25 March 2015 LES Annual Lunch Recent contract cases Patrick Cantrill

25 March 2015

LES Annual LunchRecent contract cases

Patrick Cantrill

25 March 2015

The Interpretation Of ContractsGeneral Principles – What To Do When The Drafting Is ImperfectPatrick Cantrill

Interpretation Of Contracts: General Principles (1)

Investors Compensation Scheme v West Bromwich Building

Society [1998] 1 All ER 98 [House of Lords]

Dear v Jackson [2013] EWCA Civ 89 • Shareholders’ dispute whereby Mssrs Dear and Griffith,

shareholders of PCH II purported to remove Jackson, a fellow shareholder, as a director of TFG which was a subsidiary of PCH II.

• Issue was the extent to which following a resolution of a similar dispute, (“the Agreement”) a term should be implied that would prevent the other directors from exercising their powers under TFG’s articles of association to have Jackson removed. The articles had not been altered by the Agreement. The Claimants allege that without such an implied term the Agreement was unworkable.


• What does the document convey to the reasonable person having all the background knowledge which would have been reasonably available?

• Interpretation of a contractual provision depends upon an understanding of its context within the agreement as a whole.

• The Court’s function is to ascertain meaning – not to improve upon the agreement or put right any inadequacies in the terms.

• The implication of terms addresses events for which the express language made no provision


• The absence of an express term means that nothing has been agreed to happen in relation to that event unless the only consistent meaning was that something would happen

• Business efficacy is not the only relevant type of necessity.

Express terms could work perfectly well but their consequences might contradict what any reasonable person would understand the contract to mean. In such a case, an implied term is necessary to spell out what the contract actually means

• The Court may choose between alternatiive interpretations but it cannot decide on the basis of what is its own notion of the most sensible solution. The Court is not permitted to re-write the contract.


• The judge cannot inquire into the subjective intention of the parties.

• The Court of Appeal rejected the submission that there was an

implied term in the Agreement under which the contracting parties were fettered in the exercise of their powers under the Articles of Association of TFG to remove Mr Jackson despite the fact that the Agreement had resulted in the re-appointment of Jackson as a director of TFG.

• “…The implication of the terms proposed would involve an impermissible re-writing of the parties’ contract or in other words, would subject them merely to one notion of ..what might have been the most sensible solution to the parties’ connundrum….That is not a proper basis for implying terms into the Agreement …” [Lord Justice McCombe]

25 March 2015

InterpretationOwnership Matters

Patrick Cantrill

Ownership/Equitable Assignment (1)

Fresh Trading v Deepend & Chappell [2015] EWHC 52

• Fresh Trading was the business behind INNOCENT smoothies

• Defendants were the successors to the design agency that under commission from Fresh (then a small start up) had created the iconic Dude logo.

• Under a contract from October 1998, signed copies of which could not be found by the time of trial, (“the Contract”), Deepend had been appointed to handle all of Fresh’s design needs and Clause 3 cited that the relationship was one of partnership not one of “..normal client/agency…”.


• Under Clause 4, the design agency was to receive a 2 % shareholding in Fresh

• Under Clause 5, Fresh was to “…receive full intellectual copyright of any work, creative ideas or otherwise, presented by the agency and then subsequently approved by Fresh…”.

• Fresh underwent fast, substantial growth such that a 2% holding came to represent a very considerable sum

• Shares were never allotted to the agency which went into liquidation (in 2001) after which Fresh did not allot the shares.

• Just before the final creditors’ meeting (in 2007), Chappell the Second Defendant took an assignment of all intellectual property from the liquidator and then assigned such IPR to the First Defendant he had set up to pursue and enforce a claims. The “Dude Logo” was not specifically mentioned in the contract between the liquidator and Chappell


• In Aprill 2009, the Defendants commenced invalidity proceedings before OHIM in respect of the CTM which Fresh owned in relation to the Dude logo

• On 15 December 2012, OHIM’s Cancellation Division ruled that Fresh’s CTM had been improperly registered on the ground that use of the logo would infringe Deepend’s copyright - Decision No 3555C. Fresh has appealed the ruling, which appeal was stayed pending the determination of this declaratory action by Fresh.

• The High Court held that reading the Contract as a whole, Clause 5 (the IPR ownership clause) was concurrent but not conditional upon Clause 4 (the unfulfilled obligation on Fresh to allott the 2% share holding).


• In the absence of any signed version of the Contract, the judge was unable to hold that there had been a legal assignment so section 90 of the CDPA did not assist Fresh and neither did section 91 assist Fresh as the transfer of the IPR only occurred if Fresh approved the designs of future works

• However, the High Court did hold that there was an agreement to

assign and as such Fresh was the equitable owner in the copyright in the logo and that Deepend held such on trust for it.

• Injunctions are an equitable remedy and the judge also held that even if he had decided that Fresh was neither the legal nor the equitable owner nor even the owner of an irrevocable licence, his “.. inclination would have been to reject a notion that Deepend Fresh is now able to obtain injunctive relief against Fresh…”.

Ownership/Exclusive Licence (1)

Orvec International v Linfoots [2014] EWHC 1970 [IPEC]

• Orvec was a supplier of blankets and other textile products mainly for airlines. Linfoots was an advertising agency responsible for the design and maintenance of Orvec’s website for which included photographs of Orvec’s products.

• Some of the products supplied by Orvec were sourced from Intex, a trader based in Hong Kong.

• Intex terminated its relationship with Orvec and asked Linfoots to create and supply photographs for use in its own advertising and its website. In doing so, Linfoots used some of the photographs that it had taken for Orvec of products that Intex had supplied to Orvec.


• Linfoots standard Ts & Cs provided that “..Copyright remains the property of the company [Linfoots] unless otherwise assigned..”

• Orvec argued that into the relationship with Linfoots should be implied a perpetual exclusive licence in relation to the photographs that Linfoots had taken for it because some of the images bore trade marks and livery of not only Orvec but also of Orvec’s clients such that Linfoot would have no legitimate interest in reusing such images. However, it was not established that any photographs showing Orvec’s trade marks were used in the material supplied by Linfoots to Intex

• HHJ Hacon distinguished the case from Griggs Group v Evans [2005] EWCA Civ 11 in which the CA had held that by applying the “officious bystander” rule Griggs, the client had been found to own the logo that Evans had designed for it.


• “…If the work created is a photograph displaying a third party’s trade mark, I can see no reason for an implication that exclusive rights were granted to the claimant …It is also important to bear in mind that a minimalist approach must be taken when inferring the presence of unexpressed terms in a contract…”.[HHJ Hacon]

• According, the judge held that a reasonable person looking at Linfoots’ Ts & Cs would conclude that the copyright licence granted by Linfoots to Orvec was only non exclusive albeit probably perpetual.

• Indeed, obiter the judge was reluctant to agree that even if photographs had borne Orvec’s trade marks, such implied licence would have been exclusive.

• Linfoots were therefore not in breach of any such implied licence by using the photographs for the work it did for Intex.

25 March 2015

InterpretationThe Bristol Groundschool Case

Patrick Cantrill

Interpretation/Bristol Groundschool (1)

Bristol Groundschool Limited v Intelligent Data Capture Limited et al [2014] EWHC 2145

• Bitter, protracted and convoluted dispute between two contracting parties and those individuals who were the moving spirits behind the warring companies.

• Claimant (BGL) was set up by former RAF officer to provide training manuals for civil aviation pilots. Defendant (IDC), which was also set up by former RAF officer, contracted in 1998 with BGL to convert the manuals into an electronic format. In 2001, BGL and IDC entered into a further contract when the training of civil aviation pilots moved from a domestic to European platform, (“the 2001 Agreement”). The purpose of the 2001 Agreement was to produce a software application for a multimedia revision aid to accompany the printed course study material of BGS for the JAA /ATPL the European wide, pilot training course, (“the Application”)

Interpretation/Bristol Groundstool (2)

• Under Clause 4 IDC agreed for £5,000 to produce a Windows comptible version of the Application of “..marketable quality..” which version was “..to display text, graphics and self-assessed question material…”. Thereafter the Application would be “..jointly published..” by IDC and BGS.

• Under Clause 3.1 IDC agreed “..to produce for BGS vector [non

pixel] artwork for any and all diagrams required to be included in printed notes in the JAA ATPL. The cost price of these artworks will be borne by BGS.

• Clause 3.2 stated that IDC would “…produce..” and bear the cost of animated versions of artworks where such were deemed by IDC to be practicable and appropriate. By Clause 3.3., BGS were to provide all all necessary textual content


• Under Clause 7, BGS owned and retained copyright to the text and to “…the static works produced by [IDC] for inclusion in the syllabus document, with the exception of those artworks owned by Rolls Royce which are currently licensed to [IDC]…”

• The Agreement stated that IDC “..owns and retains..” copyright in the animated artworks, accompanying soundtracks, “…the design of the Application and any underlying source code written by [IDC]…”

• IDC “…agrees to License the Application to [BGS] …” for a fee for every CR-ROM or CD-R for each student; BGS being able to distribute one copy of the Application to each student.

• In 2009, the parties fell out and a dispute arose as to the interpretation of

Clauses 3 and 7 because the Defendants published electronic products for pilot training and used such products in the training of pilots.


• Applying the Investors Compensation Scheme principles laid down by Lord Hoffman, the Court held that reading Clauses 3 and 7 together and taking heed of how Clause 7.1 contained a specific exception with regard to artworks owned by Rolls Royce, then the obligation on IDC to assign copyright to BGS extended to all (i) static artworks and (ii) any static artworks taken by IDC from animations, which had been made available by IDC under the 2001 Agreement for inclusion in the text etc – not just works created by IDC.

• Insofar as IDC did not own such copyright “..it seems to me that IDC is in breach of its contractual obligations to BGS and that BGS’s remedy is in damages…”.

• The 2001 Agreement was to run for an initial period of 5 years and then would roll on.


• Under Clause 10 IDC had agreed to “…provide technical support by e-mail to staff and Students…” for the duration of the Agreement which support included the activation of security software. The Court held that after the dispute had arisen but before termination of the Agreement, IDC had been in breach of this obligation by withdrawing the security key for non payment of invoices rendered to BSG when payment of such bills was not overdue.

• Under Clause 11 IDC agreed to provide “…further minor development and enhancement of the Application including animated artworks for a period of 12 months from the first delivery of the Application…”


• The Court agreed with BGS that there should be implied into the Agreement an obligation on IDC to incorporate into the digital works, such material as may be reasonably required by BGS (not least because under Clause 3.1, BGS was obliged to pay for such material. IDC had continued to carry out development under the Agreement for many years after its commencement, most notably in the development of a program for recording the students’ exam results (“the MRS Global Database”)

• The Court also agreed that an obligation should be implied that IDC should not do “…any act which would damage, obstruct, hinder and so forth the business of BGS in providing distance learning course..”.

• The Court held that IDC was in breach of these implied obligations.


• By 2009 and the time that the relationship between the parties had deteriorated, BGS downloaded certain materials from IDC’s system and in May 2011 released a version of the training pack that did not require activation by IDC.

• The Court held that the Agreement was a “relational” contract into which would be implied a duty of good faith as per the decision in Yam Seng Pte Ltd v International Trade Corp [2013] EWHC 111 and BGS had been in breach of such by downloading materials from IDC’s system.

• The Court held that in making the download and releasing the training pack, even if it was acting in “self defence”, BGS contravened section 296ZA of the CDPA in that it knowingly or with reasonable grounds to suspect, circumvented measures to prevent copying etc. The Court also held that the actions of BGS amounted to an offence under the Computer Misuse Act 1990.


• Nevertheless, despite these unlawful acts by BGS, the Court held that they did not amount to a repudiation of the Agreement. The unlawful acts did not “…strike at the heart of the trust which is vital to any long term commercial relationship …”.

• The Court also held that any such misconduct by BGS did not provide IDC with a defence to its own breaches committed before termination of the Agreement.

• Finally, the Court implied into the Agreement a term that IDC should have given reasonable notice of 9 months on its intention to terminate.

25 March 2015

InterpretationRepudiation

Patrick Cantrill

Interpretation/Repudiation(1)

• Termination for a repudiatory breach is a common law right and remedy

• A repudiatory act is one that is so serious that the innocent party can treat the contract at an end. In BSkyB Ltd v HP Enterprises [2010] EWHC 86, it was described by the High Court as a breach that “…goes to the root of the contract ..” or one where “…a party evinces an intention no longer to be bound by the terms of the contract…”.

• The right lies outside the contractual terms but assessing whether the common law right has arisen, needs to made within the context of the contract in particular with regard to any terms which allows termination for breach.

• For example, if the contract provides for a remedial period for the particular types of act then there cannot be a question of it being a repudiatory act until that remedial period has expired.


• Faced with what appears to be a repudiatory act, the innocent party can choose (i) to accept the repudiation and treat the contract at an end or (ii) to affirm the contract and allow it to continue.

• Avoid delaying in making the choice. If the innocent party delays,

it might be taken to have affirmed the contract. • The consequences of terminating for an act that is subsequently

held not to be repudiatory, can be severe since the Courts are likely (unless the terminating party’s misapprehension was wholly honest) to hold that the unlawful purported termination is itself a repudiatory act.


• Moreover, if a party accepts a repudiatory breach at common law, it is entitled to “loss of bargain” damages i.e. the profits that it could have made had the contract been performed.

• In contrast, if temination is carried out for breach of a contractual term, then damages will generally be limited to loss incurred up to the point of termination. The difference between the two types of assessment could be substantial.

• Consideration needs to be given to (i) the extent to which any licence terms are to be expressed to be without prejudice to a party’s common law rights; (ii) remedial processes falling short of termination; (iii) how the licence should define what will not constitute a repudiatory act; and (iv) the extent to which the licence shall exclude or limit damages available for repudiation


• With regard to the point (iv), there used to be a doctrine arising from the likes of the 1960s decision in Suisse Alantique that it was not possible to limit or exclude common law remedies arising from deliberate repudiatory acts/fundamental breaches.

• Such a doctrine was wholly rejected in 1980 by the House of Lords in its decision in Photo Productions v Securicor which held that it was all a matter of interpreting the exclusion or limitation clauses, regardless of the nature of the breach

• This modern approach has been supported by recent cases such as the Court of Appeal in Kudos Catering v Manchester Central Convention [2013] EWCA Civ 38

Interpretation/Reputation (5)

Force India v Aerolab [2013] EWCA Civ 780

• The Court of Appeal addressed repudiation issues following the decision of the High Court [2012 EWHC 616] when it had only awarded €25,000 on the “user principle” against the several millions that the Formula 1 team had claimed for misuse of confidential information by Aerolab, the company which it had previously engaged to carry out wind tunnel aerodynamic testing and design development and who had used such material when working for team Lotus, its replacement client.

• Aerolab had been operating under a contract that was due to expire on 31 December 2009. However, on 3 August 2009 it had began work for a rival F1 team, Team Lotus. The High Court had held that Aerolab was entitled to do so because by that time Force India had persistently defaulted in paying sums due to Aerolab



• On 31 July 2009 after repeated demands by Aerolab, Force India announced that it would not make any payment until 17 August 2009 at the earliest. It was common ground that such an announcement did amount to a repudiatory act but had it been accpted?.

• In response to the announcement, Aerolab on 31 July telephoned Force India to say in consequence of what it had now been told, work would be temporarily suspended by Aerolab and would resume until at least 17 August 2009.

• On 3 August 2009, Aerolab sent Force India an invoice for the month of August 2009 which was a reduced fee to reflect the shutdown agreed in May by the Formula One Teams Association for all F1 teams from 3 to 16 August 2009, (“the FOTA Accord”)



• In addition, on 3 August 2009 Aerolab severed its Internet connection and data stream arrangements with Force India.

• The High Court held that such severance constituted a notification by Aerolab that it had elected to accept the contract as having been repudiated by Force India.

• The High Court also held such acceptance had retrospective effect back to 31 July 2009, the date when Force India had said that it was suspending the payment of invoices.

• Aerolab who had been under an exclusive arrangement with Force India, immediately coommenced work for Team Lotus



• However, the CA noted (i) the phone call from Aerolab on 31 July 2009 and (ii) the invoice rendered on 3 August. On 19 August 2009, Force india telephoned Aerolab to say that they had noticed the severance of the connection and were told that it had occurred because of the persistent failure to pay Aerolab’s invoices and Aerolab were now working for another team

• The CA held that in light of (i) and (ii) above, the contract did not end until 19 August 2009, after this call and the High Court was wrong to have held it terminated earlier. Accordingly, Aerolab were as from 3 August in breach of the clause in the contract that they would not work for any other F1 team. However, although Force India had pleaded breach of this clause, it had not pleaded for any compensation arising from such breach.



• Citing Vitol SA v Norelf Ltd [1996] AC 800, the CA held hat “..there is no need to prove reliance on the communication..” but (i) the communication had to be clear and unequivocal election to terminate and (ii) the communication had to reach the defaulting party.

• With regard to the latter, the CA pointed out that there was no work being done by any Formula 1 team from 3 to16 August as a result of the FOTA Accord.

25 March 2015

InterpretationAudit Clauses

Patrick Cantrill

Interpretation/Audit Clauses (1)

118 Data Resource Ltd v IDS Data Services Limited et al [2014] EWHC 3629

• 118, the claimant, is the owner of a database with up to date directory details of UK businesses, (“the Database”) which information it sells to for the likes of BT, Yahoo, 118500 and others. IDS is a rival organisation and competitor. In April 2009, 118 granted IDS for a substantial fee a non exclusive, non transferable licence under which IDC was granted access to the Database together with a limited right to sub license, (“the Licence”) for the purpose of direct marketing only.

• Clause 4.7 of the Licence provided that IDC will “…permit any duly authorised representative of [118] on reasonable prior notice to enter into any of its premises where any copies of [the Database] are used, for the purpose of ascertaining that the provisions of this Agreement are being complied with…”.


• Clause 3.2 provided that “…[IDC] shall ensure that, save for archiving purposes, only one copy of [the Database] is physically stored and that it is held separately from other data in a secure environment and [IDS] is expressly prohibited from alowing any other party whatsoever from producing copies of [the Database]…” .

• The contract was initially for three years and then in February

2012 renewed for a further three years. • IDC was prohibited from granting any sub licence which exceeds

300,000 remedial period; was prevented from sub licensing to certain named customers; and was not to ensue the data would be used in any competing product and to use its “..best endeavours..” that its customers did not do so.


• It was common ground that although the licence required IDC’s standard Ts & Cs to its customers to be such as to ensure its customers compliance with the main licence, the Ts & Cs had never been inspected by 118. The judge found that IDC was in breach of this obligation to ensure compliance by customers.

• Clause 7 contained a mutual standard confidentiality clause under which 118 was to keep confidential “..the financial information and all information of a confidential or proprietary nature…”.

• 118 applied for summary judgment for specific performance of the audit clause. Applying the principles of Dear v Jackson and the maxim of ut res magit valeat quam pereat [“the thing be given meaning rather than be destroyed”], the Court addressed the following questions.


• Who Can Have Access? The Court held that it is implied that although 118 could not swamp IDC’s premises, it had to act reasonably. Nevertheless, the Court held that the audit could be handled by 118’s own employees.

• Where Is The Audit To Occur? The Court ruled that the Agreement must mean IDC’s Glasgow offices only i.e. where the one permitted copy of the Database is meant to be held.

• For What Purpose? 118 wanted access to check the terms on which data is sublicensed. The judge found that whereas Clause 4.7 clearly required IDC to give 118 access to the computer there was no mechanism for preventing 118 from gaining access to any confidential or sensitive information of IDC. The judge held that whereas implying terms such as 118 will act reasonably would only be addressing obvious gaps so as to make the contract workable, implying whole restrictions on what type of access 118 could have, would mean rewording the whole agreement – Sudbrook Trading Estate v Eggleton [1983] 2 AC444


• Under the circumstances, the judge decided that the application was not suitable for a summary judgment requiring specific performance.

25 March 2015

The Unified Patent SystemLicensees & Co-Owners

Patrick Cantrill

Unified Patent System/Licensees & Co Owners

• Under Article 47 of the UCPA, an exclusive licensee can enforce a Unified Patent without the patent proprietor’s permission unless the licence provides otherwise provided that the proprietor is given prior notice.

• Under Article 83 of the UPCA, it is only the patent proprietor who can choose to opt out from the Unified Patent system. If the exclusive licensee wishes to have power to decide on whether to opt out, it should provide in the licence that the proprietor will implement its wishes.

• Co-owners must agree to opt out and in situatiions where the ownership of designations has been split, then all proprietors must agree to opt out including even those proprietors in contracting Member States that have not ratified the UPC

Documents

25 March 2015 LES Annual Lunch Recent contract cases Patrick Cantrill