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[2015] ZASCA 68
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Attachmate Corporation v Minister of Water and Environmental Affairs (20071/2014) [2015] ZASCA 68 (20 May 2015)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
NOT
REPORTABLE
Case
No: 20071/2014
In
the matter between:
ATTACHMATE
CORPORATION
................................................................................
APPELLANT
and
MINISTER
OF WATER AND ENVIRONMENTAL
AFFAIRS
.............................
RESPONDENT
Neutral
citation:
Attachmate v Minister of
Water and Environmental Affairs
(20071/2014)
[2015] ZASCA 68
(20 May 2015).
Coram:
Brand, Bosielo, Majiedt, Petse and Mbha JJA
Heard:
4 May 2015
Delivered:
20 May 2015
Summary:
Software license agreement –
unlicensed copies made by licensee in breach of agreement –
interpretation of clause providing
for that event – maintenance
agreement providing for payment per unit in respect of licensed
copies – whether licensee
also liable in respect of unlicensed
copies.
ORDER
On
appeal from:
Gauteng Division of the
High Court, Pretoria (Tuchten J sitting as court of first instance):
1 The appeal is
upheld to the extent reflected in paragraph (3) below.
2 The respondent is
ordered to pay the appellant’s costs, including the costs of
two counsel.
3 Paragraph 2 of the
order of the court a quo is set aside and replaced by the following:
‘
2
In relation to the plaintiff’s claim for maintenance fees, the
defendant is ordered to pay the plaintiff:
2.1 The sum of
R7 744 302.40
2.2 Interest on the
sum of R7 744 302.40 at the rate of 15.5 per cent per annum
from 14 December 2009 to date of payment.’
4
Save for paragraph (3) above, the order of the court a quo is
confirmed.
JUDGMENT
Brand
JA
(Bosielo, Majiedt, Petse and Mbha
JJA concurring):
[1]
The appellant, Attachmate Corporation (Attachmate), is incorporated
in the United States of America with its head office in
Seattle,
Washington State. The respondent is the minister in the national
cabinet responsible for the Department of Water and Environmental
Affairs (the Department). The appeal turns on the interpretation and
the application of two written agreements between the parties,
both
concluded in June 2005. The first of the two is a software license
agreement (the license agreement) in terms of which the
Department
acquired from Attachmate 300 licenses for a suite of software known
as EXTRA! Mainframe Server Edition Version 8.1 (the
software). The
second is a maintenance and support agreement, entitled Technical
Support Guide (the maintenance agreement) in terms
of which
Attachmate was obliged to provide maintenance and support in respect
of the software furnished in terms of the license
agreement.
[2]
Generally speaking, the software was aimed at enabling a number of
users, typically geographically dispersed, to access data
stored by a
large concern in its mainframe computer at some central location. The
mainframe computer in this case was housed in
the premises of the
State Information Technology Agency (Sita). In accordance with its
general function, the software thus enabled
employees of the
Department to access the data on the mainframe by means of their
desktops, laptops and other personal computers.
Mindful of the
affinity for acronyms in this field of IT, I shall refer to these
collectively as PCs. In the main the information
accessed by
departmental employees through their PCs in this way was stored in
electronic files on the mainframe referred to as
Persal and Logis.
Persal contained human resources data while Logis related to the
procurement of goods and services as well as
payment for these by the
Department.
[3]
The license agreement required the Department to determine the number
of PCs upon which it decided the software to be installed.
The
Department then had to pay a license fee to Attachmate for each PC
upon which a copy of the software had been installed. The
agreement
pertinently prohibited the use of the licensed software until the
Department had obtained a so-called license unit certificate
from
Attachmate, which permitted it to install up to the number of
software copies reflected in the certificate. The license unit
certificate issued to the Department on 30 June 2005, reflected 300
units only. In terms of the maintenance agreement, Attachmate
undertook to provide maintenance and support required by the
Department in respect of all licensed units, but only until the end
of April 2006. The agreement, however, made provision for its annual
renewal at the election of the Department. After the initial
period,
the Department was therefore free to decline to buy any maintenance
at all. But, once it elected to do so, as the Department
eventually
did, it was obliged to pay the maintenance fee in respect of all the
licensed copies, not just some of them. The maintenance
fee at the
time was R204 per unit. So it happened that the Department paid a
maintenance fee in respect of each of its 300 copies
in April 2006.
[4]
The license fee paid by the Department in 2005 was R455 per copy. It
was common cause between the parties that the Department
had acquired
the licenses through a procurement process facilitated by Sita and
that the R455 was a deeply discounted rate. The
discount was prompted
by the consideration that Sita was able to estimate that it would
purchase, on behalf of various State departments,
in the order of
about 500 000 licenses from Attachmate. The uncontroverted
evidence by Mr Harry Kingma, the sales director
of Attachmate in
South Africa, was that, if the Department had not purchased the
licenses through Sita, it would not have qualified
for the discount,
but would have rather paid the list price that applied to buyers of
single units or smaller quantities.
[5]
The mainframe component of the software was installed by the
technicians of Attachmate. The interfacing components on the PCs,
on
the other hand, were provided to the Department together with the
installation software that enabled departmental technicians
to load
the software copies onto the individual PCs. Right from the outset,
so the evidence shows, the Department did not pay much
heed to its
express undertaking not to install more than the 300 copies reflected
in the license unit certificate. So it came to
the notice of
Attachmate in 2006 that the Department had installed a total of 660
copies on PCs within the Department. The parties
entered into
negotiations and managed to reach an agreement which regularised the
position. In terms of this agreement, Attachmate
afforded the
Department the license to use 360 additional copies at the original
price of R455 per copy. At the same time it extended
its undertaking
to support and maintain these additional copies for the same fee of
R204 each.
[6]
What gave rise to the present litigation, however, was that the
Department continued, in rather cavalier fashion, so it seems,
to
make and install additional copies of Attachmate’s software
without its consent. When this information was conveyed to
Attachmate
during the latter half of 2009, it first tried to resolve the issue
through negotiations. What Kingma essentially requested
the
Department to do was to determine the number of copies installed in
excess of R660 and to pay the license fee for these additional
copies
at the prevailing Sita rate during 2009, which was US$100 per unit.
Initially the Department appeared to be willing to comply
with this
request, but eventually failed to come up with a final answer. The
reason for this, Kingma concluded, was not that the
Department was
trying to avoid payment of license fees, but that its affairs were in
such disarray that it could not determine
the number of unlicensed
copies involved. However, be that as it may, the upshot was that
Attachmate compelled an audit in terms
of clause 11 of the license
agreement. This clause provided:
‘
AUDIT
At
Attachmate’s request and upon ten (10) days prior written
notice, an Attachmate representative or an independent auditor
selected by Attachmate may inspect and audit your computers and
records for compliance with this License Agreement and Licensed
Unit(s) Certificate during your normal business hours and no more
than twice a year. You shall fully cooperate with such audit
and
provide any necessary assistance and access to all records and
computers. If an audit reveals that you possess or at any time
possessed unlicensed copies of the software, you will promptly pay
Attachmate the applicable license fee for such unlicensed copies.’
[7]
The audit was conducted by KPMG. According to the audit report
subsequently brought out by KPMG on 7 December 2009, the Department
possessed 1 564 unlicensed copies of the software. At the trial,
the Department accepted this number, but Attachmate contended
that
the number of unlicensed copies were substantially more than this. In
essence its claim was that every one of the PCs in the
Department, of
which there were about 5 000 at the time, had been installed
with a copy of the software. Accordingly its claim
was based on 4 544
(ie 5 204 – 660) unlicensed copies. Attachmate further
contended that (a) the Department was
obliged to pay the ‘applicable
license fee’ as contemplated in clause 11 for each of these
copies; (b) that its list
price – ie the price payable by
purchasers of single units – constituted that ‘applicable
license fee’;
and (c) that in 2009, its list price for the
software amounted to R5 308 per unit. In addition Attachmate
claimed that, in
terms of the maintenance agreement, it was entitled
to payment of a maintenance fee in respect of all the unlicensed
copies, ie
4 544, at the rate of R1 237 per copy, which was
its prevailing maintenance rate in 2009.
[8]
With regard to Attachmate’s claim based on the license
agreement, the Department denied, as I have said, that there were
more than 1 564 unlicensed copies. It further contended that, in
any event, it was absolved from paying for these copies for
two
reasons. First, because of an exemption in clause 2(f) of the license
agreement. Secondly, because the concept of ‘an
applicable
license fee’ in clause 11 of the license agreement, which lay
at the heart of Attachmate’s claim, was too
vague to be given a
quantifiable meaning. In the alternative the Department contended
that, if the rate of an ‘applicable
fee’ could be given a
meaning, the Sita discount price of R455 in 2005 represented that
rate. As to Attachmate’s claim
based on the maintenance
agreement, its answer was essentially that, since this agreement
provided for licensed copies only, Attachmate
was not entitled to any
maintenance fee in respect of unlicensed copies at all.
[9]
With regard to the license fee claim, the court a quo (Tuchten J)
held that Attachmate had failed to establish that there were
more
than 1 564 unlicensed copies. At the same time, the court
dismissed the Department’s defence that it’s liability
was excluded, either by clause 2(f) – which the court found not
applicable on the facts of the case – or on the basis
that no
meaning could be given to ‘applicable license fee’ in
clause 11. As to the meaning of this expression, the
court, however,
accepted the Department’s alternative argument that the
applicable fee was the Sita discounted rate in preference
to the list
price contended for by Attachmate. On the face of it, the court also
appeared to have endorsed the Department’s
contention that the
applicable rate was R455 per copy, which was the Sita discount price
in 2005. But when it came to the calculation
of the amount awarded
under this heading, the court clearly applied the rate of US$100 per
copy, which was the Sita discount price
in 2009. As to Attachmate’s
claim based on the maintenance agreement, the court a quo agreed with
the Department’s
argument that the maintenance agreement did
not afford Attachmate the right to claim maintenance in respect of
unlicensed copies
at all. The appeal against that judgment is with
the leave of the court a quo.
[10]
On appeal, Attachmate accepted that it had failed to establish that
the number of unlicensed copies exceeded 1 564. It
only took
issue with the court’s finding that the applicable fee as
contemplated by clause 11 of the license fee agreement
was the Sita
discount price of US$100 in 2009. Instead it stood firm in its
contention that the applicable license fee contemplated
in clause 11
was the list price of R5 308 per license. In support of its
claim based on the maintenance agreement Attachmate
persisted in its
contention, which did not find favour with the court a quo, namely,
that it was entitled to payment of R1 237.90
– that being
the prevailing maintenance fee in 2009 – for each of the 1 564
unlicensed copies.
[11]
With regard to Attachmate’s claim under the license fee
agreement, the Department accepted on appeal that Attachmate
was
entitled to payment of a license fee for the 1 564 unlicensed
copies, but supported the court a quo’s finding that
the
applicable fee contemplated by clause 11 was the Sita discount rate
of US$100, as opposed to the list price, in 2009. As to
the quantum
of Attachmate’s claim under this heading, it was common cause
on appeal that: (a) if Attachmate’s list
price for the software
in 2009 was the ‘applicable fee’, it was entitled to
payment in a total amount of R8 301 714;
but (b) if the
US$100 per unit represented the ‘applicable fee’, the
amount of R1 168 495, which was awarded
by the court a quo
under this heading (in paragraph 1 of its order), should prevail.
With regard to the license fee claim, the
dispute on appeal thus
turned on the narrow issue as to whether the applicable fee was
Attachmate’s list price, on the one
hand, or the Sita discount
price, on the other.
[12]
As to Attachmate’s claim in respect of the maintenance
agreement, the Department supported the court a quo’s finding
that, on a proper interpretation of this agreement, Attachmate was
not entitled to any amount at all. As to the quantum of the
claim
under this heading, the Department conceded, however, that if
Attachmate were held to be entitled, in principle, to any payment
for
the 1 564 unlicensed copies: (a) its fee should be calculated at
the rate of R1 237.90 per copy; (b) over a period
of four years;
and (c) that in the event, its total claim under this heading would
amount to R7 744 302.40. The parties
also agreed that in
this event, interest on the amount awarded should be calculated as
from 14 December 2009, that being the date
on which the KPMG report
was communicated to the Department. Under this heading the dispute on
appeal therefore, again turned on
a narrow pivot, namely, was the
court a quo right in holding that, in terms of the maintenance
agreement, Attachmate was not entitled
to any fee for unlicensed
copies at all.
[13]
I proceed to deal first with the confined issue regarding
Attachmate’s claim under the license agreement. It is common
cause that this issue hinges on the interpretation of the expression
‘applicable license fee’ in clause 11 of the license
agreement. What is also common cause is that the expression is not
specifically defined in the agreement. According to Attachmate’s
witnesses, they intended ‘applicable license fee’ to be
represented by Attachmate’s list price for the particular
software. But of course, in accordance with established principles,
interpretation is a matter for the court and not for witnesses.
Accordingly, the admissibility of evidence in this regard is limited
to the provision of the context or the factual matrix of the
document
(see eg
KPMG Chartered Accountants (SA)
v Securefin (Ltd) & another
2009
(4) SA 399
(SCA) para 39).
[14]
As explained more recently by this court in
Bothma-Batho
Transport (Edms) Bpk v S Bothma & Seun Transport (Edms) Bpk
2014
(2) SA 494
(SCA) paras 10-12, the starting point in interpreting a
contract remains the words of the document. Yet the process of
interpretation
does not stop at the literal meaning of those words.
It construes them in the light of admissible evidence as to the
context of
the document, including the circumstances in which the
contract came into existence. With regard to context, Attachmate
pointed
out, first of all, that clause 11 explicitly relates to
unlicensed copies. It is therefore concerned with a situation where
an
audit had revealed a breach of contract by the Department. To
apply the deeply discounted rate that had been negotiated with Sita,
in these circumstances, so Attachmate’s argument went, would be
to encourage non-compliance with the license agreement. The
licensee
would be able to install and use software without charge until
discovered, after which it would pay the same rate that
had been
negotiated commercially. Hence, the licensee would benefit from its
own unlawful conduct and the interpretation which
found favour with
the court a quo would therefore encourage that unlawful conduct. By
contrast, so Attachmate argued, the interpretation
for which it
contends would serve to discourage and deter unlawful non-compliance
with the terms of the license agreement by unauthorised
copying of
its software. The licensee would know that if it breached the
agreement through unlicensed copying, it would have to
pay the
substantially higher list price whereas if it ‘came clean’
by seeking a license, it would only have to pay
the discount rate.
[15]
My problem with the interpretation contended for by Attachmate is
that it casts clause 11 in the role of a penalty clause.
I say that
because on that interpretation, Attachmate would get much more than
contractual damages for a breach by the Department
through unlicensed
copying. A contractual damages claim for such breach, as I see it,
would be calculated on the basis of the number
of unlicensed copies
multiplied by the price the licensee would have paid for every
license had that license been properly obtained.
Once it is
appreciated that Attachmate’s interpretation provides for a
penalty that exceeds its claim for damages, it becomes
apparent that
the ‘one size fits all’ provisions of clause 11 would
have a far more punitive impact on the licensee
with a substantial
discount than on the licensee who had to pay the list price in any
event. If that is so, I can think of no reason
why the parties would
have intended this result. After all, in that event the list price
would have a deterrent effect on the one
licensee and not on the
other. Moreover, once clause 11 is recognised as a penalty clause,
one would have expected a distinction
between the licensee who
deliberately and dishonestly copies to avoid payment of a license
fee, on the one hand, and the licensee
who negligently or even
inadvertently copies, on the other. The examples given by Attachmate
in argument of conduct by the licensee
which Attachmate would seek to
deter, all relate to deliberate dishonesty. But the difficulty with
these examples, as I see it,
is precisely that clause 11 is not
confined to deliberate conduct. It applies with equal force to
negligent or even inadvertent
copying. In this case there is no
suggestion that the Department was deliberately dishonest.
[16]
What the concept of ‘an applicable license fee’ conjures
up to me, is a flexible, supple yardstick: a fee that
varies in its
application with reference to the circumstances of every case,
including the identity of the licensee. It is not
a defined yardstick
that applies in all cases and with complete indifference to the
identity of the licensee, as would be the case
with a list price or
standard price of the seller. If this is so, ‘applicable fee’
with reference to a particular licensee
would of necessity be a
reference to the fee that this particular licensee has to pay, having
regard to the negotiated discount,
if any. Put somewhat differently:
once a license fee had been determined through negotiation between
Attachmate and the licensee
involved, I do not think the fee
applicable to that licensee can be determined without any reference
to the negotiated fee.
[17]
Accordance to the court a quo’s understanding, the whole
purpose of clause 11 was to provide Attachmate with a procedure
to
obtain evidence so as to determine whether unlicensed copies of its
software had been made and, if so, how many. I agree with
this
interpretation. The exact number of unlicensed copies would in most
cases be peculiarly within the knowledge of the licensee.
Without a
remedy in the nature of clause 11, Attachmate would potentially have
great difficulty in establishing a claim for damages
based on
unlawful copying. Once the number had been established, the licensee
would then have to pay the fee applicable to it.
Attachmate need not
prove any damages at all. That, I believe, was the purpose of clause
11. It was not intended to introduce a
penalty. Thus understood, the
clause was intended as a means in favour of Attachmate to facilitate
proof of its claim for the damages
it had suffered through unlicensed
copying. It was not intended to enhance the quantum of its damages
claim. There is no evidence
at all in this instance of deliberate
dishonesty on the part of the Department, and Attachmate did not
contend otherwise.
[18]
Finally, and even if I am wrong in my understanding of ‘applicable
fee’ Attachmate only has itself to blame. After
all, the terms
of its standard contract were clearly formulated by someone on its
behalf and approved by it. If it wanted to stipulate
for its list
price or its standard price or some other penalty in the situation
contemplated by clause 11, I can think of nothing
which prevented it
from doing so. These considerations are reflected in what is commonly
known as the
contra proferentem
rule
(see eg
Fedgen Insurance Ltd v Leyds
1995 (3) SA 33
(A) at 38B-E). It
follows that in my view the court a quo’s interpretation of
clause 11 of the license agreement cannot be
faulted. It follows from
this that the appeal against paragraph 1 of its order, cannot be
sustained.
[19]
This brings me to the appeal against the dismissal of Attachmate’s
claim under the maintenance agreement. The court a
quo’s
reasoning in support of this dismissal, went along the following
lines:
(a) In terms of the
maintenance agreement, maintenance fees are calculated with reference
to all licensed copies.
(b) There is no
express term in this agreement which obliges the Department to pay
maintenance fees in respect of any unlicensed
copy of the software.
(c) Attachmate did
not plead a tacit term that obliged the Department to purchase a
maintenance plan for an unlicensed copy.
(d)
In any event, such tacit term could not be read into the maintenance
agreement, because the Department would not be entitled
to use such
an unlicensed copy and therefore could not require maintenance for
it.
[20]
I find this line of reasoning fundamentally flawed. The fundamental
flaw, as I see it, is that it starts out from the assumption
that
Attachmate’s claim is for specific performance of the
maintenance agreement. That is a misconception. On Attachmate’s
pleadings, its claim for maintenance fees is clearly formulated as
one for damages arising from breach of contract. Moreover, it
was
common cause on the pleadings that the maintenance agreement was part
of the license agreement and that obligations flowing
from the former
were also derived from the latter. Properly understood, Attachmate’s
claim was therefore that it is entitled
in law to be placed in the
position – by way of an award of damages – it would have
occupied if the maintenance agreement,
read with the license
agreement, had been properly performed. That approach, as we all
know, is in accordance with the correct
yardstick in determining
contractual damages.
[21]
Application of that yardstick leads me to the following line of
reasoning:
(a) If the
Department had complied with its obligations under the license
agreement, it would have paid for and in that way become
the holder
of a license for all the copies it had eventually made and installed
on its PCs. That would, of course, have included
not only the 660
licensed copies, but the 1 564 unlicensed copies as well.
(b) In terms of the
maintenance agreement, maintenance fees were to be calculated on the
basis of each licensed copy.
(c) Had the
Department complied with the obligations under both agreements, the
1 564 unlicensed copies would have become licensed
copies, for
which Attachmate would have received a maintenance fee at the agreed
rate.
(d)
In order to place Attachmate in the position it would have occupied –
in terms of both contracts – if the Department
had complied
with its contractual obligations, damages would have to be awarded to
it which would be calculated on the basis of
1 564 x the agreed
rate x four years (between 2006 and 2009) which adds up to
R7 744 302.40.
[22]
Another contention raised by the Department as to why it should not
have to pay maintenance for more than the 660 licensed
copies, was
based on the evidence at the trial, that no more than 660
departmental employees had access to the Persal and Logis
electronic
files, with the result that no more than 660 employees had any use
for Attachmate’s software. The conclusion to
be drawn from all
this, so the Department’s argument went, was that, since only
660 employees could use the software, no
more than 660 copies had to
be maintained by Attachmate under the maintenance agreement. But I
believe there are two answers to
this contention. The first derives
purely from the facts. The second relies on the interpretation of the
maintenance agreement.
As to the first, the assumption that the
number of copies used would be no more than the number of employees
who were entitled
to use it, is a
non
sequitur
.
This is so because of the further evidence that one employee, who
visits different departmental offices in different localities,
could
use different PCs in those localities as long as they were installed
with Attachmate’s software. It follows that one
employee could
and probably would use a number of PCs upon which the software had
been installed. The second answer, which derives
from an
interpretation of the maintenance agreement is this: the agreement
clearly provided for payment of a fee in respect of
every copy which
the Department was entitled to use. It was not limited to the numbers
which it actually used. That is quite understandable.
The maintenance
agreement was in the nature of an insurance contract. It follows that
the Department had the right to demand maintenance
in respect of
every copy it was entitled to use in exchange for payment of the
‘insurance premium’. Whether or not
that right had in
fact been exercised by the Department, was of no consequence to
Attachmate in the calculation of the ‘insurance
premium’
payable under the maintenance agreement.
[23]
In the result:
1 The appeal is
upheld to the extent reflected in paragraph (3) below.
2 The respondent is
ordered to pay the appellant’s costs, including the costs of
two counsel.
3 Paragraph 2 of the
order of the court a quo is set aside and replaced by the following:
‘
2
In relation to the plaintiff’s claim for maintenance fees, the
defendant is ordered to pay the plaintiff:
2.1 The sum of
R7 744 302.40
2.2 Interest on the
sum of R7 744 302.40 at the rate of 15.5 per cent per annum
from 14 December 2009 to date of payment.’
4
Save for paragraph (3) above, the order of the court a quo is
confirmed.
__________________
F
D J BRAND
JUDGE
OF APPEAL
APPEARANCES:
For
the Appellant: A R Sholto-Douglas SC & M Ioannou
Instructed by:
Cliffe Dekker
Hofmeyr Inc, Cape Town
c/o,
Symington & De Kok, Bloemfontein
For
the Respondent: R Michau SC & M P D Chabedi
Instructed by:
The State Attorney,
Pretoria
c/o
The State Attorney, Bloemfontein