An Escrow Case at Last - Filmflex Movies Ltd v Piksel Ltd

In my early years at the Bar I did a lot of work for John Morris who was in-house legal advisor to the NCC (National Computing Centre). The NCC had been established in 1966 as an autonomous not-for-profit organization, to
  • be the "voice of the computer user", 
  • encourage the use of computers in the UK and 
  • offer education and training in computers.
John spotted an opportunity for his company. He saw a need for source code escrow and persuaded his employers to offer one of the first escrow services in the UK.

Escrow is an arrangement by which a software house or software maintenance contractor deposits the latest version of a computer program in human readable form known as "the source code" to a trusted third party such as the NCC ("the escrow agent") with instructions to release the source code to the customer should the software house or maintenance contractor be unable or unwilling to maintain the program because of insolvency or some other cause. The NCC's escrow business grew quickly and eventually became the main revenue earner of the NCC. In 1999 the escrow service was hived off to a separate company known as the NCC Group which floated successfully on the alternative investment market and later on the main market of the Stock Exchange.

The escrow agreements that the NCC Group enters are not very different from the ones that I saw over 30 years ago. There is a trilateral agreement between the software owner, its customer and the NCC ("the single user agreement") and a bilateral agreement between the software owner and the NCC where there is more than one user of the software ("the multi user agreement").  There have been very few cases on escrow in any common law jurisdiction. One of the first in this country is Filmflex Movies Ltd v Piksel Ltd[2015] EWHC 426 which came before Mrs Justice Rose on 24 Feb 2015. In that case Filmflex Movies Ltd ("FilmFlex") sued Piksel Lts ("Piksel"for delivery up of the source code to the software that Piksel had developed for FilmFllex pursuant to a master services agreement.

Clause 9.7 of the of that agreement provided as follows:
"[Piksel] shall ensure that (i) the Source Code for all [Piksel] Materials, Company Platform Materials, and Third Party Software (other than off the shelf software), and (ii) the Source Control Database, is placed in escrow with NCC Escrow International Limited (…) (the "Escrow Agent") on the Company's request and at the Company's cost within 60 days of the Commencement Date. The Company,[Piksel] and the Escrow Agent shall enter into a three-party source code escrow agreement in the agreed form (incorporating such amendments as the Escrow Agent may reasonably request) (the "Escrow Agreement") in respect of the [Piksel] Materials, Company Platform Materials and Third Party Software (other than off the shelf software) and the Source Control Database. The service of a Termination Notice shall be a release event for that Source Code or Source Control Database under the relevant Escrow Agreement."
Pursuant to that clause the parties entered a single user agreement with the NCC.

Clause 9.10 of the master services agreement provided a number of circumstances in which FilmFlex could require the release of the source code. They included:
  • termination of that agreement by either party or a material or persistent breach by Piksel
  • termination by the NCC of the escrow agreement
  • Piksel's insolvency, 
  • a change of control of Piksel, or
  • the appointment by FilmFlex of another party to provide the services that Piksel had agreed to supply.
Clause 6 of the escrow agreement however provided for the release only upon Piksel's insolvency or its inability or unwillingness to fulfil its obligations.

On 17 Nov 2014 FilmFlex appointed ADITI Technologies Private Limited to carry on the work that had been done by Piksel and asked for copies of the source codes. Piksel refused to deliver them on the ground that the master services agreement had been superseded by the single user escrow agreement and there was nothing in the escrow agreement that required the NCC to release the source code upon the appointment of a new service provider.

The judge found that FilmFkex was entitled to require Piksel to deliver up the source code notwithstanding the absence of a provision in the single user escrow agreement that corresponded to the last provision of clause 9.10 of the master services agreement.  In her ladyship's judgment at paragraph [20]:
"there is an implied, if not an express, provision in the Escrow Agreement whereby NCC can be required to release the Source Code and Source Control Database to FilmFlex if the Owner and the Licensee jointly instruct them to do so in circumstances other than those set out in clause 6. FilmFlex and Piksel can agree between themselves as to additional circumstances where that should happen and that agreement can be found outside the terms of the Escrow Agreement itself. Further, I consider that the final sentence of clause 9.7 and clause 9.10 of the MSA amount to just such an agreement. They set out the circumstances in which Piksel is obliged to bring about the release of the Source Code and the Source Control Database from the Escrow Account. It is not disputed that the event specified in clause 9.10.5 has occurred. I consider that the proper construction of the MSA is that where an Escrow Account is set up by Piksel with NCC in compliance with clause 9.7, Piksel is bound to consent to the release of the Source Code and Source Control Database where FilmFlex appoints a third party to provide any services for the Platform, the [Piksel] Materials or the Company Platform Materials."
Piksel had argued that the parties' intention must have changed between their signing the master agreement and the escrow agreement. The judge did not accept that the mere fact that the escrow agreement came after the master services agreement was signed meant that the escrow agreement's terms ousted the terms of the master services agreement. In her view there was no real inconsistency between the two agreements because clause 9.10 of the master  and clause 6 of the escrow agreement dealt with different things. Clause 9.10 is dealing with the obligations of FilmFlex and Piksel between themselves to bring about the release of the package from escrow whereas clause 6 of the escrow agreement is dealing with the circumstances where FilmFlex can demand release of the Package directly from NCC. The substitution of the much more limited release events in clause 6 of the escrow agreement for the more extensive trigger events in clause 9.10 would have been a substantial surrender by FilmFlex. That was particularly so in respect of clause 9.10.5 which reflected the freedom conferred on FilmFlex under other terms of the master services agreement to appoint another contractor in addition to or instead of Piksel. There was no reason why FilmFlex would retain the right to make such an appointment under the first agreement but give up the entitlement to release of the source code from escrow under clause 9.10.

Her ladyship also relied on the speech of Lord Bingham in "Starsin", Owners of cargo and Others v. "Starsin", Owners and/or demise charterers of  [2003] UKHL 12, 2003 AMC 913, [2003] 1 Lloyd's Rep 571, [2004] 1 AC 715, [2003] 1 CLC 921, [2004] AC 715, [2003] 2 WLR 711, [2003] 1 All ER (Comm) 625, [2003] 2 All ER 785, [2003] 1 LLR 571 (13 March 2003) that any inconsistency between standard and specifically negotiated contract terms the latter should prevail.

In addition to its rights under clause 9.10, FilmFlex relied on clause 9.11 of the master services agreement which provided:
"In addition to the trigger events set out in Clause 9.10, [Piksel] acknowledges and agrees that [FilmFlex] will have access to the Source Code (and [Piksel] shall reasonably co-operate in the provision of such access) throughout the term of this Agreement upon [FilmFlex's] request."
Piksel argued that this right allowed access only to the source code in escrow and not to the source code of everything that had been developed by Piksel. The judge rejected that argument as untenable as it would require the NCC which was a stranger to the master services agreement to access its servers at any time.

She also rejected Piksel's second argument that access to the source code meant only having a look at the source code. She adopted the claimant's argument that access to the source code was analogous to access to a swimming pool in an hotel. Such access implied use of the pool and not just walking to its edge. It was implicit that FilmFkex must have a copy of the source code so that it could develop its software further. Piksel had argued that was tantamount to requiring it to surrender a valuable asset to a potential competitor. The judge replied that Piksel still owned the copyright and other intellectual property rights in the software that it had already developed which would enable it to prevent FilmFlex or ADITI from using the source code to develop a competing product. The source code would be used only for further development of FilmFkex's software. Moreover Piksel had been paid well for its work under the master services agreement.

Although Piksel continued to own the copyright and other intellectual property in the software that it had developed for FolmFlex it had licensed FilmFlex in very broad terms. Clause 9.1 of the master services agreement provided:
"For the purposes of this Agreement only and subject to clause 9.4, all Intellectual Property Rights in the [Piksel] Materials and the [Piksel] Platform belong to [Piksel]. i[Piksel] grants [FilmFlex] a perpetual, royalty free, non-exclusive, non-transferable, irrevocable licence to run, use, access, maintain, modify, enhance, copy and create derivative works of the [Piksel] Materials, i[Piksel] Platform and all associated documentation, as applicable, throughout the world (and permits its subcontractors to do the same for the sole purpose of providing services to the [FilmFkex])."
This was supplemented by clause 9.2 in relation to FilmFlex's intellectual property:
"All Intellectual Property Rights in [FilmFlex's] Materials, [FilmFkex's] Platform Materials and [FilmFkex's] Data belong to [FilmFkex] [FilmFkex] grants [Piksel] a non-exclusive, non-transferable, revocable licence during the term of this Agreement to use, copy, access, maintain, modify, enhance and create derivative works of [FilmFlex's] Materials, [FilmFlex's] Platform Materials and Company Data for the sole purpose of delivering the Platform to the Company and delivering the Services."
Her ladyship held that the licence that had been granted to FilmFlex also implied access to the source code for further development of the software. According to the unchallenged evidence of FilmFlex's expert, those activities can only sensibly be carried out if FilmFlex had a copy of the source code.

Mrs Justice Rose concluded at paragraph [38]:
"that on the true construction of the contractual arrangements and in the events which have happened, FilmFlex is entitled to delivery up of the Source Code by Piksel and also to require Piksel to procure the delivery up of the Source Code by NCC."
As there had been some dispute as to what was meant by "delivery up" her ladyship added at paragraph [39] that delivery up meant providing a copy of the source code in a format which means that the copy can be kept by FilmFlex, revised by them in a way which results in that copy diverging from any copy retained by Piksel and which FilmFlex can transfer to a third party without the further involvement in that transfer of Piksel. Whether this was effected by providing the source code on a memory stick or disc or by emailing a file did not matter.

As this is a rare case on escrow it is quite an important one not just for escrow agents such as NCC Group but for the whole software industry and their customers. In so far as it considers implied contract terms and the conflict between standard and specifically negotiated terms it is relevant to other types of agreements. Should anyone want to discuss this case, escrow or computer supply contracts in general, he or she should not hesitate to call me on 020 7404 5252 during normal office hours or use my contact form.


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