Many software licence agreements provide that a client can, as well as having the right to use the software, make a copy of the software for archival or back up purposes. But what is “archival” or “back up”? Is it the same as providing for disaster recovery? At what point would the client be obliged to pay additional fees?

A recent decision by the Full Federal Court in the Racing & Wagering Western Australia case addressed this very issue.

In that case, the totalisator business of the WA Government licensed a software program from an IT company. The program comprised of database software and application development software for use on the racing authority’s mainframe system.

Under the licence agreement, the licensee was only permitted to use a single copy of the software on a single machine at a single designated location solely for the conduct for its internal business and it was not permitted to let any third party operate the software as part of any outsourcing, facilities management or application service provider arrangement or in other similar scenarios, with one exception. This exception gave the licensee the right to copy the software as part of the system “for archival or emergency restart purposes”.

Historically, the licensee’s practice was to keep backup copies of its IT system for disaster recovery by keeping regularly updated tapes at another site away from the main installation site. In 2004, the licensee changed its disaster recovery (DR) arrangements and outsourced the provision of a disaster recovery site. Under the outsourcing arrangement, a third party maintained a mirror image of the “live” system which was continuously updated remotely. This, in effect, created an up to date version of the system ready to be activated immediately in the event of an emergency or disaster.

The licensor claimed that this arrangement required the licensee to pay additional licence fees. The licensee responded by seeking a declaration from the courts that it had not breached its licence agreement and that the licensor was not entitled to an additional licence fee.

Ultimately, the court held that the licensee was entitled to do what it did – namely, make a copy of the software and give it to the third party service provider to put it on a different machine at a different location for the purpose of conducting DR testing and in the event of an actual emergency. This was held not to be a breach of the licence agreement but was within the scope of the terms of the licence which permitted copying the software for “emergency restart purposes”.

In handing down its decision, the court examined two key issues:

  1. the (well established) legal principles for interpreting agreements and contracts and how they applied to the licence agreement
  2. the provisions of the Copyright Act which permit backing up of computer software.

Scope of the terms of the licence agreement

The court recognised that it should give a “business like” interpretation to the express terms of the software licence. The court noted that, in the event of an ambiguity or where a term is capable of more than one meaning, it will prefer the construction or alternative which would avoid an outcome that may appear to be capricious, unreasonable, inconvenient or unjust.

The court considered the finding of the primary judge that the software licence permitted the installation of a DR copy on to the mainframe at the DR site in order to conduct DR testing. The licensor argued that the exception entitling the licensee to make a copy of the software for “emergency restart purposes” did not include a right to install and test a copy of the software in order to conduct disaster recovery testing. Rather, it contended that the terms of the licence agreement only permitted a licensee to make a copy of the computer software “off-line” that could be reinstalled to restart the computer systems in the case of an emergency. According to the licensor, the usual practice is for licensees to pay an extra licence fee to have a “live” copy of software installed on a disaster recovery system.

The court considered that the phrase “emergency restart purposes” had a range of possible meanings and in its view, the construction contended for by the licensor resulted in a meaning that would be unreasonable or inconvenient.

The court came to this conclusion by relying on the evidence of experts called by the licensee who expressed the view that the whole purpose of setting up the disaster recovery site was to allow for seamless continuance of IT operations in the event of an emergency affecting the mainframe.

It would seem in this case that the court was heavily influenced by what one might describe as more “subjective” matters relating to the licensee’s intention in acquiring computer software. It is a reminder for both those providing and acquiring computer software to ensure that the terms of the relevant software licence agreement clearly expresses the scope of the licence granted.

Backing up computer software under the Copyright Act

The court also noted that the Copyright Act 1968 (Cth) provided that certain acts would not constitute an infringement of copyright in computer programs. This includes relevantly sections 47C(1) and 47C(2) which permit respectively copies of computer software to be made and stored by licensees of computer software “for use in lieu of the original copy if the original copy is lost, destroyed or rendered unusable” or as part of “normal back-up copying of data for security purposes”.

Ultimately, the court did not form a view on these provisions of the Copyright Act because it decided that the licensee’s actions were authorised by its software licence agreement. However, it is worthy of note that the court left open the view that the reference to “security purposes” in section 47C(2) should be read as referring to security of the business (that is, business continuity) rather than to security flaws in the software (the latter being considered by the court to be more relevantly within the scope of section 47F). This suggests that the court may have found, consistent with the view expressed by the primary judge in the case, that section 47C(2) permitted the type of disaster recovery arrangements put in place in this case. However, this will need to be determined by the courts in another case.

Where to from here?

This case sounds a warning bell for both providers and acquirers of computer software and other IT services when negotiating and drafting software agreements. In particular, this case illustrates some of the legal difficulties that may arise when the scope of relevant provisions of IT agreements are unclear or potentially ambiguous. The case also highlights particular legal complexities around the law in Australia relating to computer software and rights of licensees to make backup or archival copies of the software.