August 2010 – Our Agreement has Expired – It Doesn’t matter, Does it?

Our Agreement has Expired – It Doesn’t matter, Does It? (August 2010)

Softlanding contracted for KDP to develop software in return for royalties, and KDP granted to Softlanding an exclusive three year licence to market the software on a standard end user licence. Softlanding was to provide support to end users, and was allowed access to KDP’s source code for that purpose. Softlanding was prohibited from assigning the contract without KDP’s consent, and there was a provision that the copyright and source code would belong to Softlanding if the agreement was brought to an end because KDP had ceased business.

After the three year period expired, the parties simply carried on. Then, however, in breach of the terms of the original agreement, Softlanding licensed some end users on terms other than the standard end user licence, failed to account correctly for royalties and transferred its support obligations to Unicom without KDP’s consent. Despite this, KDP initially allowed Unicom to have access to the source code, but the relationship soured and KDP threatened to withdraw access to the source code.

Softlanding then treated KDP’s threat as a repudiation of the agreement, and demanded that the copyright and the source code to the software be transferred to it as a result of the alleged wrongful termination. KDP counterclaimed, seeking damages for Softlanding’s breach of contract.

The court had to decide the basis on which the parties’ contractual relationship had operated after the end of the original contract period. It held that:

• the licence to resell the software on the terms of the agreed end user licence continued, but that the right was no longer exclusive

• the restriction on assignment without KDP’s consent continued to apply, and

• the right to the copyright and source code ended with the original contract period, and in any event KDP had not ceased business.

Accordingly Softlanding’s case failed. To make matters even worse for Softlanding, the court upheld KDP’s counterclaim for damages, including all the income Softlanding had received from the end users whose licence was not in the agreed form.

And the moral is? Take great care if an agreement has expired, as the court’s interpretation of how the arrangement will work after the expiration may be very different from yours.