Ipsofactoj.com: International Cases [2004] Part 3 Case 10 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

New Zealand Payroll

Software Systems Ltd

- vs -

Advanced Management

Systems Ltd

KEITH J

BLANCHARD J

TIPPING J

11 DECEMBER 2002


Judgment

Tipping J

(delivered the judgment of the court)

INTRODUCTION

  1. This appeal from Randerson J had as its main focus issues involving copyright in computer programmes. There is, however, a prior issue concerning the validity of an assignment whereby the copyright in question was purportedly transferred to the present appellant (NZPSS) from the second respondent (the Crown). The first respondent (AMS) contends that the Crown’s purported assignment of the copyright to NZPSS was invalid and did not therefore pass any title to or interest in the copyright to NZPSS. Thus, AMS contends NZPSS had no right to bring this appeal as the owner of the copyright. The reason for the suggested invalidity is that the assignment required the consent of AMS which was never sought, let alone given. It will be convenient to describe in outline the circumstances which have led the parties into dispute and then move straight to the assignment issue. We will then consider, to the extent necessary, the various copyright issues which arose on the appeal.

    BACKGROUND

  2. AMS has been in business as a provider of computer software since 1979. In March 1987 it entered into a contract with the Secretary for Defence acting on behalf of the Crown to develop a specification for a new computerised payroll system to be called LEADER. That contract, known as P2010, is of no direct relevance to the present issues. It was carried out at a cost of $425,333.00 and was regarded as Stage 1 of the general LEADER project. AMS was also awarded a contract, called P2085, for Stages 2 and 3 of the project. They involved the design and development of the LEADER system and its implementation.

  3. Some of the terms of P2085 are of present relevance. Clause 16 provided:

    16.1

    All work performed under this Agreement shall be the exclusive property of the Secretary. Without the prior written consent of the Secretary, AMS shall not make or remove any copies of material produced except for backup purposes as described in clause 27.1.

    16.2

    At the completion of the project AMS may negotiate with the Crown, the possibility of promoting and marketing the payroll software produced. Any agreements reached would be the subject of a separate contract.

  4. In clause 22.1 each party bound itself not to disclose or divulge to any person or corporation any information concerning the terms of the P2085 agreement or concerning any work carried out pursuant to that agreement. Clause 31.1 dealt specifically with the question of assignment in these terms:

    Neither party shall cede, assign, pledge, or transfer its rights, duties or obligations under this agreement without the prior written consent of the other party.

  5. P2085 was entered into by the parties in August/September 1988. The contract price was $1,020,000.00. Work was to be completed by 30 May 1989. Towards the end of the contract period AMS and the Crown entered into a further contract, as envisaged by clause 16.2. It was described as the LEADER Marketing Rights Agreement or LMRA for short. This contract is of central relevance to the matters in dispute. It is dated 17 April 1989 and recited that the Crown had agreed to grant to AMS "exclusive worldwide marketing rights to LEADER". The contract next recited that the costs and responsibilities of preparation and sale of LEADER were to be borne by AMS which was to pay royalties to the Crown from the proceeds of each sale. Thirdly, the LMRA recited:

    For royalty purposes "LEADER" consists of those software functions and attributes being created for the HMNZ Dockyard and being paid for by the Crown. This specifically excludes further enhancements and modifications carried out by AMS and paid for by either AMS or purchasers of "LEADER".

  6. In the body of the LMRA the parties agreed that AMS was entitled to set the retail price of LEADER from time to time and that the source code of LEADER would be made available to purchasers, subject to their signing an appropriate contract preventing re-sale. By clause 5 the Crown agreed:

    to confer on AMS an unencumbered right to use and to sell the Source Code upon receiving the full development cost (budgeted to be $1,017,000) in royalties.

  7. Clause 7 constituted a general arbitration clause in relation to "disputes arising in connection with" the agreement which could not be settled by negotiation. Clause 8 prevented AMS from publishing the agreement without the Crown’s written consent, whereas clause 9 allowed AMS to advertise the LEADER product in any way it saw fit. It also allowed AMS to refer to HMNZ Dockyard as a user of the system.

  8. Clause 11 is of fundamental importance, particularly to the copyright issues. It provides:

    All enhancements and modifications carried out by AMS and paid by either AMS or purchasers of "LEADER" shall be offered to the Crown with a cost to be mutually agreed between the parties. The cost of all enhancements and modifications shall be deducted from any Royalty Payments due and should the cost exceed the royalties due, the Crown shall pay the difference on the 20th of the invoiced month.

  9. There is a supplementary clause 1 in the LMRA under the heading "Furthermore" which should also be noted. It provides:

    AMS undertakes to maintain a separate Sales Ledger which will be audited annually. A copy of the Sales Ledger will be submitted to the Crown quarterly; such information will be treated in the utmost confidence by the Crown. This provision will cease upon the final payment of royalties.

  10. AMS proceeded to market and sell LEADER in terms of the LMRA for some ten years. Various issues arose between it and the Crown but they need not be addressed here. By an agreement dated 24 July 2000, and without having given any prior notice to AMS, the Crown purported to assign to NZPSS all its interest in LEADER and in its agreements with AMS. NZPSS is engaged in providing payroll services through a bureau system. AMS first became aware of the purported assignment when it received advice to that effect from the Crown and NZPSS. AMS then took urgent proceedings to assert what it saw as its rights. Those proceedings, although originally more widely framed, went to trial against only the Crown and NZPSS, which in their turn raised a number of matters by way of counterclaim against AMS.

  11. It is worth noting, as the Judge did, that although a number of the counterclaim issues had been raised some years earlier by the Crown with AMS, none of them had been pursued with any vigour or at all, until AMS began to assert its rights after the purported assignment had been notified to it. At the time of the assignment the Crown placed no more than a nominal value on its remaining interest in LEADER and its agreements with AMS. The purported sale of those interests to NZPSS was for a price of $10,000.00. It is thus more than clear that the Crown, which was indemnified by NZPSS, was really a nominal party to the proceedings and that all the beneficial interest in them, such as it may be, was regarded, as between those parties, as being vested in NZPSS. Being dissatisfied with the Judge’s determination of the various issues, NZPSS appealed. The Crown did not. The first issue is whether NZPSS was entitled to appeal as the owner of the copyright. That depends on the validity of the purported assignment.

    ASSIGNABILITY

  12. Personal property, with some presently immaterial exceptions, is generally capable of assignment. For example, the benefit of a contract will normally be assignable. That will not be so if the parties have expressly or implicitly agreed otherwise or if the nature of the contract is such that the law does not permit its assignment. Examples of that kind of contract are contracts for personal services and contracts to lend money. Assignment of copyright is expressly permitted by s113(1)(a) of the Copyright Act 1994 (the Act). In this respect s113 is enabling or permissive. It does not prevent the enforcement of a contract whereby the copyright owner expressly or implicitly agrees not to assign the copyright. Such a contract is effective between its parties. The position of a third party assignee, without notice of an inability to assign, does not require consideration here. NZPSS had full notice of the contractual provisions said to constitute the restriction on assignment.

  13. In the present case therefore, and assuming for the purposes of the assignment issue that the Crown was at the time of the purported assignment the sole beneficial owner of the copyright in LEADER, the essential question is whether the Crown had agreed with AMS, either expressly or by clear implication, not to assign the copyright without its consent. It may be helpful to note at this point that the correctness of the foregoing assumption (that the Crown was the sole beneficial owner of the copyright) is the primary matter in dispute on the copyright aspect of the case. The Judge found the copyright in LEADER was beneficially owned as to a 75% interest by AMS because of the substantial enhancements and modifications it had made to LEADER since its original creation. That finding is disputed by NZPSS on this appeal. If, however, the assignment from the Crown to NZPSS is invalid, then, as noted above, AMS contends that NZPSS lacks any interest in the copyright and so is not entitled to challenge the Judge’s conclusions as to the beneficial ownership thereof.

  14. In order to determine whether the Crown did agree with AMS not to assign its copyright in LEADER, it is necessary to examine all relevant aspects of P2085 and the LMRA. Both these contracts were drawn without professional assistance. They are not expressed with clarity in material respects. The Court must do its best to derive the intentions of the parties from the words they have used in the light of the commercial context in which they were used. We have already noted that although P2085 was a self-contained contract designed for a particular purpose, it made specific reference in clause 16.2 to the possibility of the parties entering into a further contract for the purposes of "promoting and marketing" LEADER. Such further contract eventuated in the form of the LMRA.

  15. Thus, when they entered into that contract at a time when P2085 was still on foot, it is not difficult to see how the parties may have viewed themselves as building on an existing contractual relationship. They would obviously have been aware of clause 31.1 of P2085, which prevented either party from assigning its rights, duties or obligations in P2085 without the prior written consent of the other party. Lay persons may not have appreciated that it is not legally possible to assign duties or obligations without a novation, which necessarily requires the consent of the other party.

  16. Clause 31.1 is not textually clear as to its reach. The question is whether the copyright in LEADER was a right which belonged to the Crown "under this agreement", i.e. under P2085. Mr. Rennie QC for NZPSS argued that it was not, because the words in clause 31.1 "rights .... under this agreement" were apt to cover only rights created solely by P2085 and enuring for no longer than its duration. Hence, so counsel argued, the copyright which derived in terms of clause 16 from the Crown’s ownership of all the work performed under P2085 was not itself a right under P2085. By contrast Mr. Sorrell argued that as the Crown’s ownership of LEADER was contractually provided for by clause 16.1 and copyright inevitably followed, it was reasonable to take the view that in using the expression "rights .... under this agreement" the parties meant to include all rights which flowed to either party, directly or indirectly from the agreement. The point of construction is not an easy one. But in the event the assignability issue does not turn solely on the terms of clause 31.1. The wider view, for which Mr. Sorrell contended, is supported by the words of clause 22.1 of P2085 noted earlier.

  17. Under that clause each party agreed that it would not, without the written consent of the other, disclose or divulge any information concerning the terms of P2085 or concerning any work carried out pursuant to that contract. It must follow that the disclosure about LEADER, being part of the subject matter of P2085, which would inevitably be involved in an assignment by the Crown of the copyright, could not take place without the written consent of AMS, even if the copyright was not part of the "rights under this agreement". Mr. Rennie argued that the obligations undertaken by the parties pursuant to clause 22.1 lasted only during the currency of P2085. There is nothing in the clause or otherwise in the contract to that effect and no basis exists for the implication of such a limitation. When clauses 22.1 and 31.1 are read together, as is appropriate, it becomes tolerably plain that the parties to P2085 cannot have intended the copyright in LEADER to be assignable by the Crown at any time without the written consent of AMS.

  18. That conclusion is strengthened when reference is made to the LMRA. The supplementary clause 1 of that agreement obliged AMS to maintain a separate sales ledger for LEADER transactions which would be audited annually. AMS was required to submit a copy of the ledger to the Crown quarterly. Then comes the crucial point. The Crown bound itself to treat the information in the ledger with "the utmost confidence". The use of the word "utmost" underlines the importance which AMS attached to this confidentiality obligation. The proposition that the Crown could assign the copyright in LEADER and its rights and interests under the LMRA without the consent of AMS cannot sensibly be reconciled with the Crown’s confidentiality obligation under supplementary clause 1. We agree with Mr. Sorrell’s submissions in this respect. Mr. Rennie’s contention that confidentiality could still be preserved following an assignment by means of the sales ledger being submitted to the Crown on behalf of its assignee makes little commercial sense. The Crown could not tell its assignee what the sales ledger contained without being in breach of the clause. That is hardly compatible with the notion of a general ability to assign without consent.

  19. A similar implication of non-assignability derives from clause 5 of the LMRA. The Crown thereby agreed to confer on AMS "an unencumbered right to use and sell" the Source Code when it had received the full development cost in royalties. That provision implies a transfer of the beneficial ownership of the Source Code from the Crown to AMS when the royalties paid equated the development cost. To be able to make such a transfer the Crown had to remain the owner of the Source Code. The proposition that it could assign the copyright in the meantime is inconsistent with its continued ownership of the Source Code. Furthermore, in much the same vein, clause 11 of the LMRA contemplates a negotiation between AMS and the Crown in respect of the price of all enhancements and modifications carried out by AMS. That cannot be construed as contemplating a negotiation between AMS and an assignee from the Crown. Such a negotiation would be likely to involve the exchange of commercially sensitive information. It is therefore extremely unlikely that AMS would have committed itself to negotiate with the Crown’s unknown assignee. This point does not turn on the enforceability of this aspect of clause 11, in respect of which clause 7 (the general arbitration provision) could have relevance. The point concerns the intention of the parties regarding assignability.

  20. Our conclusion is that the LMRA was not intended to be assignable without the consent of the other party. To the extent that the assignability of the copyright in LEADER is uncertain under P2085, the position under the LMRA must result in P2085 and the copyright itself not being assignable without consent. We would have reached the same conclusion as regards P2085 based on its own terms alone, but when the two contracts are looked at together, as the parties must have intended, the position overall is plain. The Crown could not assign either P2085 or the LMRA or the copyright in LEADER without the consent of AMS which was not given.

    THE EFFECT OF THE PURPORTED ASSIGNMENT

  21. The question becomes what effect this absence of necessary consent has on the assignment and hence the position of NZPSS in relation to this appeal. What effect does a purported assignment have against a party whose consent was required but has not been given?

  22. In principle the question can be looked at in terms of the law relating to breach of contract. The Crown’s purported assignment without the consent of AMS was a breach of the contract between those parties. Should the breach be compensated in damages or should the Court treat the assignment as if it had never occurred, i.e. as being invalid and of no effect – a kind of setting aside or retrospective injunction against its taking place?

  23. A very similar issue came before the House of Lords in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85. Lord Browne-Wilkinson delivered the leading speech. At 98H he characterised the issue as being the effect of a contractual provision which prohibits a party from assigning the benefit of a contract. In Linden Gardens A had contracted B to remove asbestos from A’s premises. A was not permitted to assign the contract without B’s consent. He purported to do so to C. The question was whether C could sue B for failing to remove the asbestos properly. The case was in this respect on all fours with the present. The Official Referee had found that as the assignment lacked the necessary consent it was ineffective and gave the plaintiff assignee no rights against the defendant whose consent to the assignment had been required but was not given. The Court of Appeal reversed that decision, holding that despite the lack of consent the plaintiff assignee could enforce his assignor’s contractual rights against the defendant.

  24. The House of Lords allowed the appeal and restored the Official Referee’s decision on the basis that the purported assignment of the assignor’s contractual rights against the other party to the contract was ineffective, for want of that other party’s consent, to vest those rights in the assignee. Lord Browne-Wilkinson discussed the issue now under consideration at 107G. He noted the submission that even though the assignment was in breach of the relevant contract, it was effective to vest the assignor’s rights under the contract in the assignee. After discussing the competing submissions, including a submission that damages were an appropriate remedy, and having considered several authorities which were not entirely consistent, His Lordship distinguished ordinary contractual rights (as in that case and this) from rights under leases. He concluded at 109C:

    Therefore in my judgment an assignment of contractual rights in breach of a prohibition against such assignment is ineffective to vest the contractual rights in the assignee. It follows that the claim by Linden Gardens fails and the .... action must be dismissed.
  25. Each of the other members of the Appellate Committee (Lord Keith, Lord Bridge, Lord Griffiths and Lord Ackner) expressly agreed with Lord Browne-Wilkinson’s reasoning and his conclusion. Similar reasoning was adopted by the Court of Appeal in England (Millett LJ, Hobhouse LJ and Sir Roger Parker) in R v Chester & North Wales Legal Aid Area Office (No 12), ex parte Floods Of Queensferry Ltd [1998] 1 WLR 1496, 1501F-G per Millett LJ, part of whose reasoning was that equity will not enforce the performance of an obligation which constitutes a breach of a prior contract with a third party. The decision of Salmon J in Grain Processors Ltd v Bluebird Foods Ltd (1999) 6 NZBLC 102,879, 102,883-4 is broadly to the same effect as that in Linden Gardens.

  26. We agree with the approach taken in these cases. An agreement, express or implied, not to assign contractual or other rights in personam, or not to assign them without consent, should generally be specifically enforced as between the immediate parties, unless there is some strong reason why that course should not be adopted. (Leases, as Lord Browne-Wilkinson pointed out, raise different issues because they involve interests in land as well as contractual rights.) A non-assignability clause has a clear commercial purpose. The parties do not wish, without consent, to be obliged to deal with a party not of their own choosing. The identity of the other party matters to them, so they expressly or implicitly agree to reverse the general rule that contractual rights may be assigned. As Lord Browne-Wilkinson said in Linden Gardens at 108G, if the law did not enforce such an agreement the legitimate commercial reason for agreeing not to assign would be defeated. Similarly the legitimate commercial expectations of the parties would be defeated.

  27. Hence, both in principle and on authority, the law recognises that AMS can say that the Crown’s attempt to assign to NZPSS its copyright in LEADER and its other contractual rights was ineffective. The consequence must be, as in Linden Gardens, that NZPSS has and never has had any title to the copyright in LEADER enabling it to contest Randerson J’s decision that such copyright was owned beneficially as to 75% by AMS. From that decision the Crown has not appealed and, as NZPSS has no right to do so, the Judge’s assessment must stand. The appeal which NZPSS has purported to bring cannot succeed for want of any legal right to bring it. The appeal must accordingly be dismissed. We propose, however, albeit very briefly, to express our view on the Judge’s substantive conclusion in the light of the attack which NZPSS made on it.

    THE COPYRIGHT QUESTIONS

  28. There is no doubt that on the completion of P2085 the Crown alone owned the copyright in LEADER. That follows from clause 16.1 of P2085 which provided that all work under P2085 was to be the exclusive property of the Secretary of Defence. All parties accepted this as the starting point. The dispute arises over the effect of enhancements and modifications carried out by AMS under the LMRA. In terms of clause 11 of the LMRA these were to be offered to the Crown "with a cost to be mutually agreed between the parties". They were not so offered but that, as Mr. Rennie ultimately accepted, has no bearing on the question immediately at hand.

  29. To have contracted as they did the parties must have envisaged and intended that enhancements and modifications to LEADER would belong to AMS. They cannot have intended that the enhancements and modifications should belong to the Crown. The proposition that the Crown was to pay AMS an agreed amount for them cannot be viewed in any other way. Furthermore, recital 3 in the LMRA expressly excluded "further enhancements and modifications" from the definition of LEADER for royalty purposes. There was much argument concerning whether in the circumstances there remained one copyright in LEADER or whether there became two copyrights, one in the original LEADER, and the other in LEADER as it ultimately became with the incorporation of the enhancements and modifications carried out by AMS.

  30. We can say here that we have no doubt that, whether viewed individually or cumulatively, AMS did make enhancements and modifications to LEADER. The contrary argument advanced by NZPSS lacked commercial reality and was in any event inconsistent with Randerson J’s factual findings which were based upon a correct interpretation of the contract. We are not persuaded to depart from those findings. Nor do we consider NZPSS’s submission that the case should be looked at enhancement by enhancement or modification by modification is an appropriate way to deal with a case such as the present. To decide whether a new work has been created on that narrow basis seems to us to be an unrealistic approach for determining copyright issues in relation to computer software.

  31. A computer programme is deemed for copyright purposes to be a literary work. LEADER was therefore, in its original form, a literary work commissioned by the Crown and in respect of which copyright was vested in the Crown. The LMRA permitted AMS to enhance and modify the literary work. At the completion of that process the Judge assessed the resulting work as being 75% the product of the skill and labour carried out by AMS and 25% the product of the original work carried out for the Crown and thus belonging to the Crown. The fact that under clause 11 of the LMRA AMS was to offer the enhancements and modifications to the Crown, suggests that the parties saw LEADER as remaining a single work, for the enhancement and modification of which the Crown would pay AMS, if it wished to do so. The parties did not expressly address what should happen if the Crown did not wish to take up the clause 11 offer. It does not seem that the parties regarded the Crown as bound to do so, albeit the lack of reference to the consequences of its not doing so may suggest that the prospect of that happening was regarded as remote.

  32. In any event, for present purposes, we consider that the parties must have envisaged one party or the other ending up with the ownership of the whole of LEADER, including the enhancements and modifications. Under clause 11 of the LMRA that party is envisaged as being the Crown, whereas under clause 5, dealing with the Source Code, that party is logically AMS. Whichever party might be the ultimate owner of the enhanced and modified LEADER, the contract is constructed on the basis that LEADER remains a single work with the Crown having to pay AMS (under clause 11) for the value of the enhancements and modifications and, presumably (despite clause 5), AMS having to pay the Crown for any residual value in the original LEADER if it was to become the sole owner thereof. It should be noted that the Crown established that residual value, for the purposes of the purported assignment, as being $10,000.00.

  33. In the light of the unitary approach which we discern in the contractual arrangements in respect of LEADER, we think it must be implicit that the parties agreed, for copyright purposes, that LEADER should be regarded as remaining a single work with a single copyright vested at law in the Crown. But clearly they also implicitly agreed that the beneficial ownership of that single copyright would alter with the extent of the enhancements and modifications carried out by AMS. The Crown must therefore be regarded as holding the copyright in LEADER on trust for itself and AMS in the proportions appropriate to the extent of the enhancements and modifications carried out by AMS. For the Crown, in present circumstances, to assert the whole beneficial ownership would be inconsistent with the LMRA. It would also be an unconscionable stance for the Crown to take.

  34. The approach which we favour in resolving the present issue, derives essentially from the contractual intentions of the parties. A solution whereby the Crown holds the copyright in LEADER in trust for AMS to the extent of its contribution to the enhancement and modification of the original LEADER is the most logical and just way of giving effect to the difficult and in part conflicting contractual arrangements into which the parties entered. Whether a similar approach would be appropriate in other circumstances must remain an open question. For present purposes it is sufficient to say that we are satisfied the Judge was correct in deciding that the copyright in LEADER, as at the date of his assessment, was beneficially owned as to 25% by the Crown and 75% by AMS. Hence even if NZPSS had been able to appeal, we would have upheld the Judge on this point. The further points of appeal relied on by NZPSS concerning accounting for royalties by AMS and breach of confidentiality by the Crown, are precluded by the invalidity of the assignment. We say no more about them.

  35. There are, however, four inter-linked matters in respect of which NZPSS appeals in its own right and not as assignee from the Crown. The invalidity of the assignment does not prevent NZPSS from pursuing this aspect of its case. The four issues are identified in Part E of Mr. Rennie’s written submissions. He made the following submission in relation to them as the 8th point of appeal:

    The finding (decision, paragraph 290) that [NZPSS] was a party to the infringement of AMS’s copyright was in error, in that no infringement occurred as a matter of fact or law, and the learned Judge was in error in his understanding of what had occurred and what actions had been taken by the Crown and by [NZPSS].

    The attack is therefore on paragraph 290 of the judgment which comprises part of Randerson J’s summary of his conclusions. It is in these terms: "NZPSS was a party to infringing AMS’s copyright in LEADER."

  36. The Judge’s finding in this respect was based on the premise that the purported assignment of LEADER amounted to a breach of contract and an infringement of copyright by the Crown. The Crown had purported to sell LEADER. That purported sale must have amounted to a breach of contract, as we have already indicated. It must also, we think, have amounted to an infringement of the beneficial interest which AMS was rightly held to have in the copyright of LEADER. The purported sale was to that extent a breach of trust. The issue is essentially whether NZPSS was party to that infringement and breach. The evidence establishes that NZPSS initiated the assignment transaction and did so with knowledge of the circumstances which made it invalid. We consider that the Judge was therefore entitled to hold that NZPSS was a party to the infringement involved. It was a knowing assistant in the breach of trust. This point was not developed orally and we do not find it necessary to do more than refer to the written submissions and state our concurrence with Randerson J’s conclusion.

    CONCLUSION

  37. For the reasons given the appeal is dismissed in all respects. The appellant must pay the first respondent costs in the sum of $10,000 plus disbursements including the necessary travel and accommodation expenses of both counsel, to be fixed if necessary by the Registrar.


Cases

Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85; R v Chester & North Wales Legal Aid Area Office (No 12), ex parte Floods Of Queensferry Ltd [1998] 1 WLR 1496; Grain Processors Ltd v Bluebird Foods Ltd (1999) 6 NZBLC 102,879

Legislations

Copyright Act 1994: s.113(1)(a)

Representations

H B Rennie QC and P G Scott for Appellant (instructed by Baldwin Shelston Waters, Wellington).

A C Sorrell and J McCartney for First Respondent (instructed by Cockcroft d’Young Moorhouse, Auckland)

No appearance for Second Respondent


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