England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
BAILII: [1999] EWHC Technology 222

		Royal Courts of Justice Strand, London, WC2A 2LL
		Tuesday, 21 December 1999

LORD JUSTICE EVANS:

1. The appellants, whom I shall call GEIS, operate computer networks which enable their customers to send business communications rapidly and with comparative security. They provide software packages which they obtain from manufacturers, including the respondents, Harbinger (UK) Ltd.
2. The present dispute arises under an Agreement dated 19 August 1996 between GEIS and Atlas Products International Ltd. ("Atlas"), known as the VAR agreement because GEIS were a "value added reseller". Atlas manufactured a software product known as "Atlas EDI" and by the Agreement it undertook to supply this to GEIS' customers and licensed its use by GEIS and by the end-users, to whom GEIS was authorised to grant sub-licences. Model "End-user Agreements" were scheduled to the Agreement.
3. Harbinger Corporation acquired Atlas in 1997 and subsequently transferred the company and its product range to its United Kingdom subsidiary, the respondents. It is agreed that the respondents have become parties to the Agreement in place of Atlas by a process of novation or assignment.
4. By a letter dated 30 December 1998 the respondents gave written notice terminating the Agreement with effect from 31 December 1999. His Honour Judge Anthony Thornton Q.C. decided in the present proceedings that the notice was effective to achieve that result under an express term of the Agreement ("Clause 3 - Term") and there is no appeal against his finding.
5. The issues raised by this appeal and cross-appeal are whether the respondents remain liable to provide support and maintenance - in effect, after-sales service - for the Atlas EDI software after termination of the Agreement under clause 3, and if so, for how long. The relevant term is Clause 10, which reads as follows -

"Clause 10 - Support and Maintenance

API will provide support and maintenance in perpetuity in return for an annual payment, as specified in Schedule One, and subject to the following conditions :

10.1 Eligibility for Support

..................

10.2 API's Obligations

..................

10.3 Licensee's Obligations

..................

10.4 Program Enhancements

..................."

6. The issue raised by the appeal is stated to be the meaning of the words "in perpetuity" : for how long does the support and maintenance obligation continue, after termination of the Agreement under clause 3? The Respondents say by their cross-appeal that the obligation under clause 10 terminates with the Agreement and that they will be released from the further performance of it with effect from 31 December next. Logically, the second issue comes first.

Cross Appeal - Does clause 10 survive termination of the Agreement under clause 3?

7. This was the second question answered by the judge. He held that it does. Having summarised the Agreements (judgment section 4.2) and reminded himself of the correct approach to construction in light of Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896 (hereafter "I.C.S.") (judgment section 5), he held that supply of the Atlas software and support under clause 10 are separate and severable obligations (section 6.1). Importantly, he referred to the model End-User Agreement scheduled to the VAR Agreement, which requires GEIS to provide support and maintenance to the end user "for at least 2 years after it has licensed and delivered Atlas software to that end user" (section 6.1). He then considered the respondent's arguments in favour of their contention that the clause 10 support and maintenance obligation ceases to bind them when the Agreement is terminated under clause 3 (section 6.2), but he concluded -

"All these considerations show that the Agreements provide for the possible continuation of Harbinger's supply and maintenance obligations to be performed by that company following the termination of the Agreements ....."(para.6.3).

8. This conclusion in my judgment is clearly correct. The respondents' rely upon clause 15.5(e) which shows, it is submitted, that GEIS's continuing obligations under the End-user Agreement are "relatively modest" and that in the event of termination GEIS may allow its customers to elect to receive support and maintenance direct from Atlas/Harbinger (Respondent's Skeleton Argument para. 26). Mr Mark Barnes Q.C. for the respondents did not press this argument before us. It was one of the factors taken into account by the judge (judgment para. 49(2)) and I agree with him that it does not outweigh the other matters on which he relied.
9. I would rest the same conclusion on the simple proposition that the words "in perpetuity" in clause 10 are equivalent to an express term that the support and maintenance obligation does survive termination of the Agreement under clause 3.

Appeal - For how long does the obligation survive?

10. This was the third question dealt with by the judge. His answer and reasoning appear below.
11. The appellants' extreme submission is that the words "in perpetuity" mean just that - "for ever" or "until the crack of doom" - and that the maintenance obligation continues (at least theoretically) for so long. They point out, correctly, however, that the surviving agreement under clause 10 is effectively a unilateral contract. The respondents' continuing obligation depends upon the willingness of the Licensee to continue making annual payments. Therefore, the appellants submit, the obligation will come to an end when those payments are no longer made, giving the Licensee an option as to when the respondents' obligation will cease.
12. The respondents on the other hand submit that this "grammatical" or "semantic" construction gives rise to such an uncertain and "uncommercial" result that it cannot be correct. Therefore, they say, some shorter period must be looked for within the confines of the Agreement including the model End-User Agreements attached to it, namely such period as constitutes a "reasonable" time. In the circumstances they are content to rely upon the judge's interpretation (which was not advanced before him by either party) as corresponding with what should be regarded as a reasonable time in the present context. Their alternative submission is that the words "in perpetuity" should be rejected as uncertain, leading to the same conclusion as the cross-appeal : the section 10 obligation does not survive termination under clause 3.
13. The judge held that the natural (para.55) or literal (para.56) meaning of "in perpetuity", which he paraphrased as "for ever", should be rejected because it "flouts business commonsense" (para.55). He held that this did not mean that the words should be rejected, though he accepted that the Court should not provide a meaning which was not what the parties intended (para.56). He rejected GEIS's alternative construction that the words mean "for so long as the annual payments made by end-users continue" (paras. 57-60) and also the respondents' "reasonable time" suggestion (para,. 62).
14. The judge then gave careful consideration to the terms of the Agreement and End-User Agreements and to the business background as it appears from their terms. Under these terms, GEIS customers are contractually entitled to receive support and maintenance services, which on the evidence are provided partly by GEIS and partly by Atlas/Harbinger (the latter retaining the source codes, possession of which is essential for certain of the services provided). The contractual obligations owed by GEIS to its customers can be terminated by GEIS by notice to the customers after a certain period of time. The upshot is that GEIS is contractually entitled to terminate its current support and maintenance contracts with its customers within an overall period no longer than 2 years from 31 December 1999 (para.75). The judge held that, by implication from these provisions, the obligation of Atlas/Harbinger under clause 10 of the Agreement continued only until the expiry of the minimum period of notice required to be given under the extant End User Agreements and GEIS's obligations towards its customers were terminated accordingly.
15. Mr Wilson Q.C.'s submissions in support of the appeal pointed out that GEIS for good commercial reasons would not be likely to give such notices at the first moment they were free to do so. Nonetheless, the further provision of support and maintenance to their customers would require the continued involvement of Atlas/Harbinger, and on the judge's construction GEIS would be compelled to exercise their strict contractual rights contrary to their own commercial interests as well as the end-users'. These factors would of course be relevant in deciding whether the period identified by the judge should be regarded as a reasonable time.
16. I would approach the issue of construction in this way. The words "in perpetuity" in clause 10 make it clear that the support and maintenance obligation extends beyond termination of the Agreement under clause 3. Equally clearly, they do not impose any time limit on the existence of that obligation. "In perpetuity" is inconsistent with a time limit, and the words mean, in my judgment, that the obligation is to continue "without limit of time".
17. This does not mean literally "for ever" or "until the crack of doom". The contract itself - meaning the unilateral contract under which the obligation to provide support and maintenance arises - will not live forever. The time will come when the technology is superseded and the software is outdated. As a result, customers will require a change in the software (and no doubt in the hardware) which they use and they will no longer make the annual payments in return for which the services are provided. No one can predict definitely when this will occur. But until it does, the contract and the obligation both survive.
18. "In perpetuity" in my judgment emphasises this negative aspect. There is nothing in the clause 10 contract which imposes a time limit, and the obligation continues as long as the contract survives. Perhaps because the appellants have sought to give the words a positive meaning, the judge was able to reject their construction as uncommercial, and both he and the respondents tried to seek out some other positive meaning. Hence the respondents' alternative suggestion of a reasonable time and the judge's contractual timetable which he devised in order to place a time-limit on the operation of the clause ; but the words themselves provide expressly that there is no time-limit. Both of these attempts founder, in my judgment, on the plain fact that the express words "in perpetuity" are inconsistent with any time-limit on the operation of the clause.
19. Thus in my view clause 10 has the effect contended for by the appellants in their alternative submission. The respondents' obligation continues until the appellants and their customers no longer require and are willing to pay for the support and maintenance services. Mr Barnes submits that this is a wholly uncommercial reading of the clause, because the number of customers requiring the services may dwindle even to one, yet the respondents will be obliged to maintain the service facility even for the one. I can see that this might become uneconomical for the respondents, but it is not the whole picture and this factor alone does not make the interpretation uncommercial. As any user of electronic equipment knows, an undertaking to provide after-sales service for an extended period can be a strong inducement to buy, and the commercial value to Atlas/Harbinger of promising support for an indefinite period as a standard term of their sales package must have been very great. In those circumstances they are not released from their undertaking merely because it may become uneconomical for them to perform it. Moreover the risk must have been apparent when the Agreement was made. In any event, I wonder how likely it is, given the nature of the goods in question, that there will be in fact a continuing long-term demand for support and maintenance of the software package, which is now out of production and must if it is not already, become obsolescent.
20. The question whether the clause 10 contract is terminable on reasonable notice is a separate issue. Reference was made to the judgment in Staffordshire Health Authority v. Staffordshire Waterworks Co. [1978] 1 W.L.R. 1387. There, the obligation was to supply water "at all times hereafter" under an agreement dated 30 July 1929 at a price which by 1971 had become only 1/20th of the current water rate. The Court of Appeal held that the agreement could be determined on reasonable notice. The words quoted were capable of meaning "at all times hereafter during the subsistence of this agreement" (per Goff L.J. at 1399F) and they did not "conclusively and inevitably declare perpetuity" (1400D). They therefore did not have the effect that the agreement was intended to persist in perpetuity (per Cumming-Bruce L.J. at 1404H), as the trial judge had held that it did. The difference between that case and the present, in my judgment, is that the words "in perpetuity" are sufficient to exclude the implication, in the circumstances of this case, that the extended contract provided for by clause 10 is terminable by Atlas/Harbinger on reasonable notice.

Conclusion

21. For these reasons, I would allow the appeal and dismiss the cross-appeal, and answer the second of the judge's questions as he did and the third question in favour of the appellants. The respondents shall pay the appellants' costs of the appeal and cross-appeal.

LORD JUSTICE POTTER :

I agree.

MR JUSTICE ALLIOTT :

I also agree.

Order: Appeal allowed; cross-appeal dismissed. Respondents to pay the appellant's costs of the appeal and cross-appeal.