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All clear: Taking the legal turmoil out of tech

21/01/2019

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United Kingdom

At a time of heightened business risk and potentially crippling uncertainty for UK companies, Andrew Dodd, partner and head of technology disputes at Fieldfisher, looks at how recent legal...

Against a backdrop of intensifying commercial competition and increasingly litigious business strategies, uncertainty and risk are never far from the surface of most corporate decisions.

The good news for technology companies is that courts have piloted several recent legal developments to enhance transparency on key issues, such as under-licensing, liquidated damages clauses and oral variations to contracts.

These changes give technology companies an opportunity to reduce their risk profiles by devising and implementing strategies that will underpin their future security and success.

This briefing explains the significance of these decisions and what technology companies can do to take advantage of developments in the way courts approach certain cases.

  • Software under-licensing claims can be managed and settled

Many companies are concerned about the heightened risk of under-licensing (or indirect licensing) claims in the wake of a recent case involving software solutions provider SAP (UK) Ltd and beverage giant, Diageo.

SAP v Diageo led, in the first instance, to SAP being awarded damages of £54 million against Diageo for retrospective license and maintenance fees, following Diageo's use of SAP's solutions. SAP and Diageo subsequently settled for an undisclosed sum.

The case has drawn attention to under-licensing issues, but is likely to be just the tip of the iceberg. Many, perhaps most, businesses will experience under-licensing claims.

Diageo fell foul of a seemingly minor license point concerning indirect usage of SAP's software via cloud service provider, Salesforce – illustrating just one of the many licensing pitfalls technology lawyers have seen and dealt with.

Despite the complexity of enterprise licensing software, there are clear steps and practices which companies can implement to avoid under-licensing claims and/or dispose of them.

These include regular software auditing and a critical scrutiny of so called 'wrap-up renewal' deals proposed by many software solutions providers at the time of renewal.

Companies that fail to adopt these steps risk sleep-walking into significant financial and operational exposure.

  • Compensation or liquidated damages clauses claims can now be drafted in a way which avoids them being struck down as penalties

In the past, a poorly drafted liquidated damages clause risked being struck down as an unenforceable penalty.

That risk undermined effective corporate planning: a contractual weapon that was relied upon and failed was often worse than having no weapon at all.

Thankfully, recent court decisions have shed light on this murky area. This kind of clause can now unashamedly be designed to deter a breach of contract. It just has to avoid being seen to punish the party in breach and must also be commercially justifiable.

A well-drafted clause can now side-swerve the 'penalty or not?' debate altogether, if it is expressed as a benign contractual price adjustment, rather than something that can be triggered on a contractual breach.  

In short, lawyers now have scope to draft liquidated damages regimes for their clients which are both wide-reaching and resilient.

  • The spectre of a legal claim alleging bad faith has receded

A 2013 judgment https://www.bailii.org/ew/cases/EWHC/QB/2013/111.html establishing that a duty of good faith might, in certain circumstances, be implied into English law contracts caused polite pandemonium in legal circles. If that duty had been adopted and developed by subsequent cases, a centuries-old cornerstone of English law would have been overturned.

Fortunately, the opposite has happened. Various judges have since sought to marginalise the 2013 decision. They have made clear that the concept of good faith should not be seen as a "general organising principle".

A party must (of course) act honestly. In some narrow circumstances, it must also act rationally, or at least be seen to do so. But it need not subordinate its interests to those of the other party.

Furthermore, an express contractual provision excluding any implied duty of good faith will now strangle that duty altogether.

  • Companies no longer have to worry about unintended oral variations to contracts

A recent court decision raised the alarming prospect of carefully negotiated contracts being varied – sometimes unintentionally – by subsequent oral conversations between the parties' operational staff.

This could happen irrespective of the original contract stating clearly that it was not to be varied by subsequent oral conversation. It predictably prompted a rush of disputes about purported contractual variations.

This particular genie has now been put back in the bottle.

A judge recently ruled https://www.bailii.org/uk/cases/UKSC/2018/24.html that a conversation is not ordinarily sufficient to vary a contract which explicitly prohibits oral variations. In such circumstances, agreement in writing is required.

A well-drafted 'no oral variation' clause will, absent clear conduct to the contrary by the party seeking to rely on it, be effective.

This has caused considerable relief: companies have regained control over their contractual arrangements and operational teams can now engage more freely with their counterparts.

For more information on how Fieldfisher can help companies in the technology sector obtain greater certainty on key business decisions, please contact Andrew Dodd (andrew.dodd@fieldfisher.com).

 

 

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