A Suitable Case for Escrow?
A recent High Court Case highlights the urgent need for third party escrow agents.
Psychometric Services Ltd (ÂThe ClaimantÂ) v Merant International Ltd (ÂThe DefendantÂ) Â F.S.R. 8
What do we learn from this case?
1. What is Source Code?
ÂA computer functions in response to a set of electronic signals supplied to it. The software isÂ the combination of data and instructions, which controls the computer. The software which directlyÂ controls a computer is written in a language which computers understand but which isÂ incomprehensible to humans. It is said to be a low-level language. It is called object code.Â Pursuant to the agreement between the parties, XX has been supplied by YYYY with the software inÂ object code. As YYY acknowledges and asserts, XXX has access to that code but cannot read orÂ change it. It is, therefore, of little use to XXX in relation to its desire to rectify defects andÂ to further develop it. However, computer programs are, in large part, written by or under theÂ control of humans. The authors, that is to say the computer programmers, have to understand whatÂ they are doing in order to refine any software and to correct any defects in it. A computerÂ programmer must be able to understand the program, appreciate which parts control which functionsÂ and so on. For these reasons the software will be created in a form known as source code. It is aÂ high-level language which is comprehensible to humans (or at least a group of suitably trainedÂ ones) Â.
2. The terms of the Contract are essential.
2.1 Ensure that all object and source code ÂmattersÂ are properly defined. Distinguish between theÂ two and do not simply refer to Â works.Â 2.2 Always use Escrow Agents, i.e. independent third parties who hold the software and will onlyÂ release it in accordance with the escrow agreement.
In 1999 The Claimant decided to carry on its marketing and recruitment business business via theÂ Internet and for this purpose required the design of websites which would allow users to enterÂ answers on-line, software was designed and the Defendant was contracted to carry out the same. ItÂ was agreed that the fees to be charged by the defendant would be capped at Â£195,000 plus VAT.
It soon became clear that the Claimant faced significant problems with the software. It would haveÂ been a market-leading and highly profitable business. However, the current position was that itsÂ Internet sites were not operating perfectly and that its three existing clients had repeatedlyÂ complained about the software. Towards the end of 2000, the Claimant paid the Defendant Â£200,000Â to enable a software audit to be carried out by a third party. According to the Claimant thisÂ revealed that most if not all of the problems with the software were attributable to theÂ substandard fashion in which the Defendant wrote it and that none of the three products workedÂ satisfactorily. As a result of these and other problems the relationship between the parties hadÂ broken down.
The Claimant now wanted to put his hands on the software as time was running out, and that it wasÂ vital to its current and future business that the software be corrected and that the websitesÂ function properly as soon as possible. It sought access to the source code to enable a third partyÂ to carry out the task of perfecting and further developing the software.
The Claimant asserted it was entitled to the source code under the agreement with the DefendantÂ and brought an application for a mandatory injunction requiring the Defendant to hand over theÂ source code. The Claimant asserted that unless the source code was handed over it would sufferÂ unquantifiable loss because it was likely it would lose its existing clients, future orders andÂ would very likely go into liquidation. The Defendant denied the Claimant’s right to access to theÂ source code and claimed that the Claimant had no realisable assets and no cash with which to payÂ any part of the amount it owed to the Defendant and the application was an attempt by the ClaimantÂ to get hold of the software without paying for it.
Held, ordering delivery up of the source code:
(1) What was sought was really no more than an order for delivery up and involved the more or lessÂ mechanical task of making a copy of the source code and handing it over to the Claimant. If theÂ Claimant was refused the relief it sought its Internet business would collapse and it was likelyÂ it would go into liquidation. This would be an enormous injustice if at the end of the trial theÂ Claimant was found to be right. Even if the Claimant was able to find a backer, the overwhelmingÂ likelihood was that it would lose its existing clients and would lose its leading position in theÂ market. These heads of damage were not only unquantifiable but were also potentially very large.
(2) If the injunction was not granted, the Claimant would almost certainly go into liquidation inÂ which case the Defendant’s loss would be Â£ 960,000. It would suffer no additional loss if theÂ injunction was granted and, in fact, was likely to have a greater chance of recovering what moneysÂ were due to it if the injunction were granted and the Claimant survived.