The UK High Court considered the meaning of ‘perpetual’ in the context of a software licence in the case of BMS Computer Solutions Limited v AB Agri Limited [2010] EWHC 464 (Ch) finding that the perpetual software licence in question was terminated when AB Agri Limited (AB Agri) terminated the software support agreement.

How does this affect you?

It is important that parties clearly identify whether a perpetual licence is intended to survive the termination or expiration of the agreement that contains the licence. This can be done in the licence clause itself or alternatively in the termination or survival clauses of the agreement.

The decision

The UK High Court stated that the word ‘perpetual’ in the context of a software licence agreement had different shades of meanings, namely ‘never-ending’ (where the licence is incapable of being brought to an end) or ‘operating without limit of time’ (where the licence is granted for an indefinite duration, but subject to any contractual provisions governing termination of the licence).

On the facts of the case and principles of contractual construction, the UK High Court held that the latter meaning was applicable and that the software licence terminated when AB Agri terminated the software support agreement.

Background

The parties entered into a software licence agreement and a related support agreement on
4 November 1994. The licence agreement provided for termination after ten years or upon termination of the support agreement. The licence agreement was subsequently amended by a variation agreement extending the duration of the licence to a perpetual licence. Several years later, AB Agri terminated the support agreement, however maintained that the licence continued due to its perpetual nature.

BMS Computer Solutions Limited (BMS) disagreed and argued that the licence and support agreements were linked and should be read in conjunction with one another and consequently, when AB Agri terminated the support agreement it also terminated the software licence. AB Agri argued that the termination provision in the original licence was incompatible with the term in the variation agreement and consequently the perpetual licence continued.

UK High Court

The UK High Court based its decision on the basis of general contractual construction principles and found in favour of BMS. On the basis of the latter meaning of perpetual, namely ‘operating without limit of time,’ the UK High Courts interpretation was that there was no incompatibility between the termination provision in the original licence and the perpetual term of the licence in the variation agreement. This decision was made on the basis that:

• the variation agreement plainly did not intend to wholly displace the licence agreement and also because the use of the words ‘the licence will be extended to be’ rather than ‘will be replaced by’ indicates it is the same licence which continues to have effect
  
  
• the variation agreement did not refer to the termination provisions in the licence agreement and the support agreement indicated that those terms were intended to continue in force
  
  
• there was a clear link between the continuation of the support agreement and the practical effect of the licence agreement. The variation agreement contemplated that the termination provisions of the support agreement would continue to operate which implied that the termination provision in the licence agreement would also continue to operate, and
  
  
• there was a need for the termination provisions to continue to operate from a commercial point of view and furthermore there would have had to be clear and explicit language to indicate any contrary intention and there was none in the variation agreement.

Where to from here?

The natural meaning of the word ‘perpetual’ can be different to its meaning in the context of an ongoing commercial relationship. Contract terms will be interpreted in light of the intention of the parties and therefore it is important that parties clearly and expressly identify what they mean by the word ‘perpetual’ and in particular whether or not the licence is to survive the termination or expiration of their agreement.

For further assistance or enquiries please contact:

Malcolm McBratney on 07 3233 8878
David Downie on 07 3233 8842
Emma Weedon on 07 3233 8911
James Cameron on 07 3233 8819.