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IP Court assessed the materiality of contractual violation in case of the transfer of the exclusive right to software

Managing Partner / Patent Attorney of the Russian Federation / Eurasian Patent Attorney

In accordance with paragraph 2 of Art. 450 of the Civil Code of the Russian Federation, one of the two grounds for terminating an agreement by a court decision at the request of a party to such an agreement is a material breach of the agreement by the other party.

At the same time, a violation of the contract by one of the parties is recognized as significant, which entails such damage for the other party that it is largely deprived of what it was entitled to count on when concluding the contract.

According to a case N А67-9724/2021 between the developer and the customer, an agreement was concluded on the alienation of exclusive rights, according to which the exclusive right to a computer program for a mobile software hardware complex was to be transferred to the customer for a fee.

The customer, in accordance with the terms of the contract, paid 70% of the remuneration in advance - the remaining 30% was payable after notifying the developer of the readiness to transfer the right.

Upon completion of the development, the contractor sent the customer a link to the developed materials posted on the cloud service and asked to report on the results of acceptance of work under the contract. The customer, in turn, said that he was testing the equipment in different conditions, but in the end he did not inform about the results of testing and the identified comments and did not refuse to accept the developed software.

Referring to the developer's failure to fulfill its obligations to transfer the rights to the computer program and to the loss of interest in the subject of the contract, the customer filed a lawsuit against the developer to terminate the contract, collect advance payment and interest for the use of other people's money.

The courts of all instances came to the same conclusion that the software that is the subject of the contract was developed by the defendant and transferred to the plaintiff, and the plaintiff announced the termination of the contract after the transfer of the software, therefore there are no grounds for terminating the contract and returning the funds.

The courts drew attention to the fact that the fact of a breach of the contract in itself cannot serve as a basis for its termination, the materiality of the breach must be proved - the party referring to a fundamental breach of the contract must provide the court with evidence of such a breach: namely, loss of income, possible incurring additional expenses or the onset of other consequences that significantly affect the interests of the party.

In this case, the customer got access to the material carrier of the program, started its operation without remarks, but did not issue acceptance and, citing the loss of interest, demanded termination of the contract executed by the developer - in such circumstances, the developer could not be accused of a material breach of the contract.

It should be noted that predominantly contractual violations in practice are rarely recognized as significant. As an opposite example (in which the violation of the party was so serious that it led to the termination of the contract by a court decision), case N A65-13181/2020 can be cited. In the case, the parties agreed in the commercial concession agreement that the right holder grants the user, for a fee, the right to use a set of exclusive rights in their business activities, and also provides services for finding and selecting premises for the plaintiff. It was the failure to make such a selection that served as the basis for terminating the contract due to the materiality of the violation at the user's claim. And, for example, in case N A40-82976/2017, the court terminated the license agreement on the same grounds, since the licensor granted the right to use the software only after receiving a claim to terminate the agreement.

Managing Partner / Patent Attorney of the Russian Federation / Eurasian Patent Attorney