Facts
Ansys Inc (Ansys), a US company, was the sole owner of certain
software. Under an international distribution agreement dated
1 December 1994 (“the 1994 agreement”), Ansys authorised Structures
and Computers Ltd (“SCL”) to distribute the software in the UK and
the Netherlands and to enter into tri-partite standard licence
agreements (“the licences”) between Ansys, SCL and the
licensee. Ansys terminated the 1994 Agreement as of 31
December 1996.
During the period of the agreement the licence fees payable
under the licences were payable to SCL in its own right and SCL had
no obligation to account for those fees to Ansys. Instead,
pursuant to clause 2.3 of the 1994 Agreement, SCL was obliged to
make what were termed “licence payments” to Ansys. This
obligation was not contingent on SCL receiving payment from the
licensee; SCL had an obligation to make the licence payments even
if no licence fee was received from the licensee. In practice
the licence payments were around 65% of the sums received from the
licensees; the 35% balance was retained by SCL as remuneration for
the work in selling the licence, training the licensees and
providing support and maintenance.
The claim was centred around the question of what happened to
those monies paid by licensees to SCL after termination of the 1994
Agreement (“the 1997 licence fees”). Ansys contended that
after termination SCL was not entitled to invoice the licensees for
licence fees and any monies received were received by SCL as
trustee for Ansys. On this basis Ansys alleged that the
respondents, who were the officers of SCL, were constructive
trustees to the extent that they assisted in the misappropriation
of the funds representing those licence fees.
The respondents contended that the position post-termination was
no different from that during the currency of the main agreement
and that any claim Ansys might have had was one for a claim in debt
against SCL.
Judgment
The appeal was made by the claimant from the decision of Park J
which held that the Defendants were not constructive trustees since
no constructive trust was created. This was decided on the
basis that the contracts between the parties dealt with the
position concerning licence fees (admittedly not perfectly) and
therefore ownership did not need to be determined by reference to
other areas of law such as the law of trusts.
Waller LJ agreed substantially with the decision by Park J,
holding that the 1994 Agreement did not provide that on its
termination the licences would also come to an end or that they
would be automatically novated to a new distributor, thereby
removing SCL from the relationship. Therefore,
post-termination, the licensees remained under the obligation to
pay licence fees to SCL. Pursuant to Clause 2.3 SCL did not
have an obligation to account to Ansys for the licence fees
received, i.e., the licence fees were not “held for” Ansys.
Instead, SCL’s obligation, which was wholly unconnected with the
receipt of monies, was to make licence payments. As a result,
Ansys claim against the Respondents as constructive trustees
failed.
Waller LJ continued that, whereas Parker J had found that SCL’s
obligation under the 1994 Agreement to pay the licence payments to
Ansys continued after termination of the 1994 Agreement, he did not
consider that correct. This was because clause 2.3 was not
expressly stated to survive termination. Nevertheless, an
obligation did exist for SCL to continue to make licence payments
to Ansys on that basis of (1) an implied term, i.e., the continued
collection of the licence fees by SCL carried with it an ongoing
obligation to make the licence payments required in the 1994
Agreement; or (2) Ansys being entitled to a restitutionary remedy
to prevent SCL being unjustly enriched.
Commentary
This is an interesting case, and the first instance decision was
reported in an earlier edition of Masons CLR.
The case highlights the problems that face lawyers drafting
contracts (“umbrella agreements”) which allow the creation of
separate, new, third party contracts, and the importance of paying
particular attention to the termination provisions.
In this situation the umbrella agreement (the 1994 Agreement)
was validly terminated by Ansys. However the wording of the
agreement was silent as to the effect of termination on the
contracts created beneath the umbrella agreement. As a result
those contracts did not automatically come to an end or, more
favourably, novate to a new distributor, but continued on the same
terms as before with the licensees being obliged to pay licence
fees to SCL.
The 1994 Agreement attempted to deal with the effect of
termination on the licences by a loosely drafted “co-operation”
clause as follows:
"In the event of termination or
expiration of this Agreement for any reason, Ansys and [SCL] will
work co-operatively together and with any new distributor appointed
for the Territory to transfer purchase orders, license agreements,
and any Support obligations and to resolve any other issue which
may arise from the termination or expiration of this
Agreement. If [SCL] has not materially breached any
provisions of this Agreement and has paid all amounts owed to
Ansys, Ansys and [SCL] will negotiate in good faith to determine an
equitable payment to [SCL]. Such payment will be equal to a
portion of the lease and maintenance fees collected during the
twelve (12) month period immediately following the Termination Date
for licences entered into by [SCL] and Ansys on or before the
Termination Date.”
The Court of Appeal judge held that the wording was not language
of assignment nor did it place an embargo on SCL from collecting
fees pending the conclusion of the co-operation, i.e. the clause
did no divest SCL of its contractual entitlement to collect fees,
nor did it change the character of the licence fees collected into
trust monies.
Termination clauses within umbrella agreements must be clearly
drafted to identify what happens to those third party contracts
upon termination. Waller LJ suggested some wording for the
1994 agreement:
“(i) all licence agreements would be
transferred to a new distributor;
(ii) between termination and the finding of a new distributor all
fees would be collected for the benefit of Ansys and the new
distributor, and all obligations of SCL under the licence
agreements would be carried out by Ansys;
(iii) a payment would be made to SCL of a specific proportion of
the fees collected over the 12 months from termination or as fixed
by some independent third party.”
It is interesting to note that because clause 10.3 of the 1994
Agreement (obliging SCL to make licence payments) was not
stipulated to survive termination, Waller LJ considered it strongly
arguable by SCL that an obligation to make licence payments to
Ansys no longer existed (even though it validly received licence
fees). This again emphasises the importance of drafting clear
provisions relating to the effect of termination, and the need to
carefully identify which provisions will survive termination of the
agreement. It is clear that the Court will not provide ready
assistance to ensure that certain provisions of the agreement will
survive, even if doing so renders the contract a commercial
absurdity.
Nevertheless, despite the judge stating that the Court would not
re-write the contract, the judge did decide that an implied term
possibly existed whereby SCL was under a continuing obligation to
make licence payments to Ansys. Alternatively, if there was
no such implied term, SCL was prevented from retaining the licence
payments on the basis of unjust enrichment.
The case identified that the termination of the 1994 Agreement
meant that SCL could no longer “sell” licences to end-users.
However, termination had no effect on the position vis-à-vis those
licences already in existence; the existing licences continued
regardless of the termination of the 1994 Agreement.
