[Printable RTF version]
||Neutral Citation Number:  EWHC 2198 (Ch)
||Case No: HC-2016-000164
IN THE HIGH COURT OF JUSTICE
||Royal Courts of Justice
London, EC4A 1NL
B e f o r e :
MRS JUSTICE PROUDMAN
|| PROCESS COMPONENTS LIMITED
||- and -
||KASON KEK-GARDNER LIMITED
Geoffrey Pritchard and Georgina Messenger (instructed by Squire Patton Boggs (UK) LLP) for the Claimant
Ian Mill QC and Tom Cleaver (instructed by Paul Hastings (Europe)LLP) for the Defendant
Hearing dates: 16th, 17th, 20th, 21st, and 23rd June 2016
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
Mrs Justice Proudman :
- This case is a dispute about who has the rights to sell certain industrial scale powder processing machines ("the Unit Machines") and to use the trade names associated with them. The principal issues relate to whether the claimant or the defendant owns the intellectual property rights ("the IP") relating to the Unit Machines, and whether the Licence Agreement between Process Components Limited ("PCL") and Kason Kek-Gardner Limited under its former names Frame Exchange Limited and Kek-Gardner Limited ("KGL") is valid or void and whether it has been terminated and, if so, when. As the written closing skeleton argument on behalf of the defendant pithily puts it, the Court must resolve,
a. First, who acquired what assets from Kemutec Powder Technologies Limited ("KPTL") in 2009?
b. Secondly, has the 10 July 2009 Licence been validly terminated by PCL?
- I have had the advantage of representation by Mr Pritchard and Miss Messenger for PCL and Mr Mill QC and Mr Cleaver for KGL.
- There is no dispute that KPTL originally owned the IP. The trade marks "Kek" and "Gardner" were used in relation to the Unit Machines and each of the marks has a long history and is associated with valuable goodwill.
- The principal shareholder of KPTL was a private equity organisation called EPIC Private Equity LLP which together with associated bodies I will call "EPIC". EPIC had lent KPTL some £1.5m, secured by a debenture. KPTL got into financial difficulties and went into administration on 30 June 2009 and subsequently went into a creditors' voluntary liquidation on 18 January 2011. The joint administrators and joint liquidators were Mr Jeremy Woodside and Mr Christopher Ratten.
- EPIC wanted to protect its position as far as possible and created PCL (of which it was the 100% owner), PCL entering into a pre-pack agreement with KPTL, also on 30 June 2009. I shall refer to this agreement as "the PCL Sale Agreement". The object of the PCL Sale Agreement, says PCL, was to sell to PCL KPTL's lucrative spares and valve businesses ("Mucon and Spares", often jokingly referred to as "M&S", Mucon being the name of the valves) and, again says PCL, all the IP, leaving out of account those assets which had been thought by EPIC to be dragging down KPTL and causing its financial problems. PCL says this included the St Blazey manufacturing facility in Cornwall and the English brand name "Kemutec", which in this country (but not the United States where there was a separate company -a subsidiary of PCL- called Kemutec Group Inc) was associated in customers' minds with KPTL's financial problems.
- On 10 July 2009 KGL (recently created without demur from EPIC and PCL) entered into a sale agreement with KPTL, which I will call "the KGL Sale Agreement". There is a dispute as to what IP the PCL Sale Agreement and the KGL Sale Agreement respectively transferred. Mr Pritchard says that it is plain as a matter of construction that the PCL Sale Agreement conveyed all the IP belonging to KPTL so that, whatever the KGL Sale Agreement said, it could not convey what had already been transferred. In other words, although on one view the KGL Sale Agreement purports to include the sale of necessary IP rights, KPTL had already sold its IP rights to PCL so that KGL would need PCL's permission to use those rights in the assembly and sale of the Unit Machines. One of the administrators, Mr Woodside, gave evidence for PCL that it was indeed the intention to transfer all the IP to PCL. Mr Mill QC says to the contrary that the only way sensibly to construe the PCL Sale Agreement and the KGL Sale Agreement giving each its full meaning is to split the IP.
- Mr Pritchard says that if, contrary to his submissions, I find for KGL as a matter of construction, he can rely on rectification and/or estoppel as he says it was always the intention to convey all the IP to PCL and KGL acted on that basis. Mr Mill QC however says that neither rectification nor estoppel is open to PCL for various reasons.
- Also in 2009 (the agreement bears the date 10 July 2009 but I find that the actual execution of the document was on or about 20 July 2009 although it operated as from 10 July 2009), KGL entered into a licence agreement ("the Licence Agreement") with PCL, under which KGL expressly acknowledged that PCL owned all the IP rights and PCL granted KGL an exclusive licence to assemble and sell the Unit Machines. There is a clause in the Licence Agreement by which the terms of the Licence Agreement have to be kept confidential to PCL and KGL. Mr George Tunnicliffe, who I assume was from the outset the Chief Executive Officer of KGL, says that he only entered into the Licence Agreement because PCL seemed so sure that it owned the IP (he was not shown the PCL Sale Agreement) and he and his fellow board members only wanted to start their business and did not want to rock the boat. He says that KGL acquired from KPTL all the rights it needed to assemble and sell the Unit Machines so that it never in fact needed any licence from PCL and now seeks return of the royalties paid by KGL.
- On or about 28 August 2015 Kason Industries Inc ("Kason") bought all the shares in KGL. As part of its due diligence processes Kason asked KGL for a copy of the Licence Agreement and KGL provided it. The agreement whereby Kason purchased KGL's shares is not in evidence as KGL has not produced it, on the grounds that it is "of no relevance", producing only an earlier Letter of Intent dated 29 March 2015 from Kason. Mr Jonathan Weiner the Chief Executive Officer of Kason said in oral evidence for KGL that the final agreement was very different but did not say in what way. I can only therefore work on the basis of the earlier offer contained in the Letter of Intent.
- By 2015, Kemutec Group Inc was carrying on a successful business selling the Unit Machines supplied and assembled by KGL. However, when Kason bought KGL, Kason's holding company gave formal notice to PCL in September 2015 (and also gave notice to Kemutec Group Inc) that the arrangement whereby Kemutec Group Inc received a discount was to come to an end, that after 60 days KGL would cease supplying Kemutec Group Inc and that KGL would thereafter be supplying the US market through Kason.
- PCL riposted by offering the Unit Machines for supply to Kemutec Group Inc after 2 October 2015, the date when it gave notice that the Licence Agreement was terminated with immediate effect, subject to completion of outstanding orders for Kemutec Group Inc.
- There is a difference of opinion between Mr Pritchard and Mr Mill QC as to what evidence can be taken into account in construing the PCL Sale Agreement. Mr Pritchard says that there is a common assumption as to the background and general object of the contract. He relies on the summary in Lewison's The Interpretation of Contracts (6th Edition), at 9 under the heading "Pre-Contractual Negotiations", as follows,
"Evidence of pre-contractual negotiations is not generally admissible to interpret the concluded written agreement. But evidence of pre-contractual negotiations is admissible to establish that a fact was known to both parties; to decide (in a consumer contract) whether a term has been individually negotiated; to determine which party put forward a particular term; and to elucidate the general object of the contract. Evidence that parties negotiated on the basis of an agreed meaning is only admissible in support of a claim of estoppel or rectification."
- It was, he says, the plain intention of everybody, including KGL, that all the IP rights should be transferred to PCL and this was the general object of the contract. He relied on the offer made by email by Declan McKelvey (the only director of PCL at the relevant time) on behalf of PCL on 29 June 2009 by email timed at 15.44.27 (after a flurry of emails between Mr McKelvey and Roland Houchin who was advising EPIC),
"Process Components Limited wishes to make an indicative offer for certain assets of Kemutec Powder Technologies Limited as follows:
All intellectual property, brands, licences, trademarks, customer contacts £1,350,000
Plant and machinery (per schedule supplied) £25,000
Stocks (per schedule supplied) £100,000
Work in progress (per schedule) £20,000
Investment in Kem Inc £20,000
On completion £1,350,000
The balance of the consideration to be payable in 12 equal monthly instalments commencing 30 days from completion."
- Also on 29 June 2009 Mr Tunnicliffe wrote to Mr Woodside at 9.09 am by email, saying,
"I am pleased to confirm that a management team consisting of Martin Jones, Martin Thomson, Steve Bayley and myself wish to enter a bid for the Unit Machine and Systems activities of Kemutec Powder Technologies, i.e. excluding Mucon and spares….
The structure of our offer is as follows:-
1. Goodwill of the Business £100,000
2. Plant and equipment £ 25,000 Note this would only be the Test Plant/Lab equipment and one or two associated items, not the factory equipment
3. Stock Not included
4. WIP/Order Book £100,000
We have not included an offer for the Intellectual Property as in this scenario it would be owned by another entity (PCL?) and we would agree a licensing arrangement with them."
- PCL's offer was accepted by email from Mr Woodside to Mr McKelvey at 3.36 pm on 30 June 2009, that is to say, just before the company went into administration, as follows,
"Further your offer for the Mucon/spares business and assets I confirm that I have taken independent valuation advice and am able to accept the offer.
I can confirm that completion will take place at the same time as the company going into Administration [in fact 4 pm on the same day, 30 June 2009].
I will be on site tomorrow, however please do not hesitate to contact me if you have any immediate queries."
- Mr Mill QC relies on the fact that the offer from PCL was merely an "indicative" offer, and the fact that the reply only refers to acceptance of the offer to buy the Mucon/spares business as well as the issue of law that only the terms of the PCL Sale Agreement itself is admissible in construing it.
- I turn to Chartbrook Limited v. Persimmon Homes Limited  1 AC 1101, a classic case on construction of documents. In that case the claimant company was the owner of development land, the defendant company was the developer and it entered into a contract whereby the developer would develop the land under licence from the claimant and then sell the land on long leases. The defendant was to pay an agreed price for the land but a dispute arose as to the meaning and effect of an "additional residential payment" which the defendant had to pay, a term defined in the contract. The defendant calculated the sum due under the clause as £897,051, whereas the claimant said it was £4,484,862 and it brought proceedings for the unpaid balance. In support of its construction the defendant sought to rely on pre-contractual negotiations or alternatively counterclaimed for rectification. At first instance (and by a majority, the Court of Appeal, Lawrence Collins LJ dissenting) held that evidence of pre-contractual negotiations was inadmissible and gave judgment for the claimant. The House of Lords held,
(a) That, although the court would not easily accept that linguistic mistakes had been made in formal documents, if the context and background drove a court to conclude that something had gone wrong with the language of a contract the law did not require it to attribute to the parties an intention which a reasonable person would not have understood them to have had. Thus where it was clear both that there was a mistake on the face of the document and what correction ought to be made to cure it, in that it was clear what a reasonable person having all the background knowledge which would have been available to the parties would have understood the parties by using the language in the contract to have meant, the court was able to correct the mistake as a matter of construction. Thus the House of Lords held that the definition of "additional residential payment" was obviously defective in its commercial context so that the Court could take into account the background and context but not the pre-contractual negotiations.
(b) Departure from the exclusionary rule that pre-contractual negotiations were inadmissible was something which could create uncertainty of outcome and add to the cost of litigation and advice. Unlike surrounding circumstances, by nature objective and uncontroversial facts, statements in the course of pre-contractual negotiations were subjective. It was not often easy to distinguish between statements which reflected the aspirations of a party and those which embodied a provisional consensus which might help in the construction of the contract. Thus the exclusionary rule was expressly upheld, except to found a claim for rectification or estoppel, which had to be pleaded. The House of Lords rejected the argument that where pre-contractual material furnishes a clear insight into the purpose of the disputed provision, admitting it is likely to promote certainty and would promote the interests of justice. It would require a departure from a long and consistent line of authority, the binding force of which has frequently been acknowledged. Although it would not be inconsistent to admit evidence of pre-contractual communications as part of the background, throwing light on the meaning of words used in the contract ("The rule therefore achieves little in saving costs and its abolition would restore some intellectual honesty to the judicial approach to interpretation": see ).
- Lord Hoffmann said (at ),
"What is clear…is that there is not…a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied."
- Lord Hoffmann went on to say (at ),
"Your Lordships are being asked to depart from a rule which has been in existence for many years and several times affirmed by the House. There is power to do so under the Practice Statement (Judicial Precedent)  1 WLR 1234. But that power was intended…to be applied only in a small number of cases in which previous decisions of the House were "thought to be impeding the proper development of the law or to have led to results which were unjust or contrary to public policy". I do not think that anyone can be confident that this is true of the exclusionary rule."
- I note that Baroness Hale of Richmond said (at -),
"I agree that Persimmon's construction of this contract is correct and that this appeal should be allowed.
99. But I have to confess that I would not have found it quite so easy to reach this conclusion had we not been made aware of the agreement which the parties had reached on this aspect of their bargain during the negotiations which led up to the formal contract. On any objective view, that made the matter crystal clear…
100. However, the approach to rectification adopted by Lord Hoffmann would go a long way towards providing a solution…"
- So where does that leave construction of the contract? In Investec Bank (Channel Islands) Limited v. The Retail Group Plc  EWHC 476 (Ch), Sales J said (at ),
"…in interpreting a contract, regard may be had to the content of the parties' negotiations to establish the "genesis and object" of a provision. This seems to me to be a relevant part of the factual matrix, since if the parties in the course of their negotiations are agreed on a general objective which is to be achieved by inclusion of a provision in their contract, that objective would naturally inform the way in which a reasonable person in the position of the parties would approach the task of interpreting the provision in question."
- However, in Excelsior Group Productions Limited v. Yorkshire Television Limited  EWHC 1751 (Comm) Flaux J said (at ), having (at ) referred to Sales J's judgment, which was given before Chartbrook was decided by the House of Lords in July 2009,
"It seems to me that there is a very fine line between looking at the negotiations to see if the parties have agreed on the general objective of a provision as part of the task of interpreting the provision and looking at the negotiations to draw an inference about what the contract meant (which is not permissible), a line so fine it almost vanishes."
- And in Scottish Widows Fund and Life Assurance Society v. BGC International  EWCA Civ 607, Arden LJ said (at -),
"33. …Pre-contractual negotiations rarely descend into detail on every point; the negotiations are unlikely to throw any light on the detailed points of interpretation that generally arise after execution.
34. However this does not necessarily mean that the pre-contractual negotiations should be accepted as evidence even as to the general object of the transaction. Statements made in the course of negotiations are often no more than statements of a negotiating stance at that point in time, thus shedding more heat than light on issues as to interpretation of the final deal…"
She went on to say (at ),
"…judges should exercise considerable caution before treating as admissible communications in the course of pre-contractual negotiations relied on a evidencing the parties' objective aim in completing the transaction."
- In Barclays Bank Plc v. Landgraf  EWHC 503 Comm Popplewell J held, following Sales J's decision (at ), that regard could be had to the parties' negotiations for the purpose of determining the genesis and object of a contractual provision. In his book, referred to above, Sir Kim Lewison says (at p.113) that it questionable whether this is correct in the light of Scottish Widows.
- Of course Arden LJ's wording does not apply in the present case where the language used is that of offer and acceptance, where the PCL Sale Agreement (as a pre-pack agreement) followed immediately after the emails, where there was little if anything in the way of pre-contractual negotiation and where the sums specified in the offer letter appear in the schedule to the PCL Sale Agreement. However, on the present state of the law the principle is the same, subject always to Lady Hale's words.
- Chartbrook has been considered by the Supreme Court in Arnold v. Britton and others  UKSC 36;  AC 1619. In that case Lord Neuberger of Abbotsbury (with whom three other members of the Supreme Court agreed but Lord Carnwath dissented) said (at -),
"15. When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to 'what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean', to quote Lord Hoffmann in Chartbrook…para 14. And it does so by focussing on the meaning of the relevant words…in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions…
16 For present purposes, I think it is important to emphasise seven factors.
17 First, the reliance placed in some cases on commercial common sense and surrounding circumstances (e.g. in Chartbrook...paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And again, save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision…."
- Thus the Supreme Court has put the language of the contract firmly back into the spotlight: see Lord Hodge's remarks about "the internal context of the contract" at . Although Lord Neuberger said in his second point (at ) that the less clear the relevant words, the more the court could properly depart from their natural meaning, he also said it did not justify the court in embarking on an exercise of searching for drafting infelicities in order to facilitate a departure from their natural meaning and (at ) that the court should be slow to reject the natural meaning of a provision because it appears to be a very imprudent term for one of the parties to have agreed. It was not the function of the court to relieve a party from the consequences of imprudence or poor advice.
- There is no guidance about what is a "very unusual case", save in the dissenting judgment of Lord Carnwath at . Lord Hodge and Lord Carnwath both refer to Lord Clarke's formulation of the unitary process of construction in Rainy Sky SA v Kookmin Bank  1 WLR 2900 (at ),
"[T]he exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other."
Lord Carnwath said (at ),
"…there is often a tension between, on the one hand, the principle that the parties' common intentions should be derived from the words they used, and on the other the need if possible to avoid a nonsensical result."
- It seems to me on the authorities that the following is part of the factual matrix,
- The PCL Sale Agreement was a pre-pack agreement, entered into at the time of the administration and therefore it had to have been ready before that date;
- The book value of the entire KPTL IP was £300,000. KPTL received offers for the IP: £1.35m from PCL, £150,000 from Gericke UK Limited, £875,000 for everything except the manufacturing facility in St Blazey from Fairport Engineering Limited and £225,000 for the Unit Machines and Systems business from KGL but specifically not (see the already quoted letter from Mr Tunnicliffe to Mr Woodside of 29 June 2009) for the IP. One would expect the matter to be addressed in the PCL Sale Agreement, as indeed it was in Schedule 5 ("£1,350,000 for the Goodwill, the IT system and the Intellectual Property Rights", all of which are defined terms), incorporated by Clause 3.1.
- Mr Mill QC said that EPIC and through it PCL could have offered any sum less than £1.5m for the IP which would be offset against the debenture for that sum so that the amount offered was unrealistic. It had nothing to do with the value of the IP owned by KPTL but instead had everything to do with the amount of money it was owed. Mr Mill said, in a question to Mr Woodside, "…because EPIC was owed that sum of money under loans, they decided to offer that amount of money because they weren't going to get the loans back otherwise." Mr Pritchard on the other hand said that it is a point in PCL's favour that EPIC was KPTL's largest creditor with a debt of £1.5m as EPIC was, by using that debt, in a position to outbid any other bidder and to buy whatever it chose. It seems to me that the sum in question is relevant; it is inserted in the PCL Sale Agreement. I agree with Mr Pritchard that when construing the PCL Sale Agreement one has to ask, what was that large sum for? Although it would also be part of the factual matrix that, as Mr Woodside accepted that he knew, EPIC had a loan, secured by a debenture, of £1.5m.
Mr Pritchard said that it was part of the factual matrix that the administration was not a mechanism designed to partition KPTL's business between PCL and KGL but was a way of realising the maximum value for EPIC of KPTL's assets. Everyone, including KGL and Jim Beshoff, the solicitor who would later represent both PCL and KGL in drafting the Licence Agreement, believed that PCL was set up to own, inter alia, all the relevant IP, a fact confirmed by Mr Houchin on behalf of EPIC, Tony Goodwin on behalf of PCL (a director of PCL since 9 July 2009) and Mr Woodside on behalf of the administrators. Mr Pritchard said that it is notable that there were never any pre-contractual negotiations between PCL and KPTL about what IP PCL would buy because it was taken "as a given" that PCL would buy all the IP.
- It was also part of the relevant factual matrix that one of the Trade Marks listed as sold was the "dead" Trade Mark for the name "KEK", so that there must have been a mistake. The only "live" Trade Mark was number 2506657.
Mr Pritchard relies on the so-called "common assumption" principle, namely that where PCL and the Administrators acted, both before and after the contract, on a common assumption that PCL would buy all the KPTL IP, a common assumption shared by KGL, the PCL Sale Agreement falls to be construed in the light of such a common and settled assumption. These matters were not, he said, part of pre-contractual negotiations but represent the relevant factual matrix. It would, he submitted, take very clear language indeed to prevent the PCL Sale Agreement from having the intended effect. However, I have nowhere been referred to the principle of "common assumption", even in Investec Bank and Barclays Bank v. Landgraf, as opposed to "objective" or "purpose", other than in the dissenting speech of Lord Hoffmann in BCCI SA v. Ali and others  1 AC 251, where he said (at ),
"…there is no conceptual limit to what can be regarded as background. It is not for example confined to the factual background but can include the state of the law…or proved common assumptions which were in fact quite mistaken…"
Common assumption (as does  above) relies too much on the subjective intention of KPTL, the administrators and PCL, and conflicts with the principle repeated by the Supreme Court in Arnold v. Britton that only the terms of the contract should be taken into account, save in a very unusual case, whatever that may mean. I note that there is no evidence about whether Mr McKelvey contacted Mr Woodside by telephone in accordance with the last paragraph of Mr Woodside's acceptance letter of 30 June 2009.
I turn to the construction of the PCL Sale Agreement in the light of these submissions.
First, it is instructive to look at the definition of the "Business", which is,
"The "Mucon" business and the "Spares" business carried on by the Seller at Completion (for the avoidance of doubt the Business does not include the "Unit Machine" or "Package" businesses carried on by the Seller);"
The PCL Sale Agreement sold (by Clause 2.1) the "Sale Assets", which were defined to mean,
"the Brand Names, the Commercial Information, the Contracts, the Equipment, the Goodwill, the Intellectual Property Rights, the Kemutec US Shares, the IT System, the Work in Progress and the Motor Vehicles;"
"Brand Names", "Trade Marks" and "Intellectual Property Rights" are defined terms relevant to the scope of the IP.
First, "Brand Names", which is defined to mean,
"KEK Centrifugal Sifters, KEK Conemills, KEK Universal Mills, KEK Dibblers, Gardner Mixers, Terrill Mixers, Mucon Iris Diaphragm Valves, Mucon Disc Valves, Mucon Bridge Breakers, Mucon Aerators, Mucon Rotalogs and Power Process Systems/PPS or any part of such Brand Names as are commonly used by the Seller in connection with inter alia the Business;"
Registered Trade Marks are dealt with separately under the definition of Trade Marks so, says Mr Pritchard, the rights sold as Brand Names must encompass all unregistered trade marks created by the use of brand names. Nowhere is there a limitation to Spares but, on the contrary, the definition primarily relates to whole Unit Machines. It would therefore, says Mr Pritchard, make no sense at all for PCL to acquire brand names in whole machines if it does not also have the IP relating to those machines: the expectation in any agreement is that the scope of the registered and unregistered rights are to be coterminous in the absence of a good reason to the contrary. If the definition of Brand Names assigned all unregistered rights in the names KEK and Gardner (and Mucon) to PCL, it would therefore be expected that the Trade Mark assignment in KEK and Gardner would also be in relation to all relevant rights including Unit Machines. Further it would be assumed that if a brand was assigned, there would also be assigned the goodwill underpinning it.
The last part of the definition is, says Mr Pritchard, intended to be a catch-all in case anything has been left out of the list. "Or" means what it says, relating to parts of Brand Names, "commonly used by [KPTL] in connection with…the Business". Mr Beshoff apparently asked that the words "inter alia" be added, although it is not clear what the words mean in context.
However Mr Mill QC says that Mr Pritchard's construction would mean that there is no point to the part of the definition which says "as commonly used by the Seller in connection with the Business". If the brand names were assigned for the purpose of KPTL's whole business there would be no need to qualify the definition at all. It would be more natural to use some such words as, 'as are commonly used by the Seller in the entirety of the business of KPTL'.
"Intellectual Property Rights" are defined as follows,
"the full benefit (subject to the obligations) of all patents, registered designs, the Trade Marks, service marks, copyrights, know-how, technical and/or research and development information, drawings, specifications, domain names, computer programs and all licences, rights to protection and applications for registration and rights to apply for registration relating to such matters used by the Seller in the Business on Completion;"
Mr Pritchard breaks down the definition of IP Rights into three parts, namely the words from "all patents" down to computer programs, then the words "all licences" down to registrations, and confines the words "used by the Seller in the Business on Completion" to the last part of the definition, "and rights to apply for registration", saying that this is in line with commercial common sense for two reasons. First, the right to apply for registration is inherently uncertain so that if KPTL sold the right to register IP rights relating to the business it was not selling to PCL it would not know what it was giving away, whereas by selling the right to apply for registration relating to the Mucon and Spares business no commercial uncertainty is created. Secondly, IP Rights would have to be divided and it would be extremely difficult in practice to divide Trade Marks, either by narrowing the specification under s.65 of the Trade Marks Act 1994 or by creating two new registrations with different specifications, cancelling the existing registration.
Mr Mill QC does not agree. He has produced a paper from the Intellectual Property Office on the GOV.UK website (published on 2 December 1998) positively advocating the coexistence of trade marks where there are different people trading in goods for different purposes and using the same mark. That is in my judgment correct.
Mr Mill QC points out that the construction Mr Pritchard seeks to place on the definition of "Intellectual Property Rights" does not make grammatical sense. First he says that if the words used by KPTL only apply to rights for registration, what is the scope of the words going before? There is no qualification on "all patents, registered designs…service marks, copyrights, know-how" which would enable the reader to know whether or not they fall within the definition. The natural meaning of the words at the end, he says, is to qualify which of the IP Rights are being referred to. Secondly why is the right to apply for registration put in a separate category? Why is there a distinction between the unfettered applications for registration and the rights to apply for registration depending on whether the right to apply has been exercised? The entirety of the IP Rights are qualified by the purpose for which they have been used in the Business. That qualification appears, he says, in the definitions of Goodwill and the IT System.
Then there is the definition of "Goodwill", as follows,
"the customer list and goodwill of the Business together with such right as the Seller has to enable the Buyer to hold itself out as carrying on the Business in succession to the Seller;"
Mr Pritchard points to the fact that the PCL Sale Agreement contains both a definition of Brand Names and of Goodwill so that Goodwill is not simply a reference to goodwill associated with Brand Names. He says that Goodwill is primarily directed to the accounting definition, that is to say, the assets in a business that are not separately identifiable. Goodwill represents the excess of the consideration paid to purchase the assets over the total value of the assets and liabilities. He says that the natural place to find goodwill is within the definition of Brand Names or IP Rights and the fact that it is not there points to the definition of Goodwill not being intended to circumscribe the scope of the unregistered trade mark rights already demarcated under Brand Names.
There are three other definitions of some relevance. First,
"all computer hardware and software (including all associated peripherals, preparatory materials, user manuals and related documentation) owned, used, leased or licensed by or in relation to the Business" and, secondly,
"(i) all promotional materials…and data…owned or used by the Seller in relation to the Business and the Sale Assets;
(ii) all documentation…in relation to the Business and the Sale Assets;
(iii) the right to seek to arrange the transfer to the Buyer of all telephone and fax numbers used in connection with the Business;
[But subject to certain exclusions]"
"the registered trademarks 46553 KEK, 1113675 Mucon, 1113676 Mucon, 1113677 Mucon;"
Thus the only Trade Mark relevant to the present dispute is "46553 KEK", which was at the date of the PCL Sale Agreement the "dead" Trade Mark.
Taylors Solicitors drafted both the PCL Sale Agreement and the KGL Sale Agreement and plainly used the former as a template for the latter. However, Mr Pritchard says that as the latter was not executed until 10 days after the former the KGL Sale Agreement cannot affect the drafting of the PCL Sale Agreement or form part of the factual matrix in which it was prepared. While Mr Mill QC agrees with this, he also says that KPTL must have intended the KGL Sale Agreement to bite on something and that there is a simple answer that gives proper effect to the terms of both the PCL Sale Agreement and the KGL Sale Agreement, namely that PCL acquired the right to use the IP Rights for the purposes of the Mucon and Spares Business and KGL acquired the right to use the IP Rights for the purposes of the Unit Machines and Systems. It was part of the factual matrix that it was inevitable (and the administrators accepted) that there were assets left after the PCL Sale Agreement and that the administrators had an obligation to maximise their value.
The KGL Sale Agreement sells to KGL (using similar wording to that in the PCL Sale Agreement),
"…as from Completion [10 July 2009] whatever right, title and interest [KPTL] may have at that time in the Sale Assets…"which include,
"the Business Name, the Commercial Information, the Contracts, the Equipment, the Goodwill, the Intellectual Property Rights, and the Work-In-Progress;"
The definitions then follow the pattern of the PCL Sale Agreement, as follows,
"The design and assembly parts of the Unit Machine Systems business of [KPTL] but for the avoidance of doubt not the manufacturing business of [KPTL] [that is to say the St Blazey facility in Cornwall which it is common ground was excluded from both the PCL Sale Agreement and the KGL Sale Agreement]"
"the customer list and goodwill of the Business together with such right as [KPTL] has to enable [KGL] to hold itself out as carrying on the Business in succession to [KPTL] including the right to use the Business Name;"
"Intellectual Property Rights"
"the full benefit (subject to the obligations) of all patents, registered designs, trade and service marks, copyrights, know-how, technical and/or research and development information, drawings, specifications, domain names, computer programs and all licences, rights to protection and applications for registration and rights to apply for registration relating to such matters used by [KPTL] in the Business on 30 June 2009;"
Schedule 4 to the KGL Sale Agreement (incorporated by Clause 3.1) states how the consideration should be apportioned. Mr Mill QC cross-examined Mr Woodside about the Schedule, asking him what the Goodwill, Business Name, the Commercial Information, and the Intellectual Property Rights were, since £100,000 was apportioned to them in the Schedule. Mr Woodside answered "very little". Mr Pritchard said that the £100,000 was for the use of the Kemutec (UK) name, but it must have been intended to be more than that as the Schedule shows. Mr Pritchard says that the "primary value" in the sale assets sold to KGL was the goodwill, both in the accounting sense and in the sense of the "attractive force that brings in custom" (see per Lord MacNaghten in Inland Revenue Commissioners v Muller & Co's Margarine Ltd  AC 217). Incidentally this coincides with Mr Tunnicliffe's email of 29th June 2009. He himself accepted in oral evidence (at Day 4 p. 23-24) that the addition of the words "Intellectual Property" along with "Goodwill" in the final form of the KGL Sale Agreement was a surprise.
The sale effected by the PCL Sale Agreement expressly excluded Unit Machines and Packages (systems) and, Mr Mill QC submitted, it would therefore be surprising if the sale included assets necessary for the functioning of the business of Unit Machines and Systems, such that the business could not continue without PCL's consent.
He points out that division of copyright is permissible as a matter of law and he says that the only live Trade Mark relating to either the Spares or Unit Machines was assigned to KGL and not to PCL because of the assignment in the PCL Sale Agreement of the "dead" Trade Mark.
However I do not think that he is right that the KGL Sale Agreement assigned the live Trade Mark to KGL. The PCL Sale Agreement would in my view have transferred the live Trade Mark number 2506657 to PCL as the only live Trade Mark relating to the KEK name. Although the rule would normally apply that KGL's supervening rights would take priority over PCL, it is evident from what Mr Tunnicliffe said (see below) that KGL did not believe that it acquired any IP Rights under the KGL Sale Agreement. Thus the usual rule is displaced. In other words, it was not a bona fide purchaser without notice of PCL's IP Rights.
I should mention at this juncture that Mr Mill QC referred to a Confirmatory Deed of Assignment ("the DCA") which KPTL (restored to the Register for the purpose of assigning the "live" Trade Mark), PCL and Mr Woodside and Mr Ratten as joint liquidators entered into on 9 June 2016. By this Deed KPTL purported to assign to PCL not only the live Trade Mark but also "all its right, title and interest in and to the Intellectual Property Rights owned by KPTL". Mr Adam Deacock of Counsel explained this by saying (at  and  of an Opinion written for the purpose),
"By April 2014 PCL's lawyers (i.e. SPB [Squire Patton Boggs]) and Counsel had begun to consider whether the DCA ought to address the wider question of whether the PCL Agreement effected the underlying intention of PCL and KPTL to transfer essentially all of the [sic] KPTL's IP….
7. Perhaps unsurprisingly the decision to extend the scope of the DCA was chiefly discussed between lawyers. "
Thus, said Mr Deacock, Mr Goodwin was not to be blamed and was not trying "to pull a fast one" in the run up to trial. But why on earth, asked Mr Mill QC rhetorically, had the lawyers "begun to consider whether the DCA ought to address the wider question"?
It makes no difference to the outcome of the trial whether the DCA stands or not. However Mr Mill QC relies on it as a matter of clean hands when it comes to rectification/estoppel and I will deal with it there.
I return to the question whether or not the principle of common assumption applies in the unusual circumstances of this case. It seems to me that as a matter of black letter law it does not since Arnold v. Britton stipulates that the PCL Sale Agreement should be construed according to its terms. While the terms of the PCL Sale Agreement are not wholly clear, particularly with regard to the definition of Brand Names and the price paid for the Goodwill, the IT System and the Intellectual Property Rights under Schedule 5 of the PCL Sale Agreement, the words "used by the Seller on Completion" or "in relation to the Business" appear in the definition of "Goodwill", "Intellectual Property Rights" and "IT System". Mr Pritchard's argument relies too heavily in my judgment on the definition of "Brand Names". Why should there be an assignment of the Brand Names that is broader in scope than the assignment of the rest of the property? The PCL Sale Agreement has to be construed as a whole.
The definition of IP Rights
The IP Rights as defined refer to "used by [KPTL] in the Business on Completion". In the definition of the Brand Names the expression is "commonly used by [KPTL] in connection with inter alia the Business". It is therefore essential to discover what IP was actually used in KPTL's Spares business.
Mr Pritchard says, by reference to Annex B of his closing argument, that all the IP was used, in the sense that access to it was necessary for the business. Mr Mill QC says that at least some of it was not. He points to the Test Data, (comprising an electronic and hard copy database of reports from previous tests of machinery) saying that its only real use was in designing Unit machines. On the assumption that the Spares business consisted of all replacement parts, the components supplied by the Spares business would already have been selected for use in the customer's machine. It is only if the customer wished to have the Unit Machine redesigned that the test data would be required. Mr Houchin's evidence was that he did not consider the Spares business to include upgrading. Secondly, user manuals were supplied with every Unit Machine and it is stretching the words "used in the business" too far to say that user manuals were routinely used in any part of the business concerned with Spares. Thirdly, only engineering drawings concerned with the manufacture of spares would be used in the spares business. There is no reason why a seller of spares would need general assembly drawings showing how a Unit Machine was intended to fit into a customer's site as the Unit Machine would already have been installed by the time that a spare was needed.
I find that Mr Pritchard places too much emphasis on the expression "used by the Seller in the Business on Completion" in the definition of IP and that as a whole the natural meaning of the PCL Sale Agreement is that only IP used in the Mucon and Spares business was included.
I therefore find as a matter of construction, bearing in mind that the members of the Supreme Court other than Lord Carnwath give no guidance on what is a "very unusual case" enabling me to adjust the language of the PCL Sale Agreement, that the PCL Sale Agreement did not operate to sell to PCL the whole of the IP. The test data, the user manuals and the general assembly drawings would not have been used in the spares business so that the KGL IP consisted of copyright in those materials
The meaning of "Spares"
As a secondary submission on the basis that PCL fails on its primary case on construction, the meaning of "Spares", which is not a defined term, becomes relevant as the definition of "Business" depends upon it.
The dispute is whether "Spares" comprises merely consumables which are of necessity low in value and which are held in reserve or whether the expression is apt to cover the supply of replacement parts and associated services for the repair, service or upgrade of a Unit Machine. Mr Pritchard relies on the definition in the Pocket Oxford Dictionary,
"duplicate to replace a lost or damaged part",
But Mr Mill QC relies on the Oxford English Dictionary,
"Not in actual or regular use at the time spoken of, but carried, held, or kept in reserve for future use or to supply an emergency; esp Naut…; additional, extra."
And the definition in The Oxford English Dictionary of "spare part",
"A duplicate of a part of a machine kept or available in readiness to replace a loss, failure, or breakage."
Both Counsel agree that the dictionary definition is a good starting point in construing a document, but nothing more. The problem is that there was no separate "Spares" division within KPTL. The definitions "Spares Business" and "Unit Machines Business" came into existence only for the purposes of the administration as a convenient label to describe the division of the business as it was to become.
Miss Alison Sandbach and Mr Andrew Rowe were the Spare Parts, After Sales and Service Operatives of KPTL at all relevant times. Mr Mill QC submitted that they (and particularly Mr Rowe because he remains employed by PCL but also Ms Sandbach as she left PCL on good terms) ought to have been called as a witnesses for the claimant and the fact that they were not is a matter from which I ought to draw an adverse inference within Wisniewski v. Central Manchester Health Authority  PIQR P324. He also says that I should draw an adverse inference from the absence of Hazel Wild, who was at the time the Group Financial Controller and Company Secretary. He says that the inexorable conclusion for me to draw, since all of them had relevant evidence to give on an issue where there was a serious issue to be tried, and the evidence of Mr Jones, Mr Tunnicliffe and Mr Stephen Bayley went the other way, was that the evidence they would have given would have been adverse to the interests of PCL. Mr Mill QC said,
"…if you're going to rely on the day-to-day work carried out by the operatives you call the operatives. You don't take a selection of documents, as Mr Goodwin did, emanating from those individuals and seek to apply some inference from those based on their content.
[Mr Pritchard] criticises us for not suggesting to Mr Goodwin that there were more- or challenging that there were more documents that said the same thing. That would have been a point of some substance if the other side had given disclosure of those documents and then a selection had been chosen for the purposes of the witness statement. That is not what happened. There was no disclosure of the use of IP documents and the only documents that we received were those that Mr Goodwin chose to attach."
However, Mr Goodwin attached very many emails from Ms Sandbach and Mr Rowe to his fourth witness statement showing that the IP was used in the Spares Business of KPTL. I do not think that Wisneiwski applies since, as I have said, there was no separate spares business within KPTL and the definitions "Spares Business" and "Unit Machines Business" came into existence only for the purposes of the administration. There is a limit to the evidence that can properly be called in support of any case.
Mr Mill QC said the evidence of the defendant's witnesses was that "Spares" consisted only of parts which a customer would generally be expected to keep in stock in order to replace a part in an existing machine when it broke. The list of spare parts relevant to each Unit Machine was listed under "Recommended Spares" in the manual accompanying the unit machine and "Spares" is therefore limited to such items as hoses, cones, screws, nuts, rings and drive belts and other low-value, high turnover elements. KGL's witnesses drew a distinction between spares and replacements.
Mr Pritchard however said that the scope of the Spares business was not confined to consumables but amounted to everything happening after the initial sale of a Unit Machine.
Mr Martin Jones, who was the Group Accountant of KPTL, and indeed a guru among accountants, gave evidence for KGL that sales orders and shipments were analysed by a six letter code which distinguished between Spares and Unit Machines. Spares were identified with the transaction code "S" while Unit Machines were identified as "U". Mr Jones also said that it was not uncommon for codes to misrepresent a Unit Machine as a Spare because orders for Unit Machines often originated from an enquiry with a sales representative. However, two of the three examples he gave of errors in the coding system were shown to be wrong. The first example Transcript Day 3 p.88-91 and p.118) was part of an order which contained a Unit Machine so that the whole order had been given a single code. The second example (see  of Mr Goodwin's sixth witness statement) related not to a component of a Unit Machine but to a Unit Machine itself. The third example is more tendentious. It is of 10 litre pots, which are, according to Mr Jones (but not Mr Mill QC), stand-alone units rather than components: see Transcript Day 3 p.88. Mr Jones accepted that codes could be changed at any time before the invoice was created and, more importantly, that the coding was correct 99% of the time (Transcript Day 3 p.92-4). He said that there was no distinction in the coding between consumables and Spares but that it would have been simple to include such distinctions in the system. However, I can see that there was no reason to do so since KPTL had a single business.
The cost centres were used in internal accounting records. The Backlog Reports and the Order Intake Analysis Documents show that many high-value, non-consumable items were identified by KPTL as Spares, such as shafts, bearing assemblies, baskets and associated service visits.
Mr Mill QC alleged that none of KGL's witnesses had put to them PCL's case about what was and was not within the Spares business and much of their evidence went unchallenged. In particular, Mr Jones said that the purpose of the coding system was to put sales in the right pigeon-hole, and he gave detailed evidence that he had made manual changes to eradicate human error to ensure that the pigeon-holing was correct. He also said that the feature of the Spares business which made it attractive as an acquisition was that it achieved high (some 65%) profit margins, whereas if one included non-consumable parts that would have reduced the margin. Again, this part of Mr Jones's evidence was unchallenged. However, as to the first matter, two of the three examples which he chose were shown to be incorrect, and as to the second, I do not accept that PCL was motivated entirely by its profit margins in deciding what was included in "Spares".
It seems to me that Mr Mill QC's definition of "Spares" relied too much on the dictionary definition ("kept in reserve") and not enough on what was used in the business and labelled Spares.
Again, Mr Mill QC submitted that the difference between Spares and replacement parts was that Spares did not require engineering input. Mr Bayley (see Transcript Day 4 p.61-3) and Mr Tunnicliffe (see Transcript Day 4 p.37) both said under cross-examination that this was not the case; if a part was broken it would in many cases simply be a case of having the part made without any engineering input.
It therefore seems to me that Mr Pritchard is correct as to the scope of the Spares as a matter of construction. Thus PCL's definition of "Spares" encompasses all the matters referred to in Annex B to Mr Pritchard's closing written submissions
The Licence Agreement
Under "Background", (A) provides,
"PCL owns and/or has the right to grant licences to assemble, use market and sell the Products (as defined below)."
"Copyright" was defined as follows,
"all copyright, database rights and rights in the nature of copyright and database rights to which either party may now be, or may subsequently become, entitled in, or n respect of the Design Documents and any other documents or recordings in any form and all other articles bearing or embodying any part of the Technical Information."
"Intellectual Property Rights" was defined as follows,
"the Copyright, the registered designs and the Design Rights and all other intellectual or industrial property rights recorded or embodied in any part of the Technical Information, and any patents, in each case in any part of the world and whether or not registered or registrable, for the full period and all extensions and renewals."
"Products" was defined as follows,
"Unit equipment in relation to:
KEK Universal Grinding Mills
KEK Betagrind Cone Mills
KEK Cone Mills
KEK Centrifugal Sifters
Gardner Mixers & Blenders
PPS Classifier Mills
As varied from time to time by agreement between the parties."
"Technical Information" was defined as follows,
"all Test database and machine performance related information not relating to MUCON products- defined as "The Test Database" data …;
all Test reports not relating to MUCON tests…;
all application data not relating to MUCON applications…;
all Sales data…;
Infor data not relating to MUCON and Spares sales or manufacture- Data is stored in a bespoke Oracle database accessed through the Infor software package."
Under Clause 2, "Grant of Rights" it was provided,
"2.1 PCL grants [KGL] for the Term [54 months subject to prior termination] a sole and exclusive licence…to use the Intellectual Property Rights, the Technical Information and the Trademark [which was the dead Trademark] to assemble use, market and sell the Products in the [world]…
2.4 During the Term, PCL shall not grant any licence permitting any third party to exercise the rights granted to [KGL] under clause 2.1 but it may itself exercise such rights for the sole purpose only of supplying spares for the Products. "
Under Clause 8 "Intellectual Property Rights", it was provided,
"[KGL] acknowledges PCL's ownership and proprietary rights in the Intellectual Property Rights and agrees and acknowledges that:
(a) It shall not obtain any rights in the Intellectual Property Rights, except as expressly granted to it under this Agreement; and
Clause 10 provided under the heading "Confidentiality",
(b) It shall not register or attempt to register any of the Intellectual Property Rights in any jurisdiction…"
"10.1 Each party agrees to keep the terms of this Agreement confidential…
10.5 The provisions of this clause 10 shall survive termination of this Agreement for any reason."
Clause 11 provided under the heading "Termination",
"11.1 This Agreement shall continue in force for a term of fifty four months…and shall continue thereafter until terminated by not less than six months' notice in writing from either party to the other…
11.2 Either party shall be entitled to terminate this Agreement immediately by written notice to the other in the event of:
(a) any material breach by the other party of any of its obligations under this Agreement which, being a breach capable of remedy, is not remedied within 30 days of notice to the party in breach specifying the breach and requiring its remedy. (For this purpose, non-payment of any royalty under clause 5 constitutes a remediable material breach and breach of the confidentiality obligations under clause 10 constitutes a non-remediable material breach);"
Clause 12 provides under the heading "Post Termination",
"12.1 Subject to clause 2.2 [completing contracts in force] [KGL] shall not accept orders for the Products, or products manufactured by [KGL] incorporating the Products, for delivery after the date on which this Agreement terminates…
12.3 On termination of this Agreement for any reason, [KGL] shall:
(a) cease to make any use of the Intellectual Property Rights; and
(b) promptly cooperate with PCL as requested by PCL in the cancellation of [KGL] as a licensee of any of the Intellectual Property Rights."
Clause 19 of the Licence Agreement comprised an "Entire Agreement" clause, stating,
"Each party confirms that this Agreement constitutes the entire agreement between the parties as to its subject matter and supersedes all prior or contemporaneous agreements with respect to its subject matter, except in respect of any fraudulent misrepresentation made by either party."
Has the Licence Agreement been terminated by PCL?
Clause 11.2 of the Licence Agreement provides that a party shall be entitled to terminate "immediately" in the event of any material breach by the other party of any of its obligation and that for that purpose, non-payment of any royalty under clause 5 constitutes a remediable breach whereas breach of the confidentiality obligations under clause 10 constitutes a non-remediable material breach, entitling the innocent party to terminate the contract immediately.
Mr Mill QC said that it was ludicrous to take clause 11.2 at face value since clause 10 covered trivial breaches as well as more serious breaches going to the root of the contract. However, it appears from the judgments in Hongkong Fir Shipping Co Limited v. Kawasaki Kisen Kaisha Limited  2 QB 26 that the parties can expressly decide in the contract what is a condition enabling the parties to terminate the contract rather than merely suing for damages: see especially per Upjohn LJ at p. 63 and 65 and Diplock LJ at p. 65-66, 69 and 72. It is only if the contract is silent as to the parties' rights (as with the unseaworthiness in that case) that only frustration of the contract is enough to allow the innocent party to repudiate.
Again, in Rice (t/a the Garden Guardian) v. Great Yarmouth Borough Council  TCLR 1 Hale LJ, with whom the other members of the Court of Appeal agreed, said,
"…it is open to the parties to agree that, as regards a particular obligation, any breach shall entitle the party not in default to treat the contract as repudiated."
See Bunge Corporation, New York v Tradax Export SA, Panama  2 All ER 513,  1 WLR 711, per Lord Wilberforce at page 715E of the latter report. On the other hand: "if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must yield to business commonsense."
See Antacids Companied SA Napier v Saleh Rederierna AB  AC 191,  3 All ER 229, per Lord Diplock at p 201D of the former report…
 Lord Wilberforce emphasised, in the words already quoted in para 17 above, that it is still open to the parties to agree that a term is so important to them that it should have that effect. He continued:
"It remains true, as Lord Roskill has pointed out in Cehave NV v Bremer Handelsgesellshaft mbH (The Hansa Nord)  QB 44, that courts should not be too ready to interpret contractual clauses as conditions . . . But I do not doubt that, in suitable cases, the courts should not be reluctant, if the intentions of the parties as shown by the contract so indicate, to hold that an obligation has the force of a condition."
She went on to say (at ),
"The question for the court (and indeed the contracting parties) in any case like this is whether the cumulative effect of the breaches of contract complained of is so serious as to justify the innocent party in bringing the contract to a premature end. The technical term is 'repudiatory' but that is just a label to describe the consequence which may flow. It is not always an entirely satisfactory label, if it implies that the conduct itself must always be such as to demonstrate an intention to abandon contractual obligations: while this will sometimes be so it is not an invariable requirement. As the judge indicated, there are in effect three categories: (1) those cases in which the parties have agreed either that the term is so important that any breach will justify termination or that the particular breach is so important that it will justify termination; (2) those contractors who simply walk away from their obligations thus clearly indicating an intention no longer to be bound; and (3) those cases in which the cumulative effect of the breaches which have taken place is sufficiently serious to justify the innocent party in bringing the contract to a premature end."
As clause 11.2 of the Licence Agreement entitles a party to terminate immediately in the event of a non-remediable material breach, and it is expressly specified that breach of the confidentiality obligations under clause 10 constitutes a non-remediable material breach, I do not think that business common sense of the kind referred to by Lord Diplock is relevant in this case. Commercial parties often wish to keep their contractual dealings mutually confidential and the fact that this later led to difficulties for KGL is irrelevant.
I therefore find the discussion of materiality and irremediability in Phoenix Media Limited v. Cobweb Information Limited (2004) WL 1476680 not pertinent to this case, as the agreement in that case did not contain express provisions similar to the present one.
KGL states that there was no breach because the Licence Agreement contained an implied term that it was entitled to do anything reasonably necessary for the purposes of conducting its business and because a Non- Disclosure Agreement (the "NDA") entered into between Kason and KGL on 14 October 2014 provided PCL with sufficient protection.
As to the implied term, KGL first has to get round the Entire Agreement clause in clause 19. Paul Hastings (Europe) LLP, KGL's solicitors, said (in a letter of 3 December 2015),
"We remain confident that an English court, analysing the Licence as a whole, would have no hesitation in interpreting the Licence to allow appropriate disclosure of its terms on a confidential basis to a proposed investor…"
However I do not see, and have not had explained with the benefit of authority, the basis for implying such a term, particularly one that could be used to undermine PCL's business. For understandable reasons, KGL did not ask for PCL's permission to disclose.
As to the NDA (to which PCL was not a party) the risk was not in dissemination of the information, it was the fact that Kason itself was in possession of the information. Although it undertook not to use such information in a way that was detrimental to the parties to the NDA, it did not undertake not to use the information in a way detrimental to PCL. In any event, the NDA expired on 28 August 2015 so that it did not bite at the time when PCL terminated the Licence Agreement.
Mr Mill QC also pointed to the fact that PCL itself was arguably (only arguably because no terms of the Licence Agreement are mentioned) in breach of clause 10 when it wrote to the University of Manchester citing the Licence Agreement. I do not however see the relevance of this since KGL did not rely on such a breach other than to say, "What's sauce for the goose is sauce for the gander" (Day 5 p.139), a matter which I do not understand.
It therefore seems to me that clause 10, which meant that the terms of the Licence Agreement could not be shown to third parties, is either a condition of the contract or an innominate term entitling the innocent party to immediate termination.
Further, I agree with Mr Pritchard that showing the Licence Agreement to Kason amounted to a repudiatory breach of the Licence Agreement in any event. Access to the terms of the Licence Agreement gave Kason the knowledge that Kemutec Group Inc could not make equipment in competition with Kason for at least 12 months because of the 12 month termination clause, a longer period than the 60 days KGL gave to Kemutec Group Inc. Kason would know that all it had to do to destroy Kemutec Group Inc's market was to make it impossible for Kemutec Group Inc to compete in the US market for the next 12 months. Mr Tunnicliffe and Mr Weiner both accepted that the 12 month period was important: see Transcript at Day 3 p. 161 and Day 4 p.115-6.
PCL purported to terminate the Licence Agreement by letter dated 2 October 2015. By an emailed letter dated 9 October 2015, KGL's solicitors denied that the termination was valid, queried whether PCL owned the licensed IP and asked PCL to prove that it did. KGL also (apparently without prejudice to its contention that the Licence Agreement was void and ineffective) gave notice of termination pursuant to clause 11 of the Licence Agreement terminating the Licence Agreement in any event on 10 October 2016.
Mr Mill QC said that a mere query that PCL owned the licensed IP could not amount to repudiation of the Licence Agreement. However KGL stated at all times that it would not pay royalties under the Licence Agreement unless PCL demonstrated conclusively (see the letter dated 4 November 2015) that it owned the IP. KGL's solicitors also said that the registered trademarks for KEK-Gardner in Europe, the UK and internationally belonged to KGL: see e.g. the letter of 3 December 2015 saying that the Licence Agreement was void and ineffective, that KGL was entitled to repayment of all royalties, that KGL had no obligation to pay any royalties in future, that PCL had no rights in relation to the KEK-Gardner name, that the IP in the Unit Machines belonged to KGL and that PCL had to return all IP relating to the Unit Machines. KGL's solicitors said in their letter of 10 November 2015,
"Kason is not willing to tolerate your flagrant and willful [sic] acts of unfair competition."
Mr Pritchard also relies on KGL's failure to make an interest payment within 30 days of notice in writing that it would be in breach of the Licence Agreement if it failed to do so. Mr Mill QC pooh-poohs this failure as it was less than £300. However, either there was a failure or there was not. Mr Pritchard says that the cheque for royalties did not include interest due under clause 5.6 of the Licence Agreement so that termination took place under clause 11.2 on 6/7 May 2016, 30 days after the letter of notice. However, this apparent failure was not pleaded. Non-payment of interest was raised for the first time in Mr Pritchard's skeleton argument received by KGL on 13 June 2016, the trial started on 16 June 2016 and I decline to permit PCL to rely on it.
Was KGL licensed to sell Spares?
Mr Mill QC raised a number of points of construction of the Licence Agreement to say that (assuming he is wrong about termination) KGL had the right to make spares under the Licence Agreement.
One is the use of the words "in relation to" in the definition of "Products". Mr Mill QC says that Products cannot mean only the complete Unit Machines. However this does not mean that "Products" includes Spares. The definition is of "Unit equipment" and Products includes Packages and Systems in relation to the identified Unit Machines, the 10 litre pots which are arguably units but integrate with other Unit Machines such as those identified in the Licence Agreement, and Machines which are modifications or adaptations of the Products identified.
KGL also relies on clauses 9.1, 9.2 and 5.2, which refer to "products manufactured by K-G incorporating the Products" or "any part of any Product". Again, products "incorporating the Products" or "part of any Product" would include Packages and Systems and improvements.
On 14 May 2013 Mr Tunnicliffe emailed Mr Goodwin, saying
"I think that we need to discuss the whole issue of spares as we have both probably got different takes on what our agreement means in relation to this, I cannot however leave this message [from Rocco Mastrolonardo of PCL?] as it is currently worded unchallenged"
On 15 May 2013 Mr Goodwin emailed Mr Tunnicliffe saying,
"…If we were to operate to the letter of our commercial agreement, then you make machines and we provide all the spares- no other real interpretation can be drawn. However, from day one you and I entered into a gentleman's agreement, where you could supply spares along with the equipment to help save any undue concern or confusion, especially for new customers who might get spooked by our unusual circumstances. This I see as a distinct benefit to KGL and so, a benefit to us.
Obviously we know that KGL has expanded its spares offering beyond this already extended agreement, but have effectively turned a blind eye to it. I didn't see any need to rock the boat… But we have a duty to grow and develop our business, just as you do…my hope would be that you support our line in providing spares as we do yours in providing equipment.
I believe that we have 'played a straight bat' all the way along this difficult commercial road; we pass every and all machine enquiries over to you and even actively promote your equipment when the customer expresses an interest over refurbishment/repair – I wonder how many spares enquiries we receive from KGL?"
On 16 May 2013 Mr Tunnicliffe replied,
"As I explained to you in the past, irrespective of any agreement, Kek-Gardner do not advertise or actively promote spares sales other than as part of our offerings on machine quotes or systems where clients require spares quotes as part of the offer, we are not presently set up to service this type of selling efficiently…
…in all cases the spares are either sourced from you, or if not, we pay the royalty on Kemutec heritage sales as per the agreement provisions…
In fact our total spares activity, including those from non-Kemutec heritage equipment supplied on systems is very low, historically less than 2% of our turnover per annum…"
The email from Mr Tunnicliffe does not say in terms that KGL was entitled to sell spares but he seems to have been telling his customers the opposite. In an email to one of them dated 15 November 2013 and entitled "Process Components Ltd", he said,
"Thank you both for sending this to me and for your response to them, all I can say is please feel free to deal with us on any spares with complete confidence in our ability to supply and service your requirements, I was the signatory to our agreement with PCL and this is a million miles away from what the agreement says. Maybe they are finding life tough!"
There was also a change in format in the royalty statements sent by KGL. They initially identified the customers to which Unit Machines had been sold, allowing PCL to approach them to supply spares. However at about this time KGL stopped providing this information on the royalty statements.
Accordingly, KGL was not licensed to sell Spares.
Rectification of the PCL Sale Agreement
Assuming that I am right about the ownership of the IP (and I cannot be sure as the PCL Sale Agreement and the KGL Sale Agreement are oddly drafted) the questions arise of rectification and estoppel.
Mr Mill QC relies on PCL's "inordinate delay" (Ahmad v. Secret Garden (Cheshire) Limited  EWCA Civ 1005), PCL has by its conduct and neglect, "put [KGL] in a situation in which it would not be reasonable to place [it] if the remedy were otherwise to be asserted" (KPMG v. Network Rail Infrastructure Limited  EWCA Civ 363) and that KGL cannot be restored to the position it was in before the contract was sought to be rectified (Chitty on Contracts 32nd edition 3-096). He maintains that the remedy of rectification should be refused in circumstances where, (i) the PCL Sale Agreement is more than seven years old; (ii) PCL has been aware of the terms of the PCL Sale Agreement throughout that period and has sat on its rights; (iii) the rights which are sought to be assigned by the rectification are rights which (he says) KGL has acquired as a bona fide purchaser for value. That is apart from (iv) PCL's lack of clean hands in entering into the DCA.
I do not however accept these reasons for denying rectification as KGL at all times (see for example the email from Mr Tunnicliffe to Mr Woodside of 29 June 2009 and condition (1) in the email dated 7 July 2009 from Mike Allin to Mr Tunnicliffe about a Joint Venture proposal which did not come to fruition) accepted that it was not acquiring the IP Rights, but that they were assigned to PCL under the PCL Sale Agreement instead. PCL did not know until a meeting at Mottram Hall on 15 March 2015 that KGL might take the line that it is now taking.
However I agree with Mr Mill QC that rectification of the PCL Sale Agreement is not open to the claimant for the simple reasons (a) that the parties to the PCL Sale Agreement (that is to say, KPTL) are not before the Court and (b) that Mr Goodwin made it clear that, unlike Mr McKelvey, he was not a director of PCL (he was not "entitled or authorised to make any decision to enter into an agreement on behalf of PCL") at the time of the PCL Sale Agreement so that there was no-one before the Court who was able to speak of PCL's intentions at that time. Mr Mill QC said that I should draw an adverse inference from the fact that Mr McKelvey was not called to give evidence but I have found against PCL on this point so I do not think I should do so. Mr Goodwin is the link between past and present and his evidence suffices.
Alternatively, PCL says that KGL is estopped from disputing that PCL was assigned all of KPTL's IP, with the exception of the UK name Kemutec (see the email from Mr Allin dated 7 July 2009). Mr Pritchard relies on (i) estoppel by convention, arising from clause 8.1 of the Licence Agreement and (ii) estoppel by representation, arising from the negotiations leading up to the signing of the Licence Agreement.
The requirements for estoppel by convention are set out in Republic of India v. India Steamship Co  AC 878, namely an assumption of fact or law which is shared between the parties, and an act by one party in reliance on that shared assumption, such that it would be unjust or unconscionable to resile from the common assumption. The requirements for estoppel by representation are set out in Spencer Bower and Handley on Actionable Misrepresentation 5th edition, namely (i) that a representation of fact is made by one party to another, (ii) that the party making the representation intends or knows that it is likely to induce the other party to act to his detriment and (iii) that the representation in fact induces the other party to act to his detriment. Thus both doctrines require an understanding between both parties originating from something other than the private view of one party.
However, estoppel by convention apparently merely requires that the reliance on legal rights would be unfair or unconscionable whereas estoppel by representation apparently requires that the party has relied on the representation to his detriment.
Mr Mill QC said that Mr Goodwin accepted in his evidence that Clause 8.1 of the Licence Agreement was standard wording inserted by the lawyers (but not on his instructions) and that it was of no use to him. He also said that it was not put to Mr Tunnicliffe, whose written evidence was silent on the question, that he knew that PCL was likely to rely on Clause 8.1 to its detriment. As to estoppel by representation, Mr Mill QC says it is unclear what is relied on since the representation is said to be based on "negotiations leading up to the signing of the Licence Agreement". If the relevant representation was, says Mr Mill QC, that PCL was in fact the owner of the IP licensed under the Licence Agreement, then (i) KGL did not make any such representation to PCL and (ii) PCL did not rely on any such representation where PCL had access to the PCL Sale Agreement but KGL did not. Mr Goodwin accepted that he did not give KGL a copy of the PCL Sale Agreement. If however, said Mr Mill QC, the relevant representation was that KGL did not dispute PCL's ownership of the IP, then (i) that would only be a representation as to KGL's state of mind at the time and (ii) there is no evidence of reliance, let alone reliance to its detriment. It cannot be said, says Mr Mill QC, that KGL represented that it would not dispute PCL's ownership of the IP even if information came to light justifying it.
Mr Pritchard relied on Amalgamated Investment & Property Co Ltd (In Liquidation) v Texas Commerce International Bank Ltd  QB 84 where Lord Denning MR said (at ),
"… the parties by their course of dealing adopted a "conventional basis" for the governance of the relations between them, and are bound by it…They are bound by the "conventional basis" on which they conducted their affairs. The reason is because it would be altogether unjust to allow either party to insist on the strict interpretation of the original terms of the contract - when it would be inequitable to do so, having regard to dealings which have taken place between the parties. …It is particularly appropriate here - where the judges differ as to what is the correct interpretation of the terms of the guarantee. The trial judge interpreted it one way. We interpret it in another way. It is only fair and just that the difference should be solved by the course of dealing - by the interpretation which the parties themselves put upon it - and on which they conducted their affairs for years."
In the same case, Eveleigh LJ (at p.126) quoted the then current edition of Spencer Bower,
"When the parties have acted in their transaction upon the agreed assumption that a given state of facts is to be accepted between them as true, then as regards that transaction each will be estopped against the other from questioning the truth of the statement of facts so assumed."
Mr Pritchard also relied on Lord Steyn in Republic of India v. India Steamship Co  AC 878, (cited with approval by Carnwath LJ in ING Bank NV v. Ros Roca SA  EWCA Civ 353;  1 WLR 472 at ) at p.913-4,
"It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of fact or law, the assumption being either shared by them both or being made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption…"
Again, Mr Pritchard relied on the decision of the Court of Appeal (Longmore LJ, Jackson LJ and Hildyard J) in Christopher Charles Dixon EFI (Loughton) Limited v. Blindley Heath Investments and Ors  EWCA Civ 1023, at ,
"Estoppel by convention is not founded on a unilateral representation, but rather on mutually manifest conduct by the parties based on a common, but mistaken, assumption of law or fact: its basis is consensual. Its effect is to bind the parties to their shared, even though mistaken, understanding or assumption of the law or facts on which their rights are to be determined (as in the case of estoppel by representation) rather than to provide a cause of action (as in the case of promissory estoppel and proprietary estoppel); and see Snell's Equity 33rd ed at 12-012. If and when the common assumption is revealed to be mistaken the parties may nevertheless be estopped from departing from it for the purposes of regulating their rights inter se for so long as it would be unconscionable for the party seeking to repudiate the assumption to be permitted to do so (and see, for example, The "Vistafjord"  2 Lloyds Rep 343 at 353 in the judgment of Bingham LJ, as he then was)."
Accordingly, said Mr Pritchard, PCL and KGL continued to operate under the Licence Agreement for some years showing a common assumption that PCL owned the IP and therefore that KGL needed a licence to use that IP in order to manufacture and sell Unit Machines.
Unconscionability and indeed detriment is shown in the following ways,
- PCL, by entering into the Licence Agreement, put itself in a position where it licensed KGL exclusively so that it was vulnerable to KGL, whether in refusing to fulfil its obligations or simply failing.
- PCL was lulled into taking no steps to protect itself from a later attack on the ownership of the IP, by developing new IP or by starting pre-emptive litigation.
KGL now says that it was or may have been in a position to resile from the common understanding even before it entered into the Licence Agreement. Mr Mill QC says that KGL was only recently given access to the PCL Sale Agreement and therefore it would not be unconscionable for it to resile from the Licence Agreement. However, KGL made no attempt to address the issue. It chose not to ask for a copy of the PCL Sale Agreement. In Mr Tunnicliffe's written evidence he said that until early 2015 KGL believed that PCL did own all the IP. However, in oral evidence he said that he had doubts about this from 7 July 2009, when he read the KGL Sale Agreement in draft. He said (Transcript Day 4, p. 20-1),
- Mr Pritchard says that the royalties under the Licence Agreement were below the market value (or "peppercorn") but there was no evidence about this so I shall disregard it.
"That plainly…was at variance with what my previous belief was. My previous belief was that the IP would belong to EPIC/PCL."
He did not raise the matter with Mr Woodside or his firm or PCL or Mr Beshoff, for the pragmatic reasons that (a) the terms of the draft KGL Sale Agreement were "interesting" as KGL had exclusive rights in the Unit Machines listed under "Products" which prevented PCL from selling Unit Machines and (b) KGL wanted to ensure it got a licence from PCL and was afraid that if it raised the issue it would not do so: see Transcript Day 4, p. 26-7. Mr Tunnicliffe confirmed that KGL made no later offer. If PCL had been told the true position they could at that stage (as the KGL Sale Agreement was still only in draft) have obtained a confirmatory deed from the administrators.
Further, from the autumn of 2014 KGL was dealing with PCL on the basis of the acknowledgement in the Licence Agreement and that a licence was necessary, while on the other hand negotiating with Kason on the basis that PCL might not own the IP.
Turning to estoppel by representation, if a party has so acted that the fair inference to be drawn from his conduct is that he consents to a transaction to which he might have objected, he cannot be heard to question the legality of the transaction as against persons who have acted on the view that the transaction was legal: see Handley on Estoppel by Conduct and Election (2nd edition) at 9-030, Sarat Chunder Dey v. Gopal Chunder Laha (1892) LR 19 IA 203 as applied in Re Eaves  Ch 109 (referred to in the argument in Texas Commerce at p. 113). Handley says (citing Clark v. Adie (No 2) (1877) 2 App Cas 423 and Lawes v. Purser (1856) 6 E&B 930),
"A licensee, who has used the intellectual property under his licence, like a tenant or bailee, is estopped in respect of such use from disputing his licensor's title and the validity of the intellectual property [as opposed to a licensee who has never used the licence]."
Mr Mill QC relies on Lowe v. Lombank Limited  1 WLR 196 at p.205,
"In order to found an estoppel…the defendants must show: (1) that it is clear and unambiguous; (2) that the plaintiff meant it to be acted upon by the defendants or at any rate so conducted herself that a reasonable man in the position of the defendants would take the representation to be true and believe that it was meant that he should act upon it…; (3) that the defendants in fact believed it to be true and were induced by such belief to act upon it."
He says that mere silence cannot amount to a representation. However, Mr Pritchard relies on the passage in Bingham J's judgment in Tradax Export SA v. Dorada Companied nervier of Panama SA (The Lutetian)  2 Ll Rep 140 (at 157),
"The duty necessary to found an estoppel by silence…arises where a reasonable man would expect a person against whom the estoppel is raised, acting honestly and responsibly, to bring the true facts to the attention of the other party known by him to be under a mistake as to their respective rights and obligations."
Mr Mill QC says (in Transcript Day 5 p. 129-131),
"You cannot possibly describe the state of Mr Tunnicliffe's knowledge as at July 2009 as amounting to knowledge that PCL was under a mistake as to their rights and obligations…. Mr Tunnicliffe is on the other side of a legal transaction with PCL. On what possible basis was it incumbent on him to disclose to them the doubt that he had in his mind? It clearly wasn't and no reasonable person in Mr Tunnicliffe's position would have done."
Thus Mr Mill QC says that there was no legal duty on KGL to speak on the point on which the silence of KGL misled PCL, and as for conduct, there was no relevant reliance as KGL's representation was only as to present intention and it was true. PCL has, he says, brought the whole matter upon itself by purporting to terminate the Licence Agreement. However, KGL operated under the Licence Agreement for years without demur.
I do not see why there was no legal duty to speak within the Lutetian test (confirmed by the Court of Appeal in ING Bank NV), however understandable it was for Mr Tunnicliffe to act in the manner that he did. In any event there were representations in the Licence Agreement itself so that it is not really a question of estoppel by silence. It seems to me obvious that Mr Tunnicliffe knew that a mistake had been made and that it would be unfair and unconscionable to ignore the terms of the Licence Agreement in circumstances where Mr Tunnicliffe was surprised by the terms of the draft KGL Sale Agreement but said nothing about them. As Christopher Clarke J said (at 142) in Raffeisen Zentralbank Osterreich AG v. Royal Bank of Scotland  1 Ll Rep 123,
"[A] helpful test is whether a reasonable representee would naturally assume that the true state of facts did not exist and that had it existed, he would have been informed of it."
I have however to deal with the allegation that PCL did not come with clean hands because of the DCA. However, (a) I regard KGL as also acting in an underhand manner, taking advantage of the terms of the PCL Sale Agreement when it knew that this was not the assumption made by the parties, so that it was a matter of six of one and half a dozen of the other and (b) although PCL was a party to the DCA (and thus Mr Goodwin presumably gave instructions as to the DCA's contents) that is not the reality of the matter and I do not think that blame should fall on Mr Goodwin or PCL for the actions of the lawyers.
Mr Mill QC's junior, Mr Cleaver, also raised the following point. He said that if Mr Tunnicliffe had mentioned the fact that the KGL Sale Agreement had been in the wrong form, it would not have been granted but KGL would have been entitled to carry on the business anyway without paying any royalty so that there was no detriment to PCL or benefit to KGL. However, as Mr Pritchard pointed out, this depends on certainty as to ownership of the IP. He said,
"When one goes…through the chronology…it doesn't work when one looks at the reality of what's actually happening. It's put on a series of hypotheticals that rely on certainty as to ownership. Once one accepts that in the business relationship at the time, it was not a question of certainty as to ownership, it was a question of certainty as to what the parties would do, then the point falls away."
I agree. In any event the point depends on the hypothesis that KGL is correct that it acquired the IP necessary to operate the Unit Machines business. I have decided that it did not. Estoppel by convention lies, and indeed estoppel by representation. I cannot believe that the test for the two is different, requiring unfairness for the one and detriment for the other. It seems to me plain that it was unfair and unconscionable for KGL to comply for so long with the Licence Agreement without any query until KGL was taken over by Kason.
I find that KGL is permanently (like a tenant or bailee) estopped from denying that PCL owns the relevant IP and also that the Licence Agreement has been terminated. KGL is entitled to the IP created by KGL when creating the improvements (see [7.2] of the Licence Agreement) although I note that Mr Bayley at first said that he would not have referred to KPTL's drawings when making improvements to form the K1100C Unit Machine. However he eventually conceded that certain parts had been copied: see Transcript Day 4 p.84, 87, 88 and 89.
Clause 2.5 of the Licence Agreement grants KGL an "indefinite" royalty-free licence to use "KEK-Gardner" in its corporate name. However it seems to me that "indefinite" can only mean for the term of the Licence Agreement. Once the Licence Agreement is terminated, then so is the licence to use the name.
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