Softlanding Systems, Inc v KDP Software Ltd & Anor

This is an appeal by the claimant (SLS) and the third party (Unicom) against an order of HHJ Wilcox in the Technology and Construction Court dated 2 March 2010 whereby he dismissed SLS’s claim against the defendant (KDP) for damages and consequential relief for breach of two software licensing agreements and allowed KDP’s Part 20 claims against SLS and Unicom. The appeal raised a large number of issues of which two were fundamental: first, whether the judge fell into error in concluding that KDP was entitled to terminate the agreements as a result of the breach by SLS of a material obligation; and second, whether he fell into further error in finding that there was never a fixed fee agreement between SLS and KDP.

At the invitation of this court, Mr Onslow, who appeared on the appeal on behalf of SLS and Unicom, addressed these fundamental issues first. At the conclusion of his submissions we indicated that, for reasons that would be given at a later date, we were not persuaded that the judge had erred in either respect and that we therefore saw no need to call on Mr Reed, who appeared on behalf of KDP, to respond. In the course of the adjournment which followed, the parties agreed terms for the disposal of the entire appeal. Accordingly, it only remains to provide the reasons for dismissing the appeal on the two issues upon which we heard submissions. That I now do.

SLS is a software company based in New Hampshire. It has developed a software product called TurnOver which is used to control the transfer of computer programs from the development to the live environment. SLS was originally a relatively small company run by a Mr Paul Schlieben and his wife, Joan. However, in September 2006, Unicom, a company based in California, acquired SLS’s entire issued share capital for $17 million.

KDP is an English software company which is owned and controlled by Mr Kevin Passey and his wife, Jane. KDP has developed two software products respectively called Set/Turn and Documentor. Set/Turn is a manipulation tool and was specifically designed for use with TurnOver. It has significantly enhanced TurnOver’s value and utility. Documentor is a cross referencing tool and may be used on its own or in conjunction with TurnOver and Set/Turn.

In light of the close relationship between TurnOver, Set/Turn and Documentor, it clearly made sense for KDP and SLS to collaborate in relation to their marketing. Accordingly, in 1995, they entered into two agreements in writing (the 1995 Agreements) one for Set/Turn and one for Documentor which, so far as relevant to this appeal, were in identical terms. In essence, SLS was granted an exclusive right to market the programs in return for a percentage of the gross price obtained by SLS from the end user, 75% in the case of Set/Turn and 50% in the case of Documentor.

Clause 3 addressed the obligations of SLS (defined as the “Distributor”):

“3.1

Distributor agrees, for the term of this Agreement, that it shall use its best endeavours to promote and market the Products to prospective end users by:

1.

Identifying prospects within the Territory that may benefit from use of the Products and that are capable of paying the fees required by the licence and this service agreement.

2.

Contacting such prospects and conducting presentations of the Products.

3.

Performing demonstrations of the Products to prospective end users either on the telephone, on the premises of such end users or at distributors’ facilities.

4.

Negotiating and obtaining the prospects’ execution of license and service agreements hereafter “Licence” (as provided in Exhibit B). Any amendments to the Licence must be approved by the Licensor prior to the execution of Licence by the distributor.

3.2

Distributor shall prepare and submit to Licensor on or before June 30^th and December 31^st of each year a complete and accurate written report of his activities hereunder, including, without limitation, the following:

Clause 7 contained an undertaking by KDP (defined as the “Licensor”):

“The Licensor shall provide technical support and ongoing development in order to keep the software viable and current and the Licensor shall have the right to make such changes in the Product as the Licensor shall in absolute discretion think fit.”

Clause 8 addressed the issue of pricing:

“8.1

75% of the gross price obtained by the Distributor from each end user for the Product with a minimum of $5,000.

8.2

Amounts payable to Licensor shall not be subject to credit in favour of Distributor for any amount previously paid to Licensor with respect to revenues that are refunded by Distributor to end users.

8.3

Distributor shall be responsible for its own expenses and costs under this Agreement, and Licensor shall have no obligation to reimburse Distributor for any expenses or costs incurred by Distributor in the performance of Distributor’s duties hereunder.

8.4

Licensor shall be responsible for its own expenses and costs under this Agreement, and Distributor shall have no obligation to reimburse Licensor for any expenses or costs incurred by the Licensor in the performance of Licensor’s duties hereunder.”

Clause 10 addressed both the term of the agreement and its termination:

“10.1

The term of this Agreement shall commence upon the date of execution of this Agreement and shall continue for three (3) years thereafter unless sooner terminated in accordance with the provisions hereof.

This Agreement may thereafter be extended only by written instrument executed by both parties.

10.2

Licensor may terminate this Agreement upon written notice to the Distributor in the event of the breach of any material obligation hereunder by Distributor that is not cured by Distributor after receipt from Licensor of fourteen days’ written notice calling attention to such breach and demanding cure thereof.

10.3

Either party may terminate this Agreement for such party’s own convenience and such party’s own discretion upon six (6) months’ prior written notice to the other party.

10.4

Upon termination of this Agreement by:

(a)

The Licensor by exercising its options as defined in section 10.3, Distributor may continue to license and support the Product. The Licensor shall provide Distributor with source code for the Product, to be used only for the express purpose of continuing to support its customers. In the event that Licensor sells the rights to the Product to a third party, and that third party agrees to provide services equivalent to those provided by the Licensor, then the Distributor shall return the source, along with any changes it has made to the source, to the Licensor. In the event that the Licensor ceases doing business and fails to make an assignment of the Product to a third party prior to termination proceedings, then, the Licensor shall deliver to the Distributor all materials, including but not limited to, source code, objects and related documentation, relating to the Product, and will transfer all rights and ownership of the Product to the Distributor.

(b)

The Licensor for breach of any material obligations as defined in section 10.2, or Distributor for any reason, Distributor shall within fourteen days of such termination return to the Licensor all copies of the Products including the Demonstration Copies and all materials, including but not limited to, copies of technical materials, brochures, marketing materials. Distributor shall further provide to Licensor copies of Distributor’s prospect files and end user correspondence files.”

Finally, clause 18 dealt with assignment and invalidity:

“This Agreement is personal to Distributor and is not assignable without the prior written consent of Licensor. Any attempt to assign or transfer or sub-distribute any of the rights, duties or obligations of this Agreement without consent is void. If any provision or provisions of this Agreement shall be held to be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby."

Under clause 3.1, SLS agreed to enter into a licence and service agreement with each end user in the terms of the agreement set out in Exhibit B. This agreement contained a provision committing SLS to provide maintenance for a period of one year, renewable indefinitely at the option of the end user. In practice, once SLS had granted a licence to an end user, KDP issued a pass code permitting the end user to access KDP’s software. I am content to assume for the purposes of this appeal that, in this way, KDP became aware of the identity of each end user and the date of its licence.

The term of three years provided by clause 10 came to an end in December 1998, but thereafter SLS continued to grant licences to end users in respect of KDP’s software and to pay royalties purportedly on the same basis as before. For its part, KDP continued to provide technical support services in accordance with the terms of clause 7.

In September 2006, SLS was acquired by Unicom and almost immediately thereafter its relationship with KDP began to deteriorate. Mr and Mrs Passey became increasingly concerned by what they perceived to be a failure by SLS and, indeed, Unicom, to abide by the terms of the 1995 Agreements and, in particular, to provide proper information as to renewals by end users and to make full and prompt payment of monies due to KDP. In a series of emails between January 2007 and May 2008, Mr and Mrs Passey explained that they had received little in respect of maintenance payments, expressed their anxiety that SLS had been selling KDP’s software at a higher rate than KDP had been compensated for and sought details of the licence and service agreements entered into with end users and of the prices they had been charged. For their part, SLS and Unicom sought confirmation that KDP would continue to provide support. Despite a payment on account by Unicom to KDP of some $63,000 in May 2008, a sum which was undoubtedly due to KDP, the relationship did not improve. Accordingly, by solicitor’s letter dated 6 June 2008, KDP requested various categories of further information. The letter began with the following request for clarification of Unicom’s position in relation to the 1995 Agreements:

“We understand that SoftLanding Systems Inc. was acquired by Unicom Systems Inc. in or around October 2006 and that pursuant to that acquisition Unicom assumed SoftLanding Systems Inc’s responsibilities and obligations under the Agreements. It is unclear whether this was pursuant to a formal assignment and we would therefore be grateful if you could confirm whether SoftLanding Systems Inc has formally assigned its rights and obligations under the Agreement to Unicom Systems Inc. For the purposes of this letter, we shall simply refer to ‘Unicom’, by which we mean the company which is now the proper party to the Agreements.”

After addressing particular issues raised by Unicom, the letter sought a full and accurate report of the activities of SLS and Unicom:

“Pursuant to the terms of the Agreements, our client is entitled to the following information:

Clause 3.2 – A “complete and accurate written report” of your activities under the Agreement to June 30 and December 31 of each year, including details of end user contracts.

Clause 3.3 – Copies of the licence and service agreements executed by end-users.

It appears that Unicom has never provided this information, despite requests, and we therefore formally request that you provide this information in full within 14 days of receipt of this letter for the last three years of the Agreements (that is, for the years ending 30 June 2005, 30 June 2006 and 30 June 2007), ensuring that the documents provide clear and sufficient information concerning the licence fees and other fees paid or payable by the end users, on which our client may then establish the veracity of the payment information which it has been provided by Unicom to date. Our client also asks that you provide the information for the year ending 30 June 2008 as soon as possible following that year end. Our client reserves the right to require the same information for any other period(s) covered by the Agreements.

Our client considers that Unicom is in default by failing to provide these documents and this request on the part of our client is therefore a formal notification of breach on the part of Unicom in accordance with clause 10.2 of the Agreement(s), for which we require remedy within 14 days of your receipt of this letter.”

The letter then turned to address the concern that SLS and Unicom had failed properly to account for the appropriate percentage of the gross price obtained from each end user because agents’ fees had been deducted. KDP therefore sought a clear breakdown of the fees actually paid by end users, the amounts payable to agents and the price on which the fees payable to KDP had been calculated:

“In reviewing the information available to us, it has become apparent that there may be some misunderstanding concerning the involvement of ‘agents’ or other parties acting for Unicom in its dealings with end users. Herr Vogelbusch, we understand, is a German agent for Unicom and we feel it is important to set out our client’s expectations concerning the involvement of agents and particularly the effect which Unicom’s payment of agents may have on fees due to our client.

Under clause 8.1 of the Agreements, Unicom has to account to our client for 75% and 50% respectively of the “gross price obtained by [Unicom] from each end user for the Products” with respect to the SETTURN and DOCUMENTOR products. The reference to “gross” price is important and this clause also has to be read in conjunction with clause 8.3 which states that Unicom must be responsible for its own costs and expenses under the Agreement and that our client shall have no obligation to reimburse Unicom for any “expenses or costs incurred by [Unicom] in the performance of [its] duties.

Our view is that a “gross” price is exactly that and it reflects the price paid by the end user before any deductions are made, including those for any ‘agents’ – agents being costs incurred by Unicom in the performance of its duties. It is therefore on this “gross” price that any fees payable to our client should have been calculated and paid. Similarly, the involvement of agents or otherwise is a cost or expense which Unicom may choose to take or not but if that cost is assumed by Unicom, then it must come out of Unicom’s share of the gross price. It appears that this may not have happened to date and, if so, then this must be rectified as a matter of urgency. We therefore formally request that as part of the information requested above, Unicom provides a clear breakdown of (a) the fees actually paid by all end-users and (b) the amounts payable to ‘agents’ and (c) the price on which fees payable to our client have been calculated. This request is also made pursuant to clause 10.2 and the said information should therefore be provided within 14 days of receipt of this notice.”

Finally, the letter made clear that it constituted formal notice for the purposes of clause 10.2 of the 1995 Agreements and that failure to provide the information sought might result in the agreements being terminated.

By email dated 27 June 2008, Unicom responded that it and SLS declined to provide the information sought. Accordingly, by solicitor’s letter dated 4 July 2008, KDP provided written notice of termination.

Mr Onslow submitted that it is plain that the parties agreed that they should continue to be bound by the terms of the 1995 Agreements after December 1998. We indicated during the course of the hearing that, for the purpose of this appeal, we were content to proceed on that basis.

The issue which therefore falls to be considered is whether, on 6 June 2008, SLS was in breach of a material obligation, namely clause 3.2, having failed to provide a complete and accurate written report of its activities, including the information sought by the letter from KDP’s solicitors of that date or, alternatively, whether KDP could only properly terminate upon giving notice under clause 10.3 and providing to SLS and Unicom the source codes of KDP’s software pursuant to clause 10.4(a).

The judge found that SLS was in breach of a material obligation and that KDP did properly terminate the 1995 Agreements. Mr Onslow submitted that, in so deciding, the judge fell into error for the following reasons: first, SLS was not under any obligation to provide the information requested in the letter; second, the information sought had not been identified prior to 6 June 2008 and there was therefore no pre-existing breach as of that date; third, and in any event, failure to provide the information sought did not constitute breach of a material obligation. I will address these submissions in turn.

Clause 3.2 imposed upon SLS an obligation to provide to KDP every six months a complete and accurate written report of its activities. In my judgment, the information to which KDP was entitled included details of SLS’s pricing policy, the licence and maintenance fees actually paid by end users and any deductions made by way of costs and expenses incurred by agents or distributors. Clause 18 specifically prohibited the appointment by SLS of sub-distributors and clause 8.3 provided that SLS was responsible for its own expenses and costs. Accordingly, the “gross price” referred to in clause 8.1 and which formed the basis of the calculation of monies due to KDP, was the price actually paid by the end users. All the information to which I have referred was therefore necessary for KDP to verify that SLS was properly accounting in accordance with its contractual obligations. It follows that KDP was entitled to this information under clause 3.2 and the failure by SLS to provide it every six months constituted a pre-existing breach as of 6 June 2008.

I can deal with Mr Onslow’s second point quite shortly. It is wrong both as a matter of the proper interpretation of the 1995 Agreements and on the facts. SLS was obliged to provide full information every six months under clause 3.2. In so far as it failed to do so, it was in breach. It is irrelevant whether or not the information had previously been identified or requested. Moreover, the information had indeed been requested earlier and complaint made about SLS’s failure to provide it by emails respectively dated 10 and 11 March 2008, as recorded by the judge in paragraphs 162 and 166 of his judgment.

Finally, Mr Onslow submitted that the failure to provide the information did not constitute a breach of a material obligation because KDP already knew the identity of the end users and the dates of the annual maintenance renewals. Further, some information as to licence and maintenance fees received by SLS had been provided by way of a schedule to a letter from Unicom to KDP dated 22 May 2008. As I have indicated, I am content to accept that KDP knew the identity of the end users and the dates of the annual maintenance agreement renewals. I also accept that the schedule to the letter of 22 May 2008 set out details of moneys received by SLS in 2008. However, this was not all the information to which KDP was entitled and, most importantly, did not include the licence and maintenance fees paid by the end users, the amounts paid to agents and distributors or the prices on which the fees payable to KDP had been calculated. In my judgment, the obligation to provide full information was an essential stipulation going directly to the substance of the 1995 Agreements and fundamental to the confidence of the relationship between the parties. I have no doubt that it constituted a material obligation within the meaning of clause 10.2.

It follows that SLS was in breach of a material obligation on 6 June 2008, that KDP was entitled to and did provide written notice to SLS of that breach and demanding cure, that SLS failed to cure the breach within 14 days and that KDP then properly terminated the 1995 Agreements under clause 10.2.

SLS contended at trial that, in or about 2000, Mr Passey on behalf of KDP and Mr Schlieben on behalf of SLS agreed that only a fixed fee would be payable by SLS to KDP in respect of each licence and annual maintenance agreement renewal and that such agreement continued until 2007. In relation to Set/Turn, the terms of this fixed fee agreement were said to be that SLS would pay a fee of $6469 in respect of each new licence (such licence to include one year’s maintenance) and thereafter, a fee of $844 on each annual maintenance agreement renewal.

The judge rejected this contention. He noted it was not supported by any oral evidence. SLS did not call Mr Schlieben or Ms Bergeron, the SLS accounts officer responsible for payments at the material time, although both were said to be alive and well. Instead, it seems the case was founded entirely on documentary evidence. Both Mr and Mrs Passey gave evidence and denied that any such agreement existed. An attack on their integrity was roundly rejected by the judge in paragraph 84 of his judgment:

“84.

The Claimant was initially content to rely upon documentary evidence showing that royalty payments had reached a plateau and was uniform for some years. Their case changed when the Claimant in submission asserted that Mr and Mrs Passey were not credible or honest witnesses because they denied the alleged fixed price agreement. The Claimant asserted that the Passeys’ dishonestly sought to support their counterclaim for alleged underpayments of royalties by SoftLanding, which depended upon a percentage royalty basis of assessment, by denying the fiction of an agreement to fix royalty fees. It was an allegation of dishonesty not pleaded and in my judgment wholly without foundation.”

The judge then considered the documents on which SLS relied and found that none supported the alleged fixed fee agreement. He concluded at paragraph 103 of his judgment:

“103.

I reject the submission that Mr Schlieben and Mr Passey agreed to fix royalties. I do not derive any assistance from the late disclosed email of Ms Bergeron or the late disclosed minutes of the internal meeting which Mr Zurich attended and of which he professes no recollection. There is no cogent commercial reason why KDP should have agreed fixed royalties and nonetheless have given discounts on such fixed royalties as the records show they did on the payments that they received. I am driven to conclude that the elaborate case as to a fixed fee Royalty was pursued by SoftLanding to explain in part under payments of licence fees and maintenance fees.”

Mr Onslow submitted we should reverse these clear findings of fact and reach the opposite conclusion. In my judgment, this submission is hopeless. It is well established that this court will only reverse a finding of fact which involves an assessment by the judge of the credibility of a witness if the court is satisfied that the judge was plainly wrong. In circumstances such as the present, involving as they do allegations that Mr and Mrs Passey have given dishonest evidence, such a course would require the clearest of grounds. None is to be found here.

We were taken by Mr Onslow to what he described as three sources of documentary evidence. The first was an email from Mrs Passey to Mr Neil Watt of Unicom dated 22 March 2007 responding to an enquiry from Mr Watt as to the basis of the fee of $6469. Mrs Passey explained that SLS had a complete discretion as to pricing and simply forwarded to KDP the fee of $6469 for each new Set/Turn licence. She continued that she had no idea what SLS was charging its end users. I do not read this email as providing any acknowledgement by Mrs Passey that a fixed fee agreement was in place. To the contrary, it suggests she understood the fee paid by SLS was based upon the end user price which it had set, and she so confirmed in cross examination.

The second was a letter from Mr Passey to Mr Watt dated 18 February 2007, again responding to an enquiry as to the basis for the current fee rates. Mr Passey explained that the original agreement was entered into in 1995 and it had “informally changed” over the years. He then set out fees which he understood were at that time payable. When asked about the letter in cross examination, Mr Passey explained that the rates were based upon the 1999 SLS price list, this being the last price list that KDP had seen. Once again, this provides no evidence of a fixed fee agreement.

The third was an internal note written by Ms Bergeron on a precise date unknown but prior to September 2001 which sets out the basis of payments to KDP as being 75% of the end user price in the case of Set/Turn and 50% in the case of Documentor. To my mind, this document provides no support for a fixed fee agreement; indeed, it suggests the opposite, that the fees were based upon the end user prices. In this connection Mr Onslow also referred to an email written by Ms Bergeron to Mr Watt on 20 March 2007 in which she stated “The royalties to KDP were fixed amounts and the agent pays us the royalty plus their split after royalties”. But this does not assist in discerning Ms Bergeron’s understanding some six years earlier and it sheds no light whatsoever on the fundamental question whether any agreement as to fixed fees was ever reached with KDP.

For all these reasons I would dismiss the appeal on the two issues on which this court heard submissions.

I agree.

I also agree.