Centrestage Management Pty Ltd v Riedle

Implication of terms 43 The appellant contended that, as a matter of law, in the absence of a provision to the contrary, a contract for the manufacture of a computer program has as one of its terms an implied licence to the purchaser not only to use the program but as well to have access to its source code. Frequent reference by the appellant to the need to give business efficacy to the contract in question here leads me to understand that it was put, in the alternative, that a term is to be implied to the above effect in order to provide that efficacy. 44 Chitty says of terms implied by law: The implication of a term is a matter of law for the court, and whether or not a term is to be implied is usually said to depend upon the intention of the parties as collected from the words of the agreement and the surrounding circumstances. In many cases of contract, however, implied terms have become standardised, and it is somewhat artificial to attribute such terms to the unexpressed intention of the parties. The court is, in fact, laying down a general rule that in all contracts of a defined type - for example, sale of goods, landlord and tenant, employment, the carriage of goods by land or sea - certain terms will be implied, unless the implication of such a term would be contrary to the express words of the agreement. Such implications do not depend on the intention of the parties, actual or presumed, but on more general considerations. Of the terms implied in particular contracts, Chitty says: In many cases, however, one or both of the parties will seek to imply a term from the wording of a particular contract and the facts and circumstances surrounding it. The court will be prepared to imply a term if there arises from the language of the contract itself, and the circumstances under which it is entered into, an inference that the parties must have intended the stipulation in question. An implication of this nature may be made in two situations: first, where it is necessary to give business efficacy to the transaction, and, secondly, where the term implied represents the obvious, but unexpressed, intention of the parties. These two criteria often overlap and, in many cases, have been applied cumulatively, although it is submitted that they are, in fact, alternative grounds. Both, however, depend on the presumed intention of the parties. See Chitty on Contracts, General Principles 29th ed (2004) at 13‑003 - 13‑004. 45 In Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 345‑346 Mason J adverted to the difference between these two categories of implied terms: Of course, I am speaking of an implied term necessary to give business efficacy to a particular contract, not of the implied term which is a legal incident of a particular class of contract, of which Liverpool City Council v. Irwin [1977] AC 239 is an example. The difference between the two categories of implied term was mentioned by Viscount Simonds in Lister v. Romford Ice and Cold Storage Co Ltd [1957] AC 555 at 576, where he referred to the search for the second category of implied term as being based 'upon more general considerations', a comment endorsed by Lord Wilberforce in Irwin at 255. 46 Liverpool City Council v Irwin [1977] AC 239 (Liverpool) concerned multi‑story council owned dwellings. The landlord retained control over common parts of the building. There had been a problem with vandalisation of the common parts. The question was whether the landlord was obliged to keep the common parts in repair. There was no express obligation to that effect in the leases. The House of Lords implied an obligation to take reasonable care to keep the common parts in reasonable repair and useability. After identifying instances of implication, including where there is an established usage in the relevant trade or activity and where without a term the contract will not work, Lord Wilberforce said at 254: The present case, in my opinion, represents a fourth category, or I would rather say a fourth shade on a continuous spectrum. The court here is simply concerned to establish what the contract is, the parties not having themselves fully stated the terms. In this sense the court is searching for what must be implied. After considering various possible implications, his Lordship went on at 254: In order to be able to choose between these, it is necessary to define what test is to be applied, and I do not find this difficult. In my opinion such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less: a test, in other words, of necessity. He then explained, by reference to the relationship between the parties (landlord and tenant) and the nature of the buildings (multi‑occupation high rise dependent on stairs, lifts and chutes for access and liveability), that it was necessary that the landlord have some obligation to keep the common areas in repair. His Lordship concluded that since the test of the existence of the term was "necessity", the standard of repair required should not exceed what was necessary having regard to the circumstances. 47 The "necessity" test was adopted by the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 at 104‑105. The Board referred to Lord Salmon's explication of "necessity" in Liverpool - that the term sought to be implied must be one without which the whole transaction would become "inefficacious, futile and absurd". 48 The implication of terms "independent of intention" was considered in some detail in the judgment of McHugh and Gummow JJ in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 (Byrne). At 447‑448 their Honours said: What, then, is involved in the proposition that a contractual term is implied as a matter of law rather than as the assumed intention of the parties? There is at least one basic distinction. It is that … terms implied by the application of what one might call the business efficacy test are terms unique to the particular contract in question, depending upon the form of the contract, the express terms and the surrounding circumstances. By contrast, terms implied by law are, in general, implied in all contracts of a particular class or which answer a given description. 49 Later at 450 their Honours said: Many of the terms now said to be implied by law in various categories of case reflect the concern of the courts that, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined. Hence, the reference in the decisions to "necessity". This notion of "necessity" has been crucial in the modern cases in which the courts have implied for the first time a new term as a matter of law. 50 Their Honours then quoted with approval the passage from Lord Wilberforce's speech in Liverpool set out at [46], and observations to the same effect by the House of Lords in Scally v Southern Health and Social Services Board [1992] 1 AC 294 at 307. 51 At 452‑453, in applying the necessity test to the suggested implication of a term in contracts of employment, their Honours said there was no "necessity" for such a step because the contracts were not, from the viewpoint of the employee, rendered nugatory in the absence of such a term. Nor was there anything to suggest that they were not "workable and effective" without it. And this was not a case where the provision was necessary "lest the contract be deprived of its substance, seriously undermined or drastically devalued in an important respect".

Obligation to provide source code implied by law? 52 The appellant's contention that a contract for the supply of a computer program carries with it an implied licence to use the program and call for the source code is a claim for Chitty's "standardised" implied term that is not dependent on the intentions of the parties, actual or presumed. In order to determine whether the "necessity" test in Liverpool and the later cases is satisfied in relation to contracts for the supply of computer programs, it is necessary to consider the provisions of Division 4A of Part III of the Act.

Division 4A 53 This Division was inserted by the Copyright Amendment (Computer Programs) Act 1999. It is headed Acts not constituting infringements of copyright in computer programs. Section 47AB provides that in Division 4A computer program includes any literary work that is: (i) incorporated in, or associated with, a computer program; and (ii) essential to the effective operation of a function of that computer program. That section builds on the definition of "computer program" in s 10, which is in Part II - Interpretation: a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result. 54 Section 47D, which is headed Reproducing computer programs to make interoperable products, provides: (1) Subject to this Division, the copyright in a literary work that is a computer program is not infringed by the making of a reproduction or adaptation of the work if: (a) the reproduction or adaptation is made by, or on behalf of, the owner or licensee of the copy of the program (the original program) used for making the reproduction or adaptation; and (b) the reproduction or adaptation is made for the purpose of obtaining information necessary to enable the owner or licensee, or a person acting on behalf of the owner or licensee, to make independently another program (the new program), or an article, to connect to and be used together with, or otherwise to interoperate with, the original program or any other program; and (c) the reproduction or adaptation is made only to the extent reasonably necessary to obtain the information referred to in paragraph (b); and (d) to the extent that the new program reproduces or adapts the original program, it does so only to the extent necessary to enable the new program to connect to and be used together with, or otherwise to interoperate with, the original program or the other program; and (e) the information referred to in paragraph (b) is not readily available to the owner or licensee from another source when the reproduction or adaptation is made. (2) Subsection (1) does not apply to the making of a reproduction or adaptation of a computer program from an infringing copy of the computer program. 55 The legislative purpose behind s 47D is explained in the Second Reading Speech: Since 1984, the Copyright Act has explicitly protected computer programs as literary works whether they be in a human‑readable language, called 'source code' or in machine‑readable language, called 'object code', which is the usual form in which they are sold or supplied to users. The Minister then explained 'decompilation' to the effect summarised at [42], and continued: By refusing to make available information about a computer program's interfaces with other programs with which it interoperates, the owner of copyright in a successful program can control the market in products that are interoperable with the program. Only if the maker of a new product were permitted to find out the interface information by decompilation can that maker achieve interoperability of the new program with the existing program. The Minister then observed that United States and European Union law allows makers of new programs to use decompilation for achieving interoperability, and that the purpose behind what would become s 47D was to bring Australian software copyright law more into line with the law of those countries. He went on: Accordingly, as an exception to the copyright reproduction right, where interface information about other programs is not readily available to a software producer, the producer will now be able to decompile another program to the extent necessary to get the required interface information for making an interoperable product. The government recognises that commercially successful computer programs can involve very extensive expenditure on research and development and accepts that appropriate protection via the copyright law should be afforded this investment. Accordingly, the change to allow decompilation in the circumstances I have described will ensure that only interface information may be discovered and that this information may be used only for the purpose of making an interoperable product. This limited sanctioning of decompilation will not weaken the existing proscription of software piracy. The Minister said that the amendments to be introduced by Division 4A were based on recommendations contained in the 1995 Report. 56 Section 47E is headed Reproducing computer programs to correct errors, and provides: (1) Subject to this Division, the copyright in a literary work that is a computer program is not infringed by the making, on or after 23 February 1999, of a reproduction or adaptation of the work if: (a) the reproduction or adaptation is made by, or on behalf of, the owner or licensee of the copy of the program (the original copy) used for making the reproduction or adaptation; and (b) the reproduction or adaptation is made for the purpose of correcting an error in the original copy that prevents it from operating (including in conjunction with other programs or with hardware): (i) as intended by its author; or (ii) in accordance with any specifications or other documentation supplied with the original copy; and (c) the reproduction or adaptation is made only to the extent reasonably necessary to correct the error referred to in paragraph (b); and (d) when the reproduction or adaptation is made, another copy of the program that does operate as mentioned in paragraph (b) is not available to the owner or licensee within a reasonable time at an ordinary commercial price. (2) Subsection (1) does not apply to the making of a reproduction or adaptation of a computer program from an infringing copy of the computer program. In the Second Reading Speech the Minister said this amendment will allow the use of the decompilation process for the corrections of errors in a program where an error‑free copy of the program is not reasonably available at a commercial price. 57 As indicated at [55], many of the recommendations from the 1995 Report were adopted in Division 4A. The following paragraphs from the 1995 Report are relevant to source code and the correction of errors: 10.70 The ways in which such bugs or errors are rectified are many and varied. Ideally the error is reported to the manufacturer, who often has exclusive access to the source code and hence is better equipped than most to isolate and rectify the error. The source code is then appropriately modified and a number of consequential changes are included in the next release of the object code. 10.71 Where the computer program is on a complex network or multi-user system with many other interacting programs, the manufacturer may not be able to eliminate the error. Usually the users in such cases will have sufficient expertise to isolate and correct the errors themselves. The necessary action may comprise any combination of direct modification of the source code, if the user has access to it, direct modification of the object code or the creation of an extra program or programs which are used in conjunction with the original program to avoid the situation which causes the behaviour. The modifications and additional programs are often brought together in a program which can be applied to the original code to produce a modified version without the error. Such programs are appropriately labelled "patches". 10.72 In most cases, application of the patches or the modification of source code will amount to an adaptation or reproduction of the program, which is an exclusive right of the copyright owner. If these patches are supplied by the owner, there will be an express or implied licence to modify the program. Where such patches are created by the user or supplied by a third party, some problems arise. Licences which expressly grant a right to correct errors in programs are usually limited to a small number of clients (usually universities or research institutions). Users of computer programs require them to operate on an ongoing basis and where an error is located, a solution is often required in a very tight time frame. This means that it is often impractical to wait for the manufacturer to correct the error, either in their own patch or in a new release, or to negotiate a licence to modify the program at the time the error becomes apparent. … 10.74 Having regard to the functional nature of computer programs, the Committee considers it essential that users should have the right to correct errors in programs where a corrected version of the program is unavailable. It notes that in order to fix any errors in a program it may be necessary for the user to modify the source code or object code of the program. Such acts will involve either reproducing or adapting the computer program and, if not fully within the terms of the licensed use of the program, will infringe copyright. However, users of computer programs require them to operate on an ongoing basis. Given the impracticability of fixing errors in object code without making use of decompilation, the Committee recommended in the Draft Report that reverse engineering including decompilation be permitted for the purpose of fixing errors in computer programs. 10.75 Accordingly, the making by a lawful user of a Computer program of a reproduction or adaptation of the program to restore its intended functionality should not infringe copyright where a correctly functioning version of the program is not available within a reasonable time at a normal commercial price. 58 It is important to note that the review committee considered submissions from industry stakeholders, many of them summarised in the 1995 Report. The passages above reveal that · the manufacturer of a program will often have exclusive access to the source code · users of a program on a complex network or multi‑user system will have sufficient expertise to correct errors by direct modification of the source code, if they have access to it · licences expressly granting a right to correct errors are usually limited to a small number of clients (usually universities or research institutions) · modification of the source code or object code will infringe copyright if not fully within the terms of the licensed use of the program. To the same effect is the statement of the Minister in the Second Reading Speech that the usual form in which computer programs are sold or supplied to users is "in machine‑readable language, called 'object code'" and not in source code. See [55]. 59 It is apparent from the Report and the Speech that Division 4A was constructed on the legislative assumption that the purchaser of a computer program will generally not have a licence conferring a right of access to the source code. 60 However, what is important for present purposes (namely the implication of a right to obtain access to the source code), is that since the introduction of Division 4A in 1999, any purchaser in the position of the appellant has been able, subject to the conditions therein, to obtain access to the source code for the purposes contemplated by the legislation. The appellant says it requires access to the source code in order to make changes, variations or corrections to the program, to enable other stages to be created and scrutinised, and to remedy any defects in the program. 61 Counsel's summation on this point was: Taking all these factors into account, it does not make any kind of business or common sense that CSM would hand over all its control to Mr Riedle. How could they operate like that? How could it be implied that any future problems, defects, changes, testing, the sole responsibility of CSM, would be under the control and whim of Mr Riedle who could keep the source code to himself? What sort of precedent would this set up in the world of computer programming? 62 The implication of a term of a "standardised" variety independent of the parties' actual or presumed intention depends on whether the implication is necessary in the circumstances. Having regard to the provisions of Division 4A, it is not necessary to imply a term in computer program contracts that the purchaser is entitled to access to the source code. Those provisions enable a purchaser, on compliance with the conditions contained in ss 47D and 47E, to resolve interoperability problems and correct errors. However, instead of taking steps under s 47D(1)(e) and s 47E(1)(d) to secure the respondent's assistance in accordance with the statutory scheme, the appellant caused a letter of demand to be written and commenced the present proceeding. 63 The appellant relied heavily on the decision of Jacobs J in Beck v Montana Construction Pty Ltd [1964‑5] NSWLR 229. That case concerned copyright architectural plans. The question was whether the owner of land who had paid for the plans to be used in the construction of houses on the land had an implied licence to use the plans. It was held that he did. Jacobs J said at 235: the engagement for reward of a person to produce material of a nature which is capable of being the subject of copyright implies a permission, or consent, or licence in the person giving the engagement to use the material in the manner and for the purpose in which and for which it was contemplated between the parties that it would be used at the time of the engagement. That of itself would not assist the appellant. It is common ground that the appellant is entitled to use the computer program without infringing copyright. 64 The appellant also relied on the observations of Kirby and Crennan JJ in Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577 at [59] and [69] to [73]. However, those passages go no further than to recognise, as in Beck, the existence of an implied right of a property owner or a successor in title to use architectural plans. It is true that at [60] their Honours referred to a line of patent cases where an implied licence to use and repair a patented item has been upheld as an implied licence that runs with the patented item itself. But they pointed out that the licence arises because of the rights conferred by letters patent to "make, use, exercise and vend" which can be reflected in the terms of a patent specification. Nothing in that case assists the appellant. 65 No standardised term, applicable to computer sales generally, is to be implied.

Business efficacy implied term 66 In Byrne at 422 Brennan CJ, Dawson and Toohey JJ approved the following passage from the reasons of Deane J in Hawkins v Clayton (1988) 164 CLR 539 at 573: The most that can be said consistently with the need for some degree of flexibility is that, in a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, a court should imply a term by reference to the imputed intention of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case. 67 No term such as that sought by the appellant can be supported on the business efficacy basis. The existence of ss 47D and 47E show that the implication of the term is not necessary for the reasonable or effective operation of the particular contract in the circumstances of the case.

Another implied term? 68 As part of its implied term case the appellant submitted that regardless of whether the respondent was its employee or an independent contractor, the purchase of a computer program includes, ipso facto, the source code. This was said to be so because of what counsel described as the "definition of " a computer program in s 21(5) of theAct: For the purposes of this Act, a computer program is taken to have been reproduced if: (a) an object code version of the program is derived from the program in source code by any process including compilation; or (b) a source code version of the program is derived from the program in object code by any process, including decompilation; and any such version is taken to be a reproduction of the program. 69 Section 21 is in Part II of the Act - Interpretation (ss 10 to 30A). Section 13 provides that reference in the Act to an act comprised in the copyright in a work or other subject matter is to be read as a reference to any act that the owner of the copyright has the exclusive right to do. Those acts are listed in s 31, and include the right to reproduce the work in a material form. Section 21 is concerned with what amounts to a reproduction of a work in material form. It deems various acts to be a reproduction. Sub‑section (5) is the deeming provision applicable to computer programs. 70 Although this argument was put under the heading Implied terms, it does not appear to me to invoke such a term. Rather it seeks to use s 21(5) to show that in a contract for the supply of a computer program, the subject‑matter of the transaction includes the source code. This submission does not appear to have been put to the Magistrate. At least it is not mentioned in her reasons for decision. In any event, I do not accept it. The interpretation sections of the Act are for its internal purposes. The deemed reproduction provisions in s 21, including in particular that in sub‑s (5), disclose no intention to interfere with contractual arrangements in relation to the manufacture and sale of computer programs. What is the subject matter of a particular contract is governed by the general law. 71 The passages from the Second Reading Speech summarised at [42] and quoted at [55] and those from the Report sent out at [57] show that an entitlement to source code is not typically carried by an agreement to make and deliver a computer program. See also [58] and [59]. Those passages are quite inconsistent with the argument that the "definition" of computer program contained in s 21(5) of the Act somehow causes the source code to pass with the program.

Conclusion on implied term 72 Although the Magistrate did not rely on the provisions of Division 4A in refusing to imply the term sought by the appellant, no error has been shown in that refusal.

ADAPTATION 73 In its notice of appeal the appellant asserts that the Magistrate erred in failing to consider … the applicant's argument that if neither the applicant nor the respondent owned the copyright in the 2002 Program (because the Salvation Army owned it) then the applicant should succeed in its claim for damages because the respondent was contractually bound to provide the source code to the applicant when requested. Framed in that way, the ground has to fail. The appellant has not established that the respondent was contractually bound to provide the source code on demand. 74 As formulated in its written submissions handed up at the commencement of the hearing, the ground was put in the form of this question: Did her Honour fail to take into account the fact that, whether or not the [appellant proved it was] the owner of version 2 of the … program was irrelevant because the only matter of importance was that Riedle did not own version 3 if it was an adaptation, and if he did not own it then he was in breach of his employment not to provide the source code to the appellant when requested? In order to succeed in this claim the appellant has to establish a breach by the respondent of his contract of employment. The Magistrate held he was not an employee and the appellant's appeal on this point has been unsuccessful. 75 In the body of the written submissions, however, reliance on the respondent as an employee appears to have been dropped. The argument was put in this somewhat open ended, inconclusive fashion: Her Honour does not address the question - If version 3 was an adaptation of version 2, and thus Riedle was not the owner of the copyright in version 3, regardless of who was the copyright owner, should Riedle have rendered up the source code upon request? If her Honour had addressed this question, she would have needed to determine whether the program was an adaptation or not and would have concluded that there was ample evidence before her by way of two experts … to determine whether or not the program was an adaptation regardless of who owned it. 76 The Magistrate first found that AAS was the owner of the copyright in version 2 of the program, and that if the copyright had not passed from AAS to the Salvation Army, it remained with the defunct AAS. Her Honour said: The applicant then argues that the case is actually about the respondent not having copyright in The Program. However, there can be no doubt that the respondent wrote The Program. As I have found that he did not do so as an employee, he would have copyright in The Program unless it were substantially the same as the 2002 version. Even in that case, the respondent argues, the applicant cannot bring the claim because it is not the owner of the copyright in the 2002 version. Therefore, only the Salvation Army or AAS could bring the claims predicated on ownership of copyright that are made in this proceeding. Clearly, the Salvation Army and AAS are not parties to the proceeding. In these circumstances, I consider that the applicant's copyright claims are unsustainable. 77 There is no substance in the appellant's complaint that the Magistrate failed to consider its adaptation argument, concentrating instead on whether the appellant was the owner of version 2 and dismissing the copyright claim on the basis that it was not. The Magistrate's disposition of this aspect of the case was based on the appellant's lack of standing to make a copyright claim, including an adaptation claim. The appellant's assertion that what mattered was not who owned the copyright but that the respondent did not own it, misses the point. It ignores the fact that the Magistrate's decision was based on the appellant's lack of standing to advance its adaptation argument. That is plain from the passage set out at [38]. If the Salvation Army owned version 2, it would have standing to contend that version 3 was an adaptation of version 2. If AAS was still the owner, it could, theoretically, make the same claim. But the appellant, not being the owner of version 2, cannot make that claim. It is fanciful to suppose that a third party in the position of the appellant can say to the respondent: "I know I don't own version 3. The Salvation Army, or perhaps AAS, does. Nevertheless, because you don't own it, you must give it to me". This ground of appeal is dismissed.

OTHER MATTERS 78 The Magistrate awarded costs against the appellant on an indemnity basis in relation to the adaptation issue. The notice of appeal takes issue with this, but no argument was addressed on the point. 79 The appellant complained that the Magistrate imposed on it the burden of establishing that it had a licence to use the source code, whereas the burden lay on the respondent to show that the appellant did not have such a licence. It relied on Avel v Multicoin Amusements Pty Ltd (1991) 171 CLR 88 at 94‑95. However all that was there decided was that the onus of proving the absence of the licence of the owner of copyright in relation to an issue of infringement under s 37 or s 38 of the Act lies on the party asserting infringement. That is because the absence of such licence constitutes an element of the wrong of infringement under those sections. The present case is not for infringement of copyright, and the onus submission fails. 80 The same onus submission was made in relation to defects the appellant submitted existed in the program. The respondent disputed their existence. The appellant contended that the burden was on the respondent to prove there were no defects. Reliance was placed on TSB Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3) (2007) 72 IPR 492 at [125]. That was an infringement case. One of the defences was that the respondent was authorised to reproduce the drawings there in question. Finkelstein J said that the copyright owner had the onus of proving the absence of authorisation "for that is an element of the cause of action for copyright infringement". 81 The burden of proving the existence of defects remained with the appellant. The Magistrate was not satisfied that there were defects. Her Honour considered this issue in detail at [61] to [66] of her reasons. No error has been shown in her treatment of it.

CONCLUSION 82 The appeal must be dismissed with costs. I certify that the preceding eighty-two (82) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.

Associate: Dated: 20 June 2008 Counsel for the Appellant: R Dean