Summary

A software development company whose sole programmer provided his services through a personal service company was found to own the copyright in source code authored by the programmer because its relationship with him was realistically one of employer and employee. There was a clear public interest in everyone paying taxes properly due, and not escaping their tax liability by devices falsely describing their contractual relationships. Where a court had concerns that labels which the parties had chosen to apply to their relationship were untrue and had been applied as a tax-avoidance device, it should consider the issue of its own motion, declare the true legal position, and leave it to HMRC to claim any taxes.

Facts

In joined proceedings, the claimant software development company (SEL) claimed the intellectual property in, and delivery up of, source code from a former director (P) and his service company (B). P and B counterclaimed for an injunction on the basis that they owned the copyright. P also petitioned against SEL's parent company (SRL) and its majority shareholder (X) alleging unfair prejudice.

X had incorporated SEL in 1987. He recruited P in 1996 because of his particular expertise, which SEL needed in order to expand. X required P to work for SEL through a service company for tax avoidance reasons. P formed B and entered into a service contract with SEL in 1997. In 1999 he was appointed a director of SEL and entered into a second service contract in 2000. He was effectively SEL's sole programmer, writing source code for various motor control algorithms. B retained the source code, supplying only object code to SEL. One of the disputes later to emerge was whether P's physical retention of the source code was determinative of the intellectual property. SEL maintained that the source code was "supplied" to SEL by storage on its equipment. In 2007, P assigned intellectual property to SEL for £400,000 and became a 40% shareholder. A shareholders agreement replaced the first contract, accruing further tax advantages. In 2012, SRL was incorporated. It held a 100% shareholding in SEL. P was a 40% shareholder in SRL and X a 60% shareholder. In 2015, when disagreements about the SEL's management were beginning to emerge, a third contract was executed. Disputes became entrenched and, in 2017, X removed P from SEL and SRL. P took and retained one of SEL's computers, which triggered the instant litigation.

The main issues in the source code claim were whether P and B had to provide SEL with access to the software source code; who owned the copyright in the software (both the source code and the object code); and whether B had a valid claim for copyright infringement. In the unfair prejudice petition, the court had to decide whether X's removal of P from the two companies amounted to unfair prejudice.

Held

SEL's source code claim - This claim succeeded. SEL owned the copyright in the documents and source code authored by P. Construing the contracts in accordance with the principles in Wood v Capita Insurance Services Ltd [2017] UKSC 24, it was clear that P had been obliged to personally perform the "technical services" described in the 1997 contract. The true relationship between P and SEL was one of employer and employee. P's argument that the court should respect the contractual structures which the parties had chosen to adopt was rejected. It was an implied term of the contracts that B would make the source code created by P available to SEL, R Griggs Group Ltd v Evans (No.1) [2005] EWCA Civ 11 and Ray v Classic FM Plc [1998] 3 WLUK 354 applied. The fact that SEL did not formally request delivery up was irrelevant. The court resolved disputes about the 2000 contract in SEL's favour: the nature and effect of the two contracts differed significantly and the earlier one had not survived the making of the later one. The 2007 assignment of property rights between SEL and P had been part of the process of P becoming a 40% shareholder and a necessary prerequisite to receipt of tax advantages. P had not been acting as B's agent. It was a curious transaction but not, ultimately, of much significance. The 2015 contract, properly construed, supported the finding that P and B had at all times been required to provide SEL with the source code and related documents, Wood followed (see paras 154, 168-170, 175, 184-189, 191-192, 197-202, 207-211, 216-228, 231-237, 243-244, 254, 413 of judgment).

B's claim for copyright infringement - This claim failed (paras 263-268, 413).

SEL's entitlement to delivery up of the source code - This claim succeeded. SEL's entitlement was contractual. P's argument that SEL did not need access in order to carry on its business was rejected. The rights and obligations accruing under the contracts had been intended to survive future termination of those contracts (paras 272-273).

The unfair prejudice petition - This claim succeeded and P was entitled to a buy-out order. The court summarised the law on unfairly prejudicial conduct, finding that SRL was a quasi-partnership Strahan v Wilcock [2006] EWCA Civ 13 followed. The fault did not lie all on one side, but P's conduct was not sufficiently serious to justify his exclusion from management (paras 319-330, 346-358, 380, 389-396, 401-404, 413).

Fiscal implications relating to service companies - The court examined the law concerning the practice of using service companies in an employment context and expressed concern about the level of artificiality involved. There was a clear public interest in everyone paying taxes properly due and not escaping their tax liability by devices falsely describing their contractual relationships. Where a court had concerns that labels chosen by the parties to apply to their relationship were untrue and had been applied as a tax-avoidance device, it could and should consider the issue of its own motion. If it thought that such labels were intended to deceive HMRC, it should declare the true legal position and leave it to HMRC to claim any taxes (paras 6, 123-144).

Judgment for claimant in part