Contractors’ Questions: Does leaving me unpaid reduce their right to IP?

Contractor’s Question: On a project for which I have invoiced £150,000 over two years, there is a payment of about 15% of the total which is outstanding and is now overdue by nine months.

Is there a strong precedent set about ownership, rights over the work, or the Intellectual Property at stake in such cases where the relevant work is, technically, not fully paid for? For instance, is it justifiable to inform the client that they do not own the IP until they pay up, and even to tell them they may not use the IP until they do? After all, it's IP they (re-)use to generate their revenue. Or does the client still own the IP regardless of the total payment for it being incomplete? There is nothing in my contract that appears to cover the aspects I’m asking about.  The client is based outside the UK, and the EU. Apart from pursuing them for the owed sum, what would a legal expert advise in terms of the IP at stake?

Expert’s Answer: There are a number of complexities in this situation, and the legal position will depend on where the client is based and how the contract is structured and interpreted (even if it doesn’t explicitly deal with the issue of IP ownership on non-payment).  

IP assignment or licence?

One key issue is whether the contract provides that intellectual property is assigned to the client at all.  The good news is that, under English law, the first owner of the copyright in your works is you, as the “author” (assuming you are not an employee and are creating original software).   If the contract does not explicitly assign this IP to the client, or specify an intention for the IP to be owned by the client, then it is likely still to be owned by you. The client is, however, likely to have a licence to use the software (which could be exclusive or non-exclusive; i.e. you may or may not have the right to use the IP yourself for other purposes). 

Looking at your position in these two different situations (again, under English law):

  1. If the contract is interpreted to give the client only a licence to use the IP rather than ownership of the IP, you may be able to argue that you will terminate the licence for breach of payment terms in your contract if payment continues not to be made.  The contract and surrounding circumstances would need to be reviewed to assess whether you have such a right and whether it applies to the licence for all or part of the work/IP.
  1. If the client owns the IP (let’s  say the contract specifies this), in default of anything more helpful in the contract, it is likely that the client has a right to use the IP and your rights against them may be limited to recovering the money due to you under the contract.

Which laws apply?

Unfortunately, there is another layer to consider here.  The above is an analysis under English contract and copyright laws. But given the client is located outside the UK/EU, there is a possibility that some or all of these issues will be subject to the laws of another country.  Specifically, it is necessary to consider whether: (a) the contract is governed by English law or the law of another country; and/or (b) the relevant copyright laws are those of the UK and/or those of another country.  This will depend on where you carried out the work, the location of the client and the terms of the contract.

What next?

A practical solution may be to continue to chase for the money and give the client incentives to pay. Your bargaining chips may include that you may terminate the licence to use the IP if payment is not made (if you do have such right – see above).   Of course, if you do this, there is a risk that the client prefers termination to payment.  A legal review of your specific circumstances and contract may assist in framing your communication to the client.

Unfortunately, if you are still not paid, there is another layer of complexity given the client is outside the UK/EU.  Specifically, there are the issues of which courts will hear your dispute and how you will enforce any judgement in your favour.  The law in this area is complex and legal analysis of your specific situation would be required before you proceed.  It’s a result that my response, in this section and above, provides merely an overview of the legal issues to consider that should not be relied upon as legal advice.

The expert was Olivia Whitcroft, a solicitor and principal at OBEP, a legal firm specialising in intellectual property and information laws.

Thursday 8th September 2011