Implied terms in software development contracts – the submarine in the code

The case of Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive^[1](Pan), whilst not new, presents an interesting yet not unusual fact matrix which commonly occurs in relation to software development. There was a number of issues for the Court to resolve, primarily in regard to the ownership of the copyright in the code in the absence of a signed contract (IP Issue), and whether a term could be implied into an hourly rate contract (Implied Term) that had the effect of limiting the Respondents hourly rate claim where it was alleged that they had spent more time providing the services than was absolutely necessary.

Background

The relationship between Peter Pan’s Backpacker Adventure Travel Pty Ltd (Applicant) and Eye Jam Interactive Pty Ltd ACN 087 024 208 (Respondent) began in 2003 when the parties agreed that the Respondent would design, develop and integrate a software system for the Respondents business called PPAT. Honeylamb Pty Ltd ACN 104 880 050 (Second Applicant) was a company related to the Applicant and used to hold certain intellectual property. The program which was the subject of the dispute became known as the Travel Product Portal (TPP). It was common ground on the pleadings that no formal contract was signed, but the Respondent was to be paid $95per hour plus GST.

The Applicants paid a total of $1,587,398.97^[2] over two (2) years from March 2008, with the last few invoices remaining unpaid. It was not disputed that time was spent on the Contract, however the Applicants argued that:

• that the amount of time spent was excessive; and
• that the work should have been done in half the time and therefore cost half as much.

It was alleged that there was no further obligation to pay the outstanding invoices, and further that the Respondents were entitled to recover the amount by which had been overpaid.

IP Issue

The Applicants alleged that it was an express or in the alternative an implied term of the contract that the Respondent was obliged to assign the copyright in the code to the Applicants.   The existence of such a term was disputed by the Respondent. The matter proceeded to trial and each party led evidence relating to circumstances surrounding the development and execution of the Software Rights Deed signed on 24 July 2006. The deed reserved certain IP rights known as the EyeJam Rights and included a restraint of trade on the Respondent limiting its right to work with a competitor of the Applicant.

The open source code

The Applicant expressed concern about the ownership of the copyright in the code in circumstances where the underlining code was “open source”. The Respondents then proceeded to rewrite certain aspects of the system in .Net (New Software) for which there was no written contract. The conflicting evidence which was led by both parties asserted ownership in the IP in the New Software.

On 26 May 2008 a draft contract (Draft) was prepared by the Respondents Solicitor and put to the Applicants in relation to the Travel Product Portal (TPP) and relevantly attached a requirements document. Clause 2.1 of the Draft was a promise by the Respondents

“to develop the software and use reasonable efforts to do so in accordance with any applicable timeframes”^[3]

Notably clause 5.3 of the Draft contained a lump sum termination fee of $100,000 plus GST by way of early termination payment.

There was a clause dealing with the assignment of intellectual property, however such assignment was to be as consideration to supply and develop the software and the payment of fees for that work.

The Draft was never signed.

Was the Draft contractually binding?

The Respondent submitted that the Draft should be construed according the principles from Masters and Cameron^[4], stating that the intention of the parties “is not to make a concluded bargain at all unless and until they execute a form of contract”.^[5]  Despite this it was common grounds in the pleading that the parties did reach a concluded agreement for the development of the TPP.

McMurdo J then reviewed the evidence at 42 as “post contractual conduct can be relevant to the alleged term” for the intellectual property citing Winks v WH Heck & Sons Pty Ltd [1986] 1 Qd R 226 at 238 and the cases there cited by Thomas J. On the evidence, McMurdo J ruled that the weight of evidence that the contract was made between the Parties and therefore that the intellectual property in the TPP would belong to the Applicant.^[6]

It was accepted that clause 4.1 of the Draft provided ‘clear and reliable indication of what the parties agreed’.^[7] The result was the Applicants had established their case. A declaration as to ownership of the intellectual property and consequential orders was made to deliver up the source code.

The Implied Term

It was said by the Applicants that it was an express term of the TPP that the Applicant(s) pay the Respondent the hourly rate of $95 ex GST. The Applicants asserted that this was the correct approach where a term in a contract was to be implied into an agreement that did not exist as described by Deane J in Hawkins v Clayton (1988) 164 CLR 539.

McMurdo J stated that in this situation:

“A court should imply a term by reference to the imputed intention of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case.”^[8]

Citing (not unexpectedly) Breen v Williams^[9] and Associated Alloys^[10] as authorities.

Did the Court imply the term?

Because the parties had agreed the hourly rate, it was said that any assessment of what was a reasonable cost had to, in effect, be calculated by reference to the agreed hourly rate. It was said by McMurdo J at 68 that:

“any unreasonableness of the overall cost could come only from the other factor in the calculation of the price, which was the number of hours”.

Was the number of hours spent by the Respondent unreasonable?

The Applicants led evidence from an expert in software development who stated that it should have taken only 7,980 hours to develop the TPP or $833,910. The claimed overpayment was therefore $753,488 (before interest) which was sought as damages for breach of contract or as money recoverable on the basis of restitution.

The alternative argument was that a term be implied into the contract to avoid the entitlement to fees being “unconstrained”. Without such a term it would be possible for the Respondent to use inexperienced staff who would take much longer and therefore cost more. The alternative argument was that the Respondents had a duty of care to the Applicant(s) where the duty extended to include loss caused by charging an excessive number of hours on the project.

One of the difficulties in the context of either the Applicant’s implied term argument or the Respondents fiduciary duty argument was that:

“The invoices did not contain any description, or at least a detailed description, of the work performed but only a specification of a number of hours. It is difficult to see how the reasonableness of the hours claimed within an individual invoice could have been assessed by the applicants from the invoice itself”.^[11]

The term which McMurdo J incorporated into the contract was one which was necessary for the

“reasonable operation of this contract that the respondent be confined to recovering for work which was no more than was reasonably required to produce the agreed results”.^[12]

The question was therefore whether the Respondent charged for more hours than were reasonably required in the performance of the contract.

The expert evidence

Once the above term was implied into the contract, it came down to the evidence put to the Court by the Parties. The Applicants expert was Mr Acker, who had 28 years’ experience in software development. The Applicant’s expert evidence was not contradicted with little evidence in chief by the Respondent’s Officers.

Mr Acker’s evidence was that it should have taken 7,980 hours to build the TPP.  Further Mr Acker would appear to have calculated the amount of the overpayment of $833,910.

In the absence of expert evidence to the contrary, McMurdo J accepted the evidence of Mr Acker and found that the “reasonable cost” would still be in the order of $833,910. The Applicants proved that the total paid to the Respondent of $1,587,398 exceeded the amount of $833,910 which they were entitled.

Result

The end result was judgement for the First Applicant against the Respondent in the amount of $954,418.

Not surprisingly as at 12 April 2014, the Respondent (Eye Jam Interactive Pty Ltd ACN 087 024 208) is under external administration.

Takeaways

Pan provides a series of lessons for software developers and those organisations engaging them to build systems. These lessons can be summarised as:

• Just because you don’t sign an agreement doesn’t mean that it’s not contractually binding;
• To refute expert evidence you need another expert to do so;
• Good record keeping procedures are paramount to keep an evidence trail for later use (should the need arise);
• Software development requires rigid compliance with a methodology not only for the purposes of achieving the best result, but to attempt to avoid any argument that work completed was not required or was not required to the required standard;
• Where variations to scope are made by the client, both parties must acknowledge the variation;
• Hourly rate agreements are not a “free for all” entitling a developer simply to do and charge;
• All invoices should contain sufficient detail of the work for the client to ascertain at the time what was done and whether it was necessary (to the extent that it can be).

Links and further references

Legislation

Competition and Consumer Act 2010 (Cth)

Cases

Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive Pty Ltd [2012] QSC 227

Masters v Cameron (1954) CLR 353

Breen v Williams (1996) 186 CLR 71

Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588

Further information

If you need advice on software development contracts either in order to draft them, negotiate the terms, or because you are engaged in a dispute, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive Pty Ltd [2012] QSC 227.

[2] Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive Pty Ltd [2012] QSC 227 at 4.

[3] Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive Pty Ltd [2012] QSC 227 at 32.

[4] Masters v Cameron (1954) CLR 353 at 360.

[5] Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive Pty Ltd [2012] QSC 227 at 39.

[6] Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive Pty Ltd [2012] QSC 227 at 19.

[7] Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive Pty Ltd [2012] QSC 227 at 60.

[8] Liverpool City Council v Irwin (1988) 164 CLR 539 at 573.

[9] Breen v Williams (1996) 186 CLR 71.

[10] Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588.

[11] Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive Pty Ltd [2012] QSC 227 at 73.

[12] Peter Peter Pan’s Backpacker Adventure Travel Pty Ltd and Anor v Eye Jam Interactive Pty Ltd [2012] QSC 227 at 76.

---

Related insights about software development law