Information and Communications Technology: Case Note - Ansys Incorporated v Lim Thuan Khee and Another

Jane Lambert

5 July 1999
This case note first appeared on the Lancaster Buildings website

This case highlights the need for caution in negotiating and drafting software distribution, end-user licences and support and maintenance agreements and, in particular, the termination provisions of such agreements. The plaintiff company, Ansys Inc. ("Ansys"), which was incorporated and based in Pennsylvania, had appointed the English company, Structures and Computers Ltd ("SCL"), to distribute
its software package in the United Kingdom and the Netherlands. The package, which simulated variousphysical phenomena and was used as an alternative to prototype testing to evaluate product design, needed considerable local support. Under the terms of a written agreement between the parties:

	SCL sought licensees and persuaded them to take licences from Ansys;
	SCL negotiated and fixed the licence fees and, in the case of certain licensees, fees for training, maintenance and support;
	licensees entered a 3-part agreement with Ansys and SCL whereby Ansys granted a licence and SCL agreed to provided training, maintenance and support;
	SCL agreed to make a licence payment, as opposed to licence fee, to Ansys for every licence that it procured, whether it received payment from the licensee or not, of about 65% of the fee; and
	SCL kept the balance for itself but was responsible for training, maintenance and support at its own expense although Ansys provided various technical documents and a second line support service to SCL.

The parties agreed that their contract should be governed and construed in accordance with the law of Pennsylvania.

The Dispute
The distribution agreement lapsed on the 31st December 1996 and was not renewed though SCL refused to accept its termination for a time. It continued to support Ansys's licensees and invoiced them for support and maintenance fees. Ansys objected and urged its licensees to pay its UK subsidiary who would support the software in future. Each party brought proceedings against the other, which resulted in an interlocutory order requiring SCL to pay its receipts into a trust account in the names of the parties'
solicitors to abide the action. Not all those receipts were paid into that account  because, so Park J observed, SCL's directors, Lim Thuan Khee ("Dr. Lim") and his wife, "had behaved reprehensibly, and in many respects flouted court orders". Ansys obtained judgment against SCL for the payments to which it was entitled and petitioned for that company's liquidation. As it believed that Dr. and Mrs. Lim had misappropriated moneys that should have been paid into the trust account it pursued them as constructive trustees. To succeed in that action Ansys had to prove that SCL held the moneys that it received from Ansys's licensees on trust. Jacob J ordered that and certain other matters to be tried as preliminary issues.

The Judgment
Park J decided those issues against Ansys. Both the distribution agreement between Ansys and SCL and the agreements between those parties and the end users provided for the licence fees to be payable to SCL which was entitled to hold them beneficially unless and until new contractual arrangements were put in place. Even though Ansys owned the copyright in its software and licensed it directly to the licensees, licence fees were to be paid to SCL. SCL was to pay licence payments to
Ansys which obligation was not dependent on the licensees' performing their obligations to SCL. The distribution agreement specified that SCL was an independent contractor and not an agent. It had to provide maintenance and support to licensees at its own expense, which it could achieve only by retaining the licence fees. Ansys had relied on provisions requiring SCL to return any property belonging to Ansys and precluding SCL from marketing the products in future. His lordship agreed that SCL could no longer negotiate new licences but it did not alter any of the existing arrangements. The licence agreements contained no provision for payment of the licence fees to Ansys should SCL cease to be its distributor. Nothing in the  maintenance and support agreements relieved SCL of the obligation to support the licensees in such event. SCL remained liable to make licence payments to Ansys on
receipts from licensees before as well as after termination of the distribution agreement.

Conclusion
The net result of this decision is that no action can lie against the Lims for breach of fiduciary duty. Ansys's only remedy is to prove in SCL's winding-up. It may be open for the liquidator if he judges it expedient to investigate whether the company has an action against its former directors but Ansys would have to share the proceeds of any recovery from the Lims after deduction of all legal, accounting and other professional fees and costs with SCL's other creditors. Wrangling of this kind is likely to affect
not only a supplier's cash flow but also its position in the market place. Licensees received conflicting messages from the parties as to whom they should pay their licence fees with the result that some paid neither Ansys nor SCL. The litigation was further complicated by the choice of Pennsylvania law as the proper law of the contract. Both parties called distinguished lawyers from the United States as expert witnesses, which added to the cost and delay in resolving the dispute even though the judge concluded that Pennsylvania law was probably the same on all essential issues as that of England. It is understandable that an American software house should favour the legal system with which it is most familiar, but it should bear in mind that foreign licences subsist under foreign copyright laws, that foreign insolvency laws may well apply on termination and that any agreement with a foreign distributor has to be enforced abroad. All sorts of disagreeable consequences could have been avoided had Ansys consulted English counsel in the first place.

 

 

 

 

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