The High Court case of Sprint Electric Ltd v Buyer's Dream Ltd is a timely reminder that where an individual provides services through a service company, or is otherwise a contractor, the contractual arrangements can be challenged. Such challenges can extend beyond the question of employment status so as to bring the ownership of IP into question.
A former director (P) of Sprint Electric Ltd (SEL) set up a service company, Buyer’s Dream Ltd (B), in order to work for SEL. This arrangement was established for tax purposes but despite this P was effectively acting as the sole programmer for SEL. Under the contract, B retained the source code and supplied the object code to SEL. The relationship between P and SEL broke down. P was removed as a director and a dispute followed about who owned the IP.
The court, of their own motion, looked at the substance of the relationship between the two parties and cut through the contractual terms to decide that P was an employee of SEL. The court highlighted the following as making the circumstances akin to an employee/employer relationship:
- P received a wage;
- P performed services for SEL;
- P did not provide his own equipment; and
- P was considered an integral part of the company.
The existence of an employment relationship is therefore not determinate on the formal structures in place. This consequentially meant that SEL was the actual owner of all IP rights under the Copyright, Designs and Patents Act 1988.
For life sciences companies using such service providers, this judgment is favourable. Yet, the facts of the case are precise and a sweeping precedent cannot be guaranteed for all service company relationships. The court was influenced by the fact that ‘the labels chosen by the parties to apply to their relationship were untrue and had been applied as a tax avoidance device’. It may therefore be no more than a useful reminder that the courts are willing to look beyond contractual wording or 'labels' applied to a particular contract to find the true legal position between parties.
In the life sciences industry, these agreements are commonplace. Notwithstanding this judgement, companies should still be wary of the service provider relationship because if the structure is legitimate, the IP rights will rest with the individuals of the service provider not the company.