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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Tool Metal Manufactuing Company Ltd v Tungsten Electric Company Ltd [1955] UKHL 5 (16 June 1955)
URL: http://www.bailii.org/uk/cases/UKHL/1955/5.html
Cite as: [1955] 1 WLR 761, [1955] 2 All ER 657, [1955] WLR 761, [1955] UKHL 5

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JISCBAILII_CASE_CONTRACT

    Parliamentary Archives,
    HL/PO/JU/4/3/1034

    Die Jovis, 16° Junii 1955

    Upon Report from the Appellate Committee, to whom
    was referred the Cause Tool Metal Manufacturing Com-
    pany Limited against Tungsten Electric Company
    Limited, that the Committee had heard Counsel, as well
    on Wednesday the 20th, Thursday the 21st, Monday the
    25th, Tuesday the 26th, Wednesday the 27th and Thurs-
    day the 28th days of April last, as on Monday the 2d
    and Tuesday the 3d, days of May last, upon the Petition
    and Appeal of Tool Metal Manufacturing Company
    Limited, of 3 The Sanctuary, Westminster, in the County
    of London, praying, That the matter of the Order set
    forth in the Schedule thereto, namely, an Order of Her
    Majesty's Court of Appeal of the 29th of March 1954,
    might be reviewed before Her Majesty the Queen, in
    Her Court of Parliament, and that the said Order might
    be reversed, varied or altered, or that the Petitioners
    might have such other relief in the premises as to Her
    Majesty the Queen, in Her Court of Parliament, might
    seem meet; as also upon the printed Case of Tungsten
    Electric Company Limited, lodged in answer to the
    said Appeal; and due consideration had this day of
    what was offered on either side in this Cause:

    It is Ordered and Adjudged, by the Lords Spiritual
    and Temporal in the Court of Parliament of Her Majesty
    the Queen assembled, That the said Order of Her
    Majesty's Court of Appeal, of the 29th day of March
    1954. complained of in the said Appeal, be, and the
    same is hereby. Reversed, and that the Judgment of the
    Honourable Mr. Justice Pearson of the 16th day of
    November 1953, be, and the same is hereby Restored:
    And it is further Ordered, That the Respondents do pay,
    or cause to be paid, to the said Appellants the costs
    incurred by them in the Court of Appeal, and also the
    costs incurred by them in respect of the said Appeal to
    this House, the amount of such last mentioned costs to
    be certified by the Clerk of the Parliaments: And it is
    also further Ordered that the Cause be, and the same
    is hereby, remitted back to the Queen's Bench Division
    of the High Court of Justice, to do therein as shall be
    just and consistent with this Judgment.

    Tool Metal

    Manufacturing

    Company

    Limited v.

    Tungsten Electric

    Company

    Limited.



    HOUSE OF LORDS

    Viscount Simonds
    Lord Oaksey
    Lord Reid
    Lord Tucker
    Lord Cohen


    TOOL METAL MANUFACTURING COMPANY LIMITED

    v.

    TUNGSTEN ELECTRIC COMPANY LIMITED

    Viscount Simonds

    16th June, 1955.


    My Lords,


    The facts in this complicated case are fully stated in the speech of my
    noble and learned friend, Lord Cohen, which I have had the privilege of
    reading, and I do not think it necessary to trouble your Lordships by refer-
    ring, except incidentally, to the events which preceded the issue of the writ in
    the action in which this appeal is brought.

    It was in the circumstances stated by my noble friend that the Appellants,
    by writ issued on the 11th September, 1950, claimed from the Respondents
    as compensation under clause 5 of the Deed as from the 1st January, 1947,
    to the 26th January, 1950, a quantified sum of £84,050, and an account of
    compensation payable under the same clause from the 26th January, 1950,
    to the 27th July, 1950, when the licence terminated.

    To this claim the Respondents put in a number of defences. They pleaded
    that the provisions of clause 5 were void on three separate grounds: (a)
    because they imposed a penalty; (b) because they were an unreasonable
    restraint of trade; and (c) because they contravened section 38 of the Patents
    and Designs Act, 1938. They also pleaded that the delivery of the counter-
    claim in the first action did not operate as notice to terminate the equit-
    able arrangement which, as was held in that action, existed at any rate until
    such delivery and that it was a condition of its termination that the notice
    determining it (a) should be unequivocal and (b) should specify the date
    of termination, and further that that date should give them a reasonable
    time to adjust their business affairs to meet the altered circumstances. To
    this, in effect, the Appellants replied that the delivery of the counterclaim
    was a sufficient intimation of their intention to reassert their legal rights and
    that, that intimation having been given, equity demanded nothing more than
    that a reasonable time should be allowed before they sought to enforce
    them. And they further said (nor was this denied by the Respondents)
    that upon this footing a reasonable time was given since the counterclaim
    was delivered in March, 1946, and compensation claimed from January,
    1947.

    Upon this part of the case I will be as brief as I can, for, having read
    the Opinion of Lord Cohen in which the facts of the case are set out at
    greater length, I am not prepared to dissent from his conclusion. It would
    not, however, be right in a case in which I find myself unable to agree
    with the decision of the Court of Appeal to say nothing on the far-reaching
    conclusion to which they have come.

    My Lords, the decision of the Court of Appeal in the first action was
    based on nothing else than the principle of equity stated in this House in
    Hughes v. Metropolitan Railway Company, 2 A.C. 439 and interpreted by
    Lord Justice Bowen in Birmingham and District Land Company v. London
    and North Western Railway Company
    40 Ch.D. 268 at p. 286 in these terms:
    " It seems to me to amount to this, that if persons who have contractual rights
    " against others induce by their conduct those against whom they have such
    " rights to believe that such rights will either not be enforced or will be kept
    " in suspense or abeyance for some particular time, those persons will not
    " be allowed by a Court of Equity to enforce the rights until such time has
    " elapsed, without at all events placing the parties in the same position
    " as they were in before." These last words are important, for they
    emphasise that the gist of the equity lies in the fact that one party has


    2

    by his conduct led the other to alter his position. I lay stress on this
    because I would not have it supposed, particularly in commercial transac-
    tions, that mere acts of indulgence are apt to create rights, and I do not
    wish to lend the authority of this House to the statement of the principle
    which is to be found in Combe v. Combe [1951] 2 K.B. 215 and may well
    be far too widely stated.

    The difficulty in the present case lies in the fact that in the first action,
    in which it was held that between these parties the principle applies, neither
    of them in any pleading or other statement between the delivery of the
    counterclaim in March, 1946, and judgment in April, 1950, took their stand
    upon its existence. The Respondents asserted a binding agreement for the
    complete and final abrogation of any compensation: the Appellants, though
    willing to make some concession in regard to the past, denied any agreement
    in respect of any period at all. The position of neither of them was com-
    patible with the existence of an equitable arrangement by which the right
    to receive and the obligation to pay compensation were suspended for a
    period which lasted at least until March, 1946, and for a debatable period
    thereafter.

    My Lords, I think that at this point the issue is a very narrow one.
    On the one hand it is said that a plea resting on the denial of an agree-
    ment cannot be a notice determining that agreement. This is the view
    taken by Lord Justice Romer in which the other members of the Court of
    Appeal concurred. On the other hand it is urged that, since the suspensory
    period is due to the gratuitous willingness of the one party to forgo
    their rights, nothing can be a clearer intimation that they propose no
    longer to forgo them than a claim which, though it may ask too much, can
    leave the other party in no doubt that they must not expect further indul-
    gence. The problem may perhaps be stated in this way. Did equity require
    that the Appellants should expressly and unequivocably refer to an equitable
    arrangement which the Respondents had not pleaded and they did not
    recognise? Or was it sufficient for them by a reassertion of their legal
    rights to proclaim that the period of indulgence was over? In favour
    of the latter view it is added that such an attitude on the part of the
    Appellants could not surprise the Respondents who had not hesitated to
    bring against them a serious charge of fraud.

    My Lords, it is not clear to me what conclusion the Court of Appeal
    would have reached but for the authority of the case of the Canadian
    Pacific Railway Company
    v. The King [1931] AC 414, to which I must refer
    later. For my part I have, after some hesitation, formed the opinion that, as
    soon as the counterclaim was delivered, the Respondents must be taken to
    know that the suspensory period was at an end and were bound to put their
    house in order. The position is a very artificial one, but it was their
    own ignorance of a suspensory period, or at least their failure to plead
    it, which created the difficulty, and I do not think that they can take
    advantage of their own ignorance or default and say that they were entitled
    to a further period of grace until a further notice was given. Equity
    demands that all the circumstances of the case should be regarded and I
    think that the fair and reasonable view is that the Respondents could
    not, after they had received the counterclaim, regard themselves as entitled
    to further indulgence.

    It was, however, urged on behalf of the Respondents that, even if the
    counterclaim could otherwise be regarded as a sufficient notice that the
    equitable arrangement was at an end, yet it was defective in that it did not
    name a certain future date at which it was to take effect. To this the reply
    was made that equity did not require a future date to be named in the notice,
    but that what it did require was that a reasonable time should be allowed
    to elapse before it was sought to enforce it. Here, too, the Court of Appeal
    favoured the view of the Respondents, again feeling themselves constrained
    by the decision in the Canadian Pacific Railway case. And here, too, I am
    forced to the opposite conclusion. Equity is not held in a strait-jacket.
    There is no universal rule that an equitable arrangement must always be

    3

    determined in one way. It may in some cases be right and fair that a dated
    notice should be given. But in this case what was the position in January,
    1947, which I take to be the critical date? Then for nine months the
    Respondents must, in my opinion, be taken to have been aware that the
    Appellants proposed to stand on their legal rights. It is not denied that those
    nine months gave them ample time to readjust their position. I cannot
    regard it as a requirement of equity that in such circumstances they should
    have been expressly notified in March of 1946 that they would have nine
    months and no more to take such steps as the altered circumstances required.
    In coming to this conclusion I do not think I run counter to any authority
    that was cited to us unless it be the Canadian Pacific Railway case to which I
    must now refer.

    My Lords, in his judgment in the Court of Appeal Lord Justice Romer
    introduced that case with these words: " In my opinion, although in many
    " cases the equity, to which Hughes v. Metropolitan Railway Company gave
    " recognition and high authority, is satisfied by merely conforming to the
    " terms in which Lord Cairns (and subsequently Lord Justice Bowen) formu-
    " lated it, there are other cases where justice requires that the resumption of
    " legal rights which have been suspended for a period must be preceded by a
    " notification to the other party concerned specifying a fixed period of grace
    " during which that party can put his house in order: and that in such cases
    " a notification such as that will be a condition precedent to the valid
    " re-assumption of the owner's legal rights." " Such a case ", the learned
    Lord Justice proceeds, " was Canadian Pacific Railway v. The King."

    My Lords, it is undoubtedly the fact that the Canadian Pacific Railway
    case decided that what I have called a " dated notice " was required in that
    case to terminate an existing licence and that the Crown, the licensor, had in
    that case the duty and the risk of fixing a reasonable period of notice, but I
    must observe that not only was the equitable principle, which was recognised
    in Hughes' case, not invoked, but Lord Russell of Killowen in delivering the
    opinion of the Board expressly disclaimed any reference to that or any other
    equitable principle. The relevant problem there was whether a licence to
    occupy land by placing telegraph poles thereon had been revoked by the
    institution of proceedings by the Crown, and the question was what term in
    regard to revocation should be implied in the licence which the Crown was
    assumed to have granted. I have no doubt that the question is analogous
    to that which we have to decide in this case, for the implication of a term
    as to revocation, upon which the licence is silent, must depend on what is
    fair and reasonable between the parties. The Court will be guided by the
    same principles in the one case and the other. The passage which I cited
    from Lord Justice Bowen's judgment in the Birmingham case ended with
    these words: " That is the principle to be applied. I will not say it is
    " not a principle that was recognised by Courts of Law as well as of Equity.
    " It is not necessary to consider how far it was always a principle of common
    " law." Nor, my Lords, is it necessary today, but in the House of Justice
    it would be difficult to distinguish between the equitable principle recognised
    in Hughes' case and the rule well established at common law long before the
    fusion of law and equity that a licensor must give reasonable notice to
    determine a licence. It was this rule which was applied in the Canadian
    Pacific Railway
    case and, in applying it, Lord Russell of Killowen said:
    " Whether any and what restrictions exist on the power of a licensor to
    " determine a revocable licence must, their Lordships think, depend upon the
    " circumstances of each case." And, as I read the decision, it was the
    circumstances of that case and nothing else, certainly not any general rule,
    which led him to say that " it will be for the Crown to determine the licence
    " by service of a notice the sufficiency of which, if called in question, will
    " have to be decided, upon proper evidence, in subsequent proceedings. It
    " will be for the Crown, at its risk, to fix the length of notice." The circum-
    stances of that case were very unusual, and I do not doubt that they fully
    justified the rule being applied in that way. But so also in the present case
    the circumstances are very unusual: it is hardly possible that they should be
    repeated, and even if I apply in the amplest way to the termination of the

    4

    equitable arrangement between the parties in this case the rule applicable to
    the revocation of licence, I find nothing in the Canadian Pacific Railway case
    which precludes me from reaching the conclusion which I have already stated,
    viz. that the Appellants gave sufficient notice that the suspensory period was
    at an end and allowed enough time to elapse before seeking to enforce their
    rights. For these reasons I think that this defence fails and that the judg-
    ment of the Court of Appeal cannot on this ground be upheld.

    The plea that the provisions of the deed are unenforceable because they
    impose a penalty clearly cannot be maintained. It is perhaps enough to say
    that they do not impose, or purport to impose, a penalty. No doubt the
    consequences of certain actions by the Respondents may be detrimental to
    them, but that does not involve that a penalty is imposed in the sense in
    which that word is used in the equitable doctrine that equity relieves against
    penalties. No case was cited where the doctrine was invoked otherwise
    than for a penalty payable upon the breach of a contractual obligation.

    The further plea that the provisions of the deed are unenforceable, because
    they constitute an unreasonable restraint of trade, must also fail. It was
    conceded that as between the parties the restraint was reasonable. But it
    was contended that it was unreasonable in the public interest. The onus of
    proof here lay with the Respondents and it is a notoriously heavy burden.
    In my opinion, the Respondents did not discharge it and I concur so fully in
    the reasoning and conclusion of Lord Justice Romer that I need say no more.

    My Lords, having come to the conclusion that it has not been established
    that clause 5 of the Deed of the 2nd April, 1938, is under the general law
    void as in restraint of trade, it is necessary now to consider whether it is
    avoided by section 38 of the Patents and Designs Act, 1907. The Patents Act
    of 1949 has substituted a new section for that section but it is with the earlier
    Act that we are here concerned. It had by 1907 become notorious that
    patentees were seeking by virtue of their patents to obtain a collateral ad-
    vantage by imposing conditions upon licensees such as that the patented article
    should not be used save in conjunction with some other article produced by
    the patentee or that the patented article alone should be used or that the user
    should purchase his raw materials from the patentee: see Terrell 9th Edition
    p. 262 and cases there cited. And it is, I think, clear that the object of the
    Legislature was to put an end to this grave abuse of monopoly rights. How far
    it has done so must depend on the true construction of section 38 of the Act
    of 1907, but the background is one in which I see first the common law
    rejection of a monopoly, then the statutory grant under the Statute of
    Monopolies and the succeeding Patent Acts of limited monopolies hedged
    about with divers safeguards in the public interest against their abuse, then
    the attempt by patentees, in spite of such safeguards, to secure for themselves
    collateral advantages by virtue of their monopoly, and finally the attempt to
    check such attempts by prohibitory legislation with powerful sanctions. Lord
    Justice Romer in Huntoon Company v. Kolynos (Incorporated) 47 R.P.C.403
    accurately stated the purport of the legislation in one aspect when he said that
    its language " would seem to suggest that the object of the Legislature was
    " to prevent persons who had obtained a monopoly in respect of an article or
    " a process by means of a patent so using that monopoly as to obtain for
    " themselves a virtual monopoly in respect of other articles and processes for
    " which they have not obtained any patent ". His statement would be equally
    applicable to articles which had been patented but the patents had expired.
    Nothing, I suppose, could be in more direct conflict with the law relating to
    patents than a contractual provision which indirectly secured for a patentee
    a monopoly extending beyond the statutory period of his patent.

    I now turn to section 38, and for the sake of clarity state the first subsection,
    with the omission of words not relevant to the present case—

    " It shall not be lawful in any contract ... in relation to the
    "... licence to use . . . any article . . . protected by a
    " patent to insert a condition the effect of which will be

    5

    " (a) to prohibit or restrict the ...licensee from using any
    " article or class of articles, whether patented or not, supplied
    "... by any person . . . other than the ... licen-
    " sor or his nominees; or

    " (b) to require the ... licensee to acquire from the
    "... licensor, or his nominees, any article or class of articles
    " not protected by the patent . . ."

    I need not at the present stage refer to the provisoes to this subsection nor
    to the other subsections.

    Upon the meaning and effect of the words that I have cited numerous
    questions have arisen, but the controversy has chiefly centred round the words
    " the effect of which will be " and the words " prohibit or restrict ".

    I think that it is clear that the words " the effect of which will be " have a
    wider scope than the words " which will ", and I cannot find a more accurate
    way of stating the difference than by saying that the former phrase emphasises
    that the result may be directly or indirectly achieved. But it is the word
    " will " which has caused the greater difficulty. It was pointed out truly
    enough that the word is " will " not " may ". and from this the short step was
    taken of saying that it must be shown by evidence that the condition
    necessarily will or, in other words, must have a certain effect. But, in my
    opinion, too much stress is laid on the use of the future tense. The subsection
    looks forward to the future; it opens with the words " It shall not be lawful
    " in any contract ", and in describing what could only be a future condition in
    a future contract it was, I think, good grammar to use the words " the effect
    " of which will be ". The problem is precisely the same as if the present tense
    had been used, or as if (leaving out the words " the effect of which will be ")
    the subsection had run " condition prohibiting or restricting etc.", or (giving
    their proper meaning to the words I have for the moment omitted) " condition
    directly or indirectly prohibiting or restricting ". It is common ground that
    the matter must be examined as at the date of the execution of the contract.
    That is a date at which the surrounding circumstances are known but the
    future cannot be foreseen, and nobody can predict that such and such a result
    will inevitably ensue. The Court then, in my opinion, in considering whether
    section 38 operates to avoid a condition, has the task of determining whether
    its essential quality is (I will not repeat " directly " or " indirectly ") prohibitive
    or restrictive of a certain course of conduct. This cannot as a rule, I think,
    be a difficult task.

    Obviously, no condition will have the effect of prohibiting or restricting
    me from following a certain course if I have never wanted and never shall
    want to follow that course. The fundamental supposition is that, if I do want
    to follow it, I shall be faced with the condition, and it is fair to assume that it
    is just because I may want to follow it, that the condition is imposed. If I
    find such a condition in a contract, it is, in my view, idle to speculate (as was
    done at great length in this case) whether and when I shall want to do a
    certain thing: the question is whether, when I want to do it, I shall find myself
    prohibited or restricted.

    What, then, is the meaning of " prohibit " and " restrict "? It has been
    urged by the Appellants and was, I think, held by Mr. Justice Pearson that
    both these words cover only a direct contractual provision, e.g. " the licensee
    " will not use any hard alloys except those supplied by the licensor " or " the
    " licensee will not use more than 25 per cent. of hard alloys supplied by any
    " other supplier than the licensor ", the former taken as an example of a
    prohibiting, the latter of a restricting, condition. And, if I understood the
    argument, it proceeded on the footing that " prohibit " meant " forbid ", that
    " forbid " connoted such a contractual provision as I have stated and that
    " restrict ", being found in immediate conjunction with " prohibit ", must be
    given a similar meaning. I cannot accept this argument. In the first place,
    it wholly ignores the words " the effect of which will be ". But, secondly, I
    see no reason in the context for so limiting the meaning of the word
    " prohibit" or, if indeed that word has a limited meaning, for saying that
    " restrict " must be similarly limited. I put to learned Counsel the hypothesis

    6

    of a penalty which must in fact effectually deter the licensee from purchasing
    in the market and he admitted candidly that his construction required him
    to deny that that operated to prohibit the licensee. It appears to me that,
    while one meaning of " prohibit " is " forbid ", it has another meaning, which
    I would by no means call a secondary meaning, and that is " prevent ". If
    a modest tourist says that the prices of a certain hotel are prohibitive, he
    is not thinking in terms of contractual provision. The prices are so high
    that he is prevented from entering that hotel. It is interesting to note that
    he might say that the condition of his purse forbade it. I would say
    then that a man may be prohibited from a course of action equally by the
    express terms of his contract, by the law of the land, or by economic circum-
    stance. Nor do I see any reason for giving the word in the context of
    section 38 a narrower meaning than it fairly bears. True enough it is in a
    sense a penal provision. But I do not detract one jot from what I said in
    London, North Eastern Railway Company v. Berriman ([1946] A.C. 278) if
    I insist that, it being the plain purpose of the section to prohibit (or prevent)
    the licensor from using his monopoly to obtain a collateral advantage,
    nothing less than its fair meaning should be given to the clause. It would
    be a strange piece of legislation which disallowed a direct contractual
    provision but allowed a condition which indirectly had the same effect. It
    was, perhaps, in order to avoid the possibility of such a conclusion that the
    words " the effect of which will be " were introduced.

    But to " prohibit " must be added " restrict ". If I am wrong in thinking
    that prohibition covers prevention as well by economic circumstance as by
    direct contractual provision, why should " restrict " be so limited? I see
    no reason for saying that it follows from an application or misapplication of
    the ejusdem generis rule. The argument, I think, involves that " prohibit "
    means " totally prohibit " and " restrict " means " partially prohibit " and in
    either case by means of an express contractual provision: for otherwise I do
    not know what meaning can, upon this footing, be given to " restrict ". But
    this would be surplusage: for it could not be maintained that a condition
    was not prohibitive, if it forbade the user of material supplied by outsiders
    to the extent of (say) 75 per cent. In truth, however, there is no valid
    reason in the context or otherwise for giving a limited meaning to this
    word. A word of command, the fear of penal consequences, or barbed
    wire may equally restrict my movement. I do not know why the means by
    which I am restricted should affect the fact that I am restricted in a real
    sense of that word. And I would say that in the sphere of commerce nothing
    could more truly restrict a trader than the fact that, wishing to purchase
    the goods of A rather than the goods of B, he finds that he can only do so at
    the cost of paying a heavy penalty to B. That is the effect which the
    penalty is intended to have and it will probably have it.

    I do not find anything contained in the other subsections which throws
    any light upon the meaning of the relevant words. The proviso to sub-
    section (1) offers some mitigation to its stringency and subsection (4) gives
    cogent evidence of the importance attached by the Legislature to subsection
    (1). Some comment was made on the fact that the section does not preclude
    a condition prohibiting sale by the licensee of goods supplied by outsiders,
    but I do not see why this omission should lead to a narrow construction of
    " prohibit " and " restrict " in relation to user. There may be good reason
    for thinking that a selling agent may fairly be restrained by the licensor
    from selling the goods of an outsider. This seems to be the motive of
    subsection (5) (a).

    After this too long exposition of the section I return to the present case
    and ask whether, on the 2nd April, 1938, it could fairly be said of clause 5
    that it was a condition which will have the effect of prohibiting or restricting
    TECO from using contract material supplied by suppliers other than
    T.M.M.C. As I have already indicated, it must have been an idle and
    irrelevant speculation at that date whether at any time in the next ten
    years TECO would want to do so. The penal clause is inserted upon the
    assumption that they may or will want to do so and to meet just that
    eventuality. Assuming then, that the time comes when TECO wants to

    7

    use contract material obtained from an outsider, will this clause have a
    prohibitive or restrictive effect? I do not see how it can fail to do so. The
    assumption is that TECO want to obtain their material from an outsider
    either because they can get it cheaper or because they think it better material
    or for some other good commercial reason. If there was no clause, they
    would do so. But the clause is there and at once the position is changed.
    They can pursue their chosen course only at the expense of a penalty which
    will not be borne by their own competitors in the market, and so they are
    compelled to buy from their licensors. I repeat that the compulsion of
    economic conditions is as truly prohibitive or restrictive as a direct contractual
    obligation. Its intention and its effect are to confine them to purchase from
    their licensor, when unhampered by the clause they would be free to purchase
    from another. That is, in my opinion, a restrictive condition which section
    38 (l) of the Act avoids.

    On this ground, and this ground only, I would dismiss this appeal.

    Lord Oaksey

    My Lords,

    I have had the advantage of reading the Opinion prepared by my noble
    and learned friend, Lord Reid, who has not yet taken the Oath in your
    Lordships' House on account of his absence from the country, and as I
    entirely agree with his Opinion I propose to read it as my own, and to
    vote accordingly.

    My Lords,

    Krupps of Essen had been developing processes for the manufacture of
    hard metal alloys and in 1931 they formed the Appellant Company, whom
    I shall call " T.M.M.C.", to operate in Britain. T.M.M.C. owned a number
    of British patents and they sought to stop what they alleged to be infringe-
    ments by certain British companies including the Respondents TECO
    who had been making hard tips for machine tools and other articles from
    tungsten carbide powder. After much negotiation, on 2nd April, 1938,
    two deeds were executed by which T.M.M.C. granted a licence to TECO
    to import, make, use and sell under certain conditions hard alloys made
    in accordance with the inventions the subjects of their patents (called
    " contract material ") and TECO agreed to pay a royalty of 10 per cent.
    and in addition " compensation " at the rate of 30 per cent. of the value
    of contract material sold or used by them in excess of 50 kilograms per
    month. This was a very heavy burden on TECO and they only agreed
    to it because the alternatives were either to defend an action for infringe-
    ment, which would have been disastrous for them if they were unsuccessful,
    or to go out of business and perhaps also pay damages for past infringe-
    ments. Before the war TECO paid about £16,000 to T.M.M.C. as
    " compensation ".

    Shortly before the war Krupps sold their interest in T.M.M.C. to British
    buyers and early in the war TECO settled their liability for compensation
    down to the date of settlement by paying a further sum of over £3,000.
    Thereafter no demand for further payment of compensation was made until
    after the end of hostilities.

    In July, 1945, TECO sued T.M.M.C. for repayment of those sums
    amounting in all to £19,521, alleging that the deeds of 1938 had been obtained
    by fraudulent misrepresentation, and they also pleaded that T.M.M.C. had
    agreed that no further compensation should be payable. On 26th March,
    1946, T.M.M.C. lodged a defence and counterclaim denying fraud and
    claiming payment of royalties and also of compensation as from 1st June,
    1945. The case was finally decided by the Court of Appeal on 4th April,
    1950. Fraud was not proved and the counterclaim for compensation
    failed. In that action there was no plea or suggestion by TECO that their
    agreement to pay compensation was void or voidable on any other ground
    than fraud.


    8

    On 11th September, 1950, T.M.M.C. raised the present action claiming
    compensation as from 1st January, 1947, and TECO's defence was
    delivered on 10th November, 1950. Four defences were pleaded; first,
    that no notice had been given by T.M.M.C. which entitled them to demand
    compensation, secondly, that the clause in the 1938 agreement imposing
    liability to pay compensation was in restraint of trade and illegal, thirdly,
    that this clause provided for the imposition of a penalty which was irrecover-
    able at law, and fourthly, that the clause was null and void in that it
    offended against section 38 (1) (a) of the Patents and Designs Act, 1907.
    I agree with your Lordships that the first and third defences fail, and I
    propose only to deal with the other two.

    If these defences, or either of them, are valid it is somewhat remarkable
    that nothing was said about them in the earlier action but it is admitted that
    it is competent to raise them now for the first time. In order to deal with
    them I must first consider the terms of the clause against which they are
    directed. It is clause 5 of the Agreement of 1938, which is in these terms:
    " If in any month during the continuance of the said Licence the
    " aggregate quantity of contract material sold or used by TECO and
    " Industrial (other than contract material supplied to TECO by the
    " Grantors or any Licensees under the said patents) shall exceed a quota
    " of 50 kilograms (50 Kg) TECO shall whether all or any of such
    " material shall be subject to royalty hereunder or not pay to the
    " Grantors compensation equal to thirty per cent. (30%) of the sum
    " which represents the excess net value that is to say the average net
    " value per kilogram of all contract material sold or used by TECO
    " and Industrial in the said month multiplied by the weight in kilograms
    " of all such contract material as aforesaid sold or used by TECO
    " and Industrial during such month in excess of fifty kilograms (50 Kg).
    " Provided that contract material sold by TECO to Industrial shall
    " only be taken into account for the purposes of this clause on the
    " occasion of its sale or use by Industrial."

    Before considering this clause in detail it is necessary to have in mind
    something about the nature of contract material. TECO's process begins
    by taking tungsten carbide and any other desired ingredient in finely powdered
    form and the object of the process is to get the grains or particles to adhere
    to each other so that the finished product is an extremely hard object of the
    required shape. This is done by sintering in two stages. After the first
    stage the powder has been compacted into an object which can be fairly
    easily worked to approximately the right size and shape. The second
    stage then makes the object so hard that it is difficult to grind away any
    of it. It is only when this second stage is completed that the object becomes
    contract material within the meaning of the Agreement. The manufacturer
    can then sell the object in this state or he can grind it after the second
    stage is completed so as to sharpen its edge or bring it to the exact shape
    which his customer wants. It is admitted that any such operation after
    the second stage is use of contract material by the manufacturer within the
    meaning of the Agreement.

    It appears that there are two grades of contract material, the iron grade
    and the steel grade. They are made by somewhat different processes and
    both were within the scope of the patents in force in 1938. But the patents
    with regard to the iron grade expired in 1941: thereafter only the patents
    with regard to the steel grade remained. So the clause operated in this way.
    Down to 1941 the only possible ways in which TECO could get contract
    material which they could sell or use were by making it themselves or by
    buying it from T.M.M.C. or their other licensees. If in any month TECO
    sold or used more than 50 Kg. of contract material made by themselves
    they had to pay compensation on the excess, but they would pay no
    compensation in respect of selling or using any contract material which they
    had acquired from T.M.M.C. or their licensees. This was not, in my view.
    calculated to confer any preference on T.M.M.C. or to induce TECO
    to buy from T.M.M.C. rather than make the material themselves. There
    were price fixing arrangements in the deeds which, if I understand them
    rightly, would give little encouragement to TECO to buy from T.M.M.C.


    9

    even though they could do so without compensation affecting material so
    bought, and I can find nothing to indicate that TECO did buy from
    T.M.M.C. or that it was contemplated that they would make a practice of
    doing so. But the inclusion of this exemption in clause 5 and of a similar
    exemption from royalty in clause 3 shows that the parties thought that
    such purchases might occur and the most likely reason for the exemption
    would seem to be that, if TECO bought direct from T.M.M.C., T.M.M.C.
    would get their full profit on what they sold to TECO in the same way
    as if they had sold to anyone else, and that, if TECO bought from another
    licensee of T.M.M.C., the material sold by that licensee would be taken
    into account in assessing the compensation payable by that licensee. So,
    if material acquired by TECO from T.M.M.C or their licensees were
    taken into account to increase the compensation payable by TECO, the
    effect would be that T.M.M.C. would get a double profit from the same
    material and that no doubt was thought to be unfair, and to require the
    insertion of the exemption.

    But after the iron grade patents had expired the situation with regard
    to iron grade contract material might be different. It was then open to
    anyone to make that material and, if that material was then made by some
    manufacturer independent of T.M.M.C., it was open to TECO to buy it
    and use it or resell it. In 1938 no one could say whether after 1941
    independent manufacturers would manufacture this material or whether, if
    they did, the price and quality of their product would offer any inducement
    to TECO to buy from them rather than make the material themselves
    or buy it from T.M.M.C. But the terms of clause 5 are certainly wide
    enough to require TECO to bring into computation for the purpose of
    compensation any material which they might then buy from independent
    manufacturers and use or resell themselves. And it is also clear that after
    the iron grade patents had expired TECO were still liable to pay com-
    pensation in respect of iron grade contract material manufactured by
    themselves.

    TECO now say that in as much as clause 5 required payment of com-
    pensation to T.M.M.C. in respect of iron grade material after T.M.M.C.'s
    patents relating to that material had expired it was in restraint of trade.
    I think that in the circumstances of this case it may be presumed that this
    obligation would tend to have the effect of diminishing the amount of iron
    grade material which TECO would be able to sell at a profit and putting
    them at some disadvantage in competing with T.M.M.C. But even if that
    were sufficient to show that clause 5 is objectionable it is still necessary to
    consider whether any restraint which it might cause is justifiable as being
    reasonable in the interests of the parties and in the public interest. As
    regards the parties, counsel for TECO rightly admitted that in view of
    their disadvantageous position, which I have already mentioned, it was
    reasonable for them to accept the 1938 agreement. T.M.M.C. no doubt
    drove a hard bargain but I cannot hold that they took an unconscionable
    advantage of their position, or that clause 5 was commercially unjustifiable
    or unreasonable for the protection of their trading interests. Counsel argued
    that a restraint may be reasonable in the interests of the parties and yet
    against the public interest, and so it may be. But I am unable to hold that
    this restraint was against the public interest. There is nothing to show that
    it either limited or was likely to limit the total supply of the material
    available for purchase by the public or that it had or was likely to have
    any substantial effect on the price which consumers would have to pay. If
    TECO had refused to make the agreement it was not argued that there
    was any provision in the Patents Act which could have been invoked. The
    most that can be said is that T.M.M.C., instead of trying to drive TECO
    out of business, which they could probably have done without in any way
    offending against the law, offered to TECO an agreement which, although
    it might limit their activities, allowed to them a substantial share of the
    trade: and I know of no authority for holding that that is against the
    public interest. To hold that that is against the public interest would only
    encourage a trader in an advantageous position to act more ruthlessly
    against his rival than he might be inclined to do.


    10

    TECO's last defence is that clause 5 of the Agreement of 1938 offends
    against section 38 (1) (a) of the Patents and Designs Act, 1907, and is there-
    fore null and void. Section 38 (1) is in these terms:

    " It shall not be lawful in any contract made after the passing of this
    " Act in relation to the sale or lease of, or licence to use or work, any
    " article or process protected by a patent to insert a condition the effect
    " of which will be—

    " (a) to prohibit or restrict the purchaser, lessee or licensee from
    " using any article or class of articles, whether patented or not, or
    " any patented process, supplied or owned by any person other than
    " the seller, lessor or licensor or his nominees; or

    " (b) to require the purchaser, lessee, or licensee to acquire from
    " the seller, lessor, or licensor, or his nominees, any article or class
    " of articles not protected by the patent;

    " and any such condition shall be null and void, as being in restraint
    " of trade and contrary to public policy."

    This is not an easy subsection to interpret. Let me therefore first take
    a case to which it clearly applies. Before the section was enacted the owner
    of a patented process might and sometimes did attach to a licence to use
    the process a condition that the licensee must buy raw material used in the
    process from him and from no one else. Such a condition was prohibited
    by the section, no doubt because it was regarded as an abuse of the patentee's
    monopoly in that it imposed on the licensee a restraint beyond the scope
    of the patent. The condition might be a positive obligation to buy the
    raw material from the licensor—that is made unlawful by subsection (1) (b)
    —or it might be a negative obligation prohibiting the licensee from buying
    it from any person other than the licensor and that is prohibited by sub-
    section (1) (a). In the same way the seller of a machine protected by a
    patent might require the buyer to purchase raw material from him or
    prohibit the buyer from purchasing it from any other person and that is also
    made illegal.

    Obviously, a condition restricting the right of the licensee to choose from
    whom he would buy articles not protected by the licensor's patents need
    not be drafted in such direct terms. It is not difficult to imagine circum-
    stances where a condition which did not expressly require the licensee to
    buy from the licensor or prohibit him from buying elsewhere would in fact
    operate to deprive the licensee of the right to buy in the open market and
    the section is drafted in terms wide enough to nullify such a condition.
    It is not limited to conditions which in terms prohibit or restrict or require:
    it makes unlawful any condition the effect of which will be to prohibit or
    restrict the licensee from buying from others or to require him to buy from
    the licensor.

    In trying to simplify my explanation I have stated the effect of sub-
    section (1) (a) rather too widely. For some reason that is not apparent to
    me this subsection does not nullify a condition prohibiting or restricting the
    licensee from purchasing articles from any person other than the licensor:
    it only affects conditions the effect of which will be to prohibit or restrict
    the licensee from using such articles. No doubt the effect would generally
    be the same because generally the licensee would purchase with a view
    to using the articles, but it is worth noting in connection with the present
    case that if the licensee desired to buy for resale and not for use a condition
    might have the effect of restricting his right to buy in the open market and
    yet be unobjectionable provided that its effect was not to require him
    to buy from the licensor.

    Before turning to the question at issue in the present case I should
    perhaps deal rather more fully with the phraseology of subsection (1) (a).
    I read it as affecting, first, any article or class of articles, whether patented
    or not, supplied by any person other than the licensor, and, secondly, any
    patented process owned by any person other than the licensor; and the
    patented articles or patented processes must, I think, be articles or processes
    protected by other patents than those under which the licence is granted.

    11

    I have tried to explain the subsection using only the words " licensee " and
    " licensor ": I do not think that it is necessary to elaborate my explanation
    to include all the words "purchaser, lessee or licensee" on the one hand
    and " seller, lessor, or licensor, or his nominees " on the other. And I must
    further note that it is admitted that section 38 does not apply to a condition
    the effect of which is merely to restrict the volume of the licensee's trade
    or the amount of unpatented raw material which he can use in his manu-
    facture while leaving him free to buy the restricted amount where he chooses.
    Such a condition is left to the ordinary law of restraint of trade. The
    purpose and effect of section 38 is to prevent the licensor from limiting
    the right of the licensee to trade with others so as in effect to compel the
    licensee to trade with him.

    I now turn back to the facts of the present case. I have already said
    that the terms of clause 5 show that the parties contemplated at least the
    possibility that TECO would want to buy contract material as well as
    make it themselves; and that after the expiry of the iron grade patents they
    might be able to buy iron grade material from other manufacturers than
    T.M.M.C. and their licensees. If then they wanted to buy iron grade material
    and if supplies from such outside manufacturers were available, they would
    not be prevented by clause 5 from buying from outsiders but there would
    be an inducement to buy from T.M.M.C. and not from outsiders because
    purchases from outsiders would come into the computation for paying com-
    pensation, whereas purchases from T.M.M.C. would not. It is said that
    the effect of this inducement would be to restrict TECO from buying
    material from persons other than T.M.M.C. or their other licensees, and
    if TECO were not buying to resell but were buying to use the material them-
    selves then the effect of this inducement would be to restrict TECO from using
    material bought from persons other than T.M.M.C. or their other licensees.
    That and that alone is said to bring clause 5 within the scope of section 38
    and to make it null and void.

    It will be seen that a number of contingencies were involved before this
    inducement could operate: TECO must want to buy iron grade material
    instead of making it and they must want to buy it for use and not for
    immediate resale ; some independent manufacturer must have started making
    the material; and the material must be of suitable quality and must be
    available at a competitive price. If then the independent manufacturer's
    price were more than 30 per cent. below T.M.M.C.'s price the 30 per cent.
    compensation would not matter as it would still pay TECO to buy
    from the independent manufacturer, and if that manufacturer's price were
    above T.M.M.C.'s price the compensation would not matter as TECO
    would in any case buy from T.M.M.C. But if that manufacturer's price
    were below, but less than 30 per cent. below, T.M.M.C.'s price, then the
    liability to pay compensation would probably induce TECO to buy
    from T.M.M.C. whereas, in the absence of clause 5, they would probably
    have bought from the independent manufacturer. It is the possibility of
    that happening which, on the argument for TECO. makes it necessary to
    hold that the effect of clause 5 " will be " to restrict TECO from using
    iron grade material supplied by any person other than T.M.M.C. and their
    licensees.

    There appear to me to be four key words in the subsection—" the effect
    " of which will be (a) to prohibit or restrict ... or (b) to require . . .".
    To my mind, the natural meaning of the subsection is that the effect of the
    condition must be to limit the right of the licensee to make a choice, and I
    do not think that these words are appropriate to cover a case such as the
    present where the licensee remains free to choose but the presence of the con-
    dition will in some circumstances create an inducement to choose to buy from
    the licensor. I take first the word " require " in subsection (1) (b): the effect
    of a particular condition may be to offer so great an advantage to the licensee
    if he buys from the licensor that it would be extremely foolish of him not
    to do that, but I do not think that in the ordinary use of language it could
    properly be said that the effect of such a condition will be to " require "
    the licensee to do it. I feel bound to hold that subsection (1) (b) only
    applies if the effect of the condition is that whenever certain circumstances

    12

    occur the licensee, if he wishes to buy the article, is obliged to buy it from
    the licensor. Then I take the word "prohibit" in subsection (1) (a). It is
    true that the adjective " prohibitive " is frequently used when there is no
    legal prohibition, as in the phrase " a prohibitive price ", and it may be
    that the verb " prohibit" is sometimes used in that way; but I would not
    expect the word " prohibit" to be used in this context to denote a state
    of affairs where the inducement not to buy the other person's goods is so
    great that no reasonable person would choose to do so, and I see nothing
    in the context pointing to such a meaning. I think that the meaning is that
    the effect of the condition will be such as to oblige the licensee in certain
    circumstances not to use the other person's goods. Then I come to the
    word " restrict". A person though not prohibited is restricted from using
    something if he is permitted to use it to a certain extent or subject to
    certain conditions but otherwise obliged not to use it, but I do not think
    that a person is properly said to be restricted from using something by a
    condition the effect of which is to offer him some inducement not to use it,
    or in some other way to influence his choice. To my mind, the more
    natural meaning here is restriction of the licensee's right to use the article
    and I am fortified in that opinion by two considerations.

    If I am right in thinking that " require " and " prohibit " refer to legal
    obligations to buy or not to use, I see nothing to suggest that " restrict "
    is used in quite a different sense which has nothing to do with legal obligation
    but which relates to financial disadvantage. And, secondly, to say that the
    effect will be to restrict seems to me much more appropriate if restriction
    refers to restriction of the licensee's right to use than it would be if restriction
    refers to an inducement not to use. The legality of the condition has to
    be determined at the time when the licence is granted and if the terms of
    the condition are such as to restrict the licensee's right to use an article in
    certain circumstances then it can properly be said that its effect will be
    to restrict him from using it. But if, as in the present case, all that can
    be said is that the effect of the condition in some circumstances will be
    to offer a financial advantage, which may be considerable or may be small,
    if the licensee uses the licensor's goods, I do not see how it can be said
    that its effect will be to restrict the licensee from using other goods. The
    licensee may be influenced by this financial advantage or he may, perhaps
    for good reason, choose to disregard it: it is impossible to say in advance
    what the effect will be.

    I recognise that to give this meaning to the section leaves room for
    evasion. I do not think that the primary purpose of clause 5 was to evade
    this section and the absence of any reported case in a period of 48 years
    since the section was enacted would seem to show that evasion of this
    kind has not been common. But undoubtedly it would often be possible
    to achieve a preference for the licensor by coupling the licence with a
    condition which, though not having the effect of limiting the licensee's free-
    dom of choice, imposed some burden on the licensee if he bought certain
    articles in the open market. The question is whether it is legitimate to
    stretch the words of section 38 to make them apply to such a case. Section
    38 (1) is a highly penal provision. It not only makes the whole condition
    void, although the circumstances in which it would have the effect of
    restricting the licensee may be very unlikely to occur, but by subsection (4)
    it also makes the existence of the condition a defence to an action for
    infringement of the patent. At best the section is ambiguous, and if a penal
    provision is ambiguous it ought not, in my view, to be construed in a
    wider sense than the ordinary meaning of its terms requires. This section
    appears to have been enacted to deal with a definite and limited abuse, and
    if Parliament failed to take the opportunity to deal with the whole matter
    sufficiently comprehensively, then the remedy was an amending Act of
    Parliament.

    I would allow this appeal and restore the order of Mr. Justice Pearson. The
    respondents must pay the costs in your Lordships' House and in the Court of
    Appeal.

    13

    Lord Tucker

    My Lords,,

    The Court of Appeal allowed the appeal of the present Respondents (here-
    inafter referred to as " TECO ") on the ground that the Appellants (herein-
    after referred to as T.M.M.C.) were not entitled to recover sums called
    " compensation " under clause 5 of a deed dated 2nd April, 1938, to which
    T.M.M.C. and TECO were parties, because they had not before action
    brought given a sufficient notice to terminate a period of suspension during
    the currency of which payment of compensation money could not be enforced
    by reason of the equitable principle enunciated in Hughes v. Metropolitan
    Railway Company
    2 A.C. 439. It may be convenient at this stage to quote
    the language used by Lord Cairns in that case. He said: " It was not argued
    " at your Lordships' Bar, and it could not be argued, that there was any
    " right of a Court of Equity, or any practice of a Court of Equity, to give
    " relief in cases of this kind, by way of mercy, or by way merely of saving
    " property from forfeiture, but it is the first principle upon which all Courts
    " of Equity proceed, that if parties who have entered into definite and
    " distinct terms involving certain legal results—certain penalties or legal
    " forfeiture—afterwards by their own act or with their own consent enter
    " upon a course of negotiation which has the effect of leading one of the
    " parties to suppose that the strict rights arising under the contract will not
    " be enforced, or will be kept in suspense, or held in abeyance, the person
    " who otherwise might have enforced those rights will not be allowed to
    " enforce them where it would be inequitable having regard to the dealings
    " which have thus taken place between the parties."

    The present is the second of two actions between these parties arising
    out of the deed of 2nd April, 1938, which contained the terms and conditions
    under which a licence under certain Letters Patent was granted by T.M.M.C.
    to TECO. In the first action TECO claimed damages for fraud against
    T.M.M.C. They alleged that as a result of certain fraudulent misrepresenta-
    tions they had paid sums for compensation under clause 5, and in paragraph
    10 of their Statement of Claim they said: "Thereafter the Plaintiffs and
    " Defendants agreed that no sums should be payable in respect of com-
    " pensation after 31st December, 1939, or alternatively that the Defendants
    " would accept the amount of the royalties in full satisfaction of all sums
    " payable under the said deeds as from 31st December, 1939."

    By their Defence T.M.M.C., in paragraph 8, denied the agreement alleged
    and alternatively relied on the Statute of Frauds and lack of consideration.
    In paragraph 17 of their Counterclaim T.M.M.C. said : " In breach of their
    " obligations under Clauses 3, 5, 7 and 8 of the Deed of Agreement the first
    " Plaintiffs " (i.e. TECO) " have not since 31st March, 1942, rendered any
    " accounts or paid the sums due for ' royalties' or compensation. The
    " Defendants do not desire to enforce payment of compensation in respect of
    " deliveries made after 31st December, 1939, but before the end of hostilities
    " with Germany."

    In their claim for relief they asked for delivery of accounts in the form
    specified in clause 7 of the deed of all material sold or used since 31st
    March, 1942, and for an enquiry into the sum due from TECO for com-
    pensation since 1st June. 1945.

    In their Reply TECO admitted that they had not rendered accounts or
    paid any sum to the Defendants (T.M.M.C.) but otherwise did not admit
    paragraph 17 of the Counterclaim.

    It is perhaps relevant to refer also to paragraph 3 of the Reply in which,
    inter alia, TECO relied on part performance in answer to the plea of the
    Statute of Frauds. The particulars thereunder are as follows: —

    " Subsequent to the date of the said oral agreement the Plaintiffs
    " have not paid any compensation and have received no complaint from
    " the Defendants in respect of such non-payment. Subsequent to the
    " said date the Defendants have never made any demand upon the
    " Plaintiffs for the payment of compensation but have confined their

    14

    " requests for payment to payments due in respect of royalty, and in
    " particular the Plaintiffs will rely upon letters passing between the
    " first named Plaintiffs and the Defendants " (the dates of which are
    then set out).

    It will be observed that nowhere in the pleadings is there any statement
    of facts relied upon as giving rise to the application of the principle in
    Hughes v. Metropolitan Railway whereby T.M.M.C. would be precluded
    from recovering compensation for a limited period or for a period which
    would continue until terminated by notice. Nor are any facts set out
    showing in what manner and to what extent TECO altered their position
    in reliance on any promise or forbearance on the part of T.M.M.C.

    At the trial before Devlin, J. no amendments were made to the pleadings
    with respect to these matters although other amendments were made. Devlin,
    J. found against TECO both on the issue of fraud and with regard to
    the agreement alleged in paragraph 10 of the Statement of Claim. After
    referring to the extremely vague and unsatisfactory evidence of Mr. McLeod
    on behalf of TECO with regard to the alleged agreement he said:

    " Accordingly the Plaintiff has been forced to rely mainly upon the
    " evidence of a Mr. Bateman, a witness called for the Defendants, and
    " Mr. Bateman's evidence was in these terms on Day 5, at page 46, that
    " on an occasion in 1942 he heard Mr. Wickman say to Mr. McLeod
    " when this topic was being discussed words to this effect—he cannot,
    " of course, remember the precise words—' I have already told you
    " ' that you will not be charged compensation and you will get a new
    " ' agreement in which we hope there will not be a quota '. That
    " evidence, taken in conjunction with the evidence of the Plaintiff,
    " vague though it is, satisfies me that some agreement of some sort
    " was made. When I use the word ' agreement ' I am using it now in
    " a very broad sense ; I am not attempting to consider the question
    " whether it is an agreement that is binding in law. But it is quite
    " plain that something was said by Mr. Wickman to these licensees,
    " something which resulted in their not paying compensation, at any
    " rate, for the duration of the war, and I have no doubt that the sort
    " of thing that was said—and indeed it is the best evidence the Plaintiff
    " could produce—is the sort of thing that Mr. Bateman heard said.

    " That being so, what I have to consider is whether those words
    " support the Plaintiff's contention. The Plaintiff says that an agree-
    " ment was made which relieved him from the obligation of ever paying
    " compensation again, and thus to that extent varied the deed into which
    " he had entered in 1938, by striking out from it the compensation
    " provisions. I think that that is putting far too great a weight on the
    " words used by Mr. Wickman as Mr. Bateman heard them. One has
    " to have regard to the circumstances in which they are used. They
    " were used in relation to a plan (if I may so put it) that a new agree-
    " ment was in course of preparation, and that in this new agreement
    " there was going to be some sort of redrawing of quotas. It seems
    " to me extremely unlikely, since the idea was then in the minds of
    " the parties that a new agreement was to be drawn up, that Mr.
    " Wickman should have intended or should have been understood to be
    " striking something for ever out of the old agreement."

    After stating that that view is borne out by some further considerations,
    to which he refers, he went on: " He is less likely to have taken either of
    " those courses if he treated it as being merely a temporary remission of
    " the obligation to pay compensation, a remission that was to last only
    " during certain circumstances, or only until it was recalled by the
    " Defendants."

    Finally he said:

    " The result is that I reject the view that there was an agreement that
    " was intended to continue, which was to vary the original agreement.
    " The agreement that was made was, in my view, one of two things
    " I do not think there was anything in it which could be said to

    15

    " limit its operation for the duration of the war, although that may
    " have been the intention of the Defendant Company. But I think it
    " fairly emerges, from the language which Mr. Wickman was heard to
    " use, that it was intended to be a temporary modification pending the
    " new agreement. Accordingly, I think that when the new agreement
    " was presented to Mr. McLeod and was rejected by him the tem-
    " porary relief which he had been granted came to an end. I do not
    " mean that it came at once to an end. It is obvious that it would
    " be a reasonable provision that he should have some reasonable notice
    " in order to make the necessary alterations. Compensation is now
    " claimed from June, 1945, which is some nine months after the new
    " agreement was presented to him, and I think that gives him sufficient
    " time."

    I have set out these passages at some length as I consider it important to
    see precisely what the learned Judge decided. He uses the word " agree-
    " ment " more than once, but explains that he is using it in a very broad
    sense, and when his findings are examined it appears that what he found as
    a fact was that Mr. Wickman had made a promise not to charge compensa-
    tion pending the new agreement and that he had carried out his promise
    by not claiming it. That and nothing more.

    On appeal the Court of Appeal held, with regard to the counterclaim,
    that the findings of Devlin, J. made the principle laid down by Lord Cairns
    in Hughes v. Metropolitan Railway (supra) and by Lord Justice Bowen in
    Birmingham and District Land Company v. London and North Western
    Railway Company
    40 Ch. Div. at page 296 applicable, but they differed from
    his view that the temporary period of suspension ended with the presentation
    of the new draft agreement or when the negotiations broke down. Lord
    Justice Somervell said: " I think, against that background, the Plaintiffs were
    " entitled to an express notice if the old terms were to be enforced again
    " according to their literal provisions. If you read the correspondence, the
    " Plaintiffs wrote objecting to the agreement; there was ample opportunity
    " for the Defendants to say: ' Well, you know, if you do not like this agree-
    " ' ment we shall withdraw our terms of not collecting the 30% and you
    " ' will be back on the letter of the old pre-war contract'. Not having done
    " that, I do not think they can rely on anything until we come to the counter-
    " claim. That plainly indicates the view that they were taking."

    Lord Justice Cohen agreed and said: " Now, as my Lord has said, the
    " direct evidence that the Plaintiffs acted on that invitation may be somewhat
    " scanty, but I respectfully agree with him in accepting the argument of Mr.
    " Beyfus that the matter is really one of res ipsa loquitur, and I feel no doubt
    " that the Plaintiffs carried on their business during the war on the basis that
    " the compensation would not be demanded until due intimation of the
    " intention so to do was given."

    This last sentence sums up the essence of the decision on this point so far
    as the present action is concerned. The Defendants could not get the relief
    they claimed in their Counterclaim because they had given no previous
    intimation of their intention to demand payment. That left open for decision
    in a subsequent action whether or not the Counterclaim was a sufficient
    intimation.

    My Lords, the parties to the present action are estopped from disputing
    the correctness of the decision of the Court of Appeal in the first action to
    the effect that circumstances existed which gave rise to the application of the
    equitable principle in Hughes v. Metropolitan Railway and that no sufficient
    intimation to terminate the period of suspension of payment had been given
    prior to the Counterclaim in that action, but it would be wrong, in my
    opinion, if the view were to prevail that your Lordships in the present case
    are tacitly accepting the correctness of that decision. If it were permissible
    to go into these matters on the present appeal I should—with all respect—
    have desired to hear argument as to the application of this equitable doctrine
    to a case where the party who says he has been misled and altered his
    position has done so in reliance on an agreement which is found never to

    16

    have been entered into and which is essentially different from the promise
    which is held to have been made and who gives no precise evidence with
    regard to the manner or extent of the alteration of his positon. The sole
    question, therefore, before the Courts on this issue in the present action has
    been throughout: Was the Counterclaim in the first action a sufficient inti-
    mation to terminate the period of suspension which has been found to exist?
    Pearson. J. held that it was. He said:

    " The result of these cases, in my opinion, is that, where the rule of
    " equity applies, the period of suspension comes to an end when it is in
    " all the circumstances equitable that it should come to an end, and that
    " is, normally at any rate, according to the circumstances, either at or
    " within a reasonable time after the termination of the state of affairs
    " which is the cause or basis of the suspension. It is not necessary that
    " the person whose legal rights have been suspended should give a notice
    " purporting to terminate the suspension, although of course it would be
    '' fair and reasonable and advisable for him to do so.

    " In this case the state of affairs which was the cause or basis of, the
    " suspension would have been, according to the view taken in the Court
    " of first instance in the former action, the continuance of the negotia-
    " tions for new licensing arrangements, but according to the view of the
    " Court of Appeal the state of affairs was, I think, the attitude of
    " T.M.M.C. in not requiring payment of the compensation for the time
    " being. When that attitude was reversed, a reasonable time for resump-
    " tion of compensation payments began to run. The making of the
    " Counterclaim in the first action clearly involved a reversal of the
    " previous attitude, and therefore it started running a reasonable time
    " for resumption of compensation payments."

    In the Court of Appeal it was argued on behalf of TECO that the Counter-
    claim did not purport to determine any existing agreement and that in any
    event it was deficient in that it specified no date for the termination. These
    submissions were largely based upon a judgment of the Privy Council in the
    case of Canadian Pacific Railway v. The King (1931) A.C.414, which was
    cited for the first time in the Court of Appeal. It was a decision relating to
    a licence to erect certain telegraph poles and wires on property belonging
    to the Crown in Canada. I shall return to examine this case at a later stage.
    Both these submissions prevailed and the judgment of Pearson, J. was
    reversed. Hence the present appeal.

    My Lords, it is difficult to keep these two submissions entirely separate as
    they both involve consideration of what is necessary to terminate a period
    of suspension and restore the parties to their previous position. It has been
    said more than once that every case involving the application of this equitable
    doctrine must depend upon its own particular circumstances. It is, of course,
    clear, as Pearson, J. pointed out, that there are some cases where the period
    of suspension clearly terminates on the happening of a certain event or the
    cessation of a previously existing state of affairs or on the lapse of a reason-
    able period thereafter. In such cases no intimation or notice of any kind
    may be necessary. But in other cases where there is nothing to fix the end
    of the period which may be dependent upon the will of the person who has
    given or made the concession, equity will no doubt require some notice or
    intimation together with a reasonable period for re-adjustment before the
    grantor is allowed to enforce his strict rights. No authority has been cited
    which binds your Lordships to hold that in all such cases the notice must
    take any particular form or specify a date for the termination of the sus-
    pensory period. This is not surprising having regard to the infinite variety
    of circumstances which may give rise to this principle which was stated in
    broad terms and must now be regarded as of general application. It should.
    I think, be applied with great caution to purely creditor and debtor relation-
    ships which involve no question of forfeiture or cancellation, and it would
    be unfortunate if the law were to introduce into this field technical require-
    ments with regard to notice and the like which might tend to penalise or
    discourage the making of reasonable concessions.

    17

    My Lords, in the present case I can find nothing which persuades me
    that equity could require anything further than that which is contained in
    the Counterclaim in the first action. It is true that it does not purport
    to be putting an end to an existing " agreement " for a temporary suspension.
    No such agreement had been pleaded. It does, however, contain a clear
    intimation of a reversal by T.M.M.C. of their previous attitude with regard
    to the payment of compensation and of their intention to enforce compliance
    with clause 5 of the agreement and for an account thereunder.

    It does not, I think, lie in the mouth of TECO, who had consistently
    failed to comply with their obligations to render the returns required by the
    deed, now to complain that the notice should have specified a named future
    date upon which the suspensory period was to come to an end.

    I turn now to the case of Canadian Pacific Railway v. The King (supra)
    which was so much relied upon by Romer, L.J. in the Court of Appeal. It
    dealt with the withdrawal of a licence to erect telegraph poles. Licence
    cases are sometimes somewhat similar to the present class of case but I do
    not consider that they are safe guides to the solution of the application of
    the equitable principle with which alone your Lordships are now concerned.
    Even licence cases are, however, largely dependent upon their special facts,
    as was pointed out by Lord Russell of Killowen in delivering the judgment of
    the Board in the Canadian Pacific case (see page 432). Furthermore, in
    that case it was expressly stated that it was not decided on equitable
    grounds. At page 430 Lord Russell says: " Upon the facts of the present
    " case their Lordships can find no foundation for the application of any
    " equitable doctrine in favour of the Appellant. There was no mistaken
    " belief by the Appellant as to the ownership of or the rights over the Inter-
    " colonial property, still less was there any such mistaken belief, which was
    " known to the Crown. There was no conduct on the part of the Crown
    " which induced the Appellant to build in the belief that rights in per-
    " petuity would be acquired. There was nothing upon which to ground any
    " estoppel. The facts are all the other way." There was, moreover, one
    feature in that case which is alone sufficient to explain the decision requiring
    the Crown to specify a date in its notice, namely, that a letter had been
    written indicating that unless the poles were removed at once it would be
    necessary for the Crown to fix a date for their removal. No such date
    was ever fixed or notified to the Company before the proceedings were
    commenced. In similar circumstances it might well be held inequitable
    to allow T.M.M.C. to enforce clause 5 of the deed by issuing a writ with-
    out first giving notice specifying a date. I do not, however, think it is
    profitable to examine the circumstances in which notices may have been
    required in other cases or the precise form of such notices unless some
    principle of general application is to be found therein. I can find no such
    general principle in the Canadian Pacific case nor in any other of the cases
    referred to in argument on this appeal.

    I should, perhaps, add that those cases where a licence has been given
    contractually, in my view, afford no assistance since in such cases the
    requirements with regard to notice must necessarily be dependent upon the
    construction of the contract by virtue of which the licence was obtained. I
    have not therefore thought it necessary to refer to the views expressed on
    that subject by the noble Lords who took part in Winter Garden Theatre
    (London), Limited
    v. Millenium Productions Limited [1948} A.C. 173.

    Where I respectfully differ from the views expressed by Romer L.J. in
    the Court of Appeal in the present case is that I am unable to obtain the same
    help from the Canadian Pacific case and I feel that he has laid undue
    emphasis on the word " agreement " as constituting the basis for the applica-
    tion of the equitable doctrine and consequently imposing on T.M.M.C. steps
    which would normally be required from a party to a contract who desires to
    determine a contractual relationship.

    In my view, the Counterclaim of 26th March, 1946, followed by a period of
    nine months to 1st January, 1947, from which date compensation in the
    present action is claimed, is sufficient to satisfy the requirements of equity and
    entitle T.M.M.C. to recover compensation under clause 5 of the deed as from

    18

    the latter date. In the somewhat peculiar circumstances of the present case
    any other result would, I think, be highly inequitable.

    My Lords, with regard to the other defences relied on by TECO I agree
    that those of restraint of trade and penalty fail. As to the remaining
    defence of section 38 of the Patents and Designs Act 1907 which involves a
    question of construction which, I confess, has caused me considerable diffi-
    culty, I have reached the conclusion, for the reasons which have been stated
    by my noble and learned friend, Lord Oaksey, that the Courts below were
    right in holding that this defence did not avail the Respondents in the present
    case.

    In the result, therefore, I would allow the appeal.

    Lord Cohen

    My Lords,

    The dispute between the parties is as to the right of the Appellants to what
    was called compensation and arose out of two deeds, one a deed of agreement
    and the other a licence, both executed on the 2nd April, 1938, and made
    between the Appellants (to whom I shall refer hereafter as " T.M.M.C.")
    of the first part, the Respondents (to whom I shall refer hereafter as
    " TECO ") of the second part, and Tungsten Industrial Products Limited
    (therein defined as " Industrial ") of the third part. Industrial were the dis-
    tributors of the products of TECO and played no part in the disputes with
    which your Lordships are concerned.

    These deeds have given rise to two actions between the parties. The
    facts leading to the first action were carefully and elaborately marshalled in
    the judgment of Devlin, J. therein and the events which subsequently
    occurred are stated with sufficiency and accuracy in the judgment of Pearson,
    J. whose order, dated the 16th November, 1953, directing the payment by
    TECO to T.M.M.C. of the sum of £84,050 4s. 4d. with interest at the rate
    of 4 per cent. from the 11th September, 1950, to the date of judgment, was
    reversed by the Court of Appeal. It is from that order that the appeal now
    before your Lordships has been brought. Like Romer, L.J. in the Court of
    Appeal, I shall confine myself to stating as briefly as I can the matters which
    appear to me to be relevant to the points argued before your Lordships.

    In 1931 T.M.M.C. was incorporated in England by Krupps of Essen, the
    well-known German firm, for the purpose of developing as their subsidiary
    certain patents which Krupps had acquired in relation to Tungsten carbide.
    Under these patents T.M.M.C. manufactured articles which were, in the
    main, machine tool tips, and they marketed them under the name of
    " Wimet ". In or about 1934 T.M.M.C. brought proceedings against the
    British Thomson-Houston Company Limited (hereinafter referred to as
    " B.T.H.") for infringement of the said patents, but those proceedings were
    settled upon the terms of an agreement made on the 1st January, 1936,
    under which B.T.H. acknowledged the validity of T.M.M.C.'s patents and
    were granted an exclusive licence to manufacture under such patents in terri-
    tory which included the United Kingdom. One result of this agreement
    was that T.M.M.C. could only grant subsequent licences with the consent
    of B.T.H. but they were entitled to and did continue to manufacture them-
    selves under the patents.

    Some time later the activities of TECO came to the notice of T.M.M.C.,
    who took the view that TECO were infringing T.M.M.C.'s patents. Negotia-
    tions took place and ultimately, with the consent of B.T.H., Heads of Agree-
    ment were signed on the 1st June, 1937, under which TECO received a
    licence under the said patents. I need not refer to the terms of the Heads
    of Agreement as they were superseded by the two deeds of the 2nd April,
    1938, which in substance incorporated the terms of the Heads of Agreement.

    The licence was a non-exclusive licence under the patents to import,
    make, use, and, subject as thereinafter mentioned, to sell contract material
    as therein defined in Territory A as therein defined, and to sell contract

    19

    material in and for export to Territory B as therein defined, upon and
    subject to the conditions therein and in the Deed of even date contained.
    The licence was to commence from 1st June, 1937, and to continue until
    the 18th September, 1947, and thereafter until determined by either T.M.M.C.
    or TECO on six months' notice in writing.

    Contract material was defined as " Hard metal alloys made in accordance
    " with the inventions the subjects of the said patents or any of them whether
    " made before or after expiry of such patent or patents ".

    The hard metal alloys mentioned in the said definition fell into two classes,
    " iron grade " and " steel grade ". The last of the patents relating to iron
    grade expired in December, 1941.

    Broadly speaking, Territory A consisted of the United Kingdom and
    Territory B included the British Commonwealth and Empire but not Canada.

    The agreement of even date with the licence contained a recital that
    TECO had made and sold hard metal alloys of a composition and by a
    process which fell within one of the said patents. Under clause 2 T.M.M.C.
    waived all claims against TECO and Industrial and TECO's customers in
    respect of any infringement of the patents.

    Under clause 3 TECO had to pay to T.M.M.C. a royalty of 10 per cent.
    on the net value of all contract material sold or used by TECO and/or
    Industrial (other than contract material supplied to TECO by the Grantors
    or any Licensees under the said patents) during the continuance of the
    said licence and made in accordance with one or more of the said patents
    (other than or in addition to Letters Patent No. 262,723) which should be
    in force at the date of sale or use thereof by TECO and/or Industrial, such
    royalty being payable in the case of contract material sold by TECO to
    Industrial only upon its use or sale by Industrial.

    Clause 4 contained price regulation provisions which I need not set out
    in detail but which were said to throw light on the question of unlawful
    restraint of trade.

    Clause 5 provided for the payment of what was called " compensation "
    and so far as material is in the following terms: -

    " 5. If in any month during the continuance of the said Licence the
    " aggregate quantity of contract material sold or used by TECO and
    " Industrial (other than contract material supplied to TECO by the
    " Grantors or any licensees under the said patents) shall exceed a quota
    " of fifty kilograms (50 Kg.) TECO shall whether all or any of such
    " material shall be subject to royalty hereunder or not pay to the
    " Grantors compensation equal to thirty per cent. (30%) of the sum
    " which represents the excess net value ".

    The clause then proceeded to define " excess net value ".

    Clause 7 provided for monthly returns of contract material sold or used by
    TECO and Industrial in the preceding month, and clause 8 provided for
    the monthly payment of royalty and compensation.

    Clause 12 gave TECO certain rights in respect to improvements upon or
    modifications of the inventions the subject of the said patents.

    I need not refer to any other provision of the deed of agreement.

    The effect of clause 5 having regard to the division into iron grades and
    steel grades and to the dates of the relevant patents is accurately summarised
    by Pearson, J. as follows: —

    " The effect of the compensation provisions over the period of
    " Licence can be worked out in this way: ' 1st June, 1937, to March,
    " ' 1939: Both the iron grades and the steel grades are protected by
    " ' patents, and bear royalty, and also bear compensation on the excess
    " ' over the quota. For the period March, 1939, to December, 1941, the
    " ' iron grades are still protected by the patent No. 4 in the schedule,
    " ' they do not bear royalty, but they bear compensation on the excess
    " ' over quota. The steel grades are still protected by patents and still
    " ' bear royalty and compensation on the excess over the quota. In the

    20

    " ' third period, December, 1941 to July, 1947, the iron grades are not
    " ' protected by any patent (unless possibly there might be some later
    " ' patents under clause 12), they do not bear royalty, but they do bear
    " ' compensation on the excess over the quota. The steel grades are
    " ' protected by patents, or at least one patent, and bear royalty and
    " ' bear compensation on the excess over the quota. Then there is the
    " ' fourth short period, July to September, 1947, and both the iron grades
    " ' and the steel grades are unprotected by patents (unless conceivably
    " ' there might be some later patents under clause 12) and they do not
    " ' bear royalty but they do bear compensation on the excess over
    " ' quota ' ".

    It is convenient here to observe that between the 1st June, 1937, the date
    of the Heads of Agreement, and the 2nd April, 1938, the output of TECO
    was in every month in excess of 50 kilograms and in March, 1938, amounted
    to 168 kilograms.

    At the time of the execution of the agreements Mr. McLeod, who was
    the managing director of TECO, raised no objection to the compensation
    provisions of the agreement, but finding that he could not pass the burden
    thereof on to his customers he was, even before the outbreak of war, protest-
    ing against them.

    Shortly before the outbreak of war the control of T.M.M.C. had passed
    from German to British hands and Mr. McLeod, who had been making his
    complaints to a Dr. Louis, an agent of Krupps, renewed them to Mr.
    Wickman, who was connected with the persons then in control of T.M.M.C.

    TECO, however, continued to make returns and to pay royalty and com-
    pensation down to the outbreak of war. TECO then defaulted, but in
    May, 1940, paid a sum in satisfaction of royalty and compensation due down
    to the 31st December, 1939. TECO continued to make returns and pay
    royalties, but not compensation, up to the 31st March, 1942. After that
    date returns were made up to some date which I am unable to specify in
    1943, but nothing further was paid for royalty or compensation prior to
    the commencement of the first action.

    Discussions appear to have gone on between Mr. McLeod for TECO
    and Mr. Wickman or other representatives of T.M.M.C. in regard to com-
    pensation. It seems clear that prior to the commencement of the first action
    T.M.M.C. did not make any claim for compensation in respect of any period
    after the 31st December, 1939, and in the first action TECO alleged a
    binding agreement for cancellation of the obligation to pay such compensa-
    tion. The evidence as to what transpired is very sketchy. It is conveniently
    summarised by Devlin, J. in his judgment in the first action as follows: —

    " The Plaintiff has set up by way of defence to that that there was
    " an agreement between him and Mr. Wickman made on behalf of their
    " respective companies that compensation should be washed out
    " altogether. The evidence which he has given about it is so vague that
    " Mr. Beyfus has said that if the matter was left there he could hardly
    " rely upon it. Mr. McLeod first stated that it was said by Mr.
    " Wickman on the 19th February, 1941, but Mr. Wickman was not in
    " the country, he was in America on the 19th February, 1941. Mr.
    " McLeod then said that though he might have been mistaken about the
    " date, at any rate it was said by Mr. Wickman on some occasion in
    " 1943. All he could remember about it was that Mr. Wickman had
    " said that compensation was washed out and all that was wanted was a
    " flat 10 per cent. royalty. He had no recollection really of the circum-
    " stances in which it was said, and he really accepted that he had no
    " real recollection of the interview at all. Accordingly, the Plaintiff
    " has been forced to rely mainly upon the evidence of a Mr. Bateman,
    " a witness called for the defendants, and Mr. Bateman's evidence was
    " in these terms on Day 5 at page 46, that on an occasion in 1942 he
    " heard Mr. Wickman say to Mr. McLeod when this topic was being
    " discussed words to this effect—he cannot of course remember the
    " precise words—' I have already told you that you will not be charged

    21

    " ' compensation and you will get a new agreement in which we hope
    " ' there will not be a quota '. That evidence, taken in conjunction
    " with the evidence of the Plaintiff, vague though it is, satisfies me that
    " some agreement of some sort was made. When I use the word
    " ' agreement ' I am using it now in a very broad sense; I am not
    " attempting to consider the question of whether it is an agreement
    " that is binding in law. But it is quite plain that something was said
    " by Mr. Wickman to these licensees, something which resulted in their
    " not paying compensation, at any rate for the duration of the war,
    " and I have no doubt that the sort of thing that was said—and indeed
    " it is the best evidence the Plaintiff could produce—is the sort of thing
    " that Mr. Bateman heard said ".

    On the 21st September, 1944, T.M.M.C. submitted to TECO the draft
    of the proposed new agreement. It did not abolish quotas but it provided
    for the distribution of any compensation payable by any of the licensees
    who exceeded their quotas amongst those licensees who failed to achieve
    their quota.

    TECO did not accept the proposed new agreement and on the 17th
    January, 1945, issued the writ in the first action claiming damages for fraud
    or alternatively breach of warranty and damages for breaches of the contracts
    contained in the two deeds of the 2nd April, 1938. In formulating their
    claim for damages in paragraph 6 of the Statement of Claim they alleged
    that they had paid as compensation £19,521 12s. 7d. and that thereafter it
    had been agreed that no sums should be payable in respect of compensation
    after the 31st December, 1939. By paragraph 10 of their Defence T.M.M.C.
    denied any such agreement and in the alternative relied on the Statute of
    Frauds. In the further alternative they alleged that if (which was denied)
    any such agreement was made there was no consideration for it. By their
    counterclaim they alleged breaches by TECO of their obligation to pay
    royalties and compensation but stated that they did not desire to enforce
    payment of compensation in respect of deliveries after the 31st December.
    1939, but before the termination of hostilities.

    It is to be observed that neither in their Statement of Claim nor in their
    Reply did TECO allege any equitable bar to the enforcement of the relief
    claimed by T.M.M.C. in their counterclaim though it must have been clear
    to TECO that T.M.M.C. were claiming to be entitled as from the termina-
    tion of hostilities to enforce their strict legal rights under the two deeds of
    the 2nd April, 1938.

    On the 20th January, 1950. Devlin, J., dismissed the Plaintiffs' claim
    except in respect of a minor breach of the agreement of 2nd April, 1938,
    for which he awarded nominal damages of 40s. That part of his decision
    is irrelevant to the matter now before your Lordships.

    As regards the counterclaim, he negatived the assistance of any agreement
    binding in law for the final termination of the payment of compensation.
    I have already read one passage of his judgment dealing with this point.
    He concluded his judgment on this point of the case by saying :

    " The result is that I reject the view that there was any agreement
    " that was intended to continue, which was to vary the original agree-
    " ment. The agreement that was made was, in my view, one of two
    " things. I do not think there was anything in it which could be said
    " to limit its operation for the duration of the war, although that may
    " have been the intention of the Defendant Company. But I think it
    " fairly emerges, from the language which Mr. Wickman was heard to
    " use, that it was intended to be a temporary modification pending the
    " new agreement. Accordingly I think that when the new agreement
    " was presented to Mr. McLeod and was rejected by him the temporary
    " relief which he had been granted came to an end. I do not mean that
    " it came at once to an end. It is obvious that it would be a reasonable
    " provision that he should have some reasonable notice in order to make
    " the necessary alterations. Compensation is now claimed from June.
    " 1945, which is some nine months after the new agreement was pre-
    " sented to him, and I think that gives him sufficient time. If I should

    22

    " be wrong about that view then I should hold that it was a temporary
    " arrangement which was made subject to the right of the Defendant
    " Company to terminate by giving reasonable notice. I should regard
    " the presentation of a new agreement in such circumstances as
    " amounting to a reasonable notice. I do not think that in this type
    " of case it is necessary that the notice should be express. The rule that
    " protects a party in circumstances such as these is a broad rule of equity
    " and justice. It is not thought right that a man who has indicated that
    " he is not going to insist upon his strict rights as a result of which the
    " other party has altered his position, should be able to turn round at
    " a minute's notice and insist upon his rights, however inconvenient
    " it may be to the party who thought he was temporarily relieved. Equity
    " requires that he should give reasonable notice that he is going to
    " resume his strict rights. But all that is necessary to comply with that
    " broad rule of equity is that the notice should be such as to put an
    " ordinary person clearly in mind that the other party is going to resume
    " his strict rights. I think it is plain that when one man is served with
    " a draft of a new agreement which shows that the compensation pro-
    " visions are going to be set in force again he should understand from
    " that that he must either accept the new agreement or return to the
    " strict position under the old agreement."

    No such arrangement had been pleaded and had the judge thought that
    it afforded any defence to the counterclaim he would no doubt have required
    TECO to amend their reply, but on the view he formed of the matter any
    equitable bar to the relief claimed by T.M.M.C. in their counterclaim had
    been removed before the counterclaim was delivered. In the result T.M.M.C.
    succeeded on their counterclaim.

    TECO appealed to the Court of Appeal, who dismissed the appeal so
    far as their claim in the action was concerned but they allowed it as far
    as that part of the counterclaim was concerned which dealt with compensa-
    tion. The Court, which consisted of Somervell, L.J., Singleton, L.J. and
    myself, took a different view from that formed by Devlin, J. as to the result
    in equity of the conversation between Mr. McLeod and Mr. Wickman and
    of the conduct of T.M.M.C. in not claiming compensation after the 31st
    December. 1939, at any time prior to the delivery of the counterclaim.
    Romer, L.J. in the present action has cited relevant passages from the
    judgments of Somervell, L.J. and myself in the first action and I will
    content myself with three short citations. The first from the Judgment of
    Somervell, L.J.: " I think, against that background, the Plaintiffs were entitled
    " to an express notice if the old terms were to be enforced again according
    " to their literal provisions. If you read the correspondence, the Plaintiffs
    " wrote objecting to the agreement; there was ample opportunity for the
    " Defendants to say: ' Well, you know, if you do not like this agreement we
    " ' shall withdraw our terms of not collecting the 30 per cent. and you will
    " ' be back on the letter of the old pre-war contract. ' They not having done
    " that, I do not think they can rely on anything until we come to the Counter-
    " claim. That plainly indicates the view that they were taking. I think the
    " Plaintiffs would be entitled to a reasonable time after that." At page 71
    of the record I say: " I think that there was the plainest possible indication
    " by the Defendants that they did not intend for the time being to claim
    " compensation, and that they conveyed that intimation in terms which
    " amounted to an invitation to the Plaintiffs to continue to conduct their
    " business on the basis that until something was done, until notice was
    " given, no royalty would be demanded. Now, as my Lord has said, the direct
    " evidence that the Plaintiffs acted on that invitation may be somewhat
    " scanty, but I respectfully agree with him in accepting the argument of
    " Mr. Beyfus that the matter is really one of res ipsa loquitur, and I feel no
    " doubt that the Plaintiffs carried on their business during the war on the
    " basis that the compensation would not be demanded until due intimation
    " of the intention so to do was given." On page 72 I say: " I think the
    " Plaintiffs were entitled ... to receive notice if the Defendants were
    " proposing to enforce a right to compensation which had been in suspense
    " for five years or thereabouts. So far as I can see, nothing equivalent to

    23

    " such notice was given before, as I have said, the counterclaim was delivered,
    " and in my opinion, therefore, compensation did not become payable until
    " a reasonable time after delivery of the counterclaim."

    It is, I think, plain from these judgments that at that time the Court of
    Appeal was of opinion that the counterclaim was a sufficient notice and that
    after the lapse of a reasonable time to enable TECO to make the necessary
    adjustments in the conduct of their business compensation would be payable
    without the necessity for further action by T.M.M.C. But our observations
    on that point must be regarded as obiter since once we came to the conclusion
    that (1) some positive action by TECO determining the temporary arrange-
    ment was required and that a reasonable time must be allowed to enable
    TECO to adjust their position after that action had been taken before
    T.M.M.C. could enforce their strict legal rights, and (2) as no such positive
    action had been taken before the delivery of the counterclaim, the counter-
    claim so far as compensation was claimed must necessarily fail.

    Reaching the conclusion that we did we should, I think, have required
    TECO to amend their reply so as to raise the equitable defence which they
    had successfully advanced in their arguments. Unfortunately we did not
    do so.

    In the course of his judgment Somervell, L.J. had dropped the hint that
    nine months might be a reasonable time after which compensation would be
    payable and on the 11th September, 1950, T.M.M.C. issued the writ in the
    present action claiming compensation from the 1st January, 1947. By para-
    graph 4 of their Defence TECO pleaded as follows: —

    " 4. In or about March, 1943, and on an occasion prior thereto which
    " the Defendants cannot now more particularly specify, the Plaintiffs
    " agreed to forgo the payment of compensation by the Defendants until
    " a reasonable time should elapse after notice given by the Plaintiffs to
    " the Defendants to resume such payment. No such notice has been
    " given to the Defendants. Alternatively, if such notice has been given
    " to the Defendants, a reasonable time thereafter had not elapsed by
    " 1st January, 1947, or by any date during the currency of the 1938
    " Deeds ".

    They do not now allege that if the counterclaim was a sufficient notice, the
    action was brought prematurely.

    In paragraphs 6 and 7 of the Defence they allege in the alternative that
    clause 5 of the Agreement of the 2nd April, 1938, was invalid either (a) as
    being an unreasonable and unnecessary restraint of TECO's trade, or (b) as
    being a penalty not recoverable at law, or (c) as offending against section 38
    (1) (a) of the Patents and Designs Act, 1907.

    On the 16th November, 1953, Pearson, J. rejected all these defences and
    gave the judgment for T.M.M.C., the effect of which I have already indicated.

    He dealt first with the allegation of unreasonable restraint of trade and
    rejected it on the ground that the compensation clause did not contain
    any restraint of trade but that even if it did, the provisions of the agreement
    and licence as a whole were reasonable both as between the parties and in
    relation to the public interest.

    He rejected the penalty argument because, as he found, no penalty was
    involved.

    He also held that clause 5 did not infringe section 38 of the Patents and
    Designs Act, 1907. I shall return to this subject later.

    On the question of the sufficiency of the notice to determine the temporary
    arrangement, he summarised his conclusion as follows: —

    " The result of these cases " (Hughes v. Metropolitan Railway Com-
    pany 2
    A.C. 439; Birmingham and District Land Company v. London
    and North Western Railway Company
    40 Ch. D. p. 268 ; Central London
    Property Trust Limited
    v. High Trees House Limited [1947] 1 K.B. 130]
    " in my opinion is that, where the rule of equity applies, the period of
    " suspension comes to an end when it is in all the circumstances equitable

    24

    " that it should come to an end, and that is, normally at any rate,
    " according to the circumstances, either at or within a reasonable time
    " after the termination of the state of affairs which is the cause or basis
    " of the suspension. It is not necessary that the person whose legal
    " rights have been suspended should give a notice purporting to terminate
    " the suspension, although of course it would be fair and reasonable
    " and advisable for him to do so.

    " In this case the state of affairs which was the cause or basis of the
    " suspension would have been, according to the view taken in the court
    " of first instance in the former action, the continuance of the nego-
    " tiations for new licensing arrangements, but according to the view of
    " the Court of Appeal the state of affairs was, I think, the attitude of
    " T.M.M.C. in not requiring payment of the compensation for the time
    " being. When that attitude was reversed, a reasonable time for
    " resumption of compensation payments began to run. The making
    " of the counterclaim in the first action clearly involved a reversal of
    " the previous attitude, and therefore it started running a reasonable
    " time for resumption of compensation payments ".

    TECO appealed to the Court of Appeal, who allowed the appeal.
    Romer, L.J., in whose judgment Somervell, L.J. and Birkett, L.J. concurred,
    agreed with Pearson, J. on the issues of unreasonable restraint of trade
    and penalty and agreed provisionally with his conclusion on the issue arising
    under section 38 of the Patents and Designs Act, 1907, but stated that he
    did not necessarily agree with all the reasoning upon which that conclusion
    was founded. On the question of the issue as to the sufficiency of the
    notice to terminate the temporary arrangement for suspension of compensa-
    tion payment the Court of Appeal differed from Pearson, J. and accordingly
    reversed his order and entered judgment for TECO with costs.

    My Lords, Romer, L.J. based his conclusion on the notice point mainly
    on the decision of the Privy Council in Canadian Pacific Railway v. The King
    [I931] A.C. 414. He said: "In my opinion, although in many cases the
    " equity, to which Hughes v. Metropolitan Railway Company gave recogni-
    " tion and high authority, is satisfied by merely conforming to the terms
    " in which Lord Cairns (and subsequently Lord Justice Bowen) formulated
    '' it, there are other cases where justice requires that the resumption of legal
    " rights which have been suspended for a period must be preceded by a
    " notification to the other party concerned specifying a fixed period of grace
    " during which that party can put his house in order; and that in such
    " cases a notification such as that will be a condition precedent to the valid
    " reassumption of the owner's legal rights.

    " Such a case was Canadian Pacific Railway v. The King [1931] Appeal
    " Cases, page 414".

    I must, therefore, examine closely what were the facts and what was the
    reason for the decision in the case last cited. The Canadian Pacific Railway
    had erected poles carrying telegraph wires on the roadway of a Canadian
    Government railway at various times ranging from 1888 to 1911. There
    were some negotiations between the parties as to parts of the telegraph
    line but at no time was any written agreement ever concluded. As to
    what was called the " main telegraph line " there was correspondence in
    the course of which a representative of the Department of Justice of Canada
    wrote on the 20th March, 1924, withdrawing offers which had been made
    for settling the dispute between the parties and saying that wires and poles
    must be removed. The letter ended: " No time has been fixed within which
    " you must effect this removal, but unless you agree to act at once in the
    " matter, a date will be fixed by the Department of Railways and Canals."
    No such date was fixed nor were the wires and poles ever removed from
    any section of the telegraph line. Accordingly in 1926 the Crown com-
    menced proceedings against the Canadian Pacific Railway alleging trespass
    and claiming damages. The trial judge found that as to the whole line
    the telegraph poles were on the Crown land by the leave and licence of
    the Crown but that the licence was not irrevocable. He gave leave to

    25

    apply for further directions. On appeal to the Supreme Court of Canada
    that Court found that the Canadian Pacific Railway were trespassers except
    as to a small section as to which they had an irrevocable licence. The Privy
    Council agreed with the trial judge that as to the whole line the Canadian
    Pacific Railway had a revocable licence, and held that it had not been
    determined before the commencement of the proceedings. The Board then
    proceeded to consider how that revocable licence could be determined.
    Upon the facts of the case their Lordships were unable to find any founda-
    tion for the application of any equitable doctrine in favour of the Canadian
    Pacific Railway nor were they able to see anything upon which to found
    an estoppel (see p. 430). They went on to say, at p. 432: " Whether any
    " and what restrictions exist on the power of a licensor to determine a
    " revocable licence must, their Lordships think, depend upon the circum-
    " stances of each case. The general proposition would appear to be that
    " a licensee whose licence is revocable is entitled to reasonable notice of
    " revocation." They then proceeded to examine the facts of the particular case
    and came to the conclusion that it was " peculiarly a case in which grave
    " injustice might ensue if the Crown were at liberty by the mere initiation
    " of legal proceedings to determine summarily the rights of the appellant,
    " and turn the appellant's occupancy into trespass. For the appellant is not
    " the only one concerned; the telegraph line is part of a system in the exist-
    " ence and continuance of which the public has a very considerable interest."
    They accordingly concluded that the case was one in which the licence
    could only be effectively ended after notice had been served upon the
    Canadian Pacific Railway to determine the licence on such a specified date
    in the future, as would give the Canadian Pacific Railway an interval of
    time between the service of the notice and the specified date sufficient not
    only to allow the removal of the poles and wires but also to make arrange-
    ments for the continuance of the telegraph line on another site.

    My Lords, I have, I think, sufficiently stated the circumstances to indicate
    the very considerable differences between this case and the case now before
    your Lordships. In the Canadian Pacific Railway case the Crown had,
    at any rate, as regards one section, expressly stated they would name a
    date by which the poles and wires must be removed. Moreover, a para-
    mount public interest was involved. In these circumstances I cannot see
    that the facts are so analogous that the decision can be safely taken as a
    sure guide in the present case.

    The Canadian Pacific Railway case was considered by the Court of Appeal
    in Minister of Health v. Bellotti [1944] I K.B. 298, where Lord Greene,
    M.R. said that the only proposition of general application which he could
    extract from the Canadian Pacific Railway case was to be found in the
    paragraph I have already cited, which reads : " Whether any and what restric-
    " tions exist on the power of a licensor to determine a revocable licence
    " must, their Lordships think, depend upon the circumstances of each case."
    With that observation of the then Master of the Rolls I respectfully agree.

    Before I turn to the circumstances of the present case, I must observe
    that the Canadian Pacific Railway case was not determined on equitable
    principles. Indeed, Lord Russell of Killowen, in delivering the judgment
    of the Board, expressly pointed out that no equitable doctrine was involved.
    It is no doubt true, as Mr. Beyfus argued, that any condition or restriction
    affecting the power to determine a revocable licence which the law would
    imply would be one which equity would regard as reasonable, but before
    reaching a conclusion on the matter it seems desirable to look at the two
    cases relied upon by the Court of Appeal in the first action as laying down
    the principles applicable to the case.

    In Hughes v. Metropolitan Railway Company 2 A.C. 439 the Respondents
    sought to recover possession of premises for breach of a lessee's covenant to
    repair within six months after notice calling up him to do so. That notice
    had been given on the 22nd October, 1874, but in December negotiations
    started between the parties for the purchase by the appellant of the
    respondents' interest. These did not break down until the 31st December.

    26

    1874. On the 28th April, 1875, the writ in the action was issued. The
    repairs were completed some time in June. The question arose whether,
    having regard to the negotiations, they had been completed within due time.
    It was held in this House that the negotiations had the effect of suspending
    the notice and that the suspension did not cease to operate until the 31st
    December, 1874. In the course of his judgment Lord Cairns stated the
    equitable principle involved in these words: " It was not argued at your
    " Lordships' Bar, and it could not be argued, that there was any right
    " of a Court of Equity, or any practice of a Court of Equity, to give relief
    " in cases of this kind, by way of mercy, or by way merely of saving
    " property from forfeiture, but it is the first principle upon which all
    " Courts of Equity proceed, that if parties who have entered into definite
    " and distinct terms involving certain legal results—certain penalties or
    " legal forfeiture—afterwards by their own act or with their own consent
    " enter upon a course of negotiation which has the effect of leading one
    " of the parties to suppose that the strict rights arising under the contract
    " will not be enforced, or will be kept in suspense, or held in abeyance,
    " the person who otherwise might have enforced those rights will not be
    " allowed to enforce them where it would be inequitable having regard to
    " the dealings which have thus taken place between the parties."

    In Birmingham and District Land Company v. London and North Western
    Railway Company
    40 Ch. D. 268 a similar question arose and the Court of
    Appeal applied the principle as laid down by Lord Cairns in the passage
    I have quoted. After citing it Bowen, L.J. pointed out that it had nothing
    to do with forfeiture and went on: " It seems to me to amount to this, that
    " if persons who have contractual rights against others induce by their
    " conduct those against whom they have such rights to believe that such
    " rights will either not be enforced or will be kept in suspense or abeyance
    " for some particular time, those persons will not be allowed by a Court
    " of Equity to enforce the rights until such time has elapsed, without at
    " all events placing the parties in the same position as they were before.
    " That is the principle to be applied. I will not say it is not a principle
    " that was recognised by Courts of Law as well as of Equity. It is not
    " necessary to consider how far it was always a principle of common law."
    Though he does not, in terms, say so, it is implicit in what he says that
    to make the principle applicable the party setting up the doctrine must
    show that he has acted on the belief induced by the other party, but this
    factor is of no importance in the instant case as it has been decided in
    the first action that the principle is applicable. Does this principle afford
    a defence to the claim in the present action?

    I have already stated the findings of the Court of Appeal in the first action
    as to the circumstances which brought the equity into operation. These
    findings necessarily involve that in the present case equity required T.M.M.C.
    to give some form of notice to TECO before compensation would become
    payable. But it has never been decided that in every case notice should
    be given before a temporary concession ceases to operate. It might, for
    instance, cease automatically on the occurrence of a particular event. Still
    less has any case decided that where notice is necessary it must take a
    particular form.

    Romer, L.J. seems to have taken the view that the counterclaim could
    not be a notice because you cannot terminate an agreement by repudiating
    it. With all respect, the fallacy of this argument consists in treating the
    arrangement found to exist by the Court of Appeal in the first action as
    an agreement binding in law. It was not an agreement, it was a voluntary
    concession by T.M.M.C. which, for reasons of equity, the Court held
    T.M.M.C. could not cease to allow without plain intimation to TECO of
    their intention so to do. The counterclaim seems to me a plain intimation
    of such change of intention operating as from the 1st June, 1945, and for
    the future. None the less, the intimation would fall short of what was
    required if it was the duty of T.M.M.C. to specify in the intimation the
    reasonable time which they would allow after receipt of the intimation to
    enable TECO to readjust their business to the altered conditions. I see

    27

    no reason why equity should impose this burden on T.M.M.C. Having
    regard to the nature of the concession—a mere cessation of money payments
    —and to the fact that TECO were the only persons in a position to judge
    what time would reasonably be required to make such adjustments as were
    necessary, I think that TECO were sufficiently protected by the fact that
    if T.M.M.C. commenced proceedings before what the Court should determine
    to be a reasonable time, the action would fail. I agree, therefore, in sub-
    stance with Pearson, J. on this part of the case.

    On the questions of unreasonable restraint of trade and penalty I find
    myself in complete agreement with Romer, L.J. and I do not desire to add
    anything to the reasons given by him and by your Lordships for rejecting
    these defences.

    I turn therefore to the question whether clause 5 of the agreement offends
    against section 38 of the Patents and Designs Act, 1907. I had written
    some lengthy observations on this question, but since doing so I have had
    the opportunity of reading in print the observations of my noble and learned
    friend, Lord Oaksey. I find myself so completely in agreement with him
    that I will add no reasons of my own for rejecting this defence.

    For the reasons I have given, I would allow the appeal and restore the
    order of Pearson J.

    (31238) Wt.8100—102 35 7/55 D.L./P.A./19


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