TCC sees through claim for mandatory injunction to deliver up software – Transparently Limited -v- Growth Capital Ventures Limited [2022] EWHC 144 (TCC)

In a dispute over the completion of bespoke software, the Technology and Construction Court has refused to grant a mandatory injunction for the delivery up of the software, including its source code and underlying architecture, to the claimant. This case emphasises the need for customers to consider, when engaging developers for software, what happens if the developer produces a product which the customer finds flaws in or cannot use properly, but which it would like to develop on its own or with the help of a third party.

Agreements for software development often contain detailed provisions as to who owns the rights in the software, and how it may be used, while it remains under development. It is also common for parties to agree terms as to what will happen if the underlying agreement is terminated or work is stopped and the software unfinished.

Where this happens, a customer seeking development of bespoke software may expect it is entitled to the software’s underlying source code, so that it can finish developing it on its own or with the help of another developer. Finishing the development of the software may even be critical to the continuation of the customer’s business. Where the underlying agreement does not clearly set out the terms of which a software developer must hand over unfinished software, a customer may consider seeking an injunction from the court for delivery up of the software.

In a judgment handed down on 26 January 2022, Mrs Justice O’Farrell DBE refused to grant the claimant, Transparently Limited (TL), a mandatory injunction against the defendant, Growth Capital Ventures Limited (GCV), for delivery up of bespoke legal negotiation software. This software was still under development when the underlying agreement was terminated for cause by TL.

The case demonstrates that interim mandatory injunctions, where consideration of the "balance of convenience" test makes them inherently more difficult to obtain, cannot act as a straightforward alternative to obtaining unfinished software. This is especially the case where there are clear conditions in the contract which must be satisfied before an obligation to deliver up the software and the source code.

It is a useful reminder to customers to make sure that, if the contract provides terms on which partially developed software must be handed over on early termination, they understand and can live with any conditions which may be attached.

The Facts

TL is a provider of technology solutions in the legal sector. In April 2019 it appointed GCV, a software developer, to develop a negotiation platform to be used in family law disputes under a Software Development Agreement (SDA).

As is usual for software development, the parties agreed that the software and development would be delivered in an "alpha" phase, representing a baseline version for review and testing, and a "beta" version which would be ready to use by most of TL’s customers.

The price for the software development was GBP339,600, with payment being made partly in cash (GBP200,030) and partly in TL issuing shares in itself to GCV in the value of the remaining price of the software (GBP139,570). This share arrangement was expressed as a “discount” on the contract price. The parties entered into a separate

Conditional Equity Purchase Agreement (CEPA) regarding the issuing of TL’s shares.

Importantly, the SDA and CEPA together meant that:

• Intellectual property rights in the software would only vest in TL when either the product was accepted by TL, or when the price for the software had been paid in full including the equity transfer;
• Where the SDA was terminated, then the equity element of the price would be triggered; and
• Where the SDA was terminated, then GCV would only deliver the source code and any work in progress, and assign the IPR, where there had been full payment of any unpaid invoices and shares issued to GCV.

While the software was developed to final release of the beta version by April 2020, and TL paid the cash portion of the price in full by July 2020, TL alleged that the software in both alpha and beta versions was unfinished or contained a significant level of bugs.

As is common in such cases, GCV asserted that (i) TL had increased the scope of the software, which necessitated extra development time without a corresponding increase in price and (ii) most of the bugs amounted to functional changes or "scope creep".

Eventually TL opted to terminate the SDA for material and repudiatory breach in October 2021 and requiring delivery up of the unfinished software and source code.

In December 2021 TL sent a letter before action in which it threatened to bring a claim for damages and seek an injunction for delivery up of the software. Shortly after, GCV accepted that the SDA had been terminated (but not the alleged grounds), and noted that the terms of the CEPA meant that shares in TL should now be issued to GCV. Crucially, GCV also explained that it was willing to deliver up the software and underlying source code and transfer the IPR once it had received the shares in TL as provided for in the agreement.

In response, in December 2021 TL issued an application for a mandatory injunction, seeking delivery up all software source code, accompanying documents and authorisation codes.

Legal Test and Decision

The court summarised and applied the well-known test for an interim injunction, often referred to as the American Cyanamid test.¹ In doing so, it found against TL on the various limbs of the test of (i) whether or not there was a serious question to be tried (ii) whether or not damages would be an adequate remedy for TL instead of an injunction (TL had claimed that without delivery up of the software its business may go under, but the evidence it adduced was limited and weak) and (iii) where the balance of convenience lay in granting an injunction or not.

The court also noted that TL was seeking a mandatory injunction (i.e. seeking an order that the defendant take a positive step to do something) rather than a prohibitory injunction (i.e. stopping the defendant from doing something) and applied the guidance in the Nottingham -v- Eurodynamics case. In particular, as a mandatory injunction represents a change to the status quo as between the parties, the court will set a higher bar which a claimant must pass in establishing a real risk of injustice if the injunction is not granted. The risk of injustice in these cases being linked to the assurance that the court has that the claimant will later be successful at trial.

Analysis

Although this case involves a straightforward application of the test relating to interim injunctions, it contains a number of important takeaways in relation to technology disputes and in particular, disputes about the delivery up of and rights in unfinished software.

While TL’s application failed on all limbs of the American Cynamid test, there were two fundamental problems: one with TL’s substantive case and one with how it was presented to the court.

TL had a contractual right to the delivery up of the software at the time it had terminated the SDA, but that right was expressly conditional on TL first complying with its own obligations regarding payment of any unpaid invoices and issuing the shares under the CEPA. TL’s failure to comply with those conditions, in circumstances where GCV had also confirmed that it would deliver up the software and underlying source code, was ultimately fatal to TL’s case. As the judge found, the SDA and the CEPA were clear and contained “a complete code in the event of termination”.

TL presumably had good commercial reasons for not issuing shares under the CEPA , not least because it was unhappy with the work GCV had done. It may also have been the case that a share issue for a set value would be problematic where TL is in financial difficulty. However, the parties had set out clear contractual provisions governing when rights in the software would pass from GCV to TL and when it would be delivered up. This involved TL issuing shares to GCV, which it had refused to do.

A party in TL’s position would be well-advised to consider putting in place different rules as to delivery up and the transfer of rights depending on whether or not termination was for cause, or on other grounds (e.g. the insolvency of the supplier), as opposed to say on completion of the project. In this case, TL had alleged, but had failed to provide convincing evidence to the court, that it was encountering increasing financial difficulties due to it not obtaining the IPR in the software.

Perhaps not surprisingly, the judge went on to suggest that, if the software was so crucial to the ongoing viability of TL, it could issue the shares to GCV under the CEPA to obtain the rights in the software, before challenging the share allotment in a later claim. TL’s application for an injunction might therefore be seen as an attempt to circumvent the difficulties it was facing under the contract. Had TL possessed an unconditional contractual right to demand transfer of the rights in the software and underlying source code, it would have instead sought an order for specific performance of the corresponding obligation on its supplier.

The way in which TL’s case was put, as to whether or not there was a serious question to be tried, confused the broader substantive claims it had intimated it would bring regarding the termination for cause (and its related damages claims) with its application for an injunction. The judge, rather than looking at the dispute as a whole, focussed on what TL was actually asking for with the injunction, namely delivery up of the software. Although TL had shown that it was in dispute with GCV about the quality of the latter’s work, it had not shown that it had a contractual right to receive the software. The judge accepted that, under the SDA and the CEPA, GCV was not obliged to hand over the software until TL had allotted shares to GCV. As TL did not have a clear contractual right to delivery up of the software, then the judge concluded that in that regard there was not a serious issue to be tried.

Finally, it will be interesting to see if a claim is brought by either party in relation to the termination and related substantive damages claims. This is because there is an inherent tension in a customer bringing a case for damages based on a termination for repudiatory and material breach, where to do so, it must assert that the supplier’s performance was so bad that it was entitled to terminate and bring such claims, while at the same time being very keen to get its hands on the defective software which is at the heart of the alleged poor performance.

For GCV there is the curious way in which it responded to the notice of termination where it did not accept that there had been a material breach, “but waive[d] its right to raise issue with the notice of termination and accept[ed] that the SDA ha[d] been terminated.” In the alternative, it treated the notice of termination as a repudiatory breach which it accepted, thereby terminating the SDA. In the situation GCV faced, the standard response is either to reject the repudiation and insist on the contract continuing, or more commonly to accept the repudiation and terminate. The reason for the unusual approach GCV took is unclear and one it may come to regret.

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¹ Nottingham Building Society -v- Eurodynamics Systems [1993] FSR 468