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Centrestage Management Pty Ltd v Riedle [2008] FCA 938 (20 June 2008)

Last Updated: 20 June 2008

FEDERAL COURT OF AUSTRALIA

Centrestage Management Pty Ltd v Riedle [2008] FCA 938

COPYRIGHT – computer programs – contract for supply – implied licence in purchaser to use program without thereby infringing vendor’s copyright – whether implied term that purchaser have access to source code.


CONTRACT – implied terms – terms implied by law in contracts of a particular type independently of parties’ actual or presumed intention – terms implied to give business efficacy to a particular contract – contract for supply of computer program – implied licence in purchaser to use program without thereby infringing vendor’s copyright – whether implied term that purchaser have access to source code


Copyright Act 1968 (Cth) ss 10, 21(5), 31, 35(6), 47AB, 47D, 47E


De Garis v Neville Jeffress Pidler Pty Ltd (1990) 18 IPR 292 referred to
Beck v Montana Constructions Pty Ltd [1964-5] NSWLR 229 considered
Pacific Software Technology Ltd v Perry Group Ltd [2004] 1 NZLR 164 cited
Computer Edge Pty Ltd v Apple Computer Inc [1986] HCA 19; (1986) 161 CLR 171 referred to
Data Access Corporation v Powerflex Services Pty Ltd [1999] HCA 49; (1999) 202 CLR 1 referred to
Codelfa Constructions Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 applied
Liverpool City Council v Irwin [1976] UKHL 1; [1977] AC 239 applied
Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 cited
Byrne v Australian Airlines Ltd (1995) 185 CLR 410 applied
Scally v Southern Health and Social Services Board [1992] 1 AC 294 referred to
Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd [2006] HCA 55; (2006) 229 CLR 577 distinguished
Avel v Multicoin Amusements Pty Ltd [1990] HCA 58; (1991) 171 CLR 88 distinguished
TSB Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3) [2007] FCA 151; (2007) 72 IPR 492 distinguished
Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1; (1986) 160 CLR 16 applied
Roy Morgan Research Centre Pty v Commissioner of State Revenue (Victoria) 37 ATR 528 referred to

Chitty on Contracts, General Principles 29^th ed (2004)


CENTRESTAGE MANAGEMENT PTY LTD v TONY RIEDLE
VID 706 OF 2007

SUNDBERG J
20 JUNE 2008
MELBOURNE

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellant pay the respondent’s costs of the appeal.












Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

BACKGROUND

1 The appellant was incorporated on 18 November 2003. It provides administration and computer consultancy services. Its directors are David Roberts and Conni Paglianiti. In 2000 Mr Roberts, as an employee of Advanced Administration Services Pty Ltd (AAS), wrote a computer program for the Salvation Army for its home collection services. The program was written in Visual Basic. In 2002 Mr Roberts upgraded the program, again in Visual Basic and still as an employee of AAS. AAS went into administration on 21 November 2003 and was later wound up.

2 In late 2003 the Salvation Army told Mr Roberts it was contemplating a further upgrade of its home collection program. Mr Roberts was unable to do the upgrade himself, partly because at that time he was in full time employment with Eastern Ocean Pty Ltd. Mr Roberts discussed the upgrade with the respondent, a computer programmer. It was agreed that the respondent would prepare a proposal for the project to be given by the appellant to the Salvation Army. It was later agreed that the respondent would provide the updated program in three stages. The program would be written by the respondent in the .NET language. He would be paid by the appellant $19,800 for the first stage, a sum to be determined later for the second stage, and $13,200 for the third stage. The appellant’s contract with the Salvation Army provided for payment to the appellant of a sum greater than that payable by the appellant to the respondent. The appellant gave the respondent a copy of the 2002 version of the program to enable him to update it.

3 The respondent provided the first stage of the upgrade and was paid for it. The second stage did not proceed, as it was deferred pending the Salvation Army buying GPS equipment for its collection trucks. The third stage was not completed.

4 On 7 November 2005 Mr Roberts told the respondent by email that he had to "look at the home collections database for the Salvos", and asked the respondent to send him "the project files". The respondent did not reply to the request, and on 22 November Ms Paglianiti asked him whether she could pick up the "home collections database" from his home. He replied on the same day that "we need to resolve payment for IP and Report Design work already undertaken first".

5 On 7 December 2005 the respondent received a letter from the appellant’s solicitors requesting a copy of the source code for the program. The solicitors claimed that the respondent had no intellectual property rights in the source code. The respondent did not supply the source code, and in February 2006 the appellant brought proceedings in the Federal Magistrates Court claiming, inter alia, that the respondent’s refusal to hand over the source code was a breach of his contract of employment with the appellant. The appellant sought

• an injunction restraining the respondent from copying, using or disclosing the updated home collection program and its source code (the materials)

• an order that the respondent deliver up the materials to the appellant

• a declaration that the appellant is the proprietor of the copyright in the materials

• damages for breach of contract.

6 The respondent cross claimed for

• a declaration that he owned the copyright in the updated program

• an injunction restraining the appellant from reproducing the source code in the program

• an order that the appellant pay him $6,600 for work done on the third stage of the project.

7 The Magistrate dismissed the application, and on the cross claim granted the injunction and ordered the payment of $275 for work done on the third stage of the project.

8 The Magistrate rejected the appellant’s claim that the respondent was its employee, dismissed its claim that it was an implied term of their contract that the appellant was entitled to delivery up of the source code, and its claim that it was the proprietor of the copyright in the updated program.

ISSUES ON APPEAL

9 Three issues call for decision. The parties are agreed as to the formulation of two of the issues. The first is whether the Magistrate erred in holding that the respondent was an independent contractor rather than an employee of the appellant. The second is whether, on the basis that the respondent owned the copyright in the updated program, her Honour erred in concluding that while it was an implied term of the relationship between the parties that the appellant had a licence to use the "application", the licence did not extend to the right to access and use the source code. The parties did not agree upon the formulation of the third issue. The appellant contended that it was whether the Magistrate had failed to deal with the question whether, if "version 3" of the program was an adaptation of "version 2", so that the respondent was not the owner of the copyright in "version 3", he was obliged to deliver up the source code regardless of who was the owner. The respondent said the question was whether, having found that the appellant was not the owner of the copyright in "version 2", the Magistrate was correct in concluding that the respondent was not obliged to deliver up the source code. It will be necessary later to identify the true issue that was before the Magistrate. The expressions "version 1", "version 2" and "version 3" are respectively references to Mr Roberts’ initial program (2002), his update (2002) and the respondent’s update.

EMPLOYEE OR INDEPENDENT CONTRACTOR

10 A computer program is a literary work for the purposes of the Copyright Act 1968 (Cth) (the Act). Section 35(2) provides:

Sub-section (6) provides:

It was that sub-section which gave rise to the first issue: whether the respondent was an employee of the appellant or an independent contractor when he wrote the program.

11 The parties were basically in agreement as to the law to be applied in answering this question. In Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1; (1986) 160 CLR 16 at 24 Mason J said:

12 In Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (Victoria) (1997) 37 ATR 528 at 533 the Victorian Court of Appeal said that the determination of the employee/independent contractor question involves identifying factors or indicia that are capable of pointing in one direction or another, none of which is conclusive, and weighing or balancing them in order to reach a conclusion.

13 The cases have identified many indicia, in addition to those to which Mason J referred, that are relevant to the inquiry. See, for example, Vabu Pty Ltd v Commissioner of Taxation (1996) 33 ATR 537 at 538 and D & D Tolhurst Pty Ltd v Commissioner of State Revenue (1997) 38 ATR 1001 at 1013-1014.

14 The Magistrate first instructed herself in accordance with the relevant authorities, including those referred to above. She then noted various indicia relevant to the characterisation process. They included that the respondent was a sole operator, had an ABN, sent invoices which included GST, used his own motor vehicle and secretarial facilities without expenses or allowances from the appellant, was at liberty to take other work, worked at home without supervision, and attended meetings with the appellant’s clients without the appellant being present. Her Honour also recorded that the appellant did not advise the Tax Office that the respondent was its employee and did not deduct PAYE. Nor was the respondent provided with sick leave, annual leave or superannuation. The Magistrate referred to other indicia, pointing one way or the other. See [16] to [54].

15 The appellant summarised its complaints about the Magistrate’s characterisation of the respondent’s work status in three propositions:

(a) her Honour was incorrect in deciding that the indicia she relied upon were the correct set of indicia and were exhaustive of the determination of that issue;

(b) her Honour ignored or gave little or no regard to concrete written expressions by the respondent of his intentions as to the nature and terms of "the employment";

(c) her Honour gave no weight or no sufficient weight to

(i) the nature of the relationship between the parties, including industry practice, and

(ii) "implications that should arise as a consequence of the need to give business efficacy to the agreement".

16 In a comprehensive and detailed set of reasons on this issue, covering sixteen pages, the Magistrate dealt with many matters other than those to which she ultimately accorded particular weight, including those the subject of particular complaint in pars (b) and (c) at [15]. Having done so, her Honour announced her conclusion as follows:

17 The Magistrate did not treat the matters recorded in the second to seventh sentences of that passage as a "correct set of indicia". They were the matters that appealed to her as determinative after weighing and balancing a much larger range of indicia, including those relied on by the appellant. On a fair reading of the Magistrate’s reasons, it cannot be said that the list of specific matters recorded in the passage quoted at [16] was propounded as "exhaustive of the determination of that question".

18 For the same reason I do not accept Counsel’s oral variation of the "correct set of indicia" submission. This was that the Magistrate ticked off the matters on her check list and thus reached the wrong result because the list was incomplete.

19 For the foregoing reasons there is in my view no substance in complaint (a) at [15].

20 The "concrete written expressions" of the respondent’s intentions as to the "nature and terms of his employment" in complaint (b) at [15] were twofold. The first was that in his "Proposal to Develop a Call Centre Application" sent to Mr Roberts on 20 May 2004, he described himself as "Centre Stage Management Development Manager (Tony Riedle)". As to the significance of this title, the Magistrate said:

21 It is thus wrong for the appellant to say that the Magistrate ignored or "gave no regard" to the title the respondent had bestowed on himself. The alternative, namely that she "gave little ... regard" to it is a fair rendering of her reasons if "regard" means "weight". However, in a balancing and weighing context such as that in question here, the very process is evaluative and involves matters of impression, perception and degree. That task is for the Magistrate. On an appeal, the Court does not proceed as if trying the case at first instance. It must accord proper weight to the Magistrate’s views. The appellant must demonstrate error on the part of the Magistrate. That another view may have been open in relation to the significance of the respondent’s title does not show error. In contexts such as the present, different minds might assess the significance of a particular indicium in different ways, and therefore might not reach the same ultimate conclusion after the weighing and balancing process. See generally Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 425 at [28] to [30].

22 No error has been shown in the passage set out at [20]. In particular, it seems to me to have been entirely appropriate for the Magistrate to have treated the respondent’s use of the title, in a proposal to the Salvation Army, as a way of indicating that he was part of the appellant’s team, and that it was not his intention thereby to indicate that he was the appellant’s employee.

23 Another indicator that the respondent saw himself as an employee is said to lie in the words used on the front of the proposal to the Salvation Army: "The information in this proposal is [proprietary] and is for the sole use of Centre Stage Management in conjunction with the Salvation Army Family Stores". This was said to demonstrate "his view of the terms of the agreement and it was not that he owned the copyright". The Magistrate said this did not greatly assist in determining the employee/independent contractor issue. She said that at most, it might indicate what one of the parties might have thought the relationship was, and that in this case that was not a matter of significant weight.

24 There was no error in the Magistrate’s observation that in any event no significant weight attaches to a party’s view that he is an employee. As with other indicia, it would be no more than a consideration to be taken into account, and susceptible of being submerged or overwhelmed by other considerations. The authorities support the Magistrate’s approach. Thus Chitty says:

See Chitty on Contracts – Specific Contracts 29^th ed (2004) 39-025. Chitty then quotes a passage from the reasons of Ackner LJ in Young & Woods Ltd v West [1980] EWCA Civ 6; [1980] IRLR 201 at 208:

25 See also Australian Mutual Provident Society v Chaplin [1978] UKPC 7; (1978) 18 ALR 385 at 389 (Privy Council), Narich Pty Ltd v Commissioner of Pay-roll Tax (1983) 50 ALR 417 (Privy Council) and Buildings Workers’ Industrial Union v Odco Pty Ltd [1991] FCA 87; (1991) 99 ALR 735 at 755-756 (Full Court of this Court).

26 The Magistrate accorded both the so called indications of intention in [20] and [23] some, but not significant, weight. As Ackner LJ said in the passage quoted at [24], the importance of an expression of a common intention will vary according to the facts. In the present case, not only are the matters relied on directed to the intention of the respondent alone; they struggle, in my view, to be accounted indications of his intention at all. However, I need not pursue this particular line, because the Magistrate did take both indications into account. Her Honour doubtless thought they were not entitled to significant weight because they were so indefinite and uncertain as indicators of relevant intention, and in any event indicated the intention of one party alone.

27 Accordingly I reject complaint (b) at [15].

28 The first part of complaint (c) at [15] is that the Magistrate gave no or insufficient weight to "the nature of the relationship between the parties including industry practice". The Magistrate recorded the appellant’s argument that the nature of the programming industry in boutique operations is that the programmers are taken on for specific jobs, they work agreed hours and they work from their homes "as employees". Her Honour rejected the evidence on which this contention was based. She said at [42]:

29 The Magistrate had earlier (at [41]), in another connection, said that Mr Roberts displayed a very loose understanding of the notion of being an employee. She gave the example of a photographer who was paid for producing a series of photographs. Mr Roberts said the photographer would be an employee of the person who commissioned the photographs. That forms a sufficient basis for the Magistrate’s rejection of his evidence on the present issue. Her Honour had the advantage, which this Court does not have, of hearing and seeing Mr Roberts give evidence, and thus of forming a view of the utility of his evidence. No error has been shown in her treatment of this issue. Mr Roberts’ characterisation of the photographer, almost a paradigm of an independent contractor, illustrates the lack of worth of his evidence on this point. A further indication of Mr Roberts’ failure to understand the difference between an employee and an independent contractor appears in his affidavit. He says that "IT employees ... are employed as employees on limited and often job specific tasks. They are not employed as independent contractors specialising in some specific field".

30 The appellant also complains that her Honour ignored the evidence about industry practice. That is not correct. At [43] her Honour said:

31 The appellant drew attention to the evidence of Adam Dennis, an IT consultant. Mr Dennis said that while some companies that employ IT employees, especially large companies, have a standard employment agreement which includes a clause stating that the employer retains copyright in any IT work undertaken by the employee, "that is not the norm in this industry". That evidence is of no present relevance. Mr Dennis also said that in his dealings with clients of every size, unless it is otherwise clearly stated, the intellectual property arising from the project belongs to "the client". That is the industry norm and reflects the "master-servant relationship between the client and the consultant". That evidence is unhelpful. The relationship Mr Dennis posits is one where he, as a consultant, does work for a client. His claim is that that relationship is one of servant and master. That says nothing about the facts of the present case, where the relationship in question is not between the appellant and its client, the Salvation Army, or between the respondent and the Salvation Army, but between the appellant and the respondent.

32 The second part of complaint (c) at [15] - that the Magistrate gave no weight or no sufficient weight to "implications that should arise as a consequence of the need to give business efficacy to the agreement" - was explained by Dr Dean, who appeared for the appellant. He said that

33 The catastrophe argument was dealt with by the Magistrate at [20] to [21] of her reasons. At [20] she said:

34 Her Honour rejected this argument at [21]. After noting that the location of ownership of the copyright in the program depended on whether the respondent was an employee or an independent contractor, and that whether he is one or the other depends on various indicia, including control, integration and whether he is in business on his own account, she concluded:

35 Her Honour returned to the catastrophe argument at [48] to [50]. She referred to the Copyright Law Review Committee’s 1995 Report on Computer Software Protection (the 1995 Report), and noted that, despite the Committee’s earlier view to the contrary, it now recommended against any change to s 35(6) of the Act in its application to computer programs. Her Honour then said:

36 The catastrophic consequences asserted by counsel, if they exist, are a result of the application of s 35(6) of the Act to the facts of the case. Those consequences cannot themselves produce a different result.

37 Later in these reasons (at [53] to [62]) the provisions of Division 4A of the Act are examined. It is apparent from those provisions, especially ss 47D and 47E, that whatever plausibility the characterisation of the consequences of the Magistrate’s decision as catastrophic may have had before the enactment of Division 4A, it has since evaporated.

38 No error has been shown in the Magistrate’s reasons. Although I need not go this far, in my view a finding that the respondent was an employee would have been perverse.

IMPLIED LICENCE

Background

39 The Magistrate accepted that the appellant and the Salvation Army have an implied licence to use the program. However, her Honour was of the view that the licence does not extend

40 The cases to which the Magistrate referred in the last sentence are De Garis v Neville Jeffress Pidler Pty Ltd (1990) 18 IPR 292 at 302-303, Beck v Montana Constructions Pty Ltd [1964-5] NSWLR 229 at 235 and Pacific Software Technology Ltd v Perry Group Ltd [2004] 1 NZLR 164. Her Honour put the New Zealand case aside because it turned on legislation providing that a person who commissions the making of a computer program is the first owner of the copyright in the program (Copyright Act 1994 (NZ) s 21).

Some terminology

41 An understanding of some basic concepts involved in the construction of a computer program assists in understanding the appellant’s implied term argument. The following description of the general nature of a computer program is taken from the judgment of Gibbs CJ in Computer Edge Pty Ltd v Apple Computer Inc [1986] HCA 19; (1986) 161 CLR 171 at 178-179. A computer program is a set of instructions designed to cause a computer to perform a particular function or to produce a particular result. A program is usually developed in a number of stages. First, the sequence of operations the computer will be required to perform is commonly written out in ordinary language. Next a source program is prepared, usually in a source code which is human-readable. The source code cannot be used directly in the computer, and must first be converted into an object code, which is machine-readable. The program is executed by the computer’s central processing unit. See Data Access Corporation v Powerflex Services Pty Ltd [1999] HCA 49; (1999) 202 CLR 1 at [4].

42 Computer programs in object code form cannot be rendered in source code form without making a copy. Making a copy of a copyright work without the copyright owner’s permission is an infringement of copyright. In order to learn how a computer program in object code form works without access to the version in source code form, it is necessary to employ a process called ‘decompilation’, which involves the production of a copy of the program. This process is essentially ‘reverse engineering’. See the Second Reading Speech to the Bill that became the  Copyright Amendment (Computer Programs) Act 1999 .

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:

Of the terms implied in particular contracts, Chitty says:

See Chitty on Contracts, General Principles 29^th ed (2004) at 13-003 – 13-004.

45 In Codelfa Constructions Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 345-346 Mason J adverted to the difference between these two categories of implied terms:

46 Liverpool City Council v Irwin [1976] UKHL 1; [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:

After considering various possible implications, his Lordship went on at 254:

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:

49 Later at 450 their Honours said:

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

That section builds on the definition of "computer program" in s 10, which is in  Part II  – Interpretation:

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:

The Minister then explained ‘decompilation’ to the effect summarised at [42], and continued:

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:

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.

In the Second Reading Speech the Minister said this amendment

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:

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:

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] HCA 55; (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:

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 the Act:

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

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:

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:

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:

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 [1990] HCA 58; (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] FCA 151; (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.

Associate:

Dated: 20 June 2008