Legal Briefing

Licensee beware: software licences might not be as ‘perpetual’ as you first thought

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Technology, Media and Telecoms | 01 September 2010

In recent months we have assisted on several high-value software licensing transactions, all of which involved long debates about the ‘perpetual’ nature of the licences granted. This prompted us to revisit the important lessons to be learned from the judgment recently handed down in BMS Computer Solutions Ltd v AB Agri Ltd [2010], which all customers should be aware of when purchasing perpetual licences for their business-critical software.

Facts

BMS is a software developer and supplier. Its portfolio includes ‘Millmaster’, a software package designed for use in connection with the management of production and supply of animal feeds. AB Agri is an animal feed producer. On 4 November 1994, J Bibby Agriculture Ltd, a predecessor of AB Agri, bought a Millmaster licence from BMS (the licence agreement). The licence granted at clause 2 of the licence agreement was not expressed to be ‘perpetual’ and under clause 16 was to expire after ten years, subject to the right of Bibby to extend that period by two years. Clause 5.2 of the licence agreement obligated Bibby to enter into an agreed form support agreement (the support agreement) and to maintain that throughout the term of the licence agreement, adding that if the support agreement was terminated for any reason, then the licence agreement would also terminate. Under clause 16.3, on termination of the licence agreement ‘howsoever and by whomsoever occasioned’, Bibby was required to return all copies of the software.

As required by the licence agreement, Bibby entered into the support agreement concurrently with the licence agreement. The support agreement set out termination provisions mirroring those in the licence agreement, except for the cross-termination provision at clause 5.2 of the licence agreement. It also required that all copies of the software are returned on termination for any reason.

In December 2000 BMS, Bibby and ABN Ltd (later to become AB Agri Ltd) executed a variation agreement whereby the licence agreement and support agreement were novated to take effect between BMS and AB Agri, and certain changes to the two agreements were agreed (the variation agreement). In particular, clause 4(a) of the variation agreement stated that the licence granted ‘will be extended to be a UK-wide perpetual licence’. Clause 11 of the variation agreement made it clear that the two agreements would ‘continue in full force and effect subject to these variations’.

As it was entitled to do under clause 11.1.1 of the support agreement, on 19 December 2008 AB Agri gave 12 months’ written notice to terminate the support agreement, to take effect on 31 December 2009. In its notice, AB Agri maintained that its licence to use Millmaster would continue. Naturally, BMS disagreed with this, citing clause 5.2 of the licence agreement.

In its submissions, AB Agri argued that the grant of a ‘UK-wide perpetual licence’ under clause 4(a) of the variation agreement was inconsistent with the cross-termination provision at clause 5.2 of the licence agreement. Consequently, it maintained, according to clause 11 of the variation agreement, clause 4(a) superseded and removed clause 5.2, thus breaking the link between the licence agreement and the support agreement. Logically, if this view of clause 4(a) of the variation agreement is correct, then as clause 11.3 of the support agreement required return of the software on termination, a position incompatible with a continuing right to use, it must also be superseded.

Again, BMS disagreed, submitting that there was no incompatibility between clause 4(a) of the variation agreement and the continuing effect of clause 5.2 of the licence agreement, that the licence agreement and the support agreement could not be de-linked, and that by terminating the support agreement AB Agri had also terminated the licence agreement.

Judgment

Although the judgment focused on several issues, it is Mr Justice Sales’ findings on the effect of a perpetual licence grant that are relevant to this briefing. In his view, the term ‘perpetual’ can mean different things, including:

  • never ending, in the sense of incapable of being of being brought to an end; or
  • operating without limit of time, ie of indefinite duration but subject to any contractual provisions governing termination.

Sales J found the second of these to be the correct meaning of ‘perpetual’ in the context of clause 4(a) of the variation agreement for four reasons:

  1. The variation agreement was not intended to replace the licence agreement; rather the two agreements were intended to work together. At clause 4(a), the licence granted in the licence agreement was expressed to be ‘extended’, not replaced. Hence, the same licence continued, albeit modified by the terms of the variation agreement, and that licence remained subject to the same termination provisions.
  2. The fact that the variation agreement did not refer to the termination provisions in the licence agreement and the support agreement indicates that those terms were intended to survive. Since such termination provisions are key commercial terms, had the parties intended them to be displaced, they would have been very clear on that, rather than leaving it to be implied by the use of the word ‘perpetual’.
  3. The variation agreement also ‘clearly contemplated’ that the termination provisions in the support agreement continued because it provided that AB Agri would purchase support ‘for a minimum of ten years’. This implied that the termination provisions in the support agreement must still apply so that it could be terminated at some point after the end of the minimum period. On such termination, clause 11.3 of the support agreement required the return of all copies of the software, a position already acknowledged as inconsistent with continued use rights. In this, Sales J felt that he had identified a common theme, that neither the termination provisions in the support agreement nor those in the licence agreement were intended to be displaced by the variation agreement.
  4. Sales J accepted BMS’s contention that there was ‘a clear continued commercial need’ for the termination provisions in the licence agreement to continue to operate, without which there would be no mechanism to bring potentially onerous, continuing obligations under that agreement to an end. This supported a conclusion that the parties intended these termination provisions to continue, and that it would have required ‘clear and explicit language’ to evidence a contrary intention. Since the use of ‘perpetual’ in clause 4(a) of the variation agreement did not exclude the operation of the termination provisions in the licence agreement, and because nothing in the variation agreement showed an intention to displace the approach taken in clause 5.2 of the licence agreement, clause 5.2 was not ‘overridden’ by use of the word ‘perpetual’ in clause 4(a) of the variation agreement.

Comment

Although the focus here was on the effect of the variation agreement on the licence and support agreements, we frequently see ‘perpetual’ licence grants from the outset in licence and support agreements that contain termination provisions similar to those seen in BMS. The judge’s findings provide a useful insight into the likely view that the courts will take on how these apparently contradictory provisions should be interpreted.

Customers must enter into these sorts of licensing arrangements with their eyes open, recognising that to continue to use the software that they have purchased, they must also buy the corresponding support for as long as they wish to have continuing use rights. Clearly, this may represent a substantial forward spend commitment, as well as a significant up-front capital investment in terms of the initial licence fee. If this is the commercial deal, customers should at least secure some certainty as to how future support charges will be calculated, typically by limiting annual increases to year one support fees in subsequent years to percentage changes in an agreed published index. If this is not the deal, then the licence agreement must be negotiated to break the tie between licence grant and support, while also securing the flexibility necessary for the customer to be able to continue to support the software in-house or via a third party.

Unfortunately, it is not uncommon for customers to find themselves having unwittingly signed up to terms heavily biased in a vendor’s favour. This is particularly the case where vendors present their licenses on a ‘shrink-wrapped’ and ‘non-negotiable’ basis, combined with a ‘once-in-a-lifetime’ pricing proposal that expires at the next financial quarter- or year-end. Clearly, one cannot criticise an organisation that is looking to maximise sales and secure continuing revenue streams in highly competitive markets. But one can be forgiven for becoming a little critical of such practises when fundamental terms are found buried in the detail of a size six font ‘shrink-wrapped’ licence. Discovering onerous terms at the point at which the software has been implemented and placed at the core of a business, when the costs and risk of moving away from a particular solution are unpalatable, is simply too late. Lawyers often say that the devil is in the detail and that is certainly the case here. So, licensees beware, read the contracts, and seek expert advice and guidance when unsure of any of the terms.