On termination of an IT services contract, a customer's key priority is to regain control of its data. However, an outgoing supplier hosting the customer's data will often hold on to that data in order to exercise commercial leverage to either get paid outstanding sums which may be disputed or in order to charge for transferring the data back in-house or to a new service provider.
Can a common law lien be exercised over an electronic database pending payment? The Court of Appeal in Your Response Ltd v Datateam Business Media Ltd has confirmed that suppliers have no right to hold onto data in such circumstances.
The defendant was a magazine publisher and entered into a contract (partly oral, partly written) with the claimant database manager, which was to hold, maintain and update the defendant's electronic database of subscriber information. Unhappy with the services provided, the defendant gave one month's notice of termination.
The claimant stopped providing any services under the contract during the notice period and refused to release the database or give the defendant access to it until its outstanding fees had been paid. The defendant refused to pay until the database was made available to it. Needless to say, the contract was silent as to what should happen to the database on termination.
The claimant commenced proceedings for work carried out under the contract pre-termination and for damages for repudiatory breach of the contract by the defendant - it argued that three months' notice was reasonable, not one month's. The defendant counterclaimed for damages for breach of contract as it had to bear the cost of engaging another company to reconstitute its database.
At first instance the court held that, on the facts of this case, three months' notice was reasonable and the defendant was therefore in repudiatory breach for having terminated on short notice.
More interestingly though, the judge held that the claimant was entitled to withhold the data until its outstanding fees were paid i.e. it was entitled to exercise what is known as a common law lien.
The judge rejected the defendant's argument that it was not possible to exercise a lien over intangible property i.e. the electronic data. She had been conscious of the need for the law to keep abreast of technological developments and that record keeping was moving away from hard copy to electronic media. Therefore, the judge could see no reason why a lien could not exist over electronic data in the claimant's possession.
The defendant appealed.
The interesting issue for the Court of Appeal was whether a common law lien could be exercised over intangible objects such as an electronic database. Such a right had not previously been recognised.
It is a well-known principle of English law that in certain circumstances a party has the right to continue an existing, actual, lawful possession of goods until payment of outstanding sums due has been made. This is known as a common law lien. However, the common law has historically drawn a sharp distinction between tangible and intangible property, holding that tangible property could be physically possessed and controlled whereas intangible property could not.
The Court of Appeal had to determine whether it is possible to have actual possession of an intangible object and whether the common law should be extended to recognise the existence of a possessory lien over intangible property.
The court held that the nature of the protection accorded to the makers of databases by certain other enactments (such as the Copyright and Rights in Databases Regulations 1997) reflected a clear recognition that databases do not represent tangible property of a kind that is capable of forming the subject matter of claims concerning an interference with possession.
Giving the main judgment, Moore-Bick LJ rejected the arguments that:
- The database should be regarded as a physical object because it existed in a physical form on the data manager's server. Entering information into an electronic data storage system does result in an alteration of the physical characteristics of the storage medium similar to making a manuscript entry in a ledger. However, that does not render the information itself a physical object capable of possession independently of the medium in which it is held. Here, the data had been transferred from the defendant to the claimant electronically and was stored in the claimant's computer. There was no physical transfer of equipment of any kind.
- Possession arises where one party is able to exercise complete control over access to the thing in question with an intention to exclude others. It was held that practical control may go hand in hand with possession, but the two were not the same. Possession concerned physical control of tangible objects; practical control is a broader concept, capable of extending to intangible assets.
- A database can and should be treated as a document for all purposes. This argument arose from the fact that under the Civil Procedure Rules, which govern the conduct of litigation in England and Wales, where disclosure of documentation is ordered, such disclosure includes documents held in electronic media. The court did not accept that documents held in electronic form are capable of being possessed in the same sense that that word applies to chattels.
- A database should be considered as a distinct type of intangible property different from other types, which was capable of being possessed, and which would in effect set the law on a modern footing.
In any event, the court found that the claimant did not exercise the degree of control necessary to entitle it to exercise a lien. The claimant had made access to the database freely available to the defendant during the contract by the provision of a password. That was inconsistent with the conclusion that the claimant was exercising the kind of exclusive control that would equate to the continuing possession required for the exercise of a lien.
Moore-Bick LJ concluded that the claimant was not entitled to exercise a common law lien on the database. The court was not prepared to discuss whether it would be desirable to extend the reach of the common law lien to electronic data, let alone to intangible property more generally, holding this was probably something for Parliament to decide.
Moore-Bick LJ held it was implicit in the contract that when it ended, the claimant was under an obligation to send the defendant a copy of the database in its latest form by electronic means. In refusing to do so, and in the absence of a term that the claimant could hold onto the database until its outstanding fees were paid, the claimant was itself in breach of contract.
The defendant lost its appeal on the notice period point. Three months' notice was reasonable.
Given this judgment and the unwillingness of the courts to extend the reach of the common law lien to cover intangible property, parties to a contract must take steps to protect their own interests - whether as customer or supplier.
Parties should make provision for what is to happen to customer data on termination of a contract. How and when is information kept on a database to be transferred back to the customer? Who should bear the costs of data cleansing and migration? Does the supplier have the express contractual right to hold onto the customer's data pending payment of outstanding sums?
It now seems clear that if the supplier has no such contractual right but simply refuses to return the data on termination, the court will be willing to make an order for delivery-up which perhaps tips the balance of power in favour of the customer in termination disputes.