Filmflex Movies Ltd v Piksel Ltd [2015] EWHC 426 (Ch)

Case No HC-2014-001479[2015] EWHC 426 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Rolls Building, London, EC4A 1NLDate 24/02/2015
Before
MRS JUSTICE ROSE DBE
Between
FILMFLEX MOVIES LIMITEDClaimantPIKSEL LIMITEDDefendant
Anthony Peto QC and Tom Cleaver (instructed by Covington & Burling LLP) for ClaimantGuy Philipps QC and Deepak Nambisan (instructed by Olswang LLP) for DefendantHearing Hearing dates: 17 and 18 February 2015
JudgmentMrs Justice Rose DBE:
[1]The Claimant (‘FilmFlex’) seeks the delivery up of source code and related documentation to which it asserts it is entitled pursuant to a Master Services Agreement (‘the MSA’) entered into between it and the Defendant (‘Piksel’). FilmFlex also seeks damages for breach of contract because Piksel has refused to hand over the source code. On 19 December 2014, Barling J ordered that there be an expedited trial of a preliminary issue identified as whether on the true construction of the relevant contractual arrangements and in the events which have happened, FilmFlex is entitled to the delivery up of and/or to require Piksel to procure the delivery up of the source code and documentation relating to six different categories of material referred to in the MSA plus the Source Control Database as defined in the MSA.[2]Evidence in support of FilmFlex’s application was given by Allan Dembry who is the Chief Information Officer of Vubiquity Inc, an American company which acquired FilmFlex in May 2014. Piksel did not require him to attend for cross-examination. FilmFlex also served an expert report from Professor Wolfgang Emmerich who is Professor of Distributed Computing at University College, London. In his report, Professor Emmerich explains the difference between source code (which is in human-readable form) and object code (which is a series of hexadecimal numbers). He concludes that the only commercially realistic way to carry out the acts that FilmFlex is licensed to do with the software under the MSA is by modifying the source code and then compiling it into object code. Professor Emmerich’s report was not challenged by Piksel. Evidence for Piksel was given by Mark Christie currently Chief Technical Officer of Piksel. He was briefly cross-examined by Mr Peto QC on behalf of FilmFlex but there is really nothing contentious about his evidence.

The business of the parties

[3]FilmFlex is a provider of video-on-demand movie streaming services. It provides this service to customers such as Virgin Media, TalkTalk and EE who want to stream movies and other video content to their own customers. FilmFlex provides these services by means of an online content delivery platform which was designed, built and maintained for it by Piksel.[4]Piksel used to be called ioko365 Ltd and is referred to by that name in the MSA. It is a video broadband software designer and developer and a managed services provider that designs, creates, hosts and manages the software, websites and other components that allow its customers to deliver video content online. Its customers are primarily video content owners, aggregators and distributors such as FilmFlex. The software system at the centre of this dispute is referred to in the MSA as ‘the Platform’. The Platform performs a number of functions, including delivering the video content, managing which content is available to which consumers and interfacing with the billing systems of FilmFlex’s customers so that they can incorporate the fees for viewing the videos into their overall invoicing to their individual customers.[5]Piksel began developing the Platform in early 2007 and by around 2010 it was ready to be launched commercially. On 28 April 2010, FilmFlex and Piksel entered into an Interim Services Agreement (‘the ISA’) which was expressly stated to be intended to govern their relationship only until a longer term agreement could be concluded. That longer term agreement was the MSA and was concluded on 21 June 2012. In the MSA FilmFlex is referred to as ‘the Company’ and Piksel is referred to as ‘ioko365’. According to clause 2.1, the MSA sets up a framework whereby Piksel will provide services to FilmFlex under a series of work specification contracts designed to accomplish various projects over the course of future years. Piksel is required to deliver the Platform in accordance with specified service levels and to ensure that the Platform offers specified technical and functional capabilities. A procedure whereby the different Work Specification Contracts would be negotiated and concluded was set out in section 3 of the MSA and there was also provision for tests to be carried out on the work done by Piksel before FilmFlex would accept the work. Other clauses describe the mechanism whereby Piksel would be paid for its work on a time and materials basis in accordance with rates set out in the MSA, or else on a fixed price basis.[6]There are several defined terms which are important to the construction of the MSA:
““Company Platform” the online platform with the technical and functional capabilities set out in the Source Control Database on and post the Identified Date “Company Platform Materials” all software, data, text, graphics, sounds, other materials and all Intellectual Property Rights subsisting therein or relating thereto designed, developed or created specifically for the Company (excluding Third Party Software), from the Identified Date “the Company Materials” all software, data, text, graphics, still or moving images, sounds and other materials supplied by or on behalf of [the] Company for use in development of the Platform, in connection with this Agreement and/or provision of the Services “ioko365 Materials” all data, text, graphics, sounds and other materials used or supplied by ioko365 in the course of providing the Services, but excluding software and materials which are obtained for the Company from a third party and excluding Company Platform Materials “ioko365 Platform” the online platform with the technical and functional capabilities set out in the Source Control Database as at the Identified Date “Platform” both the ioko365 Platform and the Company Platform “Services” the supply of Outputs and the performance of Tasks and Operational Services “Source Code” the source code of all the modules and components comprised in the relevant software in human-readable form and in such form that it can be compiled or interpreted into object code together with all technical information and documentation (including all specifications, input and output formats, algorithms and file structures) that are necessary for the use, reproduction, modification and enhancement of such software or have been used for such purposes “Source Control Database” a document detailing the timeline, codebase and code of iterations of the changes to the Platform”
[7]The term ‘Intellectual Property Rights’ used in the MSA was given a very wide scope in the definition clause. The Identified Date referred to is 24 June 2011.[8]A key provision of the MSA for the purposes of the current dispute is clause 9. The first two subparagraphs of clause 9 deal with the division of the intellectual property rights in the Platform. They provide:
“9.1 For the purposes of this Agreement only and subject to clause 9.4, all Intellectual Property Rights in the ioko365 Materials and the ioko365 Platform belong to ioko365. ioko365 grants the Company a perpetual, royalty free, non-exclusive, non-transferable, irrevocable licence to run, use, access, maintain, modify, enhance, copy and create derivative works of the ioko365 Materials, ioko365 Platform and all associated documentation, as applicable, throughout the world (and permits its subcontractors to do the same for the sole purpose of providing services to the Company). 9.2 All Intellectual Property Rights in the Company Materials, the Company Platform, the Company Platform Materials and Company Data belong to the Company. The Company grants ioko365 a non-exclusive, non-transferable, revocable licence during the term of this Agreement to use, copy, access, maintain, modify, enhance and create derivative works of the Company Materials, Company Platform Materials and Company Data for the sole purpose of delivering the Platform to the Company and delivering the Services.”
[9]Subsequent subparagraphs of clause 9 deal with the setting up of an Escrow Account to hold a copy of different elements of the software being developed by the parties:
“9.7 ioko365 shall ensure that (i) the Source Code for all ioko365 Materials, Company Platform Materials, and Third Party Software (other than off the shelf software), and (ii) the Source Control Database, is placed in escrow with NCC Escrow International Limited (…) (the “Escrow Agent”) on the Company’s request and at the Company’s cost within 60 days of the Commencement Date. The Company, ioko365 and the Escrow Agent shall enter into a three-party source code escrow agreement in the agreed form (incorporating such amendments as the Escrow Agent may reasonably request) (the “Escrow Agreement”) in respect of the ioko365 Materials, Company Platform Materials and Third Party Software (other than off the shelf software) and the Source Control Database. The service of a Termination Notice shall be a release event for that Source Code or Source Control Database under the relevant Escrow Agreement. 9.8 ioko365 shall ensure that all Source Code or Source Control Database placed into escrow under this Clause 9 is updated whenever there is a material change to that Source Code and, in any event, at least once every three (3) months.”
[10]Clause 9.10 dealt with the trigger events upon the occurrence of which the Escrow Agent would release the material held in escrow to FilmFlex (in addition to the termination of the agreement referred to in the last sentence of clause 9.7). “9.10 The trigger events for release of the Source Code or Source Control Database under the Escrow Agreement are:9.10.1 termination of the Agreement by either the Company or ioko365, or ioko365’s material or persistent breach of this Agreement;9.10.2 termination by the Escrow Agent of the Escrow Agreement;9.10.3 the insolvency of ioko365;9.10.4 a change of Control of ioko365; or9.10.5 the appointment by the Company of a third party to provide any part of the Services or any other services in relation to the Platform, the ioko365 Materials or the Company Platform Materials” 9.10.1 termination of the Agreement by either the Company or ioko365, or ioko365’s material or persistent breach of this Agreement; 9.10.2 termination by the Escrow Agent of the Escrow Agreement; 9.10.3 the insolvency of ioko365; 9.10.4 a change of Control of ioko365; or 9.10.5 the appointment by the Company of a third party to provide any part of the Services or any other services in relation to the Platform, the ioko365 Materials or the Company Platform Materials”[11]Clause 9.11 then provided:
“9.11 In addition to the trigger events set out in Clause 9.10, ioko365 acknowledges and agrees that the Company will have access to the Source Code (and ioko365 shall reasonably co-operate in the provision of such access) throughout the term of this Agreement upon the Company’s request.”
[12]After the MSA was concluded, an agreement was entered into between FilmFlex, Piksel and NCC Group Escrow Limited (‘NCC’). Piksel signed the agreement in late August 2012 and FilmFlex and NCC signed it on 22 November 2012 (‘the Escrow Agreement’). It refers to Piksel as the ‘Owner’ and to FilmFlex as the ‘Licensee’. The aim of the agreement is stated to be to set out the circumstances in which Piksel’s technical information licensed to FilmFlex can be released by NCC to FilmFlex.[13]The clause of the Escrow Agreement most relevant to this dispute is clause 6. This sets out the ‘Release Events’ on the occurrence of which NCC will release ‘the Material’ to a duly authorised officer of FilmFlex. The Material is defined as:
“the Source Code of the Package and such other material and documentation (including updates and upgrades thereto and new versions thereof) as are necessarily to be delivered or deposited to comply with clause 2 of this Agreement”
[14]The ‘Package’ referred to there means the software package licensed to FilmFlex. There are various Release Events set out in clause 6 of the Escrow Agreement. They are, broadly, as follows: i) If the Owner is a company, the winding up of, or appointment of an administrator for, the Owner or where the Owner enters into a compromise with its creditors or has a receiver appointed; ii) If the Owner is an individual, the death or bankruptcy of the Owner or where the Owner enters into a compromise with his creditors; iii) If the Owner is a partnership, where any of the partners are declared bankrupt or compromise with their creditors or the partnership is wound up or dissolved; iv) Where the Owner ceases to carry on its business or the part of the business which relates to the Package; v) Where the Owner assigns its rights in the Material to a third party and that third party does not adopt the Escrow Agreement; or vi) Where the Owner is in material breach of its obligations to keep the Package up to date.[15]It can thus be seen that the Release Events in clause 6 of the Escrow Agreement do not mirror the trigger events listed in clause 9.10 of the MSA.[16]The MSA and Escrow Agreement operated for some time; considerable work was done to develop the Platform by Piksel and substantial fees were paid for that work to Piksel by FilmFlex – over £7 million during the course of the project as a whole and a substantial proportion of that following the conclusion of the MSA.[17]In September 2014 FilmFlex asked Piksel for a copy of the source code created after the Identified Date. Piksel provided a file which it said complied with the request but which FilmFlex says is functionally useless. On 17 November 2014 FilmFlex appointed a third party developer ADITI Technologies Private Limited (‘ADITI’) which FilmFlex wants to work on developing the Platform.[18]FilmFlex submits that there are a number of contractual routes by which it is now entitled to a copy of the Source Code;(i) a right to the release of the Source Code in escrow because the trigger event specified in clause 9.10.5 has occurred;(ii) a direct right as against Piksel to access to the Source Code under clause 9.11; and(iii) an entitlement to a copy under clauses9.1 and9.2 because of the combination of ownership and licence of the intellectual property rights in the Platform. Piksel has refused to provide a copy of the Source Code. It argues that the only circumstances in which the MSA envisages that Source Code will be delivered up to FilmFlex is by release of the code from the Escrow Account on the happening of events which oblige the Escrow Agent to release it. Those events are set out in the Escrow Agreement and none of the circumstances described there has arisen. They therefore deny that FilmFlex is entitled to delivery up of a copy of the Source Code or that Piksel is obliged to direct NCC to release a copy to FilmFlex. (a). The application of clause 9.10.5 of the MSA[19]As I have described, the Release Events included in the Escrow Agreement are not the same as the trigger events listed in clause 9.10 of the MSA. The parties differ as to the legal consequences of this fact. FilmFlex accept that the direct obligation of NCC under the Escrow Agreement to release the Package to FilmFlex can only arise if one of the Release Events in clause 6 of the Escrow Agreement occurs and that has not happened. They therefore accept that they cannot seek the Source Code directly from NCC. But they submit that does not affect their ability to require Piksel to join with them in instructing NCC to release the Source Code to FilmFlex where Piksel is under a contractual obligation to FilmFlex to do so.[20]In my judgment, there is an implied, if not an express, provision in the Escrow Agreement whereby NCC can be required to release the Source Code and Source Control Database to FilmFlex if the Owner and the Licensee jointly instruct them to do so in circumstances other than those set out in clause 6. FilmFlex and Piksel can agree between themselves as to additional circumstances where that should happen and that agreement can be found outside the terms of the Escrow Agreement itself. Further, I consider that the final sentence of clause 9.7 and clause 9.10 of the MSA amount to just such an agreement. They set out the circumstances in which Piksel is obliged to bring about the release of the Source Code and the Source Control Database from the Escrow Account. It is not disputed that the event specified in clause 9.10.5 has occurred. I consider that the proper construction of the MSA is that where an Escrow Account is set up by Piksel with NCC in compliance with clause 9.7, Piksel is bound to consent to the release of the Source Code and Source Control Database where FilmFlex appoints a third party to provide any services for the Platform, the ioko365 Materials or the Company Platform Materials.[21]Piksel’s argument to the contrary was based on an assertion that 9.10 was superseded by the conclusion of the Escrow Agreement and that the Release Events in clause 6 were now the only circumstances in which NCC and Piksel are obliged to release the Source Code to FilmFlex. Mr Philipps QC on behalf of Piksel argues that clause 9.10 does not impose any obligations itself but merely sets out what the parties intended at that stage would be included in the future Escrow Agreement. That intention must have changed, as evidenced by the fact that they both signed the Escrow Agreement in terms which are very different from clause 9.10 of the MSA. Mr Philipps further submits that where a subsequent agreement between the parties contradicts the terms of an earlier agreement, the later provisions should prevail. Having freely entered into the Escrow Agreement, FilmFlex cannot, he said, turn the clock back or enforce the previous provisions in the MSA about what the Escrow Agreement should contain.[22]I do not accept that a reasonable observer would interpret the MSA and the Escrow Agreement as Piksel suggest in the circumstances pertaining here. Although the Escrow Agreement was signed some months after the MSA, that is not because there were continuing detailed negotiations between Piksel and FilmFlex over what should trigger release from the Escrow Account. On the contrary, the evidence shows that: i) The terms of the Escrow Agreement were based on NCC’s standard printed terms and conditions provided to the parties by NCC. ii) They were provided to the parties and were in their possession while the MSA was being negotiated. Clause 6 was in its present form at the time the MSA was signed in June 2012. iii) Although there were some email exchanges and discussion about changes to the NCC standard terms subsequent to the execution of the MSA, there is no evidence of discussion or negotiation about the scope of the release events in clause 6 or the differences between those release events and the trigger events included in clause 9.10 of the MSA. iv) There is certainly nothing in the evidence to indicate to an objective observer that the parties intended, when the Escrow Agreement was signed, that the only circumstances in which FilmFlex could obtain the release of the material from the Escrow Account were those included in NCC’s standard terms.[23]I do not accept that the mere fact that the Escrow Agreement came after the MSA was signed means that its terms oust the terms of the MSA. I agree with Mr Peto that there is no real inconsistency between the two agreements because clause 9.10 of the MSA and clause 6 of the Escrow Agreement are dealing with different things. Clause 9.10 is dealing with the obligations of FilmFlex and Piksel between themselves to bring about the release of the Package from Escrow whereas clause 6 of the Escrow Agreement is dealing with the circumstances where FilmFlex can demand release of the Package directly from NCC. The substitution of the much more limited Release Events in clause 6 of the Escrow Agreement for the more extensive trigger events in clause 9.10 would have been a substantial surrender by FilmFlex. This was particularly so in respect of clause 9.10.5 which reflects the freedom conferred on FilmFlex under other terms of the MSA (discussed below) to appoint another contractor in addition to or instead of Piksel. There is no reason why FilmFlex would retain the right to make such an appointment under the MSA but give up the entitlement to release of the Source Code from escrow under clause 9.10.5.[24]If there is an inconsistency between the two agreements then I consider that the bespoke wording of clause 9.10 should prevail. Mr Peto referred me to the statement of Lord Bingham of Cornhill in Homburg Houtimport BV and others v Agrosin Private Ltd and another [2003] UKHL 12 that it is common sense that greater weight should attach to terms which the particular contracting parties have chosen to include in the contract rather than to pre-printed terms probably devised to cover very many situations to which the particular contracting parties have never addressed their minds. The standard terms of the NCC Escrow Agreement are drafted in terms that apply to situations that the parties must have realised do not apply here. The provisions relating to where the Owner is a partnership or an individual have been left in even though they are of no relevance here. There are other respects in which the terms agreed are not appropriate to the arrangements between Piksel and FilmFlex, for example, Piksel warrants under the Escrow Agreement to both NCC and FilmFlex that it is the owner of all the rights in the material deposited. Clearly that was not true because FilmFlex owned the rights in part of the package under clause 9.2 of the MSA. That in my judgment is another pointer to the correct construction of the MSA being that clause 9.10 remains in force, despite the signature of the Escrow Agreement, and sets out the circumstances in which the Source Code or Source Control Database should be released under the Escrow Agreement.[25]I therefore find that FilmFlex is entitled to require Piksel to procure NCC to deliver up the Source Code together with the Source Control Database pursuant to clause 9.10.5 of the MSA. (b). Clause 9.11[26]FilmFlex submit that clause 9.11 provides it with a direct entitlement to obtain a copy of the Source Code from Piksel at any time upon request. Piksel deny that that is the proper construction of the clause. Piksel rely on the opening words of the clause which refer to the right conferred there being ‘in addition to the trigger events set out in Clause 9.10’. They argue that clause 9.11 is also only dealing with access by FilmFlex to the Source Code as held in the Escrow Account by NCC, not with access to the Source Code held by Piksel. The clause is intended, they say, only to allow FilmFlex to look at the material on NCC’s servers. FilmFlex might want to do this to check that the version of the Source Code deposited there incorporates the updates and amendments that the Source Control Database indicate should have been included in the Escrow Account version.[27]I do not accept that that is a tenable construction of the clause. Although the opening words of the clause refer to the right being in addition to the trigger events set out in clause 9.10 there is nothing else in the wording that indicates that the access intended is only access to the copy of the Source Code held by NCC rather than the Source Code in Piksel’s possession. It is true that clause 9.11 comes after subparagraphs 9.7 to 9.10 that deal with setting up the Escrow Account. But clause 9 deals with a number of different matters as well as the Escrow Account and covers generally the arrangements for owning and sharing the software created under the MSA and used by the parties. Piksel’s interpretation would involve NCC being expected to allow FilmFlex’s software engineers to come onto NCC’s premises – or at least to be given remote access to NCC’s servers – in order to look at Source Code held on those servers at any time during the currency of the MSA. That would be an unusual and rather cumbersome role for an Escrow Agent to be expected to fulfil. Further, the wording of clause 9.11 is inconsistent with that reading because the clause expressly states that the right to access conferred operates throughout the term of the Agreement. The obligation to enter into the Escrow Agreement under clause 9.7 is an obligation to place the Source Code and the Source Control Database with NCC within 60 days of the commencement date of the Escrow Agreement.[28]Mr Philipps also relies on the omission from the MSA of a clause that existed in the earlier ISA. That earlier agreement provided in clause 7.5.1 that on termination of the ISA, ioko365 would return to FilmFlex full copies of all FilmFlex materials then held by ioko365, together with all ioko365 platform materials including a full copy of the source code. ioko365 would then destroy all other copies of those materials. He points to the fact that there is no similar provision in clause 14 of the MSA dealing with termination of the new agreement. I do not consider that the omission from the termination provisions in clause 14 of the MSA of a clause in similar terms to clause 7.5.1 in the ISA indicates that the parties to the MSA intended that on termination of the agreement they should not have any rights to receive copies of the Source Code or that any such rights were restricted to obtaining copies of the Code from NCC. This ignores the reality of the fact that the parties were using and developing the Source Code all the time on their own servers. There is no reason why they should tie themselves to copies of the Code deposited with the Escrow Agent. The MSA contained a very different division of the rights as between the parties. Even if one should assume that those drafting the MSA were aware of the existence of clause 7.5.1 in the ISA, I do not accept that the omission of a similar clause in the MSA which is expressly intended to replace and restate the earlier terms can bear the significance that Piksel seek to place on it.[29]I therefore reject the submission that clause 9.11 only relates to access to the material in the hands of the Escrow Agent.[30]Piksel further deny that clause 9.11 entitles FilmFlex to a copy of the Source Code because the clause only refers to FilmFlex having ‘access’ to the Source Code not to having a copy of it. They say that if their primary argument about the Escrow Account is wrong, the most that they are obliged to allow FilmFlex to do under clause 9.11 is look at the Source Code on Piksel’s servers, it does not entitle FilmFlex to delivery up of a copy. On this point I agree with Mr Peto that what is included in a right of ‘access’ to something must depend on the nature of the thing and the purpose for which that access is given. He gave the example of where hotel guests are told that they have access to the hotel swimming pool. This does not mean that they can only go to look at the pool; it must mean that they are entitled to swim in it as well. Clause 9.11 does not specify for what purpose access to the Source Code is given. The key to this lies in the definition of Source Code which is the source code of the relevant software together with all technical information and documentation ‘that are necessary for the use, reproduction, modification and enhancement of such software or have been used for such purposes’. In my judgment if a contract gives one party access to certain material and the scope of that material is defined as including everything necessary to carry out certain activities, then it makes sense to construe the access granted as including whatever access is needed in order to carry on those activities. If FilmFlex wants to use, reproduce, modify or enhance the software they must not only be able to look at the source code (which I am told comprises about three million lines of code) but also have a copy of it that they can use. That is what the report of Professor Emmerich establishes and that was not seriously contested by Piksel. I therefore conclude that the parties intended by clause 9.11 that FilmFlex should be entitled to obtain a copy of the Source Code from Piksel on request at any time during the currency of the MSA. This is therefore another contractual route which entitles them to the relief sought.[31]Mr Philipps objected that such an obligation would be tantamount to giving FilmFlex ownership of the whole Platform. FilmFlex could then use the Source Code to develop the Platform further with other software engineers, pushing Piksel out entirely. The answer to that submission is two fold. First, FilmFlex does not claim rights over the Platform tantamount to ownership. It recognises that the licence granted by clause 9.1, though widely drawn, is not all encompassing. It does not entitle FilmFlex to sell the ioko365 Materials and ioko365 Platform or licence it freely to third parties. FilmFlex is only entitled to use it for its own business of providing platform services to its clients such as Virgin Media. Secondly, I do not see the consequences of this construction of the clause as commercially surprising. The ability to use, modify and enhance the Platform is essential for FilmFlex’s business of supplying existing customers with a service that can evolve speedily to incorporate new technical solutions to provide its customers and the ultimate consumer with the video on demand services that they want. Mr Peto stressed and I accept that in this sector it is essential that the service that FilmFlex provides to its customers and hence the service that those customers provide to the ultimate consumer is not interrupted or compromised by a change of software developer. It is also essential to have the Source Code when FilmFlex wins a new customer and needs to integrate that new customer’s software with the Platform. The MSA makes clear that although FilmFlex is using Piksel to develop the Platform, it does not want to be beholden to Piksel exclusively or indefinitely for the ongoing work needed to keep the Platform up to date. There is no reason why FilmFlex should be so tied to Piksel, given that they have paid Piksel the contract rates for the work that Piksel has done. FilmFlex point to other provisions in the MSA as indicating that the intention of the parties was that FilmFlex’s freedom to develop and operate the Platform independently of Piksel was assured. In particular, clause 2.6 of the MSA provides that FilmFlex and its affiliate companies could obtain the same or similar services to those provided by Piksel from any other source and were not obliged to purchase a minimum amount of services from Piksel. It is difficult to see the value of that freedom conferred on FilmFlex if they are not entitled to a copy of the Source Code for the Platform to provide to the alternative contractor.[32]Piksel argue that on FilmFlex’s construction of the agreement, FilmFlex could have insisted, the day after the MSA was concluded, on obtaining all the Source Code then in existence, they could have given it to a third party developer and not used or paid Piksel for any development work. I do not need to decide whether the MSA would have operated in that manner since that is not the position that the parties are currently in. There has been substantial development work and substantial payments under the agreement. But even if that were the position, it would not have been commercially nonsensical for Piksel to enter into an agreement on those terms in the hope and expectation that FilmFlex would not in fact behave that way but would continue the cooperative relationship started in the Interim Service Agreement. (c). Clauses9.1 and9.2 [33]The third route by which FilmFlex claim to be entitled to delivery up of a copy of the Source Code from Piksel is in the exercise of the rights conferred on them by clause9.1 and9.2 of the MSA. The ownership of the intellectual property rights in the Source Code is split so that the Source Code for the software in the platform as it stood before 24 June 2011 belongs to Piksel and is licensed in very wide terms to FilmFlex and the Source Code created after that date belongs to FilmFlex and is licensed in much narrower terms to Piksel. Does this combination of ownership and licence entitle FilmFlex to a copy of the Source Code for the whole Platform?[34]Mr Philipps argues that it does not. The only references in the MSA to Source Code as that term is defined are in the provisions in clause 9 which deal with the Escrow Arrangements. He includes in that class of provisions clause 9.11. None of the other clauses refers to Source Code so, Piksel argues, the entitlement to a copy of Source Code arises only under the Escrow Arrangements. As Mr Philipps put it “it’s escrow or nothing and in the events which have happened, it’s nothing”.[35]I do not accept that that is how a reasonable person would construe the MSA. I agree with Mr Peto that the definitions of the terms included in clause9.1 and9.2 must include the source code for the relevant software in order for those definitions to make sense. For example, the ioko365 Materials referred to in clause 9.1 are defined as all data, text, graphics, sounds and other materials ‘used or supplied by ioko365 in the course of providing the Services’ other than third party software or Company Platform Materials. Piksel used and supplied the source code for the ioko365 Platform in the course of providing the Services under the MSA. Piksel themselves refer to having carried out the ‘debugging’ work which inevitably arises in the course of operating a complex piece of software like the Platform. That work requires them to examine and correct the Source Code. Source Code must therefore be included in the ioko365 Materials. Similarly the term Company Platform Materials used in clause 9.2 is defined including all software, data and other materials ‘designed, developed or created specifically for the Company’, excluding Third Party Software, from 24 June 2011. Again it would not make sense to carve out Source Code from this definition. Given the scope of these definitions, I do not therefore accept that so much significance can be attached to the fact that the precise phrase ‘Source Code’ is only expressly used in clauses 9.7 to 9.11. The term is used in those clauses because the material which Piksel is obliged to deposit into the Escrow Account is limited to the Source Code and Source Control Database, that is only a subset of the material referred to in clauses 9.1 and 9.2. But that does not mean that the Source Code is left out of clauses 9.1 and 9.2. It follows from this reasoning therefore that the licence granted to FilmFlex of the Intellectual Property Rights in the ioko365 Materials and the ioko365 Platform includes a licence for the Source Code for that software.[36]Does that licence necessarily entitle FilmFlex to a copy of the Source Code? In my judgment it does. The licence allows FilmFlex to carry out various activities in relation to the licensed IPR. According to the unchallenged evidence of Professor Emmerich, those activities can only sensibly be carried out if FilmFlex has a copy of the Source Code to use itself. Piksel argued that a licence of the IPR in the Source Code does not entitle FilmFlex to what Mr Philipps referred to as the ‘physical delivery up’ of the Source Code or the ‘handing over’ of a copy. He sought to distinguish between the copyright in an article and the right to physical delivery up of that article. The analogy he relied on was with a painting. The artist owns the copyright in the painting and can prevent anyone reproducing it, but once the painting is sold his copyright does not entitle him to demand delivery up of the painting itself. Similarly with a book, the author owns the copyright in the content of the book but is not entitled to possession of every copy of the book that comes into existence. I do not find that analogy helpful here. Source Code is very different from a painting or a book in a number of respects. The first is that it is itself incorporeal. Although it can be copied onto a memory stick or a disc, it does not thereby become a physical thing; the stick or disc are merely two means of transporting the intangible Source Code from one computer to another. That can as easily be achieved in ways which do not result in the Source Code being incorporated into a physical object, for example by emailing a file to the licensee or allowing the licensee to download a copy onto his computer from the owner’s website. Secondly, unlike a painting, Source Code is not surrendered by the owner once he provides a copy to the licensee; it remains intact on the owner’s system once he has sent a copy to the licensee. The third important feature of the Source Code in this case is that although it is possible to have many copies of it held by different people, at the moment FilmFlex does not have a copy even though it owns the intellectual property rights in part of the Platform software and has an extensive licence to use other parts. Only Piksel and NCC have up to date copies of the Source Code for the software. If FilmFlex is entitled under its rights of ownership under clause 9.2 or its licence under clause 9.1 to make a copy of the Source Code but the only copy which currently exists is with the other party to the contract, then the other party must give FilmFlex a copy so that FilmFlex can itself make a copy of it.[37]I therefore accept FilmFlex’s argument that in this contract, the parties must have intended by licensing each other to use the rights in their software in the manner described in clause9.1 and9.2 that they would be entitled to a copy of the software from the other if that was necessary in order for those rights to be exercised. Thus, in a situation where(i) FilmFlex is granted rights over the whole of the Platform which entitle it to use, copy, modify etc that software;(ii) it can only sensibly carry out those activities if it has a copy of the Source Code;(iii) it does not currently have a copy of the Source Code but Piksel does have a copy; and(iv) Piksel can provide FilmFlex with a copy and at the same time retain a copy which enables it to exercise its own rights (ownership and licence) in the Platform, a reasonable observer would interpret the contract as meaning that Piksel is required on request to provide FilmFlex with a copy of the Source Code. If that right is not conferred by clause 9.11 (and I have held that it is) then it must be conferred impliedly by clauses 9.1 and 9.2.[38]My answer to the preliminary issue is therefore that on the true construction of the contractual arrangements and in the events which have happened, FilmFlex is entitled to delivery up of the Source Code by Piksel and also to require Piksel to procure the delivery up of the Source Code by NCC.[39]Since there has been some debate about what ‘delivery up’ means in the context of Source Code, I should make it clear that delivery up means providing a copy of the Source Code in a format which means that the copy can be kept by FilmFlex, revised by them in a way which results in that copy diverging from any copy retained by Piksel and which FilmFlex can transfer to a third party without the further involvement in that transfer of Piksel. Whether this is effected by providing the Source Code on a memory stick or disc or by emailing a file does not matter.