By Duncan Jones, associate at Fox Williams LLP
In the case of Noemalife SpA v Infinitt UK Ltd, the High Court considered the construction of a software licence agreement regarding the provision of digital imaging and archiving services. In particular, the Court had to determine whether, at the expiry of the initial term of the agreement, an implied licence had been established which contained an obligation on the licensee to pay a reasonable fee for using the software.
The licence agreement had been entered into in 2003 for an initial term of 7 years with no obligation on the recipient user of the service to pay a royalty fee. The agreement contained a provision which allowed for the term to be extended for periods of 6 months at a time, up to a total of an additional 36 months. At the expiry of the initial term, on 30 September 2010, the agreement was extended for a further 6 months, to 31 March 2011. A further extension of two and a half years, which would have taken the term up to the maximum additional 36 months following the original term, was agreed between the parties.
The Claimant contended that, at the expiry of the initial 7 year period, a new implied licence came into effect, a term of which required the Defendant to pay a reasonable fee for the use of the software. It was the Defendant’s position that the original licence (without any payment obligations) governed the parties relationship during the additional period. In the alternative, the Defendant claimed that if there was a fresh agreement, it did not contain any payment obligations.
Did the Defendant have an obligation to pay a fee for the additional term?
The Claimant’s claim was dismissed.
There was no evidence that, at the end of the initial term, there was any intention to create any legal relations; no implied contract could be inferred from the conduct of the parties that any payment was to be made. Without such an intention, a binding contract cannot be formed. If the Claimant had considered changing the basis of the commercial relationship, it did not act on such and allowed the licence to continue for an additional period of time. It did not make any indication to the Defendant that it proposed to charge a fee and it was clear that the Defendant assumed that the previous arrangements would continue. The Judge stated that, looking at the conduct and state of mind of the parties, there was nothing to put a reasonable businessman in the position of the Defendant on notice that he would be expected to pay for the software.
As such, the Claimant did not have a contractual claim to a licence fee.
The term of the agreement
The initial extension of the term for 6 months, to 31 March 2011, was valid as the extension was for only 6 months as per the provision in the agreement. However, the second extension was for a period of two and a half years. The provision clearly stated that the agreement could only be extended for 6 months at a time. It was the Judge’s opinion that the specific wording must have a commercial or regulatory purpose.
As such, the second extension was not made in accordance with the terms of the contract and therefore the licence agreement ended on 31 March 2011, after the expiry of the first extended period. Accordingly, the software had been used without a licence since 31 March 2011 and the Judge commented that the Claimant could claim for copyright infringement. Unfortunately for the Claimant, it had pleaded copyright infringement too late in the proceedings for it to be considered at the hearing. If it wished to initiate such a claim, it would have to do so from afresh.
Points to consider
This judgment serves principally to re-iterate the importance of (1) clarity of intentions when negotiating and formulating a contractual relationship, and (2) abiding by the terms of the contract which govern the relationship between the parties.
If the Claimant intended to charge a royalty payment for use of the software, this should have been expressly contained in the agreement or an appropriate addendum. Failing that, such an obligation may have been implied if the Claimant had made its intentions clear to the Defendant.
In relation to the extension of the term, the agreement clearly stated that any extension could only be made for a period of 6 months. It appears that the purpose of the provision was to ensure that the agreement did not fall foul of EU procurement legislation. The provision was express and clearly conveyed the understanding of the parties when the agreement was first entered into.
Duncan Jones is an associate at Fox Williams LLP. Duncan can be contacted at DJones@foxwilliams.com.