Software development contracts: who gets the source code if things go wrong?

Insight

28.04.2022

One of the issues that commonly arises when software development contracts go wrong is whether the customer can quickly get their hands on the (unfinished) software source code from the supplier in order to complete the job themselves (or bring in another developer). If the supplier refuses to provide this, then one option for the customer is to apply to the court for an interim mandatory injunction for delivery up of the source code.

However, as demonstrated in a recent case, a party needs to get over a high threshold to successfully obtain an urgent interim injunction. In this case, the application for an injunction failed. The case serves as a useful reminder to customers who are contracting with developers for software to consider carefully what terms they want to put in place for delivery up of the source code in case the relationship with the developer turns sour.

Background

Transparently Ltd (TL), a provider of technology solutions to the legal sector, engaged Growth Capital Ventures Ltd (GCV) – a software developer – to develop an IT platform to facilitate dispute resolution in the context of separation and divorce proceedings.

The parties entered into a Software Development Agreement (SDA) which provided that the contract price for GCV’s development of the IT platform would be a cash sum (£200,030) plus shares in TL (with an equity value of £139,570). The parties entered into a separate Conditional Equity Purchase Agreement (CEPA) which set out the mechanism for issuing TL’s shares to GCV. In summary, the SDA and CEPA provided that:

The equity element of the contract price would be triggered on the SDA’s termination.
Intellectual property (IP) rights in the software would only vest in TL following the later of either acceptance of the product by TL or payment in full for the software (including the equity consideration).
Following termination, GCV would deliver the software source code and any work in progress (and assign IP rights in the same) once there had been full payment of any unpaid invoices and the TL shares had been issued to GCV.

GCV started developing the software in 2019, but a dispute arose with TL alleging that GCV’s product was incomplete, late and defective. This led to TL sending GCV a termination notice for breach of contract. TL then demanded damages as well as delivery up of the unfinished software source code from GCV. In response, GCV said that TL had failed to issue the shares as required by the SDA and CEPA. GCV confirmed that it would be willing to deliver up the software source code as and when the shares in TL were issued.

TL then issued an application for an interim mandatory injunction seeking (among other things) delivery up of the software source code.

What did the court decide?

The court applied the general test for an interim injunction (the American Cyanamid test): (i) was there a serious issue to be tried; (ii) would damages be an adequate remedy for TL at trial if an interim injunction was not granted; and (iii) where did the balance of convenience lie? As TL was seeking a mandatory interim injunction (ie demanding the GCV take a positive step in transferring over the software source code, instead of maintaining the status quo prior to a full trial), to be successful it had to reach a higher bar in showing a real risk of injustice if the injunction was not granted.

TL’s application failed. The court wasn’t prepared effectively to re-write the contract. The SDA and CEPA contained a “complete code in the event of termination” – and TL had failed to comply with its clear contractual obligations regarding payment of unpaid invoices and issue of shares to GCV. Under the contract, GCV was not obliged to hand over the software source code until it had been issued the shares in TL. As TL did not have a contractual right to the software prior to allotment and issue of the shares to GCV, there was no serious issue to be tried.

In addition, the court was not convinced on TL’s evidence that damages would not be an adequate remedy. TL had said that without the software source code its business may go under, but the evidence for this argument was weak.

Takeaway points

When entering into a contract to develop software, parties should consider carefully:

Who owns the rights in the software as it is being developed?
What happens if the contract is terminated early, and the software has not been fully developed? Should the customer then be able to develop this partially finished software on its own (or with a new software developer)?
Should there be any conditions for delivery up of the software? (the contractual requirement for TL to pay outstanding invoices and issue shares to GCV was fatal to its case)

Consideration of questions such as these prior to entering into a software development contract can ensure parties understand what their rights and obligations will be later down the line if the contract goes wrong, and could help avoid the need for tricky interim injunction applications for delivery up of unfinished software.

The full case report is here: Transparently Ltd v Growth Capital Capital Ventures Ltd

If you require further information about anything covered in this briefing, please contact Ian De Freitas, Lucy Penn, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.