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The copyright and wrongs of tax evasion and implied contractual terms

Christopher Cobb

Addressing the copyright in computer software, the High Court saw past the tax advantageous labels applied to a contractual relationship to decide ownership by virtue of an employee/employer relationship or, alternatively, an implied assignment (Sprint Electric v Buyer’s Dream).

This post focuses on the first of several contractual agreements in dispute between the parties.

Sprint entered into an agreement in 1997 with Buyer’s Dream for programming services of a Dr Potamianos. Buyer’s Dream was a service company for Dr Potamianos used to limit the taxes paid by both Dr Potamianos and Sprint. Relations between the parties broke down and Buyer’s Dream and Dr Potamianos argued that they owned the copyright in the software and that the agreement allowed the only object code (and not the source code) to be exploited by Sprint.

Neither of the parties were arguing about the description applied to the relationship between each other (it being to both their tax advantage). They were only concerned about the ownership of the software. However, the judge held that there was a clear public interest in everyone paying whatever taxes are properly due and where the labels chosen by the parties do not reflect the reality of the relationship, for the purpose of avoiding taxes, the court should consider the issue of its own motion.

The judge reviewed the terms of the contract and held that the true relationship between Sprint and Dr Potamianos was that of employer and employee. Ownership of the software authored by Dr Potamianos in the period covered by the contract, both object and source code, therefore vested in the employer, Sprint, under Section 11(2) of the Copyright, Designs and Patents Act 1988.

Alternatively, the judge held that a term could be implied into the contract.  A contract under which Sprint commissioned and paid for the creation of software but limited its rights only to the exploitation of the object code alone lacked commercial and practical coherence. It ignored the requirement to access the source code to fix bugs or to develop the product further.

A minimalist approach is generally taken when considering an implied term granting rights in a commissioned copyright work (see Robin Ray v Classic FM); often being limited to the grant of a licence in favour of the commissioner. However, the judge considered that the present circumstances fell into the special category where there was a necessity for an assignment of the copyright in order to give business efficacy to the agreement.

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

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