Artificial Solutions Germany GmbH v Creative Virtual Ltd & Anor

In these proceedings the Claimant’s (“Artificial’s”) principal claim is for infringement of copyright in certain software known as Lingubot which enables users to build and operate a virtual interactive customer service agent capable of engaging in conversations with the user’s customers via the internet, SMS, WAP and other media (“the Software”). Artificial acquired the copyright in the Software from the original developer of the software, Kiwilogic.com AG (“Kiwilogic”), by virtue of an asset purchase agreement dated 14 July 2006 (“the Asset Purchase Agreement”). The Second Defendant (“Mr Ezekiel”) had previously been appointed by Kiwilogic as the exclusive distributor of the Software and associated services in the United Kingdom and Ireland under a distribution agreement dated 14 January 2004 as varied by an agreement dated 14 December 2005 (“the Distribution Agreement”). The Distribution Agreement expressly envisaged that the Second Defendant would incorporate a company to carry on the business. The First Defendant (“Creative”) is that company and, although no formal novation was entered into, it is common ground that Creative has acted as if it were the contracting party under the Distribution Agreement and that there is no need for present purposes to distinguish between Creative and Mr Ezekiel. Both the Distribution Agreement and the Asset Purchase Agreement are governed by German law.

Artificial claims that Creative has infringed its United Kingdom copyright in the Software by making and issuing to the public copies of the Software. Creative’s defence is that such acts are licensed under the Distribution Agreement. Artificial’s reply is three-fold.

First, Artificial disputes that the Distribution Agreement ever gave Creative the right to copy the Software anyway. This issue turns on the interpretation of the Distribution Agreement.

Secondly, Artificial contends that the Distribution Agreement was not one of the assets transferred to it under the Asset Purchase Agreement and so it never became bound by the Distribution Agreement. Kiwilogic contends, however, that the Distribution Agreement was transferred to Artificial under the Asset Purchase Agreement. This issue is to be determined in proceedings brought by Kiwilogic against Artificial in Hamburg, Germany.

Thirdly, in the alternative to its contention that it never became bound by the Distribution Agreement, Artificial contends that it has terminated the Distribution Agreement on the ground of non-payment by Creative of monthly fees due under the Distribution Agreement.

Creative does not dispute that the fees were payable under the Distribution Agreement which it has not paid, but nevertheless contends that Artificial has not validly terminated the Distribution Agreement for three reasons: “creditor delay”, “tu quoque” and “unperformed contract”. These are principles of German law the meaning and application of which I shall consider later in this judgment.

By his Order dated 12 October 2007 Briggs J ordered that the following issues be tried as preliminary issues:

“(a)

all issues between the parties relating to the subsistence and ownership of copyright in the Lingubot software; and

(b)

all issues between the parties relating to the alleged termination of the Distribution Agreement by the Claimant on 17 May 2007.”

There is no longer any issue between the parties as to subsistence and ownership of copyright in the Software. This is my judgment on the issues relating to termination.

As varied, the Distribution Agreement, which is in English, includes the following recitals and provisions:

“Recitals

WHEREAS, the Distributor is currently employed as the managing director of Kiwilogic.com Ltd, a subsidiary of the Manufacturer;

WHEREAS, the Distributor has terminated his employment agreement with Kiwilogic.com Ltd

WHEREAS, the Distributor intends to establish and operate his own business in order to sell Kiwilogic products and offer services related to these products in the United Kingdom

…

WHEREAS, the Manufacturer has so far distributed its products and services in the United Kingdom and Ireland only via its own subsidiary, Kiwilogic.com Ltd, London.

WHEREAS, the Manufacturer intends to grant to the Distributor the exclusive right to distribute Kiwilogic products and provide services related to these products in the United Kingdom and Ireland;

…

§1

Appointment of Distributor

1.

Manufacturer hereby appoints the Distributor to sell the Products, as further defined in Enclosure 1, and provide for the Services, as further defined in Enclosure 2 pursuant to the terms and conditions of this Distribution Agreement.

2.

The territory exclusively assigned to the Distributor shall be the United Kingdom of Great Britain and Northern Ireland as well as the Republic of Ireland (hereinafter referred to as the ‘Territory’).

3.

The Distributor shall buy and sell the Products directly from the Manufacturer in his own name and on his own account, and he shall then sell the Products and provide the Services to third parties residing in the Territory in his own name and on his own account. The Distributor shall not sell the Products and provide the Services to third parties residing outside the Territory without the prior written consent of the Manufacturer.

…

§4

Duties of Manufacturer

1.

The Manufacturer agrees to sell to the Distributor, during the terms of this Distribution Agreement, upon his request and in compliance with his operational capacities, the Products for the resale to third parties in the Territory.

2.

The Manufacturer may at all times extend or limit its range of products, particularly, but not limited to, modify the Products, develop new Products, discontinue the distribution of Products, determine the number of copies of products and decide which and how many products are submitted for resale.

3.

During the term of this Distribution Agreement the Manufacturer grants to the Distributor the non-assignable right to present himself as the exclusive distributor of Kiwilogic.com AG in the Territory. For this purpose, the Distributor may designate his position as an exclusive distributor on his letterhead and in his correspondence….

§6

Prices and Conditions as between the Manufacturer and the Distributor

1.

Lump sum fee:

a)

The Distributor shall pay to the Manufacturer a non-refundable monthly lump sum fee of EUR 8,500.00 in consideration of Distributor’s entitlement as an exclusive distributor in the Territory, of the substantial customer base that Kiwilogic has established in the Territory, as well as the right to use the trade name ‘Kiwilogic’ and the use of the SMS application (‘Megabase’) that Kiwilogic created and established in the Territory. Such lump sum fee shall be due on the 15^th day of each month, the first payment shall be due on 15 January 2004. The monthly lump sum fee will rise to EUR 10,000.00 beginning with Jan. 2007:

…

3.

The Distributor shall prepare statements regarding the distributed Products and Services, the revenues, the issued invoices and all other payment claims against his customers as well as detailed information about margins or payments to third parties, bad debt and invoices in dispute pursuant to para 2 on a monthly basis. Such monthly statements shall be submitted to the Manufacturer until the 15^th day of each month, the first monthly statement shall be submitted to the Manufacturer until 20 February 2004.

…

§8

Exclusivity and Competition

1.

During the term of this Distribution Agreement the Manufacturer shall not be entitled to appoint any other distributor or commercial agent for the sale or distribution of the Products and Services in the Territory.

…

§9

Term and Termination

1.

This Distribution Agreement is entered into until 20.09.2010 (‘initial period’). It will be extended for an indefinite period if not terminated by either party with 12 months notice to the end of the initial period. After that the Agreement can be terminated by either party with 12 months notice to the end of the calendar month.

2.

The right to terminate the agreement for good cause without notice shall remain unaffected. The right to terminate this Distribution Agreement for good cause shall particularly, but limited to, exist, if

a)

The Distributor fails to pay the remuneration pursuant to Sec. 6 para. 2 or any other due payments to the Manufacturer;

…

c)

The Distributor is in default with the payment of monthly lump sum fees pursuant to Sec. 6 para. 1 amounting to the equivalent of 2 monthly fees;

…

If one party fails to exercise his right to terminate for good cause, this shall not result in a waiver of the right to terminate for good cause. In case of a continuing violation and in case of a repeated violation the right to terminate for good cause shall remain unaffected.

§11

Miscellaneous

1.

All claims arising out of or in connection with this Distribution Agreement shall be exclusively governed by German substantive law.

…

4.

Any changes or amendments to this Distribution Agreement shall be made in writing unless mandatory provisions provide for further requirements as to the form. This shall also apply to the agreement not to require that modifications be made in writing. The transmission via telecopy, but not via e-mail, shall satisfy the requirement of writing….

Enclosure 1: Products

Product Description

Lingubot Creator Authoring tool for Lingubot knowledgebases

Lingubot Engine Server application for Lingubot knowledgebases

…

Enclosure 2: Services

…

3)

Implementation of Lingubot software and knowledgebases

4)

Integration of Lingubot technology into existing technical environments, including integration into websites and development of customized interfaces

5)

Design of visual characters to be used in conjunction with Lingubut applications including – but not limited to – graphic design, characterization, photography, animations, and the creation of audio and video data

6)

Hosting and maintenance of Lingubot applications

7)

Data analysis based on Lingubot technology, i.e. analysis of dialogue transcripts, including development of customized tools for such analysis

8)

All other services that might be required by customers in order to design, set up, operate or maintain Lingubot applications”

The Asset Purchase Agreement, which is in English, includes the following provisions:

Ҥ1

Assets

1.1

With economic effect as of June 30, 2005, 12.00 p.m. midnight, Seller sells and Buyer purchases the Business as a going concern, including all assets currently used in the Business (with the exception of the Excluded Assets listed in Exhibit 2), free of any encumbrances. The assets sold from Seller to Buyer are hereinafter referred to as the ‘Assets’. Buyer is aware of that the assets listed in Exhibit 3 hereto are being used in the Business but not owned by Seller but leased from third parties.

1.2

In particular, Seller sells and Buyer purchases the following assets:

…

(c)

all of Seller’s title to, interest and rights in patents, trade marks, trade names, service marks, logos, domain name, design rights, copyright, rights in computer software and databases, trade secrets and Seller’s title to, interest and rights, if any, in other confidential information, know-how and other intellectual property rights, in each case whether registered or unregistered and including applications for the grant of any such rights and all rights having equivalent or similar effect anywhere in the world, and rights in the nature of unfair competition rights (‘Intangible Assets’), particularly the Intangible Assets listed in Exhibit 4b.

….

(k)

all rights and causes of action, law suits, judgments, claims and demands of any nature made by or on behalf of Seller;

(l)

all of Seller’s rights under contracts, agreements and other commitments entered into in the ordinary course of business prior to the execution of this Agreement;

(m)

other assets as listed in Exhibit 8;

…

§3

Agreements

3.1

Subject to the approval of the other party(ies), Seller transfers the agreements listed in Exhibit 10 to Buyer.

3.2

In the event that the other party(ies) do not agree to this transfer of the agreement, Seller and Buyer agree as follows:

(a)

Buyer shall fulfil all liabilities and other obligations of Seller vis-à-vis the respective contractual partner and immediately indemnity Seller from any claims….

…

§6

Transfer of Title

6.1

Seller and Buyer agree that title to the Assets is transferred to Buyer as of the execution of this Agreements under the condition precedent of the payment of the full escrow amount from Buyer to escrow account.

…

§8

General

8.1

This Agreement contains the entire understanding of the Parties, supersedes all prior agreements and understandings relating to the subject matter hereof and shall not be amended (including any of the schedules) except by a written instrument hereafter signed by the Parties hereto. This written form requirement shall only be amended by a written instrument signed by the Parties hereto.

8.3

This Agreement shall be governed by the laws of the Federal Republic of Germany…”

The Distribution Agreement is not included in Exhibit 2, Exhibit 8 or Exhibit 10.

The following witnesses of fact were called by Artificial:

The following witnesses of fact were called by the Defendants:

In addition the Defendant served a witness statement from William Daring of KMP Associates Ltd, one of Creative’s business associates. Mr Daring was not required by Artificial to attend for cross-examination.

I also heard evidence from two distinguished professors of German law. Professor Dr Dr Stefan Grundmann, Professor of German and European Private and Business Law at Humboldt-Universität zu Berlin and presently a Visiting Professor at Oxford, gave expert evidence on behalf of Artificial. Professor Dr Heinz-Peter Mansel, Professor of German Civil Law, Comparative Law and Private International Law at the University of Köln, gave expert evidence on behalf of the Defendants. Both experts gave evidence in English, although some of Prof Mansel’s reports were originally made in German and translated into English. Both experts were clearly doing their best to assist the court. Unfortunately, however, both had been led by their instructions to focus on the application of the relevant principles of German law to their instructing party’s version of the disputed facts of the case, rather than on simply expounding their understanding of those principles. This made it more difficult to ascertain precisely where they differed as to the principles as opposed to the application of the principles. That said, it is only fair to acknowledge that the application of the principles to the unusual facts of this case is not straightforward.

Both experts referred in their reports to various German commentaries. Except for one page from one commentary, I was not supplied with copies of these, still less translations. I was, however, provided with copies and translations of the principal cases cited by the experts in their reports. In the circumstances I consider that this was a sensible and proportionate approach.

I should make it clear that nothing in this judgment is intended to pre-judge any of the issues in the proceedings between Kiwilogic and Artificial in Hamburg. Furthermore, although some of the evidence before me touched on some of those issues, they were not explored in any depth or detail. Nevertheless, it is necessary for me to outline the dispute between Kiwilogic and Artificial because it forms a crucial part of the background to the present dispute.

Prior to the Asset Purchase Agreement, Artificial Solutions was Kiwilogic’s distributor in Spain and Scandinavia. In about December 2005 or January 2006 Artificial Solutions approached Kiwilogic with a view to taking over Kiwilogic or its business or to acquire the rights in the Software. It appears that negotiations began in about January or February 2006. Subsequently it was agreed in principle that Artificial would purchase all, or at least most, of Kiwilogic’s assets. Artificial was a shelf company acquired by Artificial Solutions to purchase the assets. As I understand it, it is common ground between Kiwilogic and Artificial that Kiwilogic disclosed the Distribution Agreement to Artificial Solutions as part of the due diligence process during the negotiations.

Kiwilogic’s position is that during the negotiations Artificial Solutions originally said that it did not want to take over the Distribution Agreement because it wanted to develop the market in the United Kingdom and Ireland itself, but that Kiwilogic insisted that all its assets be transferred including the Distribution Agreement and that Artificial Solutions agreed to this. Kiwilogic says that it was not prepared to agree to the Distribution Agreement being excluded from the deal because that would have meant that it could no longer perform the Distribution Agreement and hence would be liable to compensate Creative. Kiwilogic says that, after this had been agreed, there were final negotiations beginning in June 2006 in which attention was concentrated on other issues, such as the price, fiscal aspects and so on. Kiwilogic says that drafting of the Agreement, including its exhibits or annexes, took place in parallel with these negotiations.

Kiwilogic says that what became Exhibit 10 began life as a schedule drawn up by Marina Grüning of Kiwilogic who sent versions of the document to Mr Ǻhlund by email on 20 June 2006, 21 June 2006 and 4 July 2006 and to Dr Hohensee by email on 5 July 2006, each of which included the Distribution Agreement. On 11 July 2006 Mr Ǻhlund sent Ms Grüning an email attaching the “final version after today’s discussions” which again included the Distribution Agreement. On 12 July 2006 Ms Grüning sent Mr Ǻhlund an email attaching a set of annexes which again included the Distribution Agreement.

Kiwilogic claims that on 13 July 2006 Mr Ǻhlund sent Dr Hohensee by email a version of Exhibit 10 from which he had secretly deleted the Distribution Agreement without drawing attention to the change. Dr Hohensee forwarded this email to Kiwilogic’s lawyer Dr Irrgang on 14 July 2006 (the day the Asset Purchase Agreement was signed). Kiwilogic says that during the concluding negotiations on 14 July 2006 Artificial Solutions did not mention that Exhibit 10 had been changed and, on the contrary, when Kiwilogic asked whether everything was included, Mr Ǻhlund said yes.

Artificial’s position is that it was expressly agreed that the Distribution Agreement would be excluded from the Asset Purchase Agreement. Artificial points to an email from Mr Ǻhlund to Mr Hering dated 27 April 2007 in which Mr Ǻhlund said that it was important for Artificial Solutions to be able to “get out of or greatly adapt the current partner contract [with Creative]” (although the same email goes on to make an offer “based on that we take over all assets, customer-, partner-, office rental- and other business related contracts”). Artificial claims that in an email in reply on the same day and in three subsequent telephone conversations Mr Hering did not say that there would be a problem if Artificial did not assume the Distribution Agreement. Artificial goes on to say that the question of the treatment of the Distribution Agreement was not settled until shortly before the conclusion of the Asset Purchase Agreement. Artificial claims that during meetings on 11 and 12 July 2006 Dr Hohensee proposed that, instead of transferring the Distribution Agreement, Kiwilogic could discontinue the distribution of all Products to Creative pursuant to §4(2) of the Distribution Agreement, thereby effectively bringing Creative’s rights under the Distribution Agreement to an end, and that this solution was agreed between the parties. (Whether §4(2) would have permitted Kiwilogic to do this is not for me to judge; but, for reasons that will appear, this question – and the question of whether it is likely that Kiwilogic would have agreed to this solution – is related to the issue as to the interpretation of the Distribution Agreement mentioned above.)

As for the exhibits to the Asset Purchase Agreement, Artificial says that Ms Grüning merely collated information on the basis of which Dr Hohensee drafted the exhibits. Artificial says that Dr Hohensee sent Dr Irrgang a first set of exhibits on 12 July 2006 which did not include Exhibit 10 and then sent Exhibit 10 separately on 14 July 2006. Artificial disputes that Mr Ǻhlund secretly deleted the Distribution Agreement from the attachment to his email dated 13 July 2006 and says that this merely reflected the results of the negotiations. Artificial also relies on the facts that Kiwilogic and Dr Irrgang had the opportunity to check the exhibits before the Asset Purchase Agreement was signed and raised no objection, nor did they do so before the Asset Purchase Agreement was notarised on 11 September 2006.

Counsel for Creative characterised Kiwilogic’s claim against Artificial as one of fraud. Nevertheless he accepted that, for the purposes of these proceedings, I should assume that Artificial’s contention that the Distribution Agreement was not transferred to it is an arguable contention advanced in good faith.

Although the issue is hotly contested by Artificial in the Hamburg proceedings, it is common ground that for the purposes of these proceedings I should assume that the Distribution Agreement was transferred to Artificial under the Asset Purchase Agreement. More precisely, it appears to me that I must assume that the Distribution Agreement was novated with Creative’s consent such that Artificial became the contracting party in place of Kiwilogic. As will appear, there is no doubt that Creative did consent to any such novation.

Although the agreed assumption makes it unnecessary for me to decide what the position would be if the Distribution Agreement was not transferred under the Asset Purchase Agreement, I cannot forbear from commenting briefly on this issue. It is Artificial’s position that, assuming it is right that the Distribution Agreement was not transferred, then, even if the Distribution Agreement licensed Creative to commit acts which would otherwise infringe the copyright in the Software and even though the Distribution Agreement had not been terminated, as from the date when Artificial acquired the copyright Creative ceased to be licensed. Looking at the matter from the perspective of UK copyright law, I have considerable difficulty with this.

Section 90(4) of the Copyright, Patents and Designs Act 1988 provides:

“A licence granted by a copyright owner is binding on every successor in title to his interest in the copyright, except a purchaser in good faith for valuable consideration and without notice (actual or constructive) of the licence or a person deriving title from such a purchaser; and references in this Part to doing anything with, or without, the licence of the copyright owner shall be construed accordingly.”

In the present case Artificial did have notice of the Distribution Agreement. Prima facie, therefore, any copyright licence contained in the Distribution Agreement was binding upon it by virtue of section 90(4) even if the Distribution Agreement was not transferred by the Asset Purchase Agreement. As I have said, however, there is no need for me to decide whether this is right or not.

Mr Ezekiel was first made aware of the impending deal between Kiwilogic and Artificial by Mr Hering in early July 2006. Mr Hering requested that Mr Ezekiel, who had a very small shareholding in Kiwilogic, send Olaf Voß of Kiwilogic a power of attorney to vote on his behalf in favour of the transaction at a shareholder’s meeting. Mr Ezekiel’s evidence was that at this stage he was under the impression that the transaction to which he was consenting was a take over of Kiwilogic by Artificial, and that Mr Hering expressly confirmed to him that the Distribution Agreement would not be affected by the transaction.

On 10 July 2006 Mr Ezekiel sent Mr Ǻhlund an email asking for “a chat sometime this week”. Although the email does not identify the subject of the proposed conversation, Mr Ezekiel’s evidence was that he wanted to discuss the deal between Kiwilogic and Artificial with Mr Ǻhlund. Mr Ǻhlund replied on 17 July 2006 suggesting a meeting. In the event they were unable to meet until 23 August 2006.

In the meantime Creative made the monthly payments due under the Distribution Agreement to Kiwilogic as usual on about 15 July and 15 August 2006.

On 28 July 2006 Mr Hering sent Mr Ezekiel an email asking him to have the power of attorney (which it appears had been sent previously) notarised. Mr Hering sent a chasing email on 31 July 2006 as did Mr Voß on 3 August 2006, both of which referred to the fact that the shareholders’ meeting was to be held on 4 August 2006. Mr Ezekiel duly faxed the power of attorney to Kiwilogic on 3 August 2006. It appears that the shareholders’ meeting did take place on 4 August 2006 and approved the Asset Purchase Agreement.

On 23 August 2006 Mr Ǻhlund and Mr Ezekiel met for dinner in London. There is a conflict of evidence as to what was said on that occasion.

Mr Ǻhlund’s account was that he explained to Mr Ezekiel the nature of the Asset Purchase Agreement, and in particular that it excluded the Distribution Agreement; that he said that Artificial hoped to form a new partnership with Mr Ezekiel on the basis that Artificial would ultimately buy out Creative or that Creative would focus on one or two sectors of the market; that he asked Mr Ezekiel to prepare a presentation explaining his personal goals, information on Creative including its business plans and how Mr Ezekiel saw himself fitting into Artificial; and that a temporary agreement was reached that Creative could continue selling the Software on the same basis as before, and in particular that Creative should report its sales to Artificial, while they tried to reach an agreement over a new relationship.

Mr Ezekiel’s account was that both he and Mr Ǻhlund had outlined their respective business strategies; that Mr Ǻhlund had outlined several possible scenarios for a business relationship between them, including the possibility of a takeover of Creative; that it was agreed that both parties needed to think further and meet again at a meeting involving other Board members of Artificial Solutions; and that it was agreed that Mr Ezekiel would put together some notes about Creative ahead of the next meeting. Mr Ezekiel disputed that he was told about the Asset Purchase Agreement, and in particular that it excluded the Distribution Agreement. His evidence was that he was still under the impression that Artificial was taking over Kiwilogic, and also he was not sure whether the deal had yet been completed. Mr Ezekiel also disputed that Mr Ǻhlund requested him to report his sales in accordance with the Distribution Agreement.

It was not put to Mr Ezekiel that there was a temporary agreement for Creative to continue selling the Software at the meeting, and it is implicit in his evidence that there was no such agreement. Furthermore, in his closing submissions counsel for Artificial expressly stated that he was not contending that there was any agreement at the meeting.

In these circumstances I could hardly do otherwise than accept Mr Ezekiel’s account of the meeting in preference to that of Mr Ǻhlund. But I would add that I found Mr Ezekiel’s account more credible anyway. First, Mr Ǻhlund’s claim that he told Mr Ezekiel that the Asset Purchase Agreement did not include the Distribution Agreement is improbable in the light of the subsequent correspondence. As will appear, when Mr Ǻhlund did tell Mr Ezekiel this, Mr Ezekiel reacted instantly with alarm. Secondly, Mr Ǻhlund’s claim that a temporary agreement was reached is difficult, if not impossible, to reconcile with the parties’ subsequent behaviour. In particular, it is clear that Creative subsequently refused to enter into any such agreement. Thirdly, Mr Ǻhlund’s claim that it was agreed that Creative would report its sales to Artificial does not appear to be consistent with his email of 3 September 2006 mentioned below.

On 24 August 2006 Mr Ezekiel sent Mr Ǻhlund an email proposing dates for another meeting. Mr Ǻhlund replied on 3 September 2006 asking when Mr Ezekiel would be able to send him the “history of KL/CV UK as well as the comments on your own ideas and you as a person” which had been discussed at their meeting. He did not ask for sales reports.

On 11 September 2006 Mr Ezekiel sent Mr Ǻhlund by email a short PowerPoint presentation saying that he could use this to talk through where Creative was with everything and that the best way forward was to meet up. The PowerPoint presentation includes the following headings and bullet points:

“Overview

Creative Virtual started in January 2004 – exclusive distributors for the UK and Ireland; looking after other English language markets.

…

Market focus

UK, Ireland and US.”

The Asset Purchase Agreement was notarised on 11 September 2006.

On 12 September 2006 Ms Grüning sent Mr Ezekiel an email (from a Kiwilogic email address) containing details of a bank account. Although it is not stated in the email, Mr Ezekiel’s evidence was he was asked to, and did, start making the monthly payments due under the Distribution Agreement to the account specified in the email instead of the account to which Creative had previously paid the money. At that stage, however, he did not realise that the new account was an account of Artificial’s. On about 15 September 2006 Creative transferred the amount due to this account. It is common ground that Artificial did not return this money, nor did it return the payments made by Creative in October, November and December 2006.

On 29 September 2006 Artificial paid the purchase price due under the Asset Purchase Agreement. In consequence the transfer of assets took effect on that date.

On 18 October 2006 Marianne Hoffmann of Artificial sent Mr Ezekiel an email saying that EUR 9,200 had been received by Deutsche Bank (Kiwilogic’s bank), but that Creative should have transferred the money to the account which had been specified in September, which was Artificial’s account at HypoVeriensbank. Mr Ezekiel replied the same day saying that he had thought he had used the same details and that he had not been aware that the account was in the name of Artificial. It was subsequently agreed between them that the money would be returned to Creative which would then pay it to the correct account. Creative made the payment on about 20 October 2006.

It was Mr Ezekiel’s evidence that it was only at this stage that he realised that the deal between Artificial and Kiwilogic had gone through.

Also on 18 October 2006 Mr Ǻhlund sent Mr Ezekiel an email stating:

“As we discussed in London a few weeks ago, Artificial Solutions has purchased the assets of Kiwilogic, including all rights to the Lingubot software. The partner deal between Kiwilogic and Creative Virtual is however not part of that asset purchase contract.

As Artificial Solution sees the UK as one of our target markets we will take a more active role but would as we discussed somehow find a solution where Creative Virtual and you fit in to the picture.

Thanks for the information you sent me regarding Creative Virtual. However I had expected something a bit more detailed and also with some input on how you yourself look at the future and your role. In any case, thanks.

As you can imagine there are many things going on at Artificial Solution at the moment – therefore this is a somewhat slow process. We had a board meeting last week. After reviewing the various options we have decided that the best would be for Artificial Solutions to, if possible, acquire Creative Virtual. This would, we believe, be the best way to continue building on what you have achieved during these years and make the transition for the customers as smooth as possible. It would also allow for you to have a role within the Artificial Solutions group.

The first step in this process is obviously to find out if you find this to be a good option and to know if you are interested in selling and in that case at what price level. We would also like to better understand how you in such case see your role within Artificial Solutions. So please give us your feedback on this possibility.

Additionally, as Artificial Solution now owns all rights to the Lingubot software solutions and there is no active partner agreement between Artificial Solution and Creative Virtual, Creative Virtual is not entitled to resell any of the Lingubot solutions. In order to manage the present situation in the best way possible, I suggest that we in the mean time establish a similar partnership as the one earlier existing between Kiwilogic and Creative Virtual, but on a month to month basis and with the limitation that a permission from Artificial Solution is required in order for Creative Virtual to offer or distribute any of the Lingubot solutions.”

Mr Ezekiel replied less than 50 minutes later:

“First of all, I’m surprised to read the statement about the agreement between Kiwilogic and Creative Virtual not being part of the purchase; my understanding is that if Artificial Solutions has purchased the assets of Kiwilogic then this would be an integral part of those assets. I think we should discuss this point further as a matter of urgency.

In terms of the information I sent across – the reason it was brief was because I wanted to use it as notes for a meeting between us (as I explained in the email); we have only had a discussion over dinner since the Artificial Solutions/Kiwilogic deal, and I think we need a proper meeting where I can fully understand these changes and your future plans. In terms of the future where Creative Virtual and myself fit it, I suggest we meet and discuss this fully (again, I only put together brief notes as I felt there were lots of questions up in the air – and felt I needed a better understanding as to the Artificial Solutions plans in order to answer these questions).

In terms of Artificial Solutions acquiring Creative Virtual – again, I think the first step should be to meet up to discuss all of these issues together.”

Mr Ǻhlund did not reply to this email until 5 November 2006. In the meantime Mr Hering sent Mr Ǻhlund an email on 24 October 2006 saying

“I spoke with Olaf today after he returned from Barcelona and I got back from NYC.

He informed me of your comments on the UK market and the possible cooperation with Chris Ezekiel.

At the beginning of our discussions about the acquisition of Kiwilogic.com AG you had already expressed some concern about possible conflicts with Chris since you wanted to establish an Artificial Solutions presence in the UK market. The existing contract with Chris could be an obstacle unless both parties can agree on some form of cooperation.

We now seem to have an additional problem with the question: did the contract between Kiwilogic and Creative Virtual in fact transfer to ASOL or not.

It was always our intent - clearly communicated and understood by you - that ALL contracts must be transferred to ASOL if you acquire all the operating assets.

I completely fail to understand why the Creative contract was not included in Schedule 10 of our agreement and moreover why this slipped past all of us at the signing of the contracts. It was certainly not left out intentionally.

Be that as it may – we must now jointly find a way to resolve the issue of the UK market coverage….”

In his reply on 26 October 2006 Mr Ǻhlund did not comment on these assertions. Instead he said that it appeared to be possible for Kiwilogic to simply communicate to Creative that the Software was no longer part of the agreement (i.e. under §4(2) of the Distribution Agreement as discussed above), but that it was in everyone’s interests to find a good business solution.

When Mr Ǻhlund replied to Mr Ezekiel on 5 November 2006 he did not comment on the substance of Mr Ezekiel’s comments, but proposed some dates for a meeting. In the event they were unable to meet until 24 November 2006. In the meantime Creative made a further monthly payment to Artificial on about 15 November 2006.

On 24 November 2006 Mr Ǻhlund and Mr Ezekiel met in London. At the meeting Mr Ǻhlund re-iterated to Mr Ezekiel that the Distribution Agreement had not been one of the assets purchased by Artificial under the Asset Purchase Agreement and explained why the deal had been structured as an asset purchase agreement. Mr Ezekiel said that he would need to take the matter up with Mr Hering. Mr Ezekiel’s evidence was that Mr Ǻhlund was very dismissive of Kiwilogic’s handling of the transaction. In cross-examination he initially suggested that Mr Ǻhlund had said at the meeting that a mistake had been made, but later accepted that this was something that came from Mr Hering. It is clear from his emails following the meeting, however, that he had understood Mr Ǻhlund to have said this at the meeting.

Otherwise, it appears that the discussion mainly concentrated on the possibilities for a future business relationship. Mr Ǻhlund’s evidence is that Mr Ezekiel made it clear at this meeting that Creative wished to remain independent of Artificial Solutions.

On 25 November 2006 Mr Ezekiel sent Mr Hering an email saying:

“I met with Johan yesterday and he explained that my agreement with regards to the distribution of the Lingubot software is no longer valid (apparently there was a mistake and this was not listed as one of the assets to be purchased). As you can imagine, I am very concerned about this; when you called me to inform me of the Kiwilogic/Artificial Solutions deal, and request that I give my voting authority to Olaf, you made it clear that my agreement would not be affected (obviously I would not have given Olaf the authority to vote in favour of the deal if the distribution agreement was not going to continue). Could you please let me know the situation as you see it – and what can be done to address the problem.”

Mr Hering replied on 28 November 2006 saying that there had obviously been a mistake since the transaction had been designed to transfer all assets to Artificial including Creative’s agreement, but it had not been included in the list. Mr Hering said that the preferred solution was for Mr Ezekiel to reach an agreement with Mr Ǻhlund and Kiwilogic would do everything possible to help him reach a solution. Mr Ezekiel and Mr Hering remained in regular communication with each other over the next few weeks.

Also on 28 November 2006 Mr Ǻhlund sent Dr Hohensee an email the privilege in which has been partially waived stating inter alia that Creative “has continued paying the monthly partner fee, lately to the ASOL bank account” and that Creative had a “licence code generator” (of which, more anon). He asked for their feedback on a draft email which I presume was a draft of his next email to Mr Ezekiel.

On 3 December 2006 Mr Ǻhlund sent Mr Ezekiel an email in the following terms:

“As we discussed in London last Friday, and as described in my earlier e-mail October 18, 2006 as well as discussed during our meeting in London on August 23, 2006 the situation is as follows:

•

Artificial Solutions is now the sole owner of all intellectual property related to the Lingubot Creator and Lingubot Web Engine.

•

The partner agreement between Kiwilogic and Creative Virtual was not taken over by Artificial Solutions in the asset deal.

•

I also understand that Creative Virtual has a ‘licence code generator’ that would make it possible to generate the software codes needed to install the Lingubot Creator and Lingubot Web engine on additional computers.

•

The above described situation means that Creative Virtual does at this stage not have a partner agreement with Artificial Solutions and has also not the right to resell the Lingubot solutions or to use the brand names in your marketing. Creative Virtual does also not have the right to use the ‘licence code generator’.

As discussed in London last Friday, and as described in my earlier e-mail October 18, 2006 as well as discussed during our meeting in London on August 23, 2006 I suggested that we establish a temporary partnership for the UK market, with the same economical terms as the previous partner agreement between Kiwilogic and Creative Virtual. Thus 20% of the revenue (but not less than 9200 euros per month) shall be paid to Artificial Solutions. However, with the requirement that each new or extended Lingubot Web Engine license or Lingubot Creator license must be approved by Artificial Solutions before it is sold. Without such approval the license is not valid. Also, Creative Virtual will not have exclusivity in the UK market. Such temporary partnership will be in place during our current discussions regarding the possible acquisition of Creative Virtual by Artificial Solutions or the possible alternative partnership between Creative Virtual and Artificial Solutions. The temporary partnership can be cancelled by either party with 30 days notice.

I did not receive any feedback on my suggestion e-mailed to you October 18, but have noticed that the 9200 euros have been transferred each month to the Artificial Solutions account, which I will interpret as your agreement to this temporary solution.

The purpose of this email, as we discussed last Friday, is to make sure the legal situation is clear. In the mean time I am looking forward to the information regarding Creative Virtual and your thoughts of your personal position in Artificial Solutions, that we need in order to give you an initial offer. I also expect, as discussed, your idea on how a possible alternative partnership between Creative Virtual and Artificial Solution could look like. As we want to get this in place as soon as possible it would be very much appreciated if you could send me this information within the next few days.”

It is clear from Dr Hohensee’s evidence that it was on Dr Hohensee’s advice that Mr Ǻhlund said in this email that Artificial was interpreting Creative’s payments as being made in accordance with the proposed temporary agreement; and that the reason for this was that Dr Hohensee was concerned that Creative and/or Kiwilogic might argue that, by accepting payments from Creative in accordance with the Distribution Agreement, Artificial had impliedly consented to a novation of the Distribution Agreement even if it was not included in the Asset Purchase Agreement (as indeed Kiwilogic did subsequently argue: see below).

Mr Ezekiel replied on 5 December 2006:

“First of all, I would like to state clearly that I believe the existing agreement remains valid. Since our meeting on 24th November I have contacted Gunther Hering and he has confirmed (as you have also acknowledged at the meeting) that a mistake had been made during the finalisation of the deal between Kiwilogic and Artificial Solutions. Gunther made it clear that the transaction was designed to transfer ALL operating assets to Artificial Solutions including the Creative Virtual agreement.

As yourself and Gunther both agree that a mistake was made with regards to the documentation associated with the transaction, I don’t see any reason why this cannot be resolved between Kiwilogic and Artificial Solutions (I would be happy to participate in any discussions if you think it would [be] useful).

At our meeting on 24^th November I said that it would take a couple of weeks to put together the information on Creative Virtual (financials, customers, plans etc.). However, following discussions with yourself and Gunther, and after receiving your latest email, there is now clearly a dispute between our two companies and I think it’s extremely important that this is resolved prior to any work on a possible new agreement.

To address the specific point about your email dated 18th October and the monthly payments: I provided a response to this email (see email thread attached), and with regards to the monthly payments, I have continued to make these based on the existing distribution agreement.”

Mr Ǻhlund replied on 7 December 2006:

“I do not understand how you have interpreted our discussion on the 24^th. I was very clear in that Artificial Solution had no intention of ‘taking over’ the partner ship agreement with Creative Virtual. That partner agreement was therefore intentionally excluded from the list of agreements taken over.

We would like to have this situation resolved with no further delays, i.e. at the latest by January 8, 2007. The two options available are, as discussed, Artificial Solutions acquiring Creative Virtual or us finding an alternative partner deal where Creative Virtual focuses e.g. on a particular market segment. In order for us to give you an offer regarding any of these options we need the information earlier requested from you. I would appreciate if you let us know if you are still interested in any of these two solutions.

If no agreement has been reached between Creative Virtual and Artificial Solutions before January 8, then Creative Virtual will no longer be entitled to market or sell the Lingubot Solutions. Artificial Solutions will take in this case any legal action necessary to prevent Creative Virtual from marketing or selling the Lingubot Solutions.”

Mr Ezekiel replied on 11 December 2006:

“I do not understand your comments about the meeting on the 24^th November. Let me outline the meeting in more detail:

You made it clear to me at that meeting that there had been a mistake and that the agreement hadn’t been listed for transfer. I expressed my concern about the situation and went on to ask why the deal was done on the basis of a list of assets (instead of purchasing Kiwilogic.com AG) – and you explained that the reason that Artificial Solutions proceeded in this particular way was because of the complex tax/commercial setup of Kiwilogic.com AG. You also said that you thought it was to my advantage to agree to a new agreement very quickly as Artificial Solutions was in discussions with potential investors and that the new investors were unlikely to offer the same terms to Creative Virtual as would be offered by Artificial Solutions. I explained that I had been contacted by Gunther prior to the deal; Gunther requested that I give Olaf the power of attorney to vote on my behalf in favour of the transaction – and he confirmed that the Creative Virtual distribution agreement would not be affected by the transaction – and it was on this basis that I went ahead and gave Olaf the power of attorney (obviously I would not have given Olaf the authority to vote in favour of the deal on my behalf if the distribution agreement was not going to continue). At the end of the meeting on 24^th November I said to you that I was going to contact Gunther to express my concern and to find out how this situation could be resolved.

As explained in my email to you on 5^th December, Gunther confirmed that there had been a mistake. Gunther informed me that the transaction was designed to transfer ALL operating assets from Kiwilogic.com AG to Artificial Solutions including the Creative Virtual agreement.

In summary:

•

I received a call from Gunther informing me of the proposed deal between Kiwilogic.com and Artificial Solutions – and saying that our distribution agreement would not be affected. On that basis I gave my power of attorney to Olaf to vote in favour of the transaction.

•

In your email dated 18^th October – you mentioned that Artificial Solutions had purchased the assets of Kiwilogic and that the Creative Virtual agreement was not part of this. I responded on 18^th October stating that I was surprised that the Creative Virtual agreement was not part of the purchase; Artificial Solutions had purchased the assets of Kiwilogic and the Creative Virtual agreement was an integral part of those assets. I requested that we should discuss this as a matter of urgency. The next time I heard from you was on 5^th November - at this point there was an exchange of emails to setup a meeting.

•

When we met on 24^th November, you informed me that a mistake had been made and that my agreement was not part of the take over of the assets. When I asked the question about why the deal was done in this way you said that this was because the tax/commercial situation of Kiwilogic was too complex to simply take over Kiwilogic.com AG. In an email following the meeting you suggested that I should continue to make the same monthly payment – but on revised terms (including the removal of our UK exclusivity) - which is completely unacceptable.

•

I contacted Gunther querying the mistake – he confirmed your comments that a mistake had been made and said he would contact you (he also confirmed that the transaction was designed to transfer ALL operating assets from Kiwilogic.com AG to Artificial Solutions including the Creative Virtual agreement).

•

You now say that Artificial Solutions had no intention of taking over the Creative Virtual distribution agreement and that you will take legal action against Creative Virtual unless I sell the company to you or agree to a different agreement.

To reiterate Creative Virtual’s position: there is now clearly a dispute between our two companies and I think it’s extremely important that this is resolved prior to any work on a possible new agreement. I would be happy to work with yourself and Gunther to resolve this dispute. Any legal action will be vigorously contested.”

Mr Ǻhlund did not reply to this immediately, since around this time he had to return to Sweden as his father was very ill and passed away shortly before Christmas. In the meantime Creative made a further monthly payment to Artificial on about 15 December 2006.

On 5 January 2007 Mr Ǻhlund replied to Mr Ezekiel and, after explaining the delay, said:

“Regarding your e-mail; I really do not understand how you have interpreted our discussions during the meeting 24/11. What you write below has little to do with what we discussed…

There was certainly no mistake from Artificial Solutions side regarding the transfer of the Creative Virtual partner agreement. We had no intention what so ever to take over that agreement. As I told you, this was one of the issues we raised with Kiwilogic (together with the complex tax situation in Kiwilogic). The Creative Virtual partner agreement was intentionally left out from the list of agreements.

My understanding is that you are now not willing to give us the information we need in order to either offer an alternative partner agreement or acquiring Creative Virtual. We are therefore not willing to extend the January 8 deadline and Creative Virtual will no longer be entitled to market or sell the Lingubot Solutions. Do let me know if I am interpreting you incorrectly.”

Also on 5 January 2007 Mr Ǻhlund sent an email to Mr Hering saying among other things:

“As you know I have met with Chris and have also had some email correspondence with him. I clearly explained to him that the Creative Virtual partner agreement was not taken over by Artificial Solutions. As you might remember, this was together with the complex tax issues and the administrative board related things the main issues we discussed that final week in Hamburg. I guess we were all stressed and focusing on getting the deal in place those final days and did not focus on issues such as the Creative Virtual agreement. In any case, we had no intention on taking it over (e.g. considering the exclusivity clause) and it was clearly not listed in the attachment with agreements.

…

I therefore suggest that Kiwilogic terminate the Creative Virtual partner agreement (or exclude the Lingubot solutions), based on the fact that you can no longer supply Creative Virtual with the Lingubot solutions. (Just as we discussed a while ago.) This is to protect Kiwilogic from claims from Creative Virtual.”

Mr Hering replied to Mr Ǻhlund the same day stating:

“We have an open issue and obviously a different understanding of the rights and obligations arising from the exclusive partnership agreement with Creative Virtual in the UK. We have never agreed to take this agreement from the asset purchase contract. It was always and still is out intention that Artificial Solutions acquire all the assets and the obligations attached to them. We have not and never would have agreed to any carve outs since we could no longer support such partners after we sold the technology to you. Any other interpretation or declaration is in our view erroneous and not factual.

We do not dispute that the Creative Virtual partnership agreement was not listed in the attachments to theasset purchase agreement. However, this was clearly a mistake or oversight if you will. It has nothing to do with the intention of the parties to the contract.

We were and are also aware of the fact that you had misgivings about accepting the Creative Virtual contract in this deal since you wanted to pursue other plans in the UK. I have always clearly stated to you that we will not and cannot make any exceptions to the transfer of the partnership agreements. Therefore this cannot be construed as a port [sic] mortem fact to exclude the CV contract.

We are as much interested to find an amicable solution as you are. …

The action suggested by you on the part of Kiwilogic does not offer a solution. We have asked our lawyers to review the case…”

Also on 5 January 2007 Mr Ezekiel was informed by Mr Daring that he had been given information which indicated that Artificial was seeking to recruit a sales person to sell the Software in the UK.

Mr Ezekiel replied to Mr Ǻhlund on 7 January 2007:

“I do not understand how your interpretation of the meeting on 24th November is different. I obviously haven’t seen any of the documentation relating to the transaction between Artificial Solutions and Kiwilogic – but at the meeting on 24^th November you certainly indicated that there had been a mistake; you went on to be critical about the way the deal was handled by Kiwilogic. As I say I haven’t seen any of the documentation relating to the deal and I left the meeting feeling very confused about what had actually taken place (you will recall my questions about why the deal was done in this way as opposed to a simple take over of Kiwilogic).

Following the meeting I contacted Gunther and he confirmed that there had been a mistake with regards to the Creative Virtual agreement not being transferred. He informed me that the transaction was designed to transfer ALL operating assets to Artificial Solutions including the Creative Virtual agreement. In your latest email you seem to be saying that you explicitly raised the issue of excluding the Creative Virtual agreement from the transaction with Kiwilogic – is this correct? (If it is, then there is clearly a discrepancy between yourself and Gunther on this issue). For the reasons I have already given, I am continuing to operate under the terms of the existing agreement. I believe that I have made my position clear: I would be prepared to discuss a possible new agreement, but only after the acceptance that the existing agreement remains valid. I have continued to make the monthly payments in accordance with Creative Virtual’s obligations (the only change has been to the recipient bank account: back in September Marina asked me to change the bank details to Artificial Solutions).

I do not accept your statement about Creative Virtual not being entitled to market or sell the Lingubot solution after January 8^th. As stated in my previous email: there is now clearly a dispute between our two companies and I think it’s extremely important that this is resolved prior to any work on a possible new agreement. Again, as stated in my previous email, I would be happy to work with yourself and Gunther to resolve this dispute.”

On 8 January 2007 Mr Ezekiel sent emails to both Mr Ǻhlund and Mr Hering asking for a copy of the Asset Purchase Agreement. In the event he did not receive one until the commencement of these proceedings.

On 11 January 2007 Dr Pabst and Dr Holthusen of Görg, a firm of German lawyers acting for Kiwilogic, sent a letter written in English by email to Mr Ǻhlund setting out Kiwilogic’s position that the Distribution Agreement had been transferred from Kiwilogic to Artificial under the Asset Purchase Agreement. Dr Pabst and Dr Holthusen stated that this had been explicitly agreed and also argued that this was the true interpretation of the Asset Purchase Agreement notwithstanding the omission of the Distribution Agreement from Exhibit 10. They went on:

“Accordingly Artificial Solutions also requested, and accepted, the monthly payments to be made by Chris Ezekiel/CV under the obligations of the distribution agreement. Already this proves that – even in the view of Artificial Solutions – the contractual relationship with Chris Ezekiel/CV passed to Artificial Solutions without restrictions.”

Dr Pabst and Dr Holthusen concluded by proposing a meeting to clarify the dispute, to be attended also by Mr Ezekiel, on 18 January 2007.

On 12 January 2007 Mr Hering sent Mr Ezekiel an email informing him that Dr Pabst and Dr Holthusen had written to Mr Ǻhlund and inviting him to the meeting on 18 January 2007. Mr Ezekiel replied the same day to say that he would attend.

On 15 January 2007 (apparently at 5:24 am) Dr Hohensee sent an email to Mr Ezekiel in the following terms:

“I am a German attorney at law and I would like to officially inform you that I am representing the interests of the Artificial Solutions Group (“AS”) and, in particular, of Artificial Solutions Germany GmbH.

AS submitted to me the correspondence between you, Mr. Hering and AS. I carefully reviewed any document submitted to me and came to the conclusion that the UK partner agreement was not transferred from Kiwilogic AG to AS and therefore, at the latest on January 8, 2007, Creative Solution’s right to use, market or resell the Lingubot terminated.

Therefore, I request from you on behalf of and in the name of AS that you stop using the Lingubot software with immediate effect and that you confirm in writing that you will not use, market or resell the Lingubot software any more.

If I do not receive such declaration by Wednesday, January 17, 2007, I will without further reminder take any legal actions which are necessary or helpful to prevent Creative Solutions from using the Lingubot software.”

This email was sent on the day that Creative was due to make its next monthly payment under the Distribution Agreement. Creative did not make the payment. Mr Ezekiel’s evidence was that he did not make the payment because he was waiting to see what transpired at the meeting on 18 January 207. It is not clear from his evidence whether he took the decision not to make the payment before or after receipt of Dr Hohensee’s email; but, given the apparent timing of Dr Hohensee’s email, Mr Ezekiel would have received it at a time when Creative was still in a position to make a payment that day.

On or shortly before 15 January 2007 Mr Ezekiel instructed Mr Ewald to represent him. On 16 January 2007 Mr Ewald sent an email to Dr Hohensee stating that he had been instructed to represent Creative, asking for an extension of the deadline until 24 January 2007 and stating that he and his client would join the meeting proposed by Kiwilogic.

Also on 16 January 2007 Dr Hohensee replied to Dr Pabst in a letter written in English sent by email which was copied to Mr Ezekiel as follows:

“Referring to your email I would like to point out that I disagree with your statements due to the following reasons:

1.

It was specifically discussed and agreed between Mr Hering and Mr Ahlund that the UK partnership agreement shall not be transferred to Artificial Solutions Germany Gmbh (‘AS’), formerly Kim Vermogensverwaltung Gmbh. Further, it was specifically discussed between Mr Hering and Mr Ahlund how the partnership agreement can be terminated by Kiwilogic after the transfer of Kiwilogic’s business to AS.

2.

Mr Hering admitted in his email of January 5^th that he was aware of the fact that AS did not want to take over the UK agreement.

3.

The Asset Purchase Agreement (‘APA’) clearly reflects this agreement because the UK partnership agreement is not listed in Exhibit 10 to the Asset Purchase Agreement. Accordingly, this agreement was not transferred to AS.

4.

There is a legal assumption under German law, that a notarial deed as well as any other writing is complete and that there are no oral side agreements. This is another strong argument for the agreement described in no.1. Kiwilogic AG was advised by a reputable German law firm. If the agreement had been different from what is described in no. 1, Dr Irrgang would have certainly made sure that such agreement was correctly reflected in the APA.

5.

We have chosen an asset deal structure instead of a sale of the shares because it was the clear intention of the parties not to transfer all of the liabilities and the agreements. In particular, the UK partnership agreement was not to be transferred.

6.

It is clearly the structure of the agreement that only the liabilities and agreements are transferred which are specifically listed in the Exhibits. The language of the agreement does not allow any doubts. The Preamble of the agreement does not say anything else, in particular the reference to the transfer of the ‘business as a going concern’ does not constitute an argument for the transfer of the UK agreement. First, the Preamble does not contain binding provisions but simply describes the background of the agreement. Second, the clause only refers to assets but not to agreements and liabilities.

7.

The UK agreement was not taken out ‘in last minute’ from Schedule 10. Rather, the agreement was never ‘in’ before. To my recollection, there was no previous draft in which the UK partnership agreement was listed as an agreement to be taken over by AS. There might have been lists of agreements in which the UK agreement was contained but such lists cannot be considered draft Schedules.

8.

As you know, according to German law assets which shall be transferred need to be specified individually (Bestimmtheitsgrundastz). This is another reason why the UK agreement was not transferred to AS, already as a matter of law.

9.

AS did never accept any payments from CV on the basis of the partner agreement concluded between CV and Kiwilogic. Rather, Mr Ahlund made it always very clear to CV that AS would accept the payments only on a new temporary agreement and preserved AS’ right to terminate the preliminary agreement without any notice period.”

I have to say that I was not impressed by Dr Hohensee’s unwillingness in cross-examination to accept that paragraph 9 of this letter was inaccurate if (as is now conceded by Artificial to be the case) there was no temporary agreement at the 23 August 2006 meeting. In saying this, I am not doubting that when Dr Hohensee wrote the letter he was accurately reflecting his instructions.

On 18 January 2007 Dr Pabst, Dr Holthusen, Mr Hering, Dr Hohensee, Mr Ewald and Mr Ezekiel met at Görg’s offices in Frankfurt. Mr Ǻhlund did not attend the meeting, but telephoned in during the course of it. There is a conflict of evidence as to what was said at that meeting.

The evidence of Mr Hering, Mr Ewald and Mr Ezekiel was as follows. At the beginning of the meeting, Dr Hohensee and Mr Hering acknowledged that Creative was in an unfortunate position because it was caught in the middle of a dispute about the scope of the Asset Purchase Agreement. Dr Pabst, Dr Hohensee and Mr Hering then discussed whether or not the Distribution Agreement had formed part of the Asset Purchase Agreement, and in particular whether the omission of the Distribution Agreement from Exhibit 10 was agreed or not. Dr Pabst and Mr Hering made it clear that Kiwilogic was prepared to bring proceedings against Artificial to have its position confirmed. Then Mr Ezekiel made it clear to Dr Hohensee that Creative was willing to accept Artificial as its new contractual partner under the Distribution Agreement and was prepared to continue to operate on the basis of that agreement. Both Mr Ezekiel and Mr Hering referred to the fact that Creative had been making payments to Artificial in accordance with the Distribution Agreement, and Mr Ezekiel stated that Creative was willing to continue paying the fees due under the Distribution Agreement. Dr Hohensee said, however, that Artificial would not accept Creative as a distributor of the Software since Artificial regarded the UK as one of its key markets. Dr Hohensee went on to say that Artificial was not prepared to accept payments under the Distribution Agreement but only under a temporary non-exclusive agreement (i.e. that proposed in Mr Ǻhlund’s emails), and repeated what he had said in paragraph 9 of his letter dated 16 January 2007. The meeting then turned to discussion of options for settlement. Six options were discussed, but no agreement was reached on any of them. During these discussions Dr Hohensee became frustrated and threatened that Artificial could try to erode Creative’s business base by giving away the Software in the UK. Nevertheless, when the meeting ended Dr Hohensee and Mr Ezekiel agreed that they would keep trying to find a settlement.

Dr Hohensee’s evidence was that the meeting began with a discussion over whether the Distribution Agreement had been novated and then turned to discussion of the six settlement options. His evidence was that ongoing compliance with the Distribution Agreement was not discussed, and in particular neither Mr Ezekiel nor Mr Ewald offered to make payments. He also denied making any threat to Mr Ezekiel.

I consider that the evidence of Mr Hering, Mr Ezekiel and Mr Ewald is more credible than that Dr Hohensee for the following reasons. First, their evidence was clear and consistent. It is difficult to suppose that they were all mistaken, and it was not suggested that they were all lying.

Secondly, as Mr Ewald said, it is commonplace for a settlement meeting to begin with the parties stating their positions. Given that Mr Ezekiel wanted to maintain the Distribution Agreement with Artificial and had paid in accordance with it down to December, it would only be natural for him to state that he was prepared to continue operating under the Distribution Agreement including making payments due under it.

Thirdly, Dr Hohensee accepted that the question of novation of the Distribution Agreement was discussed. In those circumstances, it would be surprising if Mr Ezekiel had not made it clear (and have been advised by Mr Ewald to make it clear) that he had paid in accordance with the Distribution Agreement and was prepared to continue doing so.

Fourthly, Mr Ewald’s evidence was that he had seen Dr Hohensee’s letter dated 16 January 2007 (which had been copied to Mr Ezekiel) and in the light of that letter was conscious of the question of creditor delay. For reasons that will appear, this makes it likely that Mr Ewald would have advised his client to offer to pay. Counsel for Artificial relied on the fact that Mr Ewald accepted that, at the time of the meeting, he personally did not know that the payment due on 15 January 2007 had not been made. In my judgment this does not assist Artificial, because it is clear from Mr Ewald’s evidence that he was thinking of the future. Counsel for Artificial also relied on the fact that neither Dr Hohensee’s notes of the meeting, nor Mr Ezekiel’s notes, nor Mr Ewald’s notes, records any such offer. I do not find this surprising given that all three sets of notes concentrate on the settlement options that were discussed.

Fifthly, Dr Hohensee’s own note of the meeting confirms that one of the settlement options which was discussed was for the Distribution Agreement to be continued on an exclusive basis. Mr Ewald’s evidence was that the possibility of a reduced period of exclusivity in return for reduced fees was discussed. (This evidence is supported by the fact that subsequently Creative made proposals of this nature in emails dated 9 February and 27 February 2007.) Again, this makes it likely that Creative made it clear that it was willing to pay.

Sixthly, Dr Hohensee’s denial of making the threat is contradicted by Mr Ezekiel’s note of the meeting.

Seventhly, I consider that the account of Mr Hering, Mr Ezekiel and Mr Ewald is supported to some extent by the letters dated 22 May 2007 and 19 July 2007 discussed below, and Dr Hohensee’s reaction to the former.

After the meeting on 18 January 2007 Creative made no further payments to Artificial until after these proceedings had been commenced. Mr Ezekiel’s evidence, which I accept, was that the principal reason why he did not make the payments was Artificial’s refusal to accept the sums that were due as payments under the Distribution Agreement and its insistence that it would only accept the payments under the proposed temporary agreement. A secondary reason was that, in the light in particular of the information he had received from Mr Daring on 5 January 2007, he was suspicious that Artificial was trying to enter the UK market.

Mr Ewald gave evidence based on his time records that he spoke to Dr Hohensee on the telephone about the dispute between Creative and Artificial on 23 January, 2 February, 6 February, 7 February, 8 February, 13 February, 21 February, 22 February, 2 March and 23 April 2007. Mr Ewald’s account was that during these conversations he and Dr Hohensee discussed the settlement options and their respective clients’ positions. Mr Ewald said that he repeatedly insisted that it was Creative’s intention to continue working on the basis of the Distribution Agreement and that Creative was willing to perform all of its obligations under that agreement. He also said that on several occasions he made it clear that these obligations included the obligation to make payments under the agreement. This account was based on recollection since he had not kept any attendance notes of these conversations.

Dr Hohensee agreed that he and Mr Ewald had spoken regularly on the telephone during this period, but disputed that Mr Ewald had ever offered on behalf of Creative to make payments or perform obligations under the Distribution Agreement.

Once again I prefer Mr Ewald’s evidence which I find more plausible for many of the same reasons as I have given in relation to the 18 January meeting. In addition, I was unconvinced by Dr Hohensee’s explanation in cross-examination that Mr Ewald did not need to say that Creative offered to continue performing under the Distribution Agreement because it was absolutely clear that that was Mr Ezekiel’s position. Counsel for Artificial understandably relied on the fact that Mr Ewald did not make any offer in writing on behalf of his client. I have to say that I am surprised that Mr Ewald did not do so; but nevertheless I am not persuaded that this undermines Mr Ewald’s testimony.

On 2 March 2007 Kiwilogic issued its proceedings against Artificial in Hamburg.

On 16 May 2007 there was a meeting in Köln attended by Mr Ǻhlund, Dr Hohensee, Mr Ezekiel and Mr Ewald. There is again a conflict of evidence as to what was said at that meeting. Again, Mr Ezekiel and Mr Ewald said that during the meeting Mr Ezekiel offered to pay the fees and to fulfil all other obligations under the Distribution Agreement. Mr Ǻhlund and Dr Hohensee denied this. Again, I prefer the evidence of Mr Ezekiel and Mr Ewald.

It is common ground that there was a final, brief, unsuccessful attempt to settle the dispute after which Dr Hohensee said that Artificial was terminating the Distribution Agreement in the alternative to its contention that it was not bound by it.

On 17 May 2007 Dr Hohensee wrote to Mr Ewald re-asserting Artificial’s position that there was no contractual relationship between Artificial and Creative, but without prejudice to that contention terminating the Distribution Agreement for good reason on the grounds that (i) since January 2007 no payments had been made by Creative as required in particular by §9(2)(c) of the Distribution Agreement, (ii) Creative had used a “licence code generator” in an impermissible manner which was expressly prohibited and (iii) Creative had breached its reporting requirements under §3(2) of the Distribution Agreement since it had not made any reports.

On 22 May 2007 Mr Ewald replied to Dr Hohensee contending that the termination of the Distribution Agreement was invalid. In this letter Mr Ewald stated (in the agreed translation):

“As you know our client has repeatedly offered to comprehensively fulfil the distribution agreement. However, this has constantly been refused by your client.”

On 28 May 2007 Dr Hohensee replied to Mr Ewald, but did not take issue with the factual accuracy of the sentences I have quoted from Mr Ewald’s letter. By contrast, emails in evidence show that Dr Hohensee was extremely quick to take issue with Dr Pabst about a telephone conversation they had in early February 2007 (and to accuse Dr Pabst of slander to boot). Dr Hohensee had no explanation for this difference in his reaction when cross-examined about it other than to say that he should have corrected Mr Ewald.

At some point both Artificial and Creative instructed English solicitors and on 13 July 2007 Artificial commenced the present proceedings and applied for an interim injunction. On 19 July 2007 the Claimant’s solicitors wrote to the Defendant’s solicitors stating:

“It appears from 7.2 of your counsel’s skeleton argument, that you will be contending that our client refused payment tendered by your client. This is the first time that such an allegation has been aired. It is also untrue.”

The Defendant’s solicitors replied on the same day:

“We are surprised by your reference that our client has not previously raised the issue that your client refused payment. Our client expressed to your client on numerous occasions that it was willing to pay the sums due in accordance with the distribution agreement if your client was willing to accept it under the terms of the distribution agreement and not under the terms of its own temporary proposal.”

Mr Ǻhlund commented on the second of the two sentences I have quoted from this letter in his second witness statement in these proceedings, saying that it was incorrect:

“At no time did [Mr Ezekiel] say that payment was conditional upon Artificial accepting his belief that the Distribution Agreement was in force.”

Mr Ezekiel commented on this statement in his third witness statement:

“[Mr Ǻhlund] is correct and I agree with this statement. I did not state that payment must be on the basis that Artificial Solutions must accept that they are bound by the distribution agreement. My position was that the payment must be received on the basis that Artificial Solutions would accept it in accordance with the distribution agreement and not under the temporary agreement which they had proposed. I did not require Artificial Solutions to accept that the distribution agreement had been transferred to it. I only require it to recognise that my actions, specifically the payments, were being made in accordance with my obligations under it. By contrast, I did require Artificial Solutions to accept the validity of the distribution agreement as a condition precedent to any negotiations between us concerning a possible new distribution agreement. I stated this in my email of 7 January 2007…”

I accept this evidence.

The sole ground of termination now relied upon by Artificial is non-payment of the fees due on 15 January 2007 and 15 February 2007. Artificial do still allege other breaches of the Distribution Agreement by Creative, but these are only relied upon by way of reply to matters relied on by Creative. As stated above, Creative does not dispute that fees were due on 15 January 2007 and 15 February 2007 or that it did not pay them. Nor does Creative dispute that prima facie such non-payment entitled Artificial to terminate the Distribution Agreement under §9(2)(c). Nevertheless Creative contends that Artificial was not entitled to terminate for the three reasons mentioned above. The principal issues I have to decide are whether any of these three reasons apply in the present case. As will appear, there is considerable overlap between these three issues. There are also certain issues as to the interpretation of the Distribution Agreement which bear upon the principal issues.

Despite the fact that each of the expert witness witnesses prepared no less than five reports for the purposes of these proceedings, the experts were not instructed to set out the principles of German law with regard to the interpretation of written agreements. This subject was only dealt with (and then only briefly) in Prof Mansel’s fifth report served just before the hearing, and it was not directly addressed in any of Prof Grundmann’s reports. I understand it to be common ground, however, that the relevant principles are accurately summarised in Markesinis, Unberath and Johnston, The German Law of Contract: A Comparative Treatise (2^nd ed, Hart, 2006) at pp. 133-135.

The authors explain that these principles are based on a number of sections of the Bürgerliches Gesetzbuch (“BGB”), the German Civil Code, of which the two most important are §133 and §157. These provide (all quotations from the BGB are in the translation published on the www.juris.de website):

Ҥ133

Interpretation of a declaration of intent

When a declaration of intent is interpreted, it is necessary to ascertain the true intention rather than adhering to the literal meaning of the declaration.

§157

Interpretation of contracts

Contracts are to be interpreted as required by good faith, taking customary practice into consideration.”

I would summarise the principles as follows:

As indicated above, there are a number of issues of interpretation of the Distribution Agreement. I shall interpret the Distribution Agreement in accordance with the principles summarised above.

The first issue is whether Creative was entitled to use a “licence code generator” under the Distribution Agreement. A licence code generator is a software tool which, as its name implies, generates licence codes. A licence code is required in order for a copy of the Software to be installed on a server. In effect, therefore, use of the licence code generator enables Creative to reproduce the Software itself rather than purchasing copies from Kiwilogic.

This issue is closely related to a second issue, which in my view logically comes first, which is whether the Distribution Agreement on its face licensed Creative to copy the Software or whether it was merely an agreement for the distribution of copies made by Kiwilogic.

So far as the latter issue is concerned, in his opening submissions counsel for Artificial submitted that the Distribution Agreement was not a licence at all, or if it was, it was only in respect of the distribution right and not the reproduction right. In his closing submissions he accepted that some of the services listed in Enclosure 2 to the Distribution Agreement necessarily involved reproduction of the Software, and thus such reproduction was licensed, but submitted that this was only ancillary to sales of copies purchased from Kiwilogic.

While it is true to say that the Distribution Agreement provides for Creative to purchase copies of the Software from Kiwilogic, it also expressly authorises Creative to provide the Services listed in Enclosure 2. In my judgment Enclosure 2 to the Distribution Agreement makes it clear that Creative was not a mere reseller of copies of the Software, but was licensed to reproduce the Software and that that licence to reproduce was not merely ancillary to sales. Thus Creative was licensed to host the Software, which might well be an alternative to selling a copy to a customer; to set up, operate and maintain the Software for customers; and to integrate the Software into other applications.

So far as the licence code generator is concerned, as the Distribution Agreement recites, Mr Ezekiel was previously the managing director of Kiwilogic.com Ltd, the UK subsidiary of Kiwilogic. He resigned with effect from 31 December 2003, purchased the assets of Kiwilogic.com Ltd, entered into the Distribution Agreement and set up Creative. Kiwilogic.com Ltd had a licence code generator and used it to licence and install the Software. The licence code generator was one of the assets which Mr Ezekiel acquired. Mr Ezekiel’s unchallenged evidence is that he and then Creative continued to use the licence code generator with the knowledge and consent of Kiwilogic. This then forms part of the context against which the Distribution Agreement falls to be interpreted. Furthermore, it was clearly the subjective intention of both parties. In my judgment it follows that the Distribution Agreement is to be interpreted as permitting Creative to use the licence code generator.

I would add three things. The first is that I consider my conclusion with regard to the second issue reinforces my conclusion with regard to the first and vice versa: it is difficult to see how Creative could have readily provided all the Services in Enclosure 2 without a licence code generator, and the fact that it was agreed that Creative could use the licence code generator confirms that it was licensed to reproduce the Software.

The second is that counsel for Artificial argued that these conclusions were contradicted by evidence that other distributors of the Software obtained licence codes from Artificial Solutions rather than using a licence code generator. I do not agree. There was little, if any, evidence as to what activities the other distributors were engaged in and their distribution agreements are not in evidence. Accordingly, there is no evidence that they were licensed to provide the same Services as Creative. Even if they were, and even if it were the case that it was technically possible for other distributors to provide such services by obtaining licence codes from Artificial, that would not persuade me to alter my view of the meaning of the Distribution Agreement in the light of Mr Ezekiel’s evidence.

The third is that it was Mr Ǻhlund’s evidence that he personally did not know about Creative’s possession and use of the licence code generator until well after the Asset Purchase Agreement. Mr Ezekiel gave evidence, however, that it was well known to both Mr Voß and Bjorn Gülsdorf, who were directors of Kiwilogic and became employees of Artificial after the conclusion of the Asset Purchase Agreement. Although Artificial served a witness statement from Mr Voß at an earlier stage of the proceedings, it did not adduce any evidence from either man to contradict Mr Ezekiel’s evidence. Nor, as I have observed, was Mr Ezekiel’s evidence challenged in cross-examination.

The third issue is whether it is a breach of the Distribution Agreement for Creative to market and/or sell the Software to customers outside the United Kingdom and Northern Ireland. §1(3) of the Distribution Agreement provides that “the Distributor shall not sell the Products and provide the Services to third parties residing outside the Territory without the prior written consent of the Manufacturer”. While in terms this only prohibits selling and providing, it makes little sense to interpret it as permitting Creative to market the Software and Services but not actually to sell or provide them. This is subject to two important qualifications, however.

The first is that it was common ground between the experts in cross-examination that a contract should, if possible, be interpreted in a way which made it legally valid rather than invalid. Article 2 of Commission Regulation 2790/99/EC of 22 December 1999 on the application of Article 81(3) of the EC Treaty to categories of vertical agreements and concerted practices exempts vertical agreements between two or more undertakings from Article 81(1) provided that certain conditions are fulfilled. Article 4 provides that this exemption does not apply to agreements which have certain characteristics, includes those which have as their object:

“(b)

the restriction of the territory into which, or of the customers to whom, the buyer may sell the contract goods or services except –

- the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer

… ”

Accordingly, if the Distribution Agreement were interpreted as preventing Creative from making passive sales into other territories (that is to say, sales as a result of an approach from a customer in such a territory as opposed to sales as a result of active marketing by Creative to customers in that territory), Article 4(b) would apply and the Distribution Agreement would not benefit from the Article 2 exemption. I therefore conclude that §1(3) should be construed as preventing active sales by Creative to customers in other territories, but not passive sales.

The second qualification arises in the following way. It was Mr Ezekiel’s unchallenged evidence that when he was employed by Kiwilogic.com Ltd that company marketed and sold the Software in the USA following the closure of Kiwilogic’s US office in 2001, and that when he set up Creative it was agreed with Kiwilogic that Creative should continue to do so on a non-exclusive basis. On 31 January 2005 Mr Ezekiel sent Mr Gülsdorf an email saying “I’m doing more and more in the US, and would like to discuss extending our distributorship agreement to cover this market”. On 2 February 2005 Mr Gülsdorf replied saying that he would get back to Mr Ezekiel on this. On 3 March 2005 Mr Gülsdorf sent Mr Ezekiel an email stating “We will generally consent to you selling to the United Sales, thus easing the bonds from §1.3 with respect to the US”. On 4 March 2005 Mr Ezekiel replied saying that he was already under the understanding that he could sell to the US and what he was asking was whether he could include the US in his exclusive territory. There was then subsequent correspondence in which Mr Gülsdorf did not dispute that Creative could sell in the US, but on the contrary sent him some US leads, although no agreement was reached as to exclusivity.

In these circumstances I conclude that Creative was permitted actively to sell the Software and Services in the USA. Prior to 3 March 2005 this is on the basis that that was the shared subjective understanding of the parties. After that date Creative had the written consent of Kiwilogic in the form of Mr Gülsdorf’s email. I would interpret that as being sufficient for the purposes of §1(3) of the Distribution Agreement, although not for §11(4).

Prof Grundmann mentioned in cross-examination that there was a potential issue in German law as to whether a change to an agreement otherwise than in writing can affect a party to whom the contract is subsequently transferred if the contract requires changes to be made in writing; but stated that he had been instructed not to investigate this. Nor was the potential issue explored with Prof Mansel. Accordingly I must proceed on the basis that this is not an issue.

The fourth issue of interpretation is the extent of Creative’s exclusivity under the Distribution Agreement. Artificial contends that the appointment was only exclusive in the sense that Kiwilogic would not appoint another distributor in the Territory, and that it did not prevent Kiwilogic itself actively selling the Software to customers in the Territory, still less passively selling the Software to such customers, still less engaging in pre-contractual discussions with potential customers in the Territory.

In my judgment Creative’s appointment was to the exclusion of Kiwilogic in all these senses except the last one. My reasons are as follows. First, the Distribution Agreement is explicit that Creative is given the exclusive right, and not just the sole right, to distribute the Software and provide the Services in the Territory: see the sixth recital and §1(2). Secondly, the Distribution Agreement expressly gives Creative the right to represent itself as the exclusive distributor in the Territory: see §4(3). Thirdly, the background to the Distribution Agreement, as reflected in the recitals, is that Mr Ezekiel/Creative was taking over the business of Kiwilogic’s UK subsidiary. Fourthly, while it is true that §8(1) of the Distribution Agreement only says that Kiwilogic “shall not be entitled to appoint any other distributor or commercial agent for the sale or distribution of the Products and Services in the Territory”, interpreting these words against that background and in the context of the agreement as a whole, I consider that they include selling the Software and providing the Services in Territory itself.

I see no reason to distinguish between active selling and passive selling in this regard. In particular, in my judgment this is not required by Article 4(b) of Regulation 2790/99/EC since this does not prevent restrictions upon the seller as opposed to the buyer.

On the other hand, I do not think it would be reasonable to interpret the Distribution Agreement as prohibiting pre-contractual discussions between Kiwilogic and prospective customers in the Territory. Kiwilogic was the developer of the Software and prospective customers might well wish to discuss with it, say, the technical capabilities of the Software or the extent to which Kiwilogic would support Creative.

§314 of the BGB provides:

Ҥ314

Termination, for a compelling reason, of contract for the performance of a continuing obligation

(1)

Each party may terminate a contract for the performance of a continuing obligation for a compelling reason without a notice period. There is a compelling reason if the terminating party, taking into account all the circumstances of the specific case and weighing the interests of both parties, cannot reasonably be expected to continue the contractual relationship until the agreed end or until the expiry of a notice period.

(2)

If the compelling reason consists in the breach of a duty under the contract, the contract may be terminated only after the expiry without result of a period specified for relief or after a warning notice without result. Section 323(2) applies with the necessary modifications.

(3)

The person entitled may give notice only within a reasonable period after obtaining knowledge of the reason for termination.

(4)

The right to demand damages is not excluded by the termination.”

In the present case it is common ground that §9(2) of the Distribution Agreement stipulates that four events each constitute a compelling reason within the first sentence of §314(1), one of which is non-payment of two monthly fees. The relevance of the second sentence of §314(2) in such circumstances is disputed, as I shall mention below.

Since it is common ground that Creative did not make the payments due on 15 January and 15 February 2007, Artificial contends that it had an accrued right of termination as from 16 February 2007 and that nothing which Creative did after that date could affect that right so as to prevent Artificial terminating on 17 May 2007. For example, Artificial says that an offer to pay by Creative at the meeting on 16 May 2007 would have been too late. Whether this is legally correct as a matter of German law was the subject of disagreement between the experts. Given my findings of fact as to what happened before 16 February 2007, however, it is not necessary for me to try to resolve this dispute. Accordingly, in what follows I shall concentrate on events prior to that date.

Before turning to consider the issues of creditor delay, tu quoque and unperformed contract, it is convenient to address three points relied on by Artificial which are particularly relevant to the first of these issues, but also have some relevance to the others.

First, Artificial points out that Creative continued to make the monthly payments down to 15 December 2006 and that these were not returned by Artificial. Artificial says that nothing changed after 15 December 2006 which justified Creative in ceasing to make the monthly payments.

Secondly, Artificial points out that the making of the monthly payments was a unilateral act on the part of Creative, in the sense that it did not require any cooperation on the part of Artificial. Thus Creative could have made the payments due on 15 January 2007 and 15 February 2007 without the involvement of Artificial. Furthermore, Artificial points out that it is common ground that, as a matter of German law, a debtor can unilaterally allocate a payment to whichever of two or more debts he owes to a particular creditor that he pleases. Thus Artificial says that, not only could Creative had made the payments due, it could have allocated them to the Distribution Agreement as opposed to the temporary agreement proposed by Artificial.

Thirdly, Artificial points out that, if Creative wanted the benefit of the Distribution Agreement to continue, then it was obliged to perform its own obligations under that agreement. Artificial says that it cannot be right for Creative to exploit the copyright in the Software without paying for the privilege.

So far as the first point is concerned, I do not agree that nothing changed after 15 December 2006. On the contrary, I consider that there were two significant developments. The first was Dr Hohensee’s email of 15 January 2007. This email was a communication to Creative from a lawyer stating that (1) the Distribution Agreement had not been transferred to Artificial, (2) Creative’s right to use, market or resell the Software had terminated at the latest on 8 January 2007, (3) Creative was required to confirm in writing that it would not use, market or resell the Software and (4) if such confirmation was not received by 17 January 2007 Artificial would take legal action without further notice. While Mr Ǻhlund had said in his email dated 7 December 2007 that Creative’s entitlement to market or sell the Software would cease if no agreement was reached by 8 January 2007 and in that case Artificial would take legal action, Creative was entitled to regard Dr Hohensee’s email as a material ratcheting up of the legal threat to its business. Furthermore, the implication of the email was that Artificial was not prepared to accept payment for use of the Software from Creative at all.

Secondly, Dr Hohensee’s letter dated 16 January 2007 for the first time asserted that Artificial had never accepted any payments from Creative on the basis of the Distribution Agreement and instead would only accept the payments under a new temporary agreement. This went further than Mr Ǻhlund’s email dated 3 December 2006, and it did so for the very good reason that Dr Hohensee was concerned to rebut the argument of implied novation advanced by Dr Pabst and Dr Holthusen in their letter dated 11 January 2007. Counsel for Artificial relied on the fact that Dr Hohensee’s letter was addressed to Dr Pabst, but it was copied to Mr Ezekiel and it is clear that it was intended for Creative as well. Counsel for Artificial also argued that paragraph 9 of the letter only referred to the past. While this is literally correct, I consider that paragraph 9 also conveyed a message, and was intended to convey a message, as to Artificial’s future stance. Furthermore, Dr Hohensee made it clear at the meeting on 18 January 2007 that this was Artificial’s position with regard to future payments.

Whether these changes justified Creative in ceasing to make the monthly payments is another matter, which I shall consider below.

So far as Artificial’s second point is concerned, I accept this so far as it goes. But for reasons that will appear, I do not consider that it is determinative.

As to Artificial’s third point, Creative says that it was always willing to perform its obligations under the Distribution Agreement and that it was only as a result of Artificial’s actions that it did not do so. This is the crux of the present dispute.

§§293-297 of the BGB provide:

Ҥ293

Default in acceptance

The obligee is in default if he not accept the performance offered to him.

§294

Actual offer

The obligee must actually be offered performance exactly as it is to be rendered.

§295

Verbal offer

A verbal offer by the obligor suffices if the obligee has declared to him that he will not accept the performance, or if effecting the performance requires an act by the obligee, in particular if the obligee must collect the thing owed. Equivalent to an offer of performance is a demand to the obligee to undertake the action required.

§296

Dispensability of the offer

If a period of time has been specified according to the calendar for an act that the obligee is to undertake, the offer is only necessary if the obligee undertakes the act in good time. The same applies if the act must be preceded by an event and a reasonable period of time is specified for the act in such a way that it can be calculated from the event onwards according to the calendar.

§297

Inability of the obligor

The obligee is not in default if the obligor at the time of the offer or, in the case of §296, at the time determined for the action of the obligee, is not in a position to effect performance.”

Creative contends that it repeatedly made verbal offers to perform within §295. It also contends in the alternative that no verbal offer was required in the circumstances of the case. There is no dispute that Creative was both willing and able to pay and so §297 does not apply.

It is common ground that, in order for §295 to apply, the following conditions must be satisfied:

The experts were divided as to the correct legal analysis to be applied with regard to the first of these conditions. With regard to the second and third conditions, there was little dispute as to the law and instead the dispute between the parties was primarily one of fact.

Refusal by the creditor. Prof Grundmann’s analysis in his reports was primarily based upon paragraph 9 of Dr Hohensee’s letter dated 16 January 2007. He interpreted this as meaning that “Artificial did not reject payment by Creative, it only rejected the interpretation that by receiving the money it also accepted Creative’s point of view as to the binding force of the agreement”. On this basis his opinion was as follows:

“The core question is whether a creditor who accepts payment, but stresses that, in so doing, he does not want to accept the debtor’s legal position, has to be seen as ‘refusing’ to accept performance in the meaning of §295 BGB. In my view, the answer under the relevant case law is clearly no. If the creditor makes this proviso, he still does not refuse to accept performance. He rather accepts it under a proviso which he is perfectly entitled to make – and this is even more evident if he never has sent back payments received before.”

Prof Grundmann’s oral evidence was that “performance” (Leistung in German) is simply what is required to be done under the contract, here payment of certain sums of money. Accordingly, refusal of Leistung is not the same thing as refusal to accept the legal basis on which Leistung is tendered. On this basis he said that Artificial had not refused to accept Leistung, that is to say payment of the sums in question, it had merely refused to accept payment as having been made under the Distribution Agreement. Furthermore, there was nothing to stop Creative making the payments unilaterally and stating that they were paying under the Distribution Agreement.

Prof Mansel’s analysis in his reports was based in part on paragraph 9 of Dr Hohensee’s letter dated 16 January 2007, but also on Mr Ezekiel’s evidence as to what was said at the meeting on 18 January 2007. He interpreted these statements as meaning that “ASOL would only accept payments on the basis of a temporary agreement. ASOL was not willing to accept payments on the basis of the distribution agreement”. On this basis his opinion was there was a refusal by Artificial for two reasons, of which the first was as follows:

“If ASOL, however, was only willing to accept payments based on a temporary agreement, then they refused at the same time the acceptance of the ‘performance’ according to paragraph 295 S. 1 BGB. The concept of performance § 295 BGB refers to the concept of performance in § 241 section 1 BGB. A performance exists only in the context of an ‘obligation’. In the present case the only potential ‘obligation’ is the distribution agreement, because the temporary agreement proposed by ASOL did not come into existence at any time because it was never accepted by the defendants. Hence, even though ASOL was willing to accept a money payment, a mere money payment does not represent a ‘performance’ if not based on an ‘obligation’. However, ASOL refused to accept the only potential ‘performance’ in form of a payment of 9,200 eur based on the distribution agreement.”

Neither expert was able to point to any case law which clearly determines which analysis is correct. Moreover, it can be seen that at least part of the reason for the experts’ disagreement is their differing starting points as to what Artificial said and how its statements should be interpreted. I find Prof Mansel’s analysis more persuasive, for the following reasons.

First, I consider that Prof Mansel was correct to say that his analysis is supported by §241(1) of the BGB. This provides:

Ҥ241

Duties arising from an obligation

(1)

By virtue of an obligation an obligee is entitled to claim performance from the obligor. The performance may also consist in forbearance.”

In my view this makes it clear that Leistung can only be claimed by a creditor by virtue of a particular contractual obligation. Thus a creditor cannot demand payment of money in the abstract, he can only demand payment of what is due and owing under the contract.

In his closing submissions counsel for Artificial sought to rebut this point by relying on §812 BGB which provides:

Ҥ812

Claim for restitution

(1)

A person who obtains something as a result of the performance of another person or otherwise at his expense without legal grounds for doing so is under a duty to make a restitution to him. This duty also exists if the legal grounds later lapse or if the result intended to be achieved by those efforts in accordance with the contents of the legal transaction does not occur.

(2)

Performance also includes the acknowledgement of the existence or non-existence of an obligation.”

I do not consider that this argument is open to Artificial since §812 was not mentioned by Prof Grundmann, nor was it put to Prof Mansel. In any event, in my judgment it does not undermine Prof Mansel’s analysis. §812 is concerned with the situation where someone who is not under an obligation nevertheless renders some performance. In that situation ex hypothesi the performance cannot be referable to any obligation. Furthermore, and perhaps more importantly, the performance is not one that can be claimed by the recipient.

Secondly, I consider that Prof Mansel’s starting point more accurately reflects the facts of the case as I have found them to be and the way in which I interpret Artificial’s statements than does Prof Grundmann’s starting point. Given that it is now common ground that there was no temporary agreement, the only basis on which Artificial was entitled to claim the payment of money from Creative was under the Distribution Agreement. Yet Artificial made it clear to Creative through Dr Hohensee’s letter dated 16 January 2007 and his statements at the meeting on 18 January 2007 that Artificial was not prepared to accept payments under the Distribution Agreement. Furthermore, Artificial did not merely state that it was not prepared to accept payments under the Distribution Agreement, it went further and said it would only accept payment under a new temporary agreement. This created a danger for Creative that, if it subsequently made a payment to Artificial, it would be held to have accepted the new temporary agreement. This is particularly so coming, as it did, immediately after Dr Hohensee’s email dated 15 January 2007.

Thirdly, it seems to me that the logic of Prof Grundmann’s analysis is that what Artificial ought to have said to Creative was “we will accept your payments which you say you are making under the Distribution Agreement, but without prejudice to our contention that the Distribution Agreement was not transferred under the Asset Purchase Agreement and therefore does not bind us”. Then it would have been correct to say that Artificial had not refused to accept Leistung, but only the legal basis on which Leistung was tendered. This is not what Artificial said, however. Counsel for Artificial argued that this is how Artificial’s statements should be interpreted, but I do not accept this.

Accordingly, I conclude that Artificial did refuse to accept the performance in question by Creative.

Prof Mansel’s second reason for saying that there was a refusal by Artificial was that “the declaration of the creditor not to accept the performance can also be derived from the fact that ASOL denies the contract in general”. In support of this Prof Mansel relied upon a decision of the Bundesgerichtshof or BGH (literally the Federal Court of Justice, more idiomatically the Supreme Court) of 22 October 1999, V ZR 401/98, NJW 2000, 506.

Prof Grundmann accepted that this case was authority for the proposition that a renunciation of the contract by the creditor could constitute a refusal to accept performance within §295 BGB; but said that it was a question of fact as to whether that was so in the individual case.

In the present case, there can be no doubt that Artificial denied that it was bound by the Distribution Agreement. Moreover, Dr Hohensee’s email dated 15 January 2007 made it clear that this was an absolute and unequivocal denial. In the circumstances of this case, I consider that this denial did amount to a refusal to accept performance by Creative. As I have said, I consider that it was implicit in this email that Artificial would not accept payment at all, and certainly not under the Distribution Agreement. All that happened after that was that Artificial once again stated that it would accept payment under a different agreement.

Counsel for Artificial argued that Artificial’s denial that it was bound by the Distribution Agreement did not constitute a refusal to accept performance because it did not necessarily mean that the contract would not be fulfilled. In support of this he argued that it made no practical difference to Creative’s ability to market the Software. This is a point I shall have to return to in another context. In the present context, however, it seems to me that this is looking at the matter from the wrong end of the telescope. The question is how Artificial’s statements are to be interpreted, and in particular whether they amounted to a refusal to accept performance by Creative; and not whether they adversely affected the benefit due to Creative under the contract.

Accordingly I conclude that Artificial refused to accept performance for this reason as well.

Subsequent verbal offer by the debtor. It was Prof Grundmann’s evidence that a mere expression of a general willingness to perform in accordance with the contract was insufficient and that a specific offer to render the performance in question must be made, and Prof Mansel accepted this. It is common ground that an offer by Mr Ewald on behalf of Creative would suffice for this purpose.

On my findings of fact Creative made offers to pay the fees due under the Distribution Agreement at the meeting on 18 January 2007 and in Mr Ewald’s telephone conversations with Dr Hohensee prior to 15 February 2007. Accordingly this condition is satisfied.

No new condition. It was common ground between the experts that an offer by Creative which was conditional upon Artificial accepting that the Distribution Agreement was binding upon it would not comply with this requirement.

On my findings of fact Creative’s offers to pay were not conditional upon Artificial accepting that the Distribution Agreement was binding upon it. Rather, they were conditional upon Artificial accepting the payments as having been made by Creative under the Distribution Agreement as opposed to under the temporary agreement proposed by Artificial. In my judgment this means that Creative’s offers did comply with this requirement.

Dispensability of the verbal offer. Although I have concluded that Creative did make a verbal offer within §295, I should nevertheless deal with its alternative argument that no verbal offer was required in the circumstances of this case.

It was Prof Mansel’s evidence in his fourth report that “a verbal offer pursuant to §295 is (by way of exception) dispensable if the creditor makes by means of his behaviour clear that he is ‘under no circumstances’ willing to fulfil the contract”, “a verbal offer on behalf of the debtor is not necessary in the particular case that the creditor has seriously and finally refused acceptance of the service as provided in the contract”. In support of this Prof Mansel relied upon a decision of BGH of 9 October 2000, II ZR 75/99. NJW 2001, 287.

Prof Grundmann’s response in his fifth report to this was to say that the Bundesarbeitsgericht (Federal Employment Court or Supreme Court for Labour Law) had indeed held that there was such an exception based on §296 BGB, and that in the case cited by Prof Mansel the BGH had applied that to cases where the provider of services depended on the other party for having the facilities in order to provide his services. Otherwise Prof Grundmann said that this exception did not apply in ordinary civil law matters. In support of this Prof Grundmann relied upon a decision of the BGH of 13 March 1986, IX ZR 65/75, NJW-RR, 1986, 794.

Prof Mansel replied in his fifth report that the reasoning of the BGH in its decision of 9 October 2000 was not based on §296, but on §295. Whereas the case law on §296 was based on the fact that performance by the debtor required the collaboration of the creditor, this was not the basis of that decision but rather that German law did not mandate senseless formalities.

In cross-examination Prof Grundmann explained that he had had to prepare his fifth report in a very short time and without his normal facilities. Having had more time to consider the position, he agreed with Prof Mansel’s analysis of the case law. He said, however, that in order for this exception to apply the creditor had to say that he would not accept the performance in question (here the payments) under any circumstances. His interpretation of the facts was that that had not happened in the present case.

On my findings of fact I consider that Artificial did refuse to accept payment by Creative under the Distribution Agreement under any circumstances because it said that it would only accept payment under its proposed temporary agreement. Accordingly I conclude that the exception to the requirement of a verbal offer does apply in the present case.

§242 of the BGB provides:

Ҥ242

Performance in good faith

An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration.”

It is common ground that by virtue of §242 termination by Artificial might not be valid if Artificial were itself in breach of the Distribution Agreement. While there was initially some divergence between the experts in the terminology used in discussing this principle, they agreed to refer to it as tu quoque (Latin for “you too”).

The experts were agreed that in order for the tu quoque principle to apply “an intrinsic connection has to be proved between the violation of the contract … by the creditor and the non-performance of the debtor” and that there is “no intrinsic connection between an eventual violation of the duty [of one party] and the breach of contract [of the other party], if that breach is neither a reaction to [the violation of duty of the first party] nor could have been influenced by that violation in any other way”.

The experts were also agreed, even though neither of them could point to any case which establishes the proposition, that the tu quoque principle was applicable where the creditor secretly breached the contract. As I understood their evidence, in such a case the court would have to consider whether the debtor’s non-performance would have been a justifiable reaction if the debtor had known of the creditor’s breach.

Creative contends that the tu quoque principle applies in the present case for two reasons. First, because Artificial denied being bound by the Distribution Agreement. Secondly, because Artificial breached the exclusivity provisions in the Distribution Agreement.

Prof Mansel’s evidence in his reports was that “the classic case of the creditor’s contractual infidelity is the creditor’s denial of being bound to an agreement”, “it is one of the classic applications of the tu quoque principle”. In support of this Prof Mansel cited a number of decisions of the BGH, including a decision of 13 November 1998, V ZR 386/97, NJW 1999, 352.

Counsel for Artificial submitted in his closing submissions that Prof Mansel had modified his position in cross-examination and had accepted that a party could say “My primary position is that a deny the contract is binding upon me, but in case it is, I hereby terminate it for good cause”. I do not accept that this is an accurate characterisation of Prof Mansel’s evidence. It is true that Prof Mansel accepted that, where it was unclear whether a contract existed, it was nevertheless possible for one party to terminate the contract, for example by giving notice to terminate in accordance with the contract. He went on, however, to explain that the issue in the present case was a different one: could a creditor who denied being bound by a contract and thereby caused the debtor not to pay then rely upon that non-payment as a ground of termination? His opinion was that the creditor could not: as he succinctly put it, “A creditor can’t create his own ground for termination”.

Prof Grundmann’s evidence in his reports was that:

“Under the rule of law, every party is, of course, allowed to challenge the validity of a contract or contest that he himself is bound by the contract – without being blamed for beaching the contract … on condition that it still complies with the duties under the contract.

…

A careful reading of the case law invoked in [Prof Mansel’s] report – and as well the other relevant case law on the tu quoque principle of the last few years – makes this distinction clear. In none of the cases in which one party fully performed the contract but at the same time challenged its legal basis, has the tu quoque principle ever been applied.

…

There is only one very extreme limit to challenging the validity or binding force of a contract i.e. when in fact such challenging constitutes also a breach of the contract. This is whenever a party the denial was made arbitrarily, without plausible cause.”

I think that Prof Mansel accepted in cross-examination that tu quoque would not apply if the creditor merely challenged the validity or binding effect of the contract while fully performing it, but he did not accept that this was such a case.

In support of his point about arbitrary denials, Prof Grundmann cited a decision of the BGH of 1 October 1986, VIII ZR 132/85, NJW 1987, 251. Prof Mansel’s evidence, however, was that Prof Grundmann had misinterpreted and mistranslated this decision. According to Prof Mansel, what this decision actually shows is that, in order for party to be able lawfully to withdraw from a contract, it must have an objectively justified cause for doing so. Even doing so upon legal advice is not sufficient if objectively no justification for renunciation exists. In cross-examination Prof Grundmann was prepared to accept that he had mistranslated the decision, but not that he had misinterpreted it. I prefer Prof Mansel’s reading of the decision, but I do not consider that this point is of central importance to this issue.

My conclusion from this evidence is that what matters is whether there is an intrinsic connection between the creditor’s denial of the contract and the debtor’s non-performance. If there is an intrinsic connection, then the tu quoque principle applies; if there is no intrinsic connection, then the mere fact that the creditor has denied the existence of the contract does not justify non-performance by the debtor.

Counsel for Artificial argued that there was no intrinsic connection for two reasons. The first was that Artificial had fully performed the Distribution Agreement. As he put it in his closing submissions, “[Artificial] did not interfere with [Creative’s] freedom to sell the Software in any way and [Creative] did not consider that their freedom was in any way impaired”. Indeed, in cross-examination Prof Grundmann expressed the view that a copyright licensor such as Artificial was still performing unless it obtained an injunction to restrain the putative licensee from continuing to exploit the copyright. I do not accept this. In Dr Hohensee’s email dated 15 January 2007 Artificial sent Creative what amounted to a letter before action demanding that Creative stop marketing the Software and else face legal proceedings without further notice. Although this did not prevent Creative from continuing to reproduce and sell the Software, it constituted the antithesis of a licence, the essence of which is that copyright owner consents to acts which would otherwise constitute an infringement of the copyright. I do not see how a copyright owner who threatens proceedings for infringement against someone who claims to be a licensee can be said to be fully performing the licence. Furthermore, I do not agree that the email did not interfere with Creative’s freedom to sell the Software in any way. To put it at its lowest, it created significant uncertainty for Creative, and in particular the risk that it could not pass good title or grant valid sub-licences to its customers. Thus Creative will have faced the difficult dilemma of having to decide whether or not to disclose Artificial’s stance to prospective customers.

The second argument put forward was that Artificial’s denial that the Distribution Agreement was binding upon it did not cause Creative to change its position, on the contrary Creative continued to insist that it was entitled to market the Software by virtue of the Distribution Agreement. Accordingly, counsel argued, Artificial’s denial did not cause Creative not to pay the sums due. I do not accept this argument either. Artificial did not merely deny that the Distribution Agreement was binding upon it, it also declined to accept payment under the Distribution Agreement and insisted that it would only accept payment under the proposed temporary agreement. As I have already said, I accept that it was a result of this that Creative stopped making the monthly payments.

Accordingly, I conclude that there was an intrinsic connection between Artificial’s denial of the Distribution Agreement and Creative’s non-payment of the sums due and therefore the defence of tu quoque applies.

For completeness I shall also consider the second reason relied on by Creative for the application of the tu quoque principle, which is that Artificial was in breach of the exclusivity provisions of the Distribution Agreement, in particular §4.3 and §8.1. The first question here is whether Artificial did commit any breach of these provisions. For this purpose I shall concentrate on the period ending on 15 February 2007, although later events shed some light on what happened during that period.

I have to say that Artificial’s evidence on this topic was unsatisfactory in a number of respects. First, Mr Ǻhlund stated in paragraph 33 of his third witness statement dated 14 August 2007:

“On 12 March 2007, Artificial hired a UK sales manager named Conrad Hoe. As it happens, he carried out no significant sales activity in the UK prior to the ‘termination’ in May. This is because he spent some weeks training in Barcelona, before preparing his sales strategy. He has also been carrying out market research to establish who would be potential clients and how best they might be approached. As our first UK sales representative, there was a great deal of preparatory work to do. Now, Mr Hoe is in the process of contacting potential clients and following up on leads he has generated. He has also been contacted by a number of interested potential customers.”

As Mr Ǻhlund accepted in cross-examination, the statement that Mr Hoe was “now” in the process of contacting potential clients was untrue, since Mr Hoe had (as Mr Hoe himself put it) “started contacting potential customers in earnest from around April 2007” and indeed attempted to contact over 30 companies before 17 May 2007. Mr Hoe was clear this constituted “sales activity”.

Secondly, both here and elsewhere in his statements Mr Ǻhlund was silent with regard to his own activities.

Thirdly, Artificial disclosed a number of emails relating to its contacts with customers in the United Kingdom prior to 17 March 2007. These were disclosed in redacted form with the customers being identified by number. Creative served a witness statement from Mr Ezekiel analysing the emails, but Artificial chose to lead no evidence to explain them.

On the evidence it seems clear that Artificial started trying to cultivate the UK market soon after it signed the Asset Purchase Agreement. From late July 2006 onwards Mr Ǻhlund was in contact with a number of potential UK customers for the Software. Some of these contacts were initiated by the customer in question, but others were initiated by Mr Ǻhlund or came about through a third party. While it is true to say that Artificial made no sale to any such customers until after 17 May 2007, let alone after 15 February 2007, I consider that it was trying to sell the Software to them.

Furthermore, one of the contacts, referred to UK Co No 5, a bank, contacted Mr Ǻhlund by email on 5 December 2006 expressing interest in the Software. This email finished with the question, “Do you have any representation in the UK?” Mr Ǻhlund replied by email on 8 December 2006:

“Artificial Solutions acquired the company Kiwilogic in July 2006. Kiwilogic is the company that has developed the Lingubot solutions that manages the natural language processing in our solutions. Kiwilogic has been present on the UK market since 2001, initially directly and then via a partner. We are currently discussing how this collaboration will continue. Artificial Solutions will in any case open up a UK subsidiary in January 2007 (we are now in the middle of the recruitment), so there will be no problems giving you the support you need.”

In my judgment Artificial did not act in breach of the Distribution Agreement as I have interpreted by trying to sell the Software to UK customers since it did not go beyond pre-contractual discussions with such customers.

I consider that Artificial did act in breach of the Distribution Agreement, however, by informing UK Co No 5 that Artificial Solutions would open a UK subsidiary in January 2007 since it thereby acted inconsistently with Creative’s right to represent itself as the exclusive distributor of the Software in the UK. Counsel for Artificial argued that this did not amount to more than a pre-contractual discussion of the kind that I have held permissible, but I do not agree. He also argued that the representation was unobjectionable because Artificial had other things to sell in addition to the Software. I do not accept this: as can be seen, the representation was made specifically in the context of a discussion about the Software. Furthermore, it would make no difference if one assumes that the subsidiary was going to sell other things in addition to the Software since that would still infringe Creative’s exclusivity with regard to the Software.

The next question is whether there was an intrinsic connection between this breach and Creative’s non-payment of the sums due under the Distribution Agreement. In my judgment there was not. Although I have accepted Mr Ezekiel’s evidence that his suspicion that Artificial was trying to enter the UK market was a secondary reason for his non-payment of these sums, I think that it is fairly clear that the dominant reason was Artificial’s stance with regard to the payments. I do not think that Mr Ezekiel would have ceased paying purely because of his suspicion that Artificial was trying to enter the UK market. Nor, more importantly, do I consider that he would have been justified in doing so on the basis of the relatively minor breach on Artificial’s part that I have found.

There was a disagreement between the experts as to whether the tu quoque principle only applies if creditor is more at fault than the debtor. Prof Grundmann’s evidence was that this was the case, whereas Prof Mansel’s evidence was that the tu quoque principle applies unless the breach(es) of the contract by the creditor are minor and unimportant to the debtor. I was left in considerable uncertainty as to who was right on this question, which depends in particular on the applicability of the second sentence of §314(1) BGB in these circumstances. As I understand it, this issue does not arise with regard to the first way in which Creative puts its case (i.e. denial of the Distribution Agreement). If I am wrong about that, I would hold that, assuming without deciding that Creative must establish preponderance of fault on the part of Artificial, then Artificial was more at fault since its action went to the root of the contract, and moreover caused Creative’s breach.

As to the second way in which Creative puts its case (i.e. breach of exclusivity), given my conclusion that there was no intrinsic connection, it is not necessary to decide the point and I decline to do so.

I should nevertheless deal briefly with three other allegations of breach of the Distribution Agreement by Creative which were relied on by Artificial for the purposes of the preponderance of fault analysis. (Some other allegations raised by Artificial were not in the end pursued.)

The first of these is that Creative failed to report its sales and so forth in accordance with the Distribution Agreement. Creative does not dispute that it did not send such reports. Mr Ezekiel’s evidence was that Creative had an agreed reporting procedure with Kiwilogic which was not strictly in accordance with the Distribution Agreement; that Creative was prepared to report to Artificial; that Creative was waiting for Artificial to tell it what form of reports it wanted, but Artificial never did so; and that Creative’s offers to comply with the Distribution Agreement included compliance with the reporting requirements. While I do not doubt the factual accuracy of this evidence, I consider that Creative acted in breach of the Distribution Agreement by failing to continue to report to Artificial in the same way as it had reported to Kiwilogic.

The second allegation is that Creative acted in breach of the Distribution Agreement by marketing the Software to non-UK customers. Two breaches are alleged. The first concerns AIG, a US customer. This was not a breach of the Distribution Agreement for the reasons given above. I would add that Mr Ǻhlund’s evidence on this subject was unsatisfactory. He said that he only discovered about Artificial’s activities in the USA as a result of an email from Mr Ezekiel on 20 November 2006 in which Mr Ezekiel said that Creative were talking to AIG. This evidence is inconsistent with the attachment to Mr Ezekiel’s email dated 11 September 2006, however. In any event, Mr Gülsdorf was well aware of what Creative were doing. Furthermore, Mr Ǻhlund claimed that he told Mr Ezekiel not to pitch to AIG at the meeting on 24 November 2006. Mr Ezekiel’s evidence was that Mr Ǻhlund agreed that Creative could continue working on this prospect, an account that is supported by an email sent by Mr Ezekiel to Mr Ǻhlund on 8 January 2007 which Mr Ǻhlund did not contradict at the time.

The second alleged breach concerns eBay. The basis for the allegation was that Creative responded to a Request for Proposal issued by eBay International AG, a German company, to a number of suppliers. As Mr Ezekiel pointed out, however, eBay is global company. In an email dated 23 May 2007 Creative sought clarification from eBay as where the contract would be held and told eBay that it covered sales for the UK, Ireland and the US. Accordingly, I consider that Creative did not act in breach of the Distribution Agreement.

The third allegation is that Creative was in breach of the Distribution Agreement through use of the licence code generator. This allegation fails for the reasons given above.

§320 of the BGB provides:

Ҥ320

Defence of unperformed contract

(1)

A person who is a party to a reciprocal contract may refuse his part of the performance until the other party renders consideration, unless he is obliged to perform in advance. If performance is to be made to more than one person, an individual person may be refused the part performance due to him until the complete consideration has been rendered. The provision of section 273(3) does not apply.

(2)

If one party has performed in part, consideration may not be refused to the extent that refusal, in the circumstances, in particular because the part in arrears is relatively trivial, would be bad faith.”

Prof Mansel’s evidence was that §320(1) applied to the present case because Artificial denied that Creative had the right to distribute the Software. He drew an analogy with a decision of the BGH of 15 June 1951, I ZR 121/50, NJW 1951, 705. In that case it was held that a licensor had not performed a film copyright licence agreement even though it delivered copies of the film because it did not have the necessary rights. Prof Mansel said that this showed that it was not sufficient that Creative had de facto use of the Software, Artificial had to give Creative the legal right to use it.

Prof Grundmann did not deal with this question in his reports, but in his oral evidence he said that the case relied on by Prof Mansel was distinguishable from the present case because in that case the licensor did not own the rights. In support of this he pointed out that the BGH had noted that licensee was exposed to the risk being sued by a third party which did own the rights and also to the risk of a criminal prosecution.

I agree that the decision of the BGH can be distinguished from the present case on the facts. I do not agree that it follows that §320 BGB does not apply to the present case. As I have said above, the essence of a copyright licence is that the licensor consents to what would otherwise be an infringement. In my judgment a copyright owner who sends a putative licensee a letter before action denying that the latter is licensed, demanding that he cease the acts in question and threatening proceedings for infringement is not performing the licence agreement, but acting flat contrary to it. It is true that, if in fact the recipient of the letter has a valid licence, then he will not be infringing; but as I have observed above, such conduct on the part of the copyright owner creates significant uncertainty and risk for the recipient, particularly with regard to his dealings with third parties. It is also true that in such circumstances the recipient is not exposed to the risk of being sued by a third party who does own the rights, let alone the risk of a criminal prosecution; but I do not consider that this is a material distinction.

I therefore conclude that Creative succeeds on this point as well.

Artificial did not validly terminate the Distribution Agreement.