Dutch Supreme Court judgment: Software contracts in disarray?

23 October 2007

Roelien van Neck

A recent insolvency law case in the Dutch Supreme Court could have serious consequences for software licensees faced with a bankrupt supplier or licensor. The effect of the judgment may be to render traditional software escrow agreements insufficient and to require additional protective measures.

Summary

The case revolved around a court appointed trustee’s claim against two tenants for an order to vacate an apartment owned by the bankrupt debtor, Nebula BV. The tenants had sublet the apartment from its beneficial owner (“economisch eigenaar”). The bankrupt debtor was the legal owner (“juridisch eigenaar”). The legal owner had granted the beneficial owner a right to occupy the property, but not a full lease granting a proprietary right. An agreement granting only a right to occupy is directly analogous to a software licence.

The Supreme Court ruled that, due to the legal owners’ bankruptcy, the beneficial owner could no longer assert its right to occupy against the trustee. Consequently, neither could the tenants’ right be invoked against the trustee, as this right was derived from the beneficial owner’s right. Thus, the trustee’s claim for an order to vacate was allowed.

The Supreme Court confirmed that, as a general rule, a party’s bankruptcy does not affect any existing reciprocal contracts. However this rule did not mean that a creditor under a continuing performance contract could under all circumstances continue to exercise its rights under such an agreement, as if the debtor had not been declared bankrupt. The latter would go against the overriding principle of equality of creditors. The trustee’s compliance with existing obligations vis-à-vis one creditor should not be detrimental to other creditors’ interests. This also applies to matters where the trustee would only have to allow use of a particular object owned by the debtor.

Issues for software distributors and licensees

The parallels between the Nebula case and software agreements raise a number of issues.

From the perspective of the licensor, a software licence can be regarded as an permission to use, as was the licence to occupy in the judgment. The judgment could imply that such agreements could be disregarded by a trustee in bankruptcy in the interest of the bankrupt estate.

Similarly, in case of a licensor’s bankruptcy, the trustee could be interested in selling the source code deposited with an escrow agent in order serve the interest of the estate (i.e. so as to increase the value of the bankrupt estate). This raises the question whether, applying the judgment, the trustee might be entitled to do just that and thus disregard the terms of the software escrow agreement. That would indeed be a far reaching consequence, as it would render the licensees’ protection under the escrow agreement useless.

The judgment also raises the matter of the position of a licensee using software on an exclusive basis. The question arises whether a trustee could in fact disregard the exclusivity obligation and offer the software to third parties. Software distributors and resellers may be faced with the uncertainty of whether a trustee may terminate the right to distribute.

It is clear that the judgment poses new, significant questions and creates uncertainty on a number of levels. It remains to be seen whether the courts will in fact apply the judgment in the far reaching manner suggested. Nevertheless, the possible consequences of the case require careful consideration in software and escrow contracts.