When will the law protect profits generated from an app, developed by friends?

Last month, the Commercial Court of the Court of Session in Edinburgh issued its judgment on a dispute centred around the dating apps Wapo and Wapa, developed by three former friends. It was alleged that a legal partnership was created, allowing for the sharing of profits between the group.

The case is a salutary reminder that when developing commercial enterprises, in the absence of a properly documented legal agreement, perceptions of what the relationship is may not be shared between all parties, and ultimately, the Court may be asked to construe the legal position from the surrounding facts and circumstances.

The case is a reminder that developers and entrepreneurs in the fast-moving tech scene ought always to have in the forefront of their minds how best to adequately document their legal relationships with collaborators.

What happened in this case?

In the matter of (1) Worbey & (2) Farrell v (1) Campbell; (2) Wapo Y Wapa Limited; & (3) Trustee in Bankruptcy of Steven Elliot [2016] CSOH 148, Mr Worbey and Mr Farrell sought profits generated by two social network applications (apps) called Wapo and Wapa. The apps had originally been developed with Mr Elliott, their then friend, following discussions in a bar in Vienna. No formal partnership agreement was ever drawn up among the friends. Over a series of months, Mr Worbey and Mr Farrell made financial contributions to the development of the app, which were later returned by Mr Elliot. The Court required to determine whether there was a partnership between the friends at law.

The decision: no partnership

The Court found that there was no evidence Messrs Worbey and Farrell had assumed any obligations, beyond their periodic investments. Neither had been prepared to accept any trading losses during the period when the business was at an embryonic stage. There was also no relationship of agency or the sharing of capital between the friends.

Perhaps most crucially, there was no formal agreement on the sharing of profits, despite the investments which Messrs Worbey and Farrell made to the business. In short, the Court was faced with a lack of proof that a partnership existed. It found that there was no partnership in law and that instead, Mr Worbey and Farrell were merely investors, without a legally binding agreement on their ultimate commercial returns to call upon.

A cautionary tale: ensure that your commercial relationships are adequately documented

Scotland has a thriving tech scene and is becoming a growing hotbed for app development. Often, the best ideas for new apps and disruptive technology emerge from collaboration among friends. In this case, the discussion at the bar in Vienna was described as an “exciting” and “animated” experience, and from which, two successful apps have emerged. The success of the development of the two apps is, for the tech scene in Scotland, very much a good news story.

For collaborators however, the legal tale is one of caution, with the case being a salutary reminder that disagreements among friends can emerge over time, and one’s perception of the nature of a relationship may not be shared by the other counterparty. Investing at an early stage in the documenting of entrepreneurial activity is always a prudent move and gives an additional measure of certainty, should your project be troubled by disputes later down the line.