PAM International v. Exact Software Nederland was a Dutch summary proceeding over Exact’s decision to end, with immediate effect, its 23-year relationship with PAM International N.V., the distributor of Exact’s ERP software in Cuba. Exact also stopped maintenance for end users, stopped issuing new licence keys for Exact Synergy and closed the client portals. It said it had to cut all ties with Cuba because the group was being acquired by the US investment firm KKR. On 25 June 2019 the preliminary relief judge of the District Court of The Hague held that immediate termination was contrary to reasonableness and fairness, rejected Exact’s force majeure defence, and ordered Exact to continue performing the agreement.[1]
Background
Exact develops and supplies financial and business software and sells through independent distributors that resell it to end users. The Exact group was owned by the British investment firm Apax from 2015 to early 2019; on 14 May 2019 KKR acquired it from Apax.[1]
PAM, incorporated in Curaçao on 5 August 1996, had supplied Exact ERP software to Cuban state enterprises and government organisations since 1996, adapting it to local conditions and providing training and user support. From 2006 it was registered in Cuba as an approved trading partner entitled to supply Exact software directly. A written distribution agreement of 5 October 1999, which named the Dominican Republic as territory and allowed termination each 5 October with 90 days’ notice, existed; PAM said an earlier 1996 agreement governed Cuba but no longer had a copy.[1]
The dispute
By letter of 11 March 2019 Exact ended the agreement with immediate effect. It said it was stopping all maintenance for end users, that no new licence keys would be issued to Synergy users, and that access for PAM and end users to the client portals ended at once. On 4 April 2019 Exact explained that its owner intended to transfer the group to a US investment firm, so that US sanctions on Cuba would soon apply to it indirectly. It added that it was in any case entitled to terminate as of 5 October 2019.[1]
PAM claimed continued performance. It argued that its only business was Exact software in Cuba, that it needed at least three years to have another ERP supplier approved by the Cuban authorities, and that the EU blocking regulation prohibited Exact from complying with the US Helms-Burton Act. Exact argued that PAM had breached the agreement by being approved to sell competing software from Sage, that the effects for PAM and its customers were limited, and that it could not perform because of force majeure.[1]
Decision or outcome
- Which agreement. The judge assumed for the summary proceedings that the 1999 agreement, which named the Dominican Republic, did not cover Cuba, so the unwritten 1996 agreement applied and Exact could not rely on the 1999 notice clause.[1]
- Termination and notice. An indefinite agreement with no notice clause can in principle be terminated, but reasonableness and fairness may require a weighty reason, a notice period or compensation. Given the 23-year term, the exclusivity Exact had given PAM, PAM’s dependence on Exact, and the time needed to bring equivalent software to market in Cuba, termination with immediate effect, or as of 5 October 2019, was not acceptable.[1]
- Competing product. The mere listing of Sage software on the Cuban ministry’s approved list did not show that PAM distributed a competing product, and Exact had raised this ground only after the termination.[1]
- Effect on end users. Existing users could keep using the software; there were 21 users representing 80% of the Cuban business market. But they would receive no further updates, upgrades or bug fixes and no support from Exact. Exact had supplied updates for years, so it was taken to be obliged to continue. The judge accepted an expert report that unsupported ERP software becomes unreliable and that an operating system update could disrupt it within a month. Exact’s voluntary grant of perpetual licences, extra rights and modules, and documentation to PAM’s customers did not release it from the agreement.[1]
- No force majeure. Exact said KKR had required Apax to ensure that all Exact companies ended their Cuban relationships before closing, and that Apax had instructed Exact to do so. The judge held that Exact was in this position through a deliberate choice of its new shareholder, which was for Exact’s account, and that the risks of criminal and financial liability under US sanctions could not be shifted onto PAM. The judge noted that complying with the Helms-Burton Act could itself breach the EU blocking regulation (Council Regulation (EC) No 2271/96) as implemented in Dutch law.[1]
Exact was ordered to perform the 1996 agreement fully within 14 days of service, on pain of a penalty of EUR 10,000 per day up to EUR 500,000, and to pay the costs.[1] No later judgment in the case is published on rechtspraak.nl.
Significance for software licensing and SAM practice
The case shows how a change of ownership at a software vendor can reach end users through the distribution chain. Although the Cuban customers kept their right to use the installed software, termination of the distributor cut off maintenance, licence keys and portal access, which the court treated as a serious risk for business-critical ERP software.[1]
Lessons learned
- Ask what a sale of the vendor means for support. Exact ended distribution, maintenance and key supply because of its pending acquisition.[1]
- A perpetual licence without support is a risk. The court accepted that end users without updates, fixes and support could not rely on the software for long.[1]
- Long relationships may need long notice. Reasonableness ruled out immediate termination after 23 years of exclusive distribution.[1]
- Practice can create obligations. Years of supplied updates meant Exact was taken to be bound to keep supplying them.[1]
- Owner-driven sanctions risk is not force majeure. The judge put the consequences of the new shareholder’s choice on Exact.[1]