Artificial Solutions Germany GmbH v Creative Virtual Ltd & Anor

A copyright licence may authorise reproduction where the agreement, read in context, permits services requiring copies or installation of the software. A party interpreting a continuing contract under German law must consider shared intention, objective meaning, context and subsequent conduct. A creditor who denies that it is bound by the contract and refuses performance under that contract may be unable to rely on the debtor’s resulting non-performance as a termination ground. The tu quoque principle applies where there is an intrinsic connection between the creditor’s breach or denial and the debtor’s non-performance. A copyright owner who threatens infringement proceedings against a putative licensee is not performing the licence for the purposes of the defence of unperformed contract.

The claimant acquired copyright in software distributed in the United Kingdom by the defendants under a distribution agreement with the original copyright owner. The claimant contended that the distribution agreement had not transferred to it under an asset purchase agreement, but the parties agreed that transfer should be assumed for these proceedings.

The claimant alternatively terminated the distribution agreement for non-payment of two monthly fees. The defendants accepted the non-payment but argued that termination was invalid because of creditor delay, the tu quoque principle and the defence of unperformed contract. The court also had to interpret the scope of the distribution licence, territorial restrictions and exclusivity.

1. Interpretation. The distribution agreement was interpreted under German law by seeking the parties’ shared intention, normally through the objective meaning of the agreement read in its context and circumstances. Where the parties shared a different subjective understanding, that understanding prevailed. Subsequent conduct was admissible evidence of that understanding (paras [97]-[100]).
2. Scope of licence. The agreement licensed reproduction of the software, not merely resale of copies supplied by the manufacturer. The services expressly contemplated hosting, setting up, operating, maintaining and integrating the software. In context, the defendants were also licensed to use the licence code generator (paras [101]-[108]).
3. Territory and exclusivity. The territorial restriction prohibited active, but not passive, sales outside the territory. The defendants were permitted to sell actively in the United States by the parties’ shared understanding and subsequent written consent. Their exclusivity extended to the manufacturer’s own sales and services in the territory, but not to pre-contractual technical discussions with prospective customers (paras [109]-[118]).
4. Creditor delay. Under §§293-297 BGB, a refusal to accept contractual performance, followed by a qualifying offer to perform, can prevent reliance on the debtor’s non-performance. The claimant’s unequivocal denial of the agreement and insistence that it would accept payment only under a proposed temporary agreement amounted to refusal of the contractual performance. The defendants made qualifying offers to pay, and the exceptional case where no verbal offer is required also applied because the claimant had refused payment under the agreement in any event (paras [130]-[159]).
5. Tu quoque. The relevant inquiry was whether there was an intrinsic connection between the creditor’s contractual breach or denial and the debtor’s non-performance. The claimant’s denial of the agreement, refusal to accept payment under it and threat of infringement proceedings caused the defendants’ non-payment. The defence therefore applied. A separate breach of exclusivity did not have the necessary connection (paras [160]-[189]).
6. Unperformed contract. A copyright owner who denies a licence, demands that the licensee stop using the software and threatens infringement proceedings is acting contrary to, rather than performing, the licence. The defendants therefore also succeeded under §320 BGB (paras [190]-[194]).
7. Disposition. The purported termination on 17 May 2007 was invalid. The Distribution Agreement remained in force.