TRANSPARENTLY LIMITED v GROWTH CAPITAL VENTURES LIMITED

Before the court is an application by Transparently Limited (the applicant) (“TL”) for a mandatory interim injunction requiring Growth Capital Ventures Limited (the respondent) (“GCV”) to deliver up to TL software, source code and other documents required for completion of an IT platform developed by GCV.

The application is supported by the witness statement of Mr Stephen Stewart dated 21 December 2021 and a supplemental statement by Mr Stewart dated 18 January 2022.

The application is opposed by GCV and Mr Craig Peterson of GCV has produced a witness statement dated 13 January 2022.

TL is a company incorporated in 2015 which intends to provide technology solutions to the legal sector.

GCV is an FCA authorised business carrying out the development of custom, bespoke software solutions, integrating proprietary, third party, open source and other similar software code as may be required to deliver product solutions for technology-enabled businesses.

In March 2019, following a competitive tender process, GCV was selected to carry out the development of TL’s negotiation management platform, designed to facilitate dispute resolution in the context of separation and divorce proceedings.

On 26 April 2019 GCV provided the Statement of Work (“SOW”), setting out the functional requirements of the software to be delivered in two phases:

an ‘alpha’ or baseline version of the product, comprising a first pass implementation of the functionality described in the SOW, to enable initial review and testing with end users, the resultant feedback to be reported to the developers;

a ‘beta’ or final version of the product, comprising the fully developed software ready for service, incorporating all functionality described in the SOW and all lessons learned from the alpha version so that it could be operated in an unsupervised manner by customers free from non- trivial defects.

On 14 May 2019 TL (as “the customer”) and GCV (as “the service provider”) entered into a software development agreement (“the SDA”). The SDA included the following provisions.

Clause 2 set out obligations relating to the scope and statement of work, including:

“Price” was defined as:

Clause 9 set out the payment provisions, including:

“Contract value” was defined as:

“Cumulative discount” was defined as:

“Discount percentage” was defined as:

Clause 10 set out provisions for the vesting of intellectual property rights in the software in TL:

Clause 18 contained provisions for termination, including the following:

Schedule 1 set out the commercial terms of the SDA, including, at clause 29.1, the “non-recurring costs” total (the “contract value”), which was stated to be £339,600.

The terms of the services for equity transaction were set out in clause 29.2:

Clause 29.3 contained the invoice and payment summary table, showing the dates and amounts of invoices and payments due throughout the term of the SDA, including the discount amount deducted from each invoice. The table showed a total contract value of £339,600, a cumulative contract cash value of £200,030 and the cumulative discount / equity consideration of £139,570.

On 12 May 2019 TL (as “the company”) and GCV (as “the purchaser”) entered into the Conditional Equity Purchase Agreement (“the CEPA”), whereby GCV would apply for, and TL would allot and issue shares in TL for consideration of the cumulative discount applied to each commercial invoice submitted by GCV under the SDA.

Clause 2.1 provided that:

Clause 3 provided that:

“Completion” was defined as completion of the performance by the parties of their respective obligations under clause 4, which provided:

Clause 7.1 provided as follows:

Thus, the material provisions of the SDA and the CEPA operated as follows:

Clause 9 and Schedule 1 of the SDA provided that the contract price was a cash sum of £200,030 together with equity value of £139,570 in TL, calculated as a discount of 41.1% against each invoice submitted during the project, a total contract value of £339,600.

Clause 10 of the SDA provided that intellectual property rights in the software would vest in TL following the later of (a) acceptance of the product by TL or (b) payment in full of the contract price, including the equity consideration.

Clause 18 of the SDA provided that termination would trigger a completion under the CEPA.

Clauses 3, 4 and 7 of the CEPA provided that, on termination of the SDA, the accrued value of the discount would be calculated and TL would issue to GCV shares in the company at the agreed share price in the CEPA up to the value of the discount within ten days of termination.

Clause 18.13 of the SDA provided that following termination for any reason, GCV would deliver to TL all software, source code and any work in progress, assigning all intellectual property rights in the same, subject to (a) payment of any unpaid invoices and (b) completion under the CEPA.

Development of the software commenced in 2019. Invoices were submitted by GCV and paid by TL in accordance with the SDA up to the full cash value of £200,030 by July 2020.

The indicative delivery dates in the SOW included delivery of the alpha baseline release by January 2020 and delivery of the beta final release by April 2020 but delays occurred, and the project is not yet complete.

Disputes have arisen between the parties. TL’s position is that the software product delivered by GCV is incomplete, late and defective, as explained by Mr Stewart in his first witness statement and as set out in the functional testing reports exhibited to his statement:

41% of the alpha specified functionality and 10% of the beta specified functionality has been delivered but, this functionality contains a significant number of bugs, other issues and omissions that require further investigation and rectification;

33% of the alpha specified functionality and 14% of the beta specified functionality has been delivered in part but this functionality contains errors and defects as reported to GCV;

26% of the alpha specified functionality and 76% of the beta specified functionality has not been delivered; this includes functionality deferred to beta that has not been delivered and those areas of functionality within both alpha and beta listed in the SOW that have not been completed;

the mobile and desktop native applications of the software have not been produced or delivered as required by Appendix B of the SOW;

GCV has failed to deliver to TL documentation relating to the software as required by the SDA, detailing matters such as final architecture, operating instructions, change control, error reporting, fault diagnosis, security policies and other matters.

GCV disputes the allegations that the software is defective or not in accordance with the SDA. Its case, as explained by Mr Peterson in his witness statement, is that:

during the project, TL required changes to the software and, as a result, the scope of the work significantly increased;

the majority of the bugs identified by TL are functional changes or additions or changes to the project scope;

TL was not prepared to make any additional payments in respect of the requirements that GCV considers to be outside the agreed project scope;

as a result GCV stopped further work on the project from about April/May 2021.

By notice dated 25 October 2021 TL terminated the SDA, alleging material breach of the contract, repeated breaches or repudiation at common law:

Having set out the alleged breaches of the SDA, TL stated:

On 21 December 2021 TL sent a letter before action to GCV, stating its intention to commence proceedings, claiming delivery up of the software and damages for breach of contract. It attached to the letter a deliverables report, setting out the alleged defects in the software, and an estimate of the costs of rectifying and completing the software in the sum of £337,500.

Before it received TL’s letter of 21 December 2022, on 22 December 2021 GCV’s solicitors sent a letter before action to TL, disputing the allegations of breach made by TL and alleging breach of contract on the part of TL in failing to issue the shares to GCV as required by the terms of the SDA and CEPA, stating:

On 21 December 2021 TL issued this application for a mandatory injunction, requiring GCV to:

deliver up to the applicant all software source code and executable software items including any associated documentation produced by the respondent under the contract for software development made on 16 May 2019 made between the parties for the development of the intended ‘Transparently’ software product along with any design documentation and third party software items integrated with other software to create the version 1.1.20 of the software released in executable form to the Applicant on 18 May 2021 within [7] Days of this Order;

deliver up to the applicant all software source code and documentation including test records for all versions of the Transparently software released to the applicant between December 2019 and May 2021 together with all project development records including any configuration management records within [14] days of this Order;

deliver up to the applicant all necessary information and authorisation codes to enable the applicant to take effective control of the account or accounts held with DigitalOcean hosting the Transparently software product [Staging and Production Servers] and the Transparently Website within [3] days of this Order;

take all necessary and reasonable steps to transfer the current GCV/DigitalOcean account(s) entered into for Transparently software and website hosting services to the applicant [or cause a replacement DigitalOcean account to be set up between Transparently and DigitalOcean] for access to the existing ‘Transparently’ servers within [7] days of this Order.

Under section 37(1) of the Senior Courts Act 1981 the High Court may by order, whether interlocutory or final, grant an injunction in all cases in which it appears to the court to be just and convenient to do so. Section 37(2) provides that any such order may be made either unconditionally or on such terms and conditions as the court thinks just.

The general test that is to be applied in respect of applications for interim injunctions is the well-known test set out in the case of American Cyanamid v Ethicon Limited [1975] AC 396. The test can be summarised as follows:

Is there a serious question to be tried?

Would damages be an adequate remedy for a party injured by the court’s grant of or its failure to grant an injunction?

If not, where does the balance of convenience lie?

The court bears in mind that this is an application for a mandatory injunction. The relevant test in that regard has now been established as set out in the case of Nottingham Building Society v Eurodynamics Systems [1993] FSR 468 in which Chadwick J set out the following principles at p.474:

The overriding consideration is which course is likely to involve the least risk of injustice if it turns out to be wrong, in the sense of granting an interlocutory injunction to a party who fails to establish their right at trial or would fail if there was a trial, or alternatively in failing to grant an injunction to a party who succeeds or would succeed at trial.

In considering whether to grant a mandatory injunction the court must keep in mind that an order which requires a party to take some positive step at an interlocutory stage may well carry a greater risk of injustice if it turns out to have been wrongly made, than an order which merely prohibits action, thereby preserving the status quo.

It is legitimate where a mandatory injunction is sought to consider whether the court does feel a high degree of assurance that the claimant will be able to establish this right at trial. That is because the greater the degree of assurance the claimant will ultimately establish their right, the less will be the risk of injustice if the injunction was granted.

But even where the court is unable to feel any high degree of assurance that the claimant will establish their right, there may still be circumstances in which it is appropriate to grant a mandatory injunction at an interlocutory stage. Those circumstances will exist where the risk of injustice if this injunction is refused sufficiently outweighed the risk of injustice if it is granted.

Those principles have been approved by the Court of Appeal in Zockoll Group Limited v Mercury Communications Limited [1998] FSR 354 in which Phillips LJ at p.366 indicated that that the concise summary in Nottingham should be considered to be all the citation that should in future be necessary to guide the court on the question of the balance of convenience in cases where an interim mandatory injunction is sought.

Mr Considine, counsel for TL, submits that TL has a serious claim for damages and delivery up of the software. Whilst the contract provided for assignment of the intellectual property in the code on completion of the project, the circumstances are such that TL has paid in full the contract cash price of £200,030 plus VAT but does not have any software that is commercially usable or access to the source code to make it so. TL has a substantial claim for damages in excess of the contract price and a claim for refund of all or part of the cash payment made. TL’s loss of profit caused by GCV’s breach is also likely to be very substantial.

Mr Morgan, counsel for GCV, submits that the court cannot be satisfied that there is a serious question to be tried. Firstly, there are no draft particulars of claim or an issued claim form. In those circumstances, TL has failed to particularise its claim sufficiently for the court to be satisfied that the serious issue test has been met. Secondly, the SDA is clear as to the effect of termination and the circumstances in which TL is entitled to receive the source code and software. Clause 18.12 provides that a termination of the SDA triggers a completion pursuant to the terms of the CEPA. Clauses 7 and 4.2 of the CEPA provide that shares with a value of £139,600 must be issued and allotted to GCV with a deed of adherence being provided. Although clause 18.13 of the SDA provides that, on termination of the SDA all software, including source code should be transferred to TL in accordance with clause 10, TL has failed to issue and allocate the shares, such that no obligation to make any transfer under clause 18.13 has yet arisen. As indicated in its letter dated 22 December 2021, GCV remains willing to deliver the product at the necessary time.

In considering this limb of the test, the court must have regard to the fact that the grant of an interim injunction is a remedy that is both temporary and discretionary. The evidence available to the court at the hearing of this application is incomplete and has not been tested by cross-examination or against disclosed documents. It is no part of the court’s function at this stage of the dispute to try to resolve conflicts of fact or expert evidence by a mini trial, nor to decide difficult questions of law which call for detailed argument and mature considerations. These are matters to be dealt with at the trial.

It is clear from the evidence before the court that there is a dispute between the parties as to value of the product delivered, responsibility for delays, responsibility for defects in the software and the quantum of each party’s claim against the other. The court is not in a position to resolve any aspect of that dispute today.

The claim for interim relief is for delivery up of the software, including the source code and other design documents. Mr Considine submits that there is a serious issue to be tried in respect of the delivery up of the software. However, there is no pleaded case before the court setting out TL’s case that it has a contractual right to the software, prior to allotment and issue of the shares to GCV, and the basis for such submission does not stand up to scrutiny.

Firstly, the terms of the SDA and the CEPA are clear and contain a complete code in the event of termination, including any termination for breach on the part of GCV (clause 18.6 of the SDA). Termination for any reason triggers completion pursuant to the terms of the CEPA (clause 18.1.2 of the SDA). Clauses 7 and 4 of the CEPA require TL to allot and issue the shares, at the agreed share price to the value of the agreed discount accrued against the work carried out by GCV up to the date of completion within ten days of termination. TL’s entitlement to delivery up of the software, source code and other documentation is subject to completion under the CEPA (clause 18.13 of the SDA). TL has not satisfied its obligations on completion pursuant to the CEPA and therefore is not entitled to delivery of the software, source code or other documents.

Secondly, TL’s case is that the software delivered is not usable but GCV’s entitlement to payment, by cash and equity in TL, is not linked to the value of the work done; it is based on the cost of carrying out the work. Clause 9 entitles GCV to the “contract value” of £339,600. “Contract value” is defined in the SDA as “the agreed total cost of £339,600 as assigned by the service provider to the work” . This is clarified in Schedule 1; clause 29.1 states that the “non-recurring costs” total (the “contract value”) is £339,600 and clause 29.2.12.2 provides that on termination the “contract cash value shall be equal to the cumulative cost for the work carried out” at termination reduced by the cumulative discount.

Thirdly, TL’s case is that clause 2.1 of the CEPA provides that completion is subject to conditions, including clause 2.1.3 which states that: “the agreed discount being equal to £139,570 or to a lesser amount only as agreed in and pursuant to clause 3.2” . Clause 3.2 provides that the consideration for the shares “shall be equal in value to the value of the agreed discount accrued against all work carried out by the purchaser up to the date of termination” . It is said that GCV has not established the value of its services and therefore cannot claim the full equity interest or establish an alternative figure for the same. However, those provisions do not assist TL. There is no “lesser amount only as agreed” in respect of the value of the discount; therefore, the agreed discount for the purpose of condition 2.1.3 of the CEPA is £139,570. Further, the definition of the “cumulative discount” and clauses 9.1.3, 29.2.2 and 29.2.12.2 of the SDA provide that the cumulative discount is calculated as the discount percentage applied to the commercial invoices as shown in the table in Schedule 1; it is not subject to any alternative assessment against valuation of GCV’s work. It is common ground that a total of £200,030 has been invoiced and paid in respect of the work done; accordingly, the cumulative discount is £139,570.

Fourthly, TL’s case is that it was always contemplated that TL would end up with the intellectual property rights in the software. However, although clause 10 of the SDA makes provision for the intellectual property rights in the software to vest in TL, it also expressly provides that such vesting shall occur “immediately following the later of” acceptance or payment of the price agreed, including the equity consideration. Neither acceptance, nor payment of the equity consideration forming part of the sums due, has occurred; therefore, the obligation on GCV to transfer intellectual property rights has not arisen.

For those reasons, the court is not satisfied that there is a serious issue to be tried on TL’s claim that it is entitled to delivery up of the software, source code and other documentation.

Even if it could be said that TL has an arguable case that no further consideration is payable to GCV, by reason of the defective state of the software, its argument that it has a contractual entitlement to the software in those circumstances is weak. However, having regard to that possible argument, the court has considered the other limbs of the test, including the balance of convenience.

Mr Stewart’s second witness statement sets out the losses suffered by TL as a result of the incomplete and/or defective software. Works to rectify and complete the system have been estimated at £337,500 plus VAT. TL’s internal costs are estimated at £145,500 plus VAT. Lost revenue as a result of delay is estimated at £2.78 million. Future loss of profits is projected to be in excess of £19 million. Although not without difficulty, such losses could be quantified and compensated for by way of an award of damages, if the claim were established at trial.

The IT platform could be replaced but at great cost and delay to the project. Mr Considine submits that TL would not be compensated by damages at a trial which could be some months away given the current threat to its survival by lack of access to the source code developed by GCV. Mr Stewart’s evidence is that TL has almost exhausted its cash reserves. It can only secure further funding from existing and potential new investors if it has access to the source code and assignment of the intellectual property rights in the same.

Mr Morgan submits that there is inadequate evidence to support TL’s assertion that it will not survive if the software, including source code, is not delivered to it now. There are cash flow forecasts showing limited cash reserves but there are no management accounts or other information showing that TL is insolvent. There are emails from individuals indicating an interest in investing in the project if TL obtains intellectual property rights in the software but there is no evidence that TL would be unable to raise funds or obtain credit from other sources. Mr Stewart has raised a concern that TL might have to repay grants received from Innovate UK but the longstop dates for compliance with the conditions of the grants are five years from the date of award and therefore not imminently due.

Mr Morgan’s points are well made. TL has not produced sufficient evidence to demonstrate that it is likely that damages would not be an adequate remedy if the injunction were refused and TL succeeded at trial. Further, if TL’s survival as a going concern is at such risk, and the profits of a successful venture would be as projected in Mr Stewart’s second witness statement, the obvious solution is for TL to avail itself of GCV’s offer to provide the software, source code and documentation, by complying with the CEPA and providing the equity consideration to GCV, reserving its right to challenge the share allotment and issue at a later date.

I turn then to consider whether damages would be an adequate remedy for GCV. GCV would not be adequately compensated by an award of damages if any injunction were to be granted and then shown to be wrong. Although TL has offered the usual undertaking in damages, on its own evidence, it does not have any funds to satisfy any such award. The suggestion that TL might have sufficient funds when the project is completed is speculative and does not provide sufficient security to support the undertaking.

Turning to the balance of convenience, having regard to the principles set out by Chadwick J in the Nottingham case, the court must consider which course is likely to involve the least risk of injustice if it turns out to be wrong.

Mr Considine draws to the court’s attention authorities in which the court has granted mandatory injunctions, ordering delivery up of software: Nottingham (above), Saphena v Allied Collection Agencies [1995] FSR 616; Psychometric Services Ltd v Merant International Ltd [2002] FSR 8. However, in Nottingham, the court had a high degree of assurance that the plaintiff would establish at trial an entitlement to delivery up of the software, the termination provision in that case not attaching a condition of payment to such entitlement. Further, the defendant was insolvent so there was no reasonable prospect that it could pay any damages if the plaintiff succeeded at trial. The decision in Saphena concerned the parties’ respective contractual obligations following a full trial and did not address interim relief. In Psychometric , the court considered that the contract in question strongly supported the claimant’s claim that it was entitled to delivery up of the source code and to proceed with another supplier. These illustrations serve to show that each case turns on its own facts. It is not suggested that the principles to be applied, as set out above, differ in such cases.

Drawing together the above matters, in this case:

TL has not identified an arguable case that it is entitled to delivery up of the software, source code and documents, so as to satisfy the court that there is a serious issue to be tried. On the contrary, the terms of the SDA and CEPA indicate that GCV has much the better argument on this issue. Therefore, the court does not have a high degree of assurance that TL will establish its right at trial.

TL has produced incomplete and unsatisfactory evidence as to its financial position and its ability to raise funds, so as to demonstrate that it would collapse if the injunction were refused. The estimates provided by TL in its evidence show that it could quantify its loss so as to support a claim for damages by way of compensation. Therefore, damages would be an adequate remedy for TL if the injunction were not granted and it succeeded at trial. However, on its face, the limited financial information produced by TL indicates that it would not have funds to satisfy any award of damages to GCV. Therefore, damages would not be an adequate remedy for GCV if the injunction were granted and it succeeded at trial.

The balance of convenience lies in maintaining the status quo. TL has a simple solution if the court does not order delivery up as sought; it can comply with its obligations under the SDA and the CEPA. TL can allot and issue the shares to GCV in return for which it will obtain the software, code and documents that will allow it to raise further funds and complete what it anticipates will be a very profitable project.

Taking into account all of those matters, the court considers that the least risk of injustice in this case lies in refusing the interim relief sought.