10 September 2001
Chris Coulter, IT partner, Ashurst Morris Crisp
A failure to focus on the technical details underpinning modern business relationships and the associated legal issues can lead to results at law which may surprise the commercial participants. Such surprises are not always of the pleasant variety. This clash between commercial hopes and the operation of law is highlighted when advances in technology enable businesses to enter into novel commercial arrangements. These arrangements are to improve efficiency, or to make fresh use of existing assets, but the mechanics of how the main commercial objectives are to be achieved are overlooked in the rush to do the deal.
A consistent market trend during the past few years has been an interest in the benefits of IT outsourcing, joint venturing (where one party brings a technological benefit to the venture) and the use of third-party services. This trend has been evident not just in times of economic optimism, but also in leaner periods. When investor enthusiasm for internet-related business was at a high, many businesses structured their online offerings around content and services that were provided and hosted by third parties. At the same time, extensive resources were ploughed into developing the application service provider (ASP) model for business software delivery.
In times of fiscal pessimism, businesses also tend to maintain, or even increase, spending on technology. In the short term it is often justified by the perceived savings brought about by increased automation, or in the long term by outsourced overheads. But notwithstanding compelling financial advantages in procuring technology and related services from third parties, difficulties sometimes arise when businesses, which have increased their dependency on third-party technology, wish to change business strategy or their business partners.
The legal pitfalls include the classic requirement to pay for new software licences on divestment of a business unit (where sub-licences are prohibited), or acquisition of shares (where change of control clauses trigger termination of licences). But the recent HFC Bank & ors British Gas Trading & ors case provides another perspective.
The case hinged upon interpretation of the word 'receivables'. In short, HFC and British Gas Trading formed a joint venture to market the Goldfish credit card, and in accordance with the terms of that joint venture, British Gas Trading subsequently terminated the arrangement. One of its options was to buy HFC's shares in the joint venture vehicle and to purchase the 'receivables'. British Gas Trading sought a declaration that the term 'receivables' meant not just the debt owed by the cardholders, but the whole card business as a going concern, including the customer database held by HFC, which was by then the card processor.
The court found that receivables meant the debt only. In reaching this decision, the court placed weight upon its finding that a necessary data migration from the systems of HFC to those of British Gas Trading or a third party chosen by British Gas Trading would take substantial time and would cause HFC to incur considerable cost. Mr Justice Lightman stated: "[If] the matter of the migration had been discussed, I would expect that... the parties would have prompted their solicitors to reflect that agreement in ... the [joint venture documentation]."
Equally, there appears to have been little contractual evidence to rebut HFC's ownership of intellectual property rights in the relevant databases. While the technical details as to how, with what and by whom the Goldfish card transactions were to be processed were evidently not the driving forces for the joint venture, the court's finding that the parties had not intended to address those mechanical details appears to have had significant consequences upon the value of British Gas Trading's rights.
This case shows that an increasing use of technology to deliver commercial objectives brings an equally significant need for businesses and their lawyers to address the mechanics of how those objectives will be met.