The recent case of Peter Vogel Instruments Pty Ltd v Fairlight.Au Pty Ltd [2016] FCAFC 172 (9 December 2016) highlighted the importance of a written agreement in determining the parties’ rights when a business relationship breaks down.

This case involved an agreement for Fairlight to develop software for Peter Vogel (PV) in return for four progress payments. Fairlight would supply the software to PV, as well as provide a licence to PV to use the trade mark FAIRLIGHT for the ‘CMI Products’. PV subsequently developed two apps and requested Fairlight’s consent to use the trade mark in connection with these apps as well. Fairlight did not reply. Unfortunately, relations between the parties broke down and each sued the other for breach of the agreement.

The role of a written agreement

Ideally, if a business relationship goes well, the written agreement governing the relationship will remain in a drawer and never see the light of day. But if the relationship breaks down, the parties turn to the agreement to determine their respective rights. A well-drafted agreement can minimise the difficulties of a business relationship break-down, and should clarify each of the parties’ roles and the respective consequences if they are not fulfilled.

Business-like interpretation

In this case, the task of the Court was to interpret the agreement to determine the parties’ rights. In doing so, the Court was required to take a business-like approach and look at the purpose of the agreement, the language used and the surrounding circumstances, as well as avoiding any interpretation that would be a commercial nonsense.

Risks of termination

Fairlight claimed that it had validly terminated the agreement because of a clause which allowed Fairlight to withdraw the trade mark licence if PV’s use was damaging the brand’s reputation. However, this argument failed because the Court held that the agreement could continue to operate even though Fairlight had terminated the licence.

Fairlight believed it had validly terminated the agreement, therefore when Fairlight refused to supply, it actually repudiated the agreement and was liable to PV for any damages that this may have caused.

Terminating a commercial agreement is very serious. It is easy to make a mistake when sending a termination letter and wrongful termination can, as in this case, give rise to breach and repudiation of the agreement by the party who is seeking to terminate.

Going outside the scope of the agreement

Another risky form of conduct is to go outside the scope of what is expressly permitted by the agreement. One of Fairlight’s complaints against PV was that it had used the FAIRLIGHT trade mark on two apps which were not included in the licence. The Court upheld this argument.

PV did seek permission to extend the licence to the apps, but Fairlight failed to respond. It is generally unwise to assume that failure on the other party’s part to respond to correspondence means consent. If the issue is important enough, it is advisable to seek legal advice as to the best course of action.

Agreements to agree

PV succeeded in its claim of copyright infringement against Fairlight. Clause 20 of the agreement provided that the software would transfer to PV upon receipt of final payment by PV. However, a second sentence said:

‘The exact definition of IP to be transferred will be defined in a separate document.’

There is an immediate problem with this sentence. It appears to leave something – the ‘exact definition of IP’, to be determined later. This is what lawyers call an ‘agreement to agree’. Agreements to agree are generally unenforceable because the parties have left something undecided and without a means to decide it. In this case, the parties never created a separate document, so the question remained – who owned the IP? – PV or Fairlight?

The purpose of clause 20 was clear. Once PV had paid for the software development, ownership of the copyright in the software should automatically transfer from Fairlight to PV. This is a common clause in agreements with creators of IP and is intended to secure payment for the IP. However, the inclusion of this second sentence raised a doubt as to whether clause 20 was effective at all. Fortunately for PV, the Court considered that the second sentence merely referred to excluding third party and generic software from the IP assignment and this was a ‘mechanical step’ which did not prevent the completion of the assignment of IP.

Nonetheless, avoiding gaps in agreements is the best way for the agreement to operate as the parties anticipate.

Summary

Both parties had some success in this case. PV established that Fairlight had wrongfully repudiated the agreement, but it was found to have infringed Fairlight’s trade mark by using the FAIRLIGHT mark on the apps. Fairlight was found to have infringed PV’s copyright by including the assigned software in products that it supplied to other customers.

Having to go to court to sort this out is unfortunate. It may not be possible to prevent a business relationship from breaking down, but a clear written agreement may minimise the fall-out.