In my last column I described the syndrome of IT contract blindness – the ailment that causes parties to an IT contract not to notice that the words in the agreement bear little resemblance to what they are actually planning on doing. Since writing, it has fallen to the Court of Appeal to interpret yet another duff IT contract term, in Softlanding Systems Inc v KDP Software Ltd and another [2010] EWCA Civ 1172. But the terms in which the court couched its judgment have some startling implications.

Softlanding Systems (SLS) and KDP Software (KDP) were both small software companies, SLS in the US and KDP in the UK. SLS had developed a software product which controlled the transfer of computer programs from the development to the live environment. KDP had developed two further software products which significantly enhanced the value and utility of SLS’s product. In 1995, SLS and KDP entered into written agreements under which SLS was granted a right to market the combined programs, in consideration of payment to KDP of a percentage of the gross price from the end-user.

In September 2006, SLS was acquired by a much larger software company, Unicom. Almost immediately, the relationship between Unicom/SLS and KDP began to deteriorate. The parties rowed about the basis on which fees should be calculated, and the information that was needed in order to calculate those fees. Unicom/SLS asserted that the agreement with KDP had changed over the years and that there was now a fixed price payable per end-user (such that, in order to calculate the fees due, KDP would just need to know the total number of end-users). KDP disagreed and said that fees were still to be calculated as a percentage of the end-user payment price (such that, in order to calculate the fees due, KDP would need to know the price paid per end-user).

In June 2008, KDP wrote to SLS requesting certain information from SLS. When SLS declined to provide the information, KDP terminated the contract on the grounds that failure to provide this information was breach of a material term. A key point is that SLS later claimed that the information that KDP said at trial that SLS had failed to produce, which KDP said entitled it to terminate, was not the information that KDP had requested before termination.

The clause KDP claimed that SLS had breached, which was the only provision-of-information clause in the contract, read: ‘Distributor [SLS] shall prepare and submit to licensor [KDP] on or before 30 June and 31 December of each year a complete and accurate written report of his activities hereunder, including, without limitation, the following: (1) a summary of the nature of contacts made with such end-users and distributor’s assessment of the results of such contacts; (2) a listing by identity and date of all licence and service agreements executed by prospective end-users and forwarded to licensor as a result of the distributor’s activities.’

Perhaps the best you can say about this clause is that it is not quite as comprehensive as KDP might have wished. SLS latched onto that point. It argued that where the contract was specific as to the information to be provided, such as the obligation to provide ‘a listing by identity and date of all licence and service agreements executed by prospective end-users’, it had provided the information and complied with the obligation. SLS argued that it was not under an obligation to provide the further information that KDP said it was entitled to (not least because there was now a fixed-fee arrangement in place, such that KDP did not need the information). It also argued that KDP had not specifically sought that further information before its purported termination of the contract and that, in any event, failure to provide this information did not constitute breach of a material obligation.

It must be said that, on a straight reading of that contract term, there is something to be said for SLS’s arguments. Outside the specific obligations, of what exactly is a ‘complete and accurate written report’ meant to consist? And would you not expect that, where an obligation is as imprecise as this, then before a party could claim that it had been breached materially, it should at least identify the information that it thought ought to be provided under it, and to have been refused that information?

Nevertheless, the court felt that SLS had treated its former contract partner shabbily, and was determined to do justice. The court said that KDP was entitled to know the licence and maintenance fees paid by end-users to verify that SLS had properly accounted in accordance with its contractual obligations. On the facts, the court rejected SLS’s argument that KDP had not requested that information before termination, but then went a step further – it said that since SLS was contractually obliged to provide this information, it was irrelevant whether KDP had previously identified or requested it. And the court found that a failure to provide this information, even if it had not been requested, comprised a material breach that entitled KDP to terminate the agreement. The court upheld the first instance finding of fact that the parties had not varied the contract to agree a fixed fee per end-user.

On one view, this is a tough judgment, perhaps born of the Court of Appeal’s apparent distaste for SLS’s case. According to the judgment, a failure by a party to a contract to provide information under that contract can lead to breach and a right of termination, even where the contract does not set out the specific information to be provided, and even where the aggrieved party has not specifically asked for that information. A clear message for practitioners is that, so far as possible, parties negotiating a contract should anticipate the information that they are going to need from one another, and spell it out. And if practitioners are advising on a vague information obligation in an executed agreement, they may need to advise that, unless there is a good reason not to do so, clients should err on the side of caution when considering how to comply with it.

Copying softwareA referral from the High Court to the European Court of Justice could be a game-changer, in respect of the extent to which third parties can ­replicate existing software.

As reported in this column UK copyright law prohibits the unauthorised copying of the source code of a computer program, and (to some extent) the look of the user interface. It does not, however, protect the program’s functionality. See a piece of software you like, and if you start coding from a blank screen, and take care not to copy the way it looks, then broadly speaking you are allowed to replicate what the software actually does. With concurring first instance and Court of Appeal decisions, the law on this point had seemed fairly settled (Nova Productions Ltd v Mazooma Games Ltd [2007] EWCA CIV 219 and Navitaire Inc v Easyjet Airline Co Ltd and others [2005] EWHC 0282).

The case that throws this question open is SAS Institute Inc v World Programming Ltd [2010] EWHC 1829. SAS sold an integrated set of analytical software programs for processing and analysis, all written in its own unique language. Over the years, customers had written thousands of applications in that language, but had to continue to license the necessary component parts from SAS in order to run those applications.

World Programming spotted a ­market opportunity and wrote ­alternative application programs, ­written in SAS language, which ­emulated the functionality of the SAS components. They did not copy any underlying code. Nevertheless, SAS sued, alleging various acts of copyright infringement. Mr Justice Arnold, a ��specialist IP judge, referred several questions to the ECJ, including: whether a software language is capable of protection; whether a program interface is capable of protection; and whether software functionality is capable of protection.

If the ECJ were to find that ­language, interface and functionality can indeed enjoy protection, then ­programmers will need to tread very carefully indeed. In both of the ­precedent cases cited above, the alleged infringers freely admitted that they had studied the programs they were accused of copying in order to work out what they did but had only copied their functionality, and in both cases the courts held that nevertheless they had not breached copyright in the programs. If the ECJ were to make a different finding, then the creators of original software would have far wider powers than they have enjoyed in the UK to date. The ECJ’s decision is expected next year. Watch this space.