that Clearsprings would acquire the copyright or the right to sub-license without the need for any further payment. He said that it was clear that Clearsprings had to plan to sell or license the copyright to third parties and this could not have been described as one of the purposes of the contract.

Regarding the second point, the judge stated that, in the absence of a specific instruction, it is to be expected that a software developer will both import pre-existing code into the code it is writing for a client, as well as export it for other projects, that being the convention in the industry.

As to the third point, he stated that CMIS was, if anything, a derivative of Businesslink and not of Clearsprings’ operating procedures, and that the law of confidence was adequate protection against Businesslink disclosing Clearsprings’ management procedures to a third party. On the facts of the case, he ruled that Clearsprings had, by implication of law, a non-exclusive, personal licence in relation to CMIS, with no right to sub-license, such licence being sufficient to give the contract business efficacy. The licence was stated to be perpetual, irrevocable, and royalty free. In addition, Clearsprings was entitled, under the licence, to repair, maintain and upgrade CMIS in accordance with the requirements of its business of providing accommodation, care and related services to asylum seekers.

Tackling ambiguity

The case reminds us that in the area of assignment of rights, the courts will usually adopt a minimalist approach to the implication of terms into a contract. So, for example, where the needs of a customer would be satisfied by the grant of a licence or the assignment of copyright in a work, the courts would (in the absence of any specific term) be more inclined to grant a licence.In addition, the scope of the licence will usually be at or near the minimum required to secure the customer the entitlement to which the parties to the contract must have intended to confer. It is, perhaps, a statement of the obvious, but clearly it is in the parties’ interests to document their agreement on intellectual property rights, rather than relying on the less certain (and more expensive) alternative of litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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