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Companies providing services to clients and the clients themselves should pay close attention to language in the contract for services, particularly when the services involve the production of intellectual property by the company, such as software, plans, drawings, designs or other trade secret information.  If conflict arises between the company and client and the contract is terminated, then a dispute can develop over who owns that partially paid for and partially completed creative work.

In a recent case, a federal court in Virginia found that due to language in a contract between an architectural firm and its client, the client had the right, after firing the architectural firm mid-performance, to provide the firm’s design documents including drawings, plans, and specifications to a new firm to finish the work.  The court found that the express license to use the documents survived even though the client refused to pay the full contract price because part payment constituted only a “partial” breach of the contract and the contract did not condition the use rights on the occurrence of any event, such as full payment of the contract price.

The specific facts of the case involved St. Thomas Aquinas Seminary Association decision to prepare a new seminary building in Buckingham County, Virginia, and formed a corporation called STAS, Inc. (“STAS”) in the process.  STAS hired Cram & Ferguson Architects to provide architectural and engineering documents for the design and construction services of the building (“Design Documents”).  The contract was negotiated between the two parties, and modifications were made to the standard form agreement provided by the American Institute of Architects (“AIA”).

STAS terminated the contract with the project only being partially complete. STAS hired another architect to pick up where Cram & Ferguson left off.  Cram & Ferguson objected to the use of its Design Documents.

The contract states that STAS may “use drawings, plans and specifications without restrictions.  This is not intended to create any rights by any other party in the drawings, plans, and specifications.”  STAS claimed that this language gives it an express license to have another architect copy, modify, and alter the Design Documents without restriction and without Cram & Ferguson’s involvement.  STAS argued that the second sentence only provided that the Contract doesn’t transfer the ownership of any copyright in the Design Documents to any other party.  Cram & Ferguson claimed that the second sentence simply declines to extend tothird parties those permissions granted to STAS itself by the first sentence, and that the use rights are restricted to STAS only.

The court decided that the “use” described in the contract clause constituted an express nonexclusive license for STAS to use the materials Cram & Ferguson developed without restrictions, even if Cram & Ferguson is no longer associated with the Project.  The court elaborated that this includes the right to hand off the documents to another architect, as STAS did in this case.  The court added that STAS cannot acquire, transfer, or assign any “rights” from that use, although STAS did not intend to do so.

Cram & Ferguson allowed many of the protections for architects in the original AIA standard form contract to be removed.  The court held that questions concerning how provisions of the contract interacted with one another (e.g., whether the exclusive license terminated if and when STAS failed to pay for services rendered), do not terminate STAS’s license.

Cram & Ferguson also claimed that because STAS owed $194,661.67 for the work completed through the date of termination, STAS had materially breached the contract, and therefore STAS could not avail itself of the contract rights.

The Court explained that a party who commits the first material breach of a contract is not entitled to enforce the contract.  The Court stated “a breach will justify rescission of a licensing agreement only when it is so material and substantial a [sic] nature that it affects the very essence of the contract and serve[s] to defeat the object of the parties. . . . The breach must constitute a total failure in the performance of the contract.”  Op. at 14 (internal quotes and citations omitted).  The Court reasoned that the provision in the contract provided no “condition of the license” and so STAS obtained the ability to use the Design Documents without restriction, and without meeting any specific conditions precedent, such as paying the full contract price.

The court held that an express license existing in a contract will survive so long as the licensee’s breach of that contract is not material or a total failure of performance.  STAS’s breach is only a partil breach due to the several hundred thousand dollars paid to Cram & Ferguson, and, therefore, STAS kept its right to use the Design Documents as it pleased.