Key IT contract principles affirmed by Full Federal Court of Australia

Key IT contract principles affirmed by Full Federal Court of Australia

Key IT contract principles affirmed by Full Federal Court of Australia

The Full Federal Court of Australia recently considered a range of issues which typically arise in IT contractual disputes. JR Consulting and Drafting Pty Limited v Cummings [2016] FCAFC 20 related to a dispute over the ownership and control of software used in the construction industry. It involved arguments concerning:

  • Principles of contractual interpretation;
  • Intellectual Property (IP) ownership and infringement;
  • Misuse of confidential information; and
  • Contractual abandonment and termination rights. 

Although the case did not break new legal ground, it serves as a convenient and useful reference point for practitioners and industry participants confronted with similar scenarios. In this article we discuss some important lessons to consider in relation to IT contacts. 

Key Lessons

  • Take care when drafting recitals
  • Avoid language that confuses licenses and assignments
  • Make it clear if future software updates and releases are included
  • Minimise risks of liability arising for “authorising” copyright infringement
  • Formally terminate superseded agreements or make it clear what rights granted under a superseded agreement continue to exist

Background to the case

The facts are complex and involve numerous interrelated contracts between various different parties. It is not necessary to analyse them deeply for the purpose of discussing briefly the above key lessons.

The case involved a dispute between a “customer group of parties” (Customers) and a “developer group of parties” (Developers) in relation to the ownership and control of software known as “QSS”.

The principal issue was whether the Customers had infringed the Developers’ copyright in the software by sublicensing different versions to third parties, in the mistaken belief that they had a right to do so.

The issues considered by the Court included whether an agreement between a Developer (the original QSS author) and a Customer in 2002 (2002 Agreement) was an assignment of, or only a non-exclusive licence to, the copyright in QSS; whether the 2002 Agreement was confined to the version of QSS then in existence; and whether the 2002 Agreement had been abandoned when the parties entered into a subsequent agreement in 2004 (2004 Agreement).  

Take Care when drafting recitals 

Under Australian law, the meaning of a commercial agreement is determined objectively, based on what a reasonable person would understand its terms to mean. 

Commercial agreements often include introductory “recitals”. These set out the background to the transaction. The extent to which recitals form part of the operative terms of an agreement, or are otherwise relevant to its interpretation, has long been debated. The issue is sometimes confused further by the inclusion of “interpretation clauses”, which expressly state that “the recitals do not form part of the agreement”. This can lead to an assumption that the drafting of recitals is inconsequential. As discussed below, this case emphasised the importance that recitals can have in that context.

Clearly distinguish a licence from an assignment

Software agreements are commonly either assignments (the customer effectively acquires unrestricted rights to the copyright subsisting in a product (eg, a computer program)) or licences (the customer can use the copyright product for limited purposes, but the supplier retains ownership of the copyright).

In this case, the Customers tried to defeat the Developers’ copyright infringement claim by showing that the copyright in QSS had been assigned to them under the 2002 Agreement (ie, that they were the owners of the copyright).

The Customers’ argued that the language in the 2002 Agreement, which described the relevant Developer as the “vendor”, and the transaction as a “sale” and “transfer” of an “interest” in QSS, was consistent with the 2002 Agreement constituting an assignment of the copyright in QSS, not a mere non-exclusive licence to use that copyright.  The Developers disputed that interpretation, arguing that the 2002 Agreement had not assigned copyright.

In resolving the ambiguity, the courts accepted that the recitals were relevant to the interpretation of the 2002 Agreement, even though they did not form part of its operative provisions. The courts also accepted that certain post-contractual conduct, including the recitals of subsequent agreements between the parties (one of which referred to the same Developer as having “copyright and proprietorship” of QSS) were also relevant to the interpretation of the 2002 Agreement.

In the end, the Court held the 2002 Agreement was not an assignment.  It only provided for the sale of the software product (not the copyright subsisting in it) and it granted the Customer a non-exclusive licence to use that product in a particular form. 

This central dispute would likely not have arisen if the 2002 Agreement had not included ambiguous language which confused the licence with an assignment.

Make it clear if future updates and releases are included

The courts also considered whether the 2002 Agreement was limited to the version of QSS in existence at the time of the agreement.  The agreement did not describe the software package by a particular version number or date and there was no clearly expressed obligation on the part of the Developer to provide future updates and releases.

The Customers argued the 2002 Agreement included subsequent versions of QSS because in part it was still being developed at the relevant time and the agreement provided for further development work and the training services. 

The courts held those matters were not sufficient to determine the issue and it was unlikely the Developer had contemplated granting a licence to use all future updates and versions for an unspecified period of time.  

IT contracts clearly specify whether and if so what future updates and releases are included.  If the licensee will be under an obligation to maintain certain qualification standards to remain entitled to exercise its rights under the contract, then the contract should clearly address those matters as well.

Avoid liability for “authorising” copyright infringement

Under the Copyright Act 1968 (Cth), a person may be liable for “authorising” the copyright infringing acts of another person. In determining whether a person is liable on that basis, the court considers:

(a) the extent (if any) of the person’s power to prevent the doing of the act concerned;
(b) the nature of the relationship existing between the person and the person who did the act concerned; and
(c) whether the person took any reasonable steps to prevent or avoid the doing of the act, including whether the person complied with any relevant industry codes of practice (there was no such code in this case).  

The Customers included an individual (Gianni Pacione) and two companies of which Pacione was a director and shareholder. The courts considered whether Pacione was liable for authorising the copyright infringing acts of those companies.

The courts found he was liable on the above basis, by reason of his position as a director and the economic owner of the companies. The companies were under the control of his guiding mind, he knew they had no right to engage in the infringing conduct and while he could have stopped them from engaging in that conduct, he took no reasonable steps to do so and in fact consciously facilitated the infringing conduct and obfuscated having done so.  

Directors and officers should always exercise an appropriate degree of caution in circumstances involving third party allegations of copyright infringement against their companies because they may, in certain circumstances, be held personally liable for such conduct.  

Make sure a superseded agreement is formally terminated

Where parties enter into a relatively informal agreement at an early stage of their relationship and agree to a more detailed arrangement at a later point in time, the parties must ensure that the relevance and any continued existence of earlier-granted rights are clearly addressed in the later agreement. 

In this case an issue arose as to whether the 2002 Agreement had come to an end when the parties entered into the 2004 Agreement or whether the Customers could continue to exercise rights purportedly granted to them under the 2002 Agreement after that date.

The courts held that although the parties took no steps to expressly terminate the 2002 Agreement, it ceased to have any effect from the date of the 2004 Agreement, because it had been “abandoned” on that date. 

While the courts most commonly make findings of abandonment in circumstances involving a failure by the parties to perform the agreement over a long period of time, in this case, the courts considered that, when viewed objectively, it could be inferred that the parties had not intended the 2002 Agreement to continue to be performed after the date of the 2004 Agreement.

To avoid possible disputes arising between parties to a series of contracts in relation to the continued existence of rights granted to one or more parties under earlier agreements, the earlier agreements should either be expressly and formally terminated or, where earlier-granted rights are intended to continue to exist after the date of a later agreement, the later agreement should expressly and clearly state what those rights are how they remain relevant to the relationship between the parties going forwards.