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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Electro Hydraulic Technology Ltd v Husco International Inc & Anor [1997] EWCA Civ 2409 (3rd October, 1997)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/1997/2409.html
Cite as: [1998] 1 All ER 403, [1997] EWCA Civ 2409
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ELECTRO HYDRAULIC TECHNOLOGY LIMITED v. HUSCO INTERNATIONAL INC and HUSCO INTERNATIONAL LIMITED [1997] EWCA Civ 2409 (3rd October, 1997)
Case No: QBENF 1999/0255/A2
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(HIS HONOUR JUDGE MADDOCKS)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 28th July 2000
LORD JUSTICE KENNEDY
LORD JUSTICE POTTER
and
LORD JUSTICE MANCE
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ELECTRO HYDRAULIC TECHNOLOGY LIMITED |
Claimant | |
- and - |
||
(1)
HUSCO INTERNATIONAL INC |
Defendants |
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Peter Smith QC and Eric Shannon Esq (instructed by Messrs Hill Dickinson, Stockport, for the Claimant)
Richard Field QC and Charles Béar Esq (instructed by Lane & Partners, London, for the appellants)
- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE POTTER:
INTRODUCTION
1. This case concerns an agreement relating to the development and exploitation of an electronically controlled high-performance valve known as a Linear Motor Valve, for use in hydraulic suspension systems in the automotive industry. It offered enhanced performance over the traditional proportional solenoid valves hitherto used in that industry. It was the invention of a Mr William Jennins, an electrical engineer and inventor who, between 1981 and 1987 had been employed by the second defendant, Husco International Limited, the English subsidiary of the first defendant Husco International Inc ("Husco"), an American company incorporated in Wisconsin USA which had a well established business in the manufacture of hydraulic control systems for plant and heavy vehicles. In 1992 Husco was looking for an opportunity to break into the automotive field and entered into an agreement with the claimant, Electro-Hydraulic Technology Limited ("EHT"), a company which had been incorporated by Mr Jennins after leaving his employment with Husco for the purpose of developing and exploiting the Linear Motor Valve and owning the various patents he had applied for in relation thereto.
2. At the end of 1992, Mr Jennins had approached the President of Husco, Mr Ramirez with a proposal that EHT enter into a collaboration agreement for the further development and manufacture of the EHT valve as it then existed. That approach led to a Confidentiality Agreement dated January 14, 1993 under which EHT disclosed information concerning the technology relating to the valve. This was superseded by an agreement described as "Services Agreement with Option for Exclusive License" (the "Services Agreement"). The Services Agreement contained as Exhibit D the form of Exclusive Licence which would become effective on the date on which Husco's option was exercised. On 8th August 1996 Husco received a letter of Intent from Mercedes Benz of Germany accepting Husco's quotation for supply of the EHT valve unit for the new Mercedes S Class car, following which Husco exercised its option on 22nd August 1996.
3. Unfortunately, the relationship between the parties deteriorated thereafter. The EHT valve unit in its then state of development was considered insufficiently robust by Mercedes Benz for the demands which would be made upon it in service. As a result Husco developed a somewhat different valve of its own design ("the Husco valve") to meet Mercedes' requirements. At the time, the Husco valve was seen by the parties as a development or continuation of the EHT valve or, at any rate, they were apparently content to treat it as such for the purposes of EHT's remuneration under the Services Agreement and/or the prospective royalties under the Exclusive Licence. However, as the parties now acknowledge, it was in fact made to a different design, outside the protection of the EHT patents. As developed, it proved acceptable to Mercedes. The result was that Husco suspended further development of the EHT valve, concentrating its efforts upon the Husco valve and the requirements of Mercedes.
4. By letter dated 9th December 1997, Mr Jennins gave a sixty-day formal notice by EHT under the Exclusive Licence, asserting non-performance by Husco of its obligation under Clause 14 to use its best efforts to promote the sale and distribution of the EHT valve. This was done with a view to activating Clause 15, which gave EHT a right to terminate upon non-performance provided that such non-performance was not cured within sixty days of the notice. The validity of that notice became the subject of arbitration before an American arbitrator under the arbitration clause in the Exclusive Licence. The result of that arbitration was not known at the time of the trial below. However, on 28th December 1998, before judgment was given, by an award made in that arbitration Husco obtained a declaration that the purported termination by EHT of the Exclusive Licence was ineffective, Husco not having been in breach of its best endeavours obligation in all the circumstances of the case. A copy of the reasoned arbitration award was sent to the judge, pursuant to the agreement of the parties, but strictly speaking it was not relevant to the issues which were before him and it played no material part in his reasoning when judgment was given.
5. The dispute in this case concerned the purported termination of the Services Agreement by EHT, following which EHT claimed (1) damages for breach of contract measured by reference to the loss of the monthly remuneration of £3,000 and (2) an injunction to enforce Clause 10(b) of the Services Agreement by which Husco warranted that for a period of four years from termination it would not develop manufacture or market Linear Motor Valves; alternatively damages in lieu. EHT claimed that the continued manufacture and marketing of the Husco valve was a breach of Clause 10(b). By its defence Husco contended (1) that the Services Agreement had not been terminated; alternatively that, if it was terminated, Husco was discharged from further performance without liability for damages; (2) that on the true construction of Clause 10(b), the term `Linear Motor Valve' was to be read as confined to valves of the type described by and/or the product of the Linear Motor Valve Technology the subject of the agreement, the Husco valve not being such a Linear Motor Valve; alternatively, rectification of the Services Agreement to achieve that result (3) alternatively a declaration that Clause 10(b) was void as being an unreasonable restraint of trade.
6. Issue (1) depended upon a close examination of the posture of Husco and the correspondence leading up to EHT's termination of the agreement purportedly in accordance with its terms, to which I will turn in more detail below. The judge found that EHT had failed to follow the machinery laid down for termination within the Services Agreement but that, nonetheless, there had been a repudiation by Husco of the Services Agreement. On that basis he found in favour of EHT in relation to issue (1) and, in that respect, gave judgment for damages to be assessed. He also found for EHT on issue (2), holding that the expression `Linear Motor Valves' was a generic description unrestricted to valves of the type described in or the product of the EHT technology, the only sensible purpose of the clause being to exclude Husco from competing by developing or marketing any other kind of linear motor valve including the Husco valve. So far as issue (3) was concerned, he found that, on such wider meaning, while the clause was one in restraint of trade, it was nonetheless reasonable as being reasonably necessary to protect EHT against the use of its technology and know-how imparted to Husco being used by Husco to develop or promote a competing product.
7. The issues in this appeal were agreed by the parties to arise under the following headings:
(1) At the time of its purported termination, was EHT itself in breach?
The context in which it is necessary first to decide this issue will become apparent below.
(2) If EHT was not in breach, was it entitled to, and did it, terminate for a repudiatory breach by Husco?
(3) The meaning of "Linear Motor Valves" in clause 10(b) of the Services Agreement.
(4) Whether EHT was estopped from asserting the broader meaning of clause 10(b),
(5) Assuming the broader meaning, whether the restraint in clause 10(b) was enforceable.
(6) Whether there were equitable defences to the grant of an injunction.
THE SERVICES AGREEMENT
8. The structure of the Services Agreement was as follows. By Clause 15 it
was stated to be the Entire Agreement between the parties and to incorporate by
reference the Confidentiality Agreement contained in Exhibit A, which
superseded that of January, 1993. It stated that no modification of the
Agreement or waiver of any of its terms should be binding unless in writing and
signed by Husco and by Mr Jennins for EHT
"Except that, in the event that the option is exercised by Husco for the
Exclusive License, the terms and conditions of the Exclusive License shall
control and take precedence over any inconsistent terms and conditions of this
Services Agreement."
9. In addition to Exhibit A, the following Exhibits were attached. Exhibit B,
which listed two Patent Applications, the second of which (No. GB9218610.5) was
entitled "Linear Motor Valve"; Exhibit C, entitled Technical Details of
Suspension Control Valve and Proportional Control Valve - 4 Port; Exhibit D,
the Exclusive License Agreement.
10. The recitals to the Services Agreement read as follows:
"WHEREAS, WILLIAM STUART JENNINS (hereafter "MR JENNINS"), the director of EHT
has contacted Husco in regard to development of technology applicable to
electrically controlled hydraulic valves and more particularly described herein
as Linear Motor Valve Technology;
WHEREAS MR JENNINS has applied for patent grants relating to Linear Motor Valve
Technology on behalf of EHT, as more particularly identified in Exhibit B;
WHEREAS, EHT is sole owner of the patent applications and Linear Motor Valve
Technology free and clear of all liens and encumbrances;
WHEREAS, HUSCO offers financial supports specified herein for development of
manufacturable products from the Linear Motor Valve Technology;
WHEREAS, HUSCO is desirous of acquiring an option to an exclusive worldwide
licence for manufacturing, sale and use of such Products within HUSCO's
markets;
WHEREAS, HUSCO and EHT have made a letter Confidentiality Agreement on January
14, 1993, covering the disclosure of information related to the Linear Motor
Valve technology;"
11. Clause 1 defined the following terms for the purposes of the
agreement and Licence referred to in exhibit B as follows:
"a) The "Linear Motor Valve Technology" of MR JENNINS and EHT shall mean all
drawings, written descriptions, documents and written and oral know-how
communicated by MR JENNINS and EHT for manufacturing and using a hydraulic
valve in which a spool is directly driven by a linear motor .. to control
either flow or pressure or both. The "Linear Motor Valve Technology" also
includes an associated electronic amplifier card.
b) "Product" shall mean any and all components and hydraulic valve assemblies
designed by MR JENNINS and or EHT that incorporate the "Linear Motor Valve
Technology", however, "Product" shall not extend to larger hydraulic systems
and equipment in which such components and assemblies are used."
12. The following Clauses of the Services Agreement are relevant to its
operation and termination for the purposes of this appeal.
"2. Patent Disclosure. Prior to signing this Agreement, EHT shall have
disclosed to HUSCO, any and all patent applications of EHT relating to the
"Linear Motor Valve Technology", including the Patent Applications listed in
Exhibit B
3. Product Disclosure
a) within sixty (60) days of the signing of this Agreement, EHT shall transmit
to HUSCO, such drawing, estimates and other information (including a list of
all materials) as shall reasonably be required by HUSCO for determining
reasonably accurate estimates of the cost of manufacture of a product
incorporating "the Linear Motor Valve Technology" for an application selected
by HUSCO ...
b) Nothing contained in this Agreement shall operate in any way to grant to
HUSCO any form of License to manufacture any Product. Such License shall only
be granted by virtue of Clause 5 hereof.
4. Payments for Services and Expenses. HUSCO retains EHT as independent
contractor to perform consultancy and engineering services and product
development related to the "Linear Motor Valve Technology. HUSCO shall
compensate EHT for the services and non-travel expenses of MR JENNINS and other
EHT employees in support of this effort in the amount of £2,000 ... per
month, for the first six months of this Agreement, and in the amount of
£3,000 .. per month thereafter for the term of this Agreement. Payments
shall be made within ten (10) days after the end of each respective month.
HUSCO shall also reimburse EHT for the travel expenses of MR JENNINS and other
EHT employees ... incurred on travel away from their place of business in
Frodsham .. to visit customers, when requested or required by HUSCO, such
reimbursement to be made promptly upon submission of expense reports.
5. Option for Exclusive License. At any time during the life of this
Agreement, HUSCO may exercise an option for an Exclusive License (Exhibit D to
this Agreement), extending worldwide, within HUSCO's Field of Use for any and
all Products incorporating the "Linear Motor Valve Technology" of MR JENNINS
and EHT by delivering written notice of the same to EHT and EHT shall
acknowledge, in writing, receipt of such notice within fourteen (14) days
thereof.
6. EHT Duties. MR JENNINS agrees that he shall perform individually
such services as are reasonably required by HUSCO. If for any reason MR
JENNINS cannot perform such services, he undertakes to nominate a substitute
and shall provide HUSCO relevant qualifications of the substitute.
7. Termination
a) This Agreement shall be effective for a term of six (6) months from the date
of this Agreement at the end of such term either party .. may terminate by
giving written notice, such termination to be effective one (1) month from the
effective date of the written notice, the Agreement expiring not earlier than
30 June 1994. Upon exercise of the license option, HUSCO's right to terminate
this Services Agreement shall be suspended until such time as royalties on
sales for any consecutive twelve months reach or exceed £36,000 for the
twelve months period.
b) This Agreement may otherwise be terminated:
i) Automatically upon expiration of the term or upon insolvency of either
party;
ii) by either party in the event of material breach by the other which (if
remediable) shall not have been rectified within thirty (30) days or such other
longer period as the other party shall have required by prior notice in
writing:
iii) Upon one (1) month's notice i f following a written request by EHT, HUSCO
fails to make any payments as provided for under this Agreement.
......
9. Ownership of Technology. MR JENNINS represents that 1) he is
authorised to make this Agreement on behalf of EHT, 2) that EHT is the owner of
the "Linear Motor Valve Technology" ...
10. Good Faith (a) during the term of this Agreement, EHT agrees not to
perform for a third party any services which are in HUSCO's Field of Use under
this Agreement without first advising HUSCO in writing of the nature of the
services contemplated and the party for whom they are to be performed.
(b) HUSCO warrants that, neither it nor any of its affiliates excluding Kayaba
Industry Co ... shall not (sic) engage in the development, manufacture or
marketing of Linear Motor Valves for a period of forty-eight (48) months from
the Date of any termination or expiration of the Services Agreement.
[It is common ground that the double negative employed in sub-clause (b) was a
mistake and that the word "not" should be deleted]
...
11. Termination for Non-Payment. If HUSCO fails to make any payment to
EHT under this Agreement, EHT shall notify HUSCO in writing, and upon
continuing failure of HUSCO to make the payment within one (1) month from
written notice, EHT may terminate this Agreement on written notice.
...
16. Notices. Notices under this Agreement shall be in writing. Notices
sent by registered mail or certified mail shall be effective when mailed. All
other notices shall be effective when received by the party to whom notice is
directed. Notices shall be addressed to parties at the following addresses
..."
13. So far as relevant, the structure and terms of the Exclusive License in
Exhibit D (which under Clause 15 of the Services Agreement took precedence over
the terms of the Services Agreement) were as follows.
Clause 1 of the License repeated the relevant definitions in the Services Agreement and added a definition as follows:
"d) "Licensed Intellectual Property" means such patents and patent applications
of EHT and MR JENNINS which describe the Linear Motor Valve Technology, such
patents and patent applications being identified in Exhibit L-1 hereto [which
was in the form of Exhibit D to the Services Agreement] and including any
subsequent patent applications or patents resulting therefrom.
e) "Licensed Products" means all products and methods for making such products
which are covered by a patent claim in any of the Licensed Intellectual
Property ...
..........
f) "Improvements and Extensions" in relation to the Licensed Products, shall
mean all inventions and technology which would have an effect in increasing or
decreasing sales of the Licensed Products."
The grant was contained in Clause 2 and Clause 3 as follows:
"2. License Grant. EHT hereby grants to HUSCO the exclusive right
world-wide, to make, use and sell the Licensed Products in HUSCO's Field of
Use, the grant extending to and including all Licensed Intellectual Property,
and Improvements and Extensions of the said Licensed Products. Such Exclusive
License Grant to HUSCO includes a right of HUSCO to sublicense within its Field
of Use.
3. Term. The term License shall extend until expiration date of the
last to expire of the parents and patent applications included in the Licensed
Intellectual Property or if no patents issue for a term of fifteen (15) years
from the Date of this License. Upon expiration of the terms of this Agreement
HUSCO shall have a paid-up royalty-free, perpetual, exclusive license within
its Field of Use and Territory for all Licensed Products and under all Licensed
Intellectual Property and Improvements and Extensions of the said Licensed
Products."
14. Clause 4 of the license provided for termination for breach by either party of any obligation which remains unremedied within 90 days of a written notice. Clause 6 provided for the payment of the royalties on Licensed Sales as set out in Schedule 1, the royalty being 5% on the selling price for annual net sales up to 500,000 and 3% thereafter, with provision for a non-refundable advance of £20,000. Clause 11 dealt with improvements. Each party was to provide from notice to the other of any improvements or extensions of the linear motor valve technology which it made during the life of the License. EHT granted to Husco the same exclusive license in respect of such improvements in extensions as originally granted, and EHT was, in turn, to be entitled to a non-exclusive licence outside Husco's Field of Use at a royalty rate to be agreed between EHT and Husco. By Clause 14 Husco was to use its best efforts to promote the sale and distribution of the Licensed Products within the territory in which it was present or represented. Clause 15 gave either party the right to terminate for non-performance of any of the provisions of the License following service of, and non-compliance with, a sixty-day notice to cure the non-performance.
THE BACKGROUND TO THE PURPORTED TERMINATION
15. Following the signing of the Service Agreement, both sides co-operated in
the expenditure of considerable time and effort to obtain a customer in the
motor manufacturing industry. Mr Jennins initiated the interest of Mercedes in
March 1994 and, by April 1995 the work on development was being directed
specifically to Mercedes' new S Class car. Between June 1995 and July 1996
some ten prototypes were built and the stage was reached by which Mercedes
sought quotations for the EHT valve. On 8th August 1996 Husco
received a Letter of Intent in relation to a purchase order for the development
and later delivery of a Valve Unit at (US)$199.80 per unit for 36,000 units per
year over three years of which (US)$53.75 was the price for the EHT valve, the
remainder being for Husco parts. Accordingly, on 22nd August 1996
Husco exercised its option and granted Mr Jennins an additional £50,000
advance on royalties, incorporated into a `Memorandum of Understanding' dated
August 31st 1998 by which Husco agreed to pay EHT a commission of
0.5% for five years on non-EHT components on the Mercedes orders and the same
on Rover orders using non-EHT technology.
16. Unfortunately, problems developed. In particular the spider spring used
within the EHT valve had far too short a working life to satisfy the
requirements of Mercedes. In addition, the valve was required to work off 1
amp of current rather than 3 amps. In the event, Mr Van Weeldon of Husco
sketched out a new and simpler design dispensing with the deflector valve which
was characteristic of the EHT prototype and incorporating two helical springs
in addition to the spider springs present in the EHT valve. The whole
arrangement was different; whereas the permanent magnets the presence of which
was essential to the functioning of a linear motor valve were, in the EHT
prototype, situated in the moving armature within the valve, they were, in Mr
Van Weeldon's design rendered part of the fixed assembly. The result was that,
as thereafter developed, the Husco valve had fewer component parts and was
simpler, more reliable in operation and less expensive to manufacture then the
EHT valve. However, at the time it was apparently treated by all concerned as
a development from the EHT valve, it having been developed as a continuation of
the project to meet the Mercedes order. From August 1996, work effectively
ceased on the EHT valve and was concentrated on the Husco valve, Mr Jennins
playing a decreasing part and being called on less and less in relation to the
development work.
17. Mr Jennins' relations with Husco became soured in the course of
negotiations which he initiated for a more formal agreement in relation to
sales commission on non-EHT products in expansion of the Memorandum of
31st October 1996. He was concerned that the Husco valve now being
developed did not have the advanced technology and performance of the EHT valve
which it was his objective to promote; yet the lack of development work on the
EHT valve inhibited progress with his finding other customers for it. Between
24th June 1997 and 7th July 1997 Mr Jennins wrote to
Husco reporting on four potential customers for the EHT valve whom he did not
identify, referring to their interest as projects A, B, C and D. He received
no reply save in relation to A, responding promptly thereto.
18. On 22nd July 1997 Mr Ramirez wrote to Mr Jennins terminating the
commission agreement for sale of Husco products other than to Mercedes and
Rover. Despite negotiations re-opening, discussions were finally terminated by
Husco on 3rd October 1997. On 13th November 1997, prompted (as the
judge found) by a concern that royalties might not be payable on the Husco
valve as now developed, Mr Jennins wrote to Mr Gannon, Husco's finance officer,
asking for an account of royalties. No reply was received and, on16th
November, Mr Jennins wrote to Mr Wilke seeking to resolve differences over the
performance of the valve being supplied to Mercedes and taking the point that
sale of the `Product' was a Husco activity, EHT having no obligation to be
involved in such sales. Having again received no reply, on 18th
November 1997 Mr Jennins wrote to Mr Ramirez, giving `formal notice' under
Clause 15 of the Exclusive License of breach by Husco of its obligation under
Clause 14 to use its best efforts to promote the sale of the Licensed Product.
On 19th November 1997 Mr Wilke riposted by quoting Clause 4 of the
Services Agreement as defining Mr Jennins' obligations and saying:
"In the past, I asked you to find the who, what, when and how many for the
linear market. I have not seen anything for some time and according to what
Jim [i.e. Mr Gannon] is telling me, there should be no reason for you not to
proceed in doing that for me."
The judge held that the only occasion on which Mr Wilke had ever made a request
on those lines was in April 1995, to which Mr Jennins had promptly replied and
that Mr Wilke had overlooked his receipt of the letters for projects A, B, C
and D in relation to which his only request for information had met with an
immediate response from Mr Jennins. On 21st November 1997 Mr
Jennins passed on a further enquiry and, on 24th November, wrote
giving a report summarising the various projects and explaining his reasons for
not naming the customers, which reasons he said (and the judge held) had in any
event already been explained to Mr Wilke on a previous occasion which the
latter could not remember.
19. On 9th December 1997, Mr Jennins wrote a further letter to Mr
Ramirez complaining that Husco was in breach of the best efforts clause in the
License (Clause 14) and giving a 60-day notice to cure pursuant to clause 15.
The letter was stated to be a formal notice under clause 19 of the Exclusive
License Agreement. The immediate response of Husco was, without notice, to
direct that the monthly payment of £3,000 due under the Services Agreement
on 10th December 1997 (in respect of the month of November) be
stopped and on 11th December Mr Wilke wrote stating that Mr Jennins
had not supplied all the customer information Mr Wilke was looking for. On
17th December 1997 Mr Jennins replied to Mr Wilke and sent a letter
to Mr Gannon noting that the payment had not been received and asking to be
advised when payment was to be made. However, because the letter was not
marked "Attention A.A. Ramirez, President", it did not constitute formal notice
of such non-payment to Husco (Clause 16 of the Services Agreement).
20. On 22nd December 1997, Husco's lawyers wrote to EHT. The letter
asserted a failure by EHT to comply with Clauses 4 and 6 of the Services
Agreement. It stated:
"The purpose of this letter is to notify you formally that you have failed to
provide services as required by the Services Agreement, and that no further
payments will be made by HUSCO to EHT under the Services Agreement until those
services are provided on an ongoing basis. You have provided no services under
the Services Agreement for the last seven months. HUSCO has asked you
repeatedly for assistance in development of the linear motor valve business,
including requests that you provide leads for product application based on that
technology. HUSCO has the right to request these services under Section 6 of
the Services Agreement. Despite these repeated requests, you have failed to
provide these or any other services.
This letter is not notice terminating the Services Agreement. In order
for payments to resume under the Services Agreement, however, you must commence
and continue the performance of the requested services and provide a weekly
report to HUSCO of your activities in that regard .... .
Our client regrets that this action has become necessary, but your failure to
perform services and comply with the Services Agreement has left HUSCO with no
other choice."
21. On 31st December 1997, Mr Jennins replied expressing his astonishment at
the contents of the letter, asserting that he had never refused to assist Husco
in any way he could, observing that Husco's refusal to continue the contract
payments appeared to be a curious and inappropriate response to his own notice
served in relation to the best efforts clause under the Exclusive License and
ending:
"Finally, if your clients are seriously intent on maintaining their position
that I have "repeatedly" been asked for assistance "in development of the
linear motor valve business, including requests that you provide leads for
product applications based upon that technology", perhaps you will be good
enough to let me know, who it is said made such requests, when and in what
manner. As the correspondence will reveal, I have been meticulous in dealing
with any and all queries which have been directed to me by your clients. Your
client's continued refusal to pay monies due to this company represents a
breach of the Services Agreement in relation to which I reserve the Company's
rights and indeed my rights."
22. On 30th January 1998 EHT wrote to Husco giving formal notice
under Clause 16 of the Services Agreement as follows:
"By this letter we hereby give you one month's notice under Clause 7(b)(iii) of
the termination of the above agreement by reason of your Company's failure to
make payment of monies due under the said agreement.
Our written request that the monies due be paid was directed to you by our
letter (by fax) dated 17th December 1997. Despite our request as to
your payment intentions, no response has been received to that fax."
Upon the same day, Husco which had plainly decided at that stage to retreat
from its decision to withhold payment faxed to EHT a letter in the following
terms:
"This letter is to notify you that HUSCO International has informed its bank to
wire transfer 6,000 GBP to your account. These payments are made for the
period of December 1997 and January 1998 pursuant to paragraph 4 of the
Services Agreement between HUSCO and EHT. You are also notified that HUSCO
reserves the right to reclaim these payments, any prior payments and any future
payments made pursuant to the Services Agreement for which EHT has failed to or
fails to perform the services as requested by HUSCO."
The Husco fax was transmitted after the mailing of EHT's notice which, under
Clause 16 of the Services Agreement was effective when mailed. However,
Husco's payment of the £6,000 had in fact been made as between the
parties' bankers by electronic transfer prior to the mailing of the EHT
notice and, if EHT had checked the position before it sent its notice, it would
no doubt so have ascertained. It is to be observed that the payment made by
Husco was in fact in respect of monies due to EHT for the month of November and
December 1997 and not, as stated, for the months of December 1997 and January
1998: but, nothing turns upon that point, the sums paid being all that was
payable at the time of payment (the next payment in respect of January 1998 not
being due until 10th February 1998).
23. On 5th February 1998 Husco wrote setting out its position. It
continued to maintain that it had repeatedly asked that EHT and Mr Jennins
identify and communicate to Husco market opportunities for product applications
and provide monthly reports regarding customers visited, market opportunities
and the status of projects which customer specifications had identified, and
that EHT had failed to do so thereby hampering Husco's efforts to sell licensed
products. Husco emphasised that the information was important and that they
were willing to continue the payments under the Services Agreement in order to
obtain the services. The letter stated that Husco had performed all its
obligations under the Exclusive License Agreement and the Services Agreement
and expected EHT to perform its obligations under both agreements. It
requested that EHT provide Husco with a summary of the services performed for
Husco during the last four months and that Husco would make no additional
payments until it received such summary of services and verification in writing
that EHT had complied with Section 10(a) of the Services Agreement. It
reserved the right to reclaim payments made to EHT under the Services Agreement
to the extent that EHT had been in breach of that agreement.
24. On 18th February 1998 EHT replied setting out its position. In
particular it stated as follows:
"The reality is that the Services Agreement has already been lawfully
terminated in accordance with its terms by reason of your companys'
failure to pay monies when due. Your last minute attempt to recover the
situation does nothing to affect this. I think you know very well that the
notice would not have been served under this agreement if the payment
had been slightly late for some more straightforward reason such as, for
example, banking delays. In fact, you chose to adopt the position that EHT was
in breach of the agreement and that is why you stopped paying. In these
circumstances, it can hardly come as a surprise to you that EHT served the
notice it did. (emphasis added)
25. By that time, the sixty-day period under the notice terminating the
Exclusive License had expired on 7th February 1998. In addition,
Husco had, as it indicated it would, withheld the payment of £3.000 due on
10th February 1998. On 28th February 1998 the period of
one month specified in EHT's notice under Clause 7(b)(iii) of the Services
Agreement expired. On 3rd March 1998 EHT wrote a further letter
asking whether it would receive a response to its letter of 18th
February, but it did not do so and the matter did not progress further on
either side until issue of the writ on 1st May 1998.
THE PLEADINGS
26. EHT issued a writ on 1st May 1998 specially endorsed with a
statement of claim. It relied simply upon the letter dated 30th
January 1998 as one month's notice of termination validly given under Clause
7(b)(iii) in respect of non-payment of the monthly fee of £3,000 due on
10th December 1997 and 10th January 1998. On
4th August 1998 the claim was amended to rely also upon the letter
of 17th November 1997 as notice of the defendants failure to make
the payment due for November by 10th December 1997. It was also
pleaded that by the terms of the Services Agreement the time for making payment
was of the essence, alternatively became of the essence after the service of
the notice on 17th December. It further relied upon Husco's
lawyers' letter of 22nd December 1997 as making clear the intention
of Husco not to be bound by its obligations under contract, thereby entitling
EHT to regard the contract as having been repudiated by Husco and stating that
EHT `was thereby entitled to terminate the agreement'. It also pleaded that by
reason of the failure to make the November payment EHT `thereby became entitled
to terminate the Services Agreement by virtue of its express terms including
paragraphs 7(b)(iii) and 11. Finally it pleaded that by failing to make the
payment for November required by the notice of 17th December and the
payment for December due on 10th January 1998 Husco evinced an
intention not to be bound by the terms of the agreement, EHT being entitled to
regard it as repudiated. However, the only `termination' relied on was the
letter of 30th January 1998 which was expressly pleaded as one
month's notice of termination of the Services Agreement under clauses 7(b)(iii)
and 11. There was no averment or other reference in the pleading to the effect
that EHT had accepted Husco's repudiatory contract either by that letter
or thereafter, in particular by issue of the writ.
27. In its amended defence and counter-claim dated 11th August 1998,
Husco pleaded as follows:
"8A . The allegation in paragraph 16 of the Amended Statement of Claim that the
Plaintiff was entitled to terminate the Services Agreement for repudiatory
breaches is denied. Even if, (contrary to the defendants' primary case), the
First Defendant was in breach of that Agreement, and further (which is also
denied) was thereby evincing an intention no longer to be bound by its
terms:
(a) by the time of the Plaintiff's alleged termination (namely its letter 30
January 1998), the First Defendant had in fact paid £6,000 to the
plaintiff being the amount of the allegedly outstanding payments. Accordingly,
the First Defendant was not by then in repudiatory breach;
(b) in any event, the Plaintiff did not accept the alleged repudiatory breach
and purport to terminate with immediate effect but instead elected to give one
month's notice of termination, thereby continuing the contract;
(c) further or alternatively, the Plaintiff, having stated its reliance on
Clause 7(b)(iii) of the Services Agreement as a ground for purportedly
terminating that Agreement, cannot now rely on a different ground."
28. By way of reply, EHT, having referred to Husco's lawyers letter of
22nd December 1997 pleaded as follows:
"7. ... the First Defendant had by the 30th January 1998 given the
plaintiff no indication of any intention to resile from this position. In the
circumstances the plaintiff was entitled to and did in fact accept the First
Defendant's repudiation by its letter to the First Defendant of 30th
January 1998
Furthermore, and in the event, the said payment [i.e. £6,000] and the
accompanying letter by their lateness and context were not sufficient to dispel
the First Defendant's clear intention not to meet its contractual obligations
and the plaintiff would have been entitled to accept the First Defendant's
repudiation of the said Agreement after their receipt.
4. As to paragraph 8A(b) of the Amended Defence and Counter-Claim the Plaintiff
says that its letter of 30th January 1998 did not continue the
Agreement but rather accepted the First Defendant's repudiation and terminated
the Agreement on one month's notice."
29. Thus, at the time of trial, while EHT had expanded its case from that of a
straightforward contractual termination for non-payment pursuant to the notice
of 30th January so as to rely also upon Husco's stance as set out in
the lawyer's letter of 22nd January, the only acceptance of such
repudiation pleaded was EHT's service of the notice of 30th January
and it is again noteworthy that no reliance was placed on anything which
happened after that date.
AT THE TIME OF ITS PURPORTED TERMINATION, WAS EHT ITSELF IN
BREACH?
30. This question caused the judge no difficulty. By Clause 4 of the Services
Agreement, Husco retained EHT `as an independent contractor to perform
consulting and engineering services and product development relating to the
"Liner Motor Valve Technology". The judge held that, on the natural meaning of
the words construed in their context, they were not apt to refer to the selling
or marketing of the valve. As he put it:
"The words are directed to the use of the technical expertise of EHT through Mr
Jennins, not to their selling or marketing skills."
Husco had relied, as they have relied in this court, upon the later words in
Clause 4 which impose an obligation on Husco to reimburse EHT for the travel
expenses of Mr Jennins and other EHT employees `incurred on travel away from
their place of business .. to visit customers, when requested or required by
Husco'. The judge took the view that those words were not intended to expand
the nature of the services required of EHT, but were directed to reimbursement
of expenses in respect of EHT's visits to customers which were necessary or
desirable in connection with technical visits to customers in relation to
products which were being developed or tailor-made to meet their requirements.
Equally, in relation to the argument that Clause 6 was designed further to
define or expand the duties of EHT, the judge held that it was clear from its
wording that it was simply aimed at ensuring that the services which EHT were
bound to supply should, so far as reasonably required by Husco, be performed by
Mr Jennins personally.
31. The judge stated that, in reaching his conclusion, he did not ignore the
wider background or the evidence that Mr Jennins had many connections in the
industry and had in fact made many visits to manufacturers to generate interest
in the EHT valve. The judge observed that such visits were referable to Mr
Jennins' own interests in promoting the valve, in the first place to create a
sale which would induce Husco to take up the Licence, and thereafter to
generate royalties under it. However, as the judge stated,
"The benefit of Mr Jennins' marketing skills is obtained by means of that
incentive. His technical skills were the subject of the fixed remuneration
under Clause 4."
32. In my view those findings are unassailable. I share the judge's view as to
the ordinary meaning of the words used in the context of the agreement itself
and bear in mind that the judge had heard evidence at some length as to the
background and circumstances surrounding the agreement, as well as the
activities of the parties once it was in force. The Services Agreement was a
carefully drafted agreement designed to cover the obligations of the parties
pending the anticipated grant of an exclusive licence, the terms and conditions
of which would control and take precedence over any inconsistent terms and
conditions in the Services Agreement. Under the licence, EHT were to grant
Husco the exclusive right to make, use and sell the Licensed Products and Husco
was to use its best efforts to promote their sale and distribution. If it had
been intended meanwhile to impose obligations on EHT in relation to the
introduction and acquisition of customers, rather than proceeding on the
assumption that EHT would regard it as in its own interests to do so, then it
would have been easy so to provide.
33. Mr Field QC for Husco has argued that, on the basis of modern principles of
construction, in first approaching the words of Clause 4 on the basis of their
ordinary meaning, the judge really put the cart before the horse. Mr Field has
submitted that he should have begun with an assessment of the commercial
reasonableness of excluding a selling or marketing obligation from the ambit of
EHT's services. He submits that each of the phrases `consulting services' or
`product development' was wide enough to impose such an obligation, in
particular because, without the obligation to investigate the market, to
contact potential customers and to ascertain their requirements, the
development of what was a new and unexploited product could not proceed. He
further submitted that, EHT having brought what, at that stage, it considered a
fully designed product to Husco, any further engineering and development work
would only arise in the context of developing the valve to meet the specific
requirements of a particular customer. Thus, the distinction drawn by the
judge between technical and sales work was one which, on the evidence and as a
matter of common sense, did not exist. Mr Field has also pointed out that, as
the judge found, when EHT approached Husco in 1992 it brought not only its
valve technology but also its contacts in the automotive industry. In that
context, Mr Field submits that the services provided for in Clause 4 should be
construed as extending to both aspects of EHT's range of experience.
34. Like the judge, I am unconvinced by those arguments. It is plain that the
words "consulting and engineering services and product development" are all
related to the Linear Motor Valve Technology which, by reference back to the
definition in Clause 1A refers entirely to technical data and know-how and does
not comprehend or refer to questions of sales or marketing. It may be, and was
no doubt the case, that development of the `product' (also defined in Clause 1B
in technical terms) would take place in the context of the demands of a
particular customer interested in making use of the EHT valve; however, there
is nothing in the wording of Clause 4 to indicate any obligation upon EHT in
relation to the obtaining of such custom or the performance of marketing work.
The Clause is silent in that regard and I see no compelling reason to suppose a
common intention or understanding that such obligation should be imposed.
Whereas EHT brought to Husco, and was happy to supply, its contacts in the
automotive industry at the time the agreement was entered into, there is no
reason to suppose that it was prepared to enter into any continuing obligation
in that respect, having handed over the technology to Husco which possessed a
world-wide sales force. In my view, if there was an intention to impose such
an obligation (as opposed to assuming that the parties would co-operate
generally in their common interest), there is every reason to suppose that it
would have been specifically referred to in the agreement.
35. We heard argument in the course of this appeal on the question whether, if
Clause 4 obliged EHT to supply Husco with customer information, EHT was in
breach of its obligation and, if so, whether such breach entitled Husco to
withhold or threaten to withhold payment as it did. In the light of the view I
have expressed as to the restricted nature of the obligation under Clause 4, it
becomes unnecessary to consider those matters. I would merely observe that the
judge made clear his view that the arguments first raised by Mr Wilke in his
letter of 19th November 1997, and persisted in by Husco's lawyers
letter of 22nd January, were unjustified in the sense that they
represented no more than a bargaining posture assumed by Husco, once the issue
had been forced by EHT in the letters to which I have already referred.
36. Finally under this head, Mr Field relied in his written Skeleton Argument
upon a further point, scarcely touched upon in oral argument, namely that EHT
was in breach of Clause 4 by refusing to perform technical development work on
the EHT valve unless Husco provided it with a new design computer. That was an
argument which had been addressed to the judge but to which he did not refer in
his judgment. Suffice it to say, it was matter never relied upon by Husco
prior to the issue of the writ, either as repudiatory conduct or as justifying
Husco in withholding any of the monthly fees due to EHT. EHT's position, as
stated at the time, depended entirely upon its lack of funds to undertake
certain further design equipment and, in my view, even if Husco could have
established a breach of contract in this respect, it was neither repudiatory
nor did it justify withholding of the monthly fee.
WAS EHT ENTITLED TO. AND DID IT, TERMINATE FOR A REPUDIATORY BREACH BY
HUSCO?
37. At the trial, EHT was in considerable difficulty in relation to this
question. First of all, it is quite apparent, and it was the primary case of
EHT on the pleadings, that EHT relied upon the letter of 30th
January 1998 as a notice of termination given pursuant to the terms of the
contract. As such, it did not have immediate effect but provided for
termination in one month's time, i.e. on 28th February. Furthermore
it was stated to be notice of termination on grounds of Husco's failure to make
payment of monies due under Clause 7(b)(iii). If the notice was to constitute
a valid termination, it was necessary first to establish that EHT had earlier
served a preliminary written request in respect of the payment(s) due (see
Clause 7(b)(iii)), which request was itself required by Clause 11 to be by
written notice in accordance with Clause 16. Such preliminary request/notice
was identified in the 30th January notice (and indeed in the
pleadings) as EHT's letter of 17th December 1997. However, it is
conceded by EHT that the request of 17th December 1997 did not
amount to a valid contractual notice because it was not sent by registered or
certified mail and it was not addressed "Attention A.A. Ramirez, President".
The judge also held that it was not on its face clearly intended as a warning
notice under Clause 11. That being the position, the notice of 30th
January was premature and was itself invalid for the purpose of determining the
Services Agreement under the contractual machinery provided.
38. The judge endeavoured to solve this deficiency in favour of EHT in the
following manner. He said:
"However, the matter does not rest there. Husco, despite having second
thoughts and making payment, then reverted to its original position that Mr
Jennins was bound to perform selling services and bound to account to Husco for
what he had been doing.
In my judgment, by refusing to pay for these reasons, which in the context were
no more than a pretext for non-payment, it was adopting a stand which can only
be viewed as a repudiation of the Services Agreement.
Mr Béar [for Husco] submitted that if there was repudiation, it was
never accepted by EHT (Howard -v- Pickford Tool [1951] 1 KB 417). That
submission I find wholly unreal in the face of the continued assertions by EHT
that the contract was at an end.
By coupling its earlier refusal and non-payment with a repeated refusal to make
any further payments, Husco gave the validity to the termination by EHT which
took effect on 28th February 1998 on the expiration of the
notice."
39. It should be noted that the judge did not, indeed he could not, point to
any letter or circumstance apart from the service of the 30th
January notice itself which amounted to or purported to be, acceptance by EHT
of a repudiation at common law by Husco. He rather relied on Husco's letter of
5th February 1998 in which it reverted to its original position that
it was entitled to withhold payment (for reasons which the judge found to be
`no more than a pretext') as somehow giving retrospective validation to EHT's
notice, not as a notice under the contract, but as an acceptance of Husco's
common law repudiation of it. The judge did not identify EHT's `continued
assertions' that the contract was at end. It seems clear that only EHT's
letter of 18th February amounted to such an assertion prior to issue
of the writ.
40. Mr Field has attacked the approach and finding of the judge on a number of
bases. First, he challenged the judge's finding that, following payment by
Husco on 30th January of the amount outstanding under the Services
Agreement, Husco's reversion to its earlier position that Mr Jennins was bound
to perform selling services for Husco and that Husco would withhold further
payments unless he supplied them with sales information, was conduct which
amounted to a repudiation of the contract.
41. Second, Mr Field submitted that, on a proper construction of the agreement,
the ordinary entitlement of the parties to terminate for a breach of a payment
obligation or other material breach of contract was intended to be displaced by
the express termination provisions of the agreement which included provisions
directed at non-payment. So far as non-payment was concerned, the scheme was
that under Clauses 11 and 7(b)(iii) EHT was entitled to give written notice of
any failure to make a payment and, upon continuing failure to make such payment
within one month of a valid warning notice, a further notice could be served to
effect termination. Clause 7(b)(iii) required such termination to be on one
month's notice. As to material breaches other than those arising from
non-payment, Clause 7(b)(ii) entitled either party by notice to require
rectification of any such breach within a stated period of not less than thirty
days before the right to terminate arose. Mr Field submitted that the
contractual protection provided to Husco by the notice provisions, which
comprehended a minimum two month period for the termination process, following
formal communication with the President of Husco, would be set at nought if
common law principles of repudiation were held to be applicable in respect of
non-payment or other breach, given that (a) such principles require no period
of notice to be given and (b) that an acceptance by one party of the other
party's repudiation takes effect immediately, rather than upon expiry of some
further period of time.
42. Third, Mr Field submitted that, even if EHT could in principle treat the
contract as terminated by acceptance of a repudiatory breach, it did not do so
in that, at all times, it purported to act under and in accordance with terms
of the contract in respect of non-payment and at no stage indicated that it
regarded the contract as terminated on any other basis. That being so, the
30th January notice was not in a form appropriate or intended to
operate as acceptance of a repudiation; it was rather an invocation and
assertion of the binding terms of the contract for the purposes of operating
the termination machinery contained within it. Nor was the position altered by
EHT's further letter of 18th February 1998. Despite the fact that,
by that time, the payment due on 10th February had not been made,
the letter of 18th February neither referred to it nor sought to
rely on it. It simply re-asserted the validity of the 30th January
notice as a termination of the agreement in accordance with its terms. Thus,
Mr Field submitted, the judge was in error when he treated EHT's purported
termination under the contractual notice scheme as constituting also a
termination by repudiation and acceptance at common law. Quite apart from the
fact that, at the time of the notice, the breach/non-payment complained of had
been rectified by Husco's payment of the two outstanding payments, the notice
of 30th January could not itself be treated as acceptance of a
repudiation because it expressly contemplated a continuance of the contract
until 28th February. Equally, the mere expiry of the period of
notice on 28th February could not, without more, constitute an
acceptance in respect of conduct subsequent to 30th January. Not
only was the notice not so expressed, but (as Mr Field put it), the idea of a
floating acceptance, awaiting a breach to give it a validity it would otherwise
lack, is a concept unknown to English law.
43. Fourth, Mr Field submitted that, even if EHT had a right to treat and
accept Husco's conduct as a common law repudiation, it elected not to do so.
If and insofar as EHT had any right to treat Husco's stance as repudiatory
prior to service of the 30th January notice, it did not do
so; it elected to affirm the Services Agreement for the purpose of adopting its
termination machinery in order to bring it to an end on 28th
February, during which period the parties' mutual obligations would continue
(c.f. Johnstone -v- Milling [1886] 16 QBD 460 per Lord Esher at 467-8
and Norwest Holst Group Administration Limited -v- Harrison [1985] ICR
668 per Sir Denys Buckley at 683). Later, when faced with Husco's reassertion
of its position on 5th February, EHT (by its letter of
18th February) merely reasserted the 30th January notice
and did not suggest that Husco's stance afforded grounds to accept it as a
common law repudiation. Thus, until issue of the writ, the position remained
that EHT asserted termination under the Notice, whereas Husco asserted that the
contract remained in being. Following issue of the writ, although a plea was
raised that EHT were entitled to accept Husco's conduct as repudiatory,
the only acceptance relied on was the contractual notice itself which preceded
the letter of 5th February setting out Husco's revised stance.
44. I shall consider Mr Field's individual submissions in turn. As to this
first submission, it seems to me that it was open to the judge to form the
view, which he plainly did, that Husco's reasserted stance was insincere and
constituted a mere pretext under which to withhold further payments while the
parties considered their position. As such it was an anticipatory breach of
contract in respect of future payments, confirmed by non-payment on
10th February, which arguably entitled EHT, had it chosen to do so,
to treat it as a common law repudiation on writing a suitable letter after the
10th February. However, it is clear that no such letter was ever
written. Nor do I consider that the judge's finding that the 30th
January Notice could constitute such a letter can be justified either by
principle or authority.
45. Mr Smith QC for EHT has sought to support that finding by submitting, that
the language of the Notice should not be narrowly confined to the function
which it was (as he accepts) designed to perform, namely an invocation of the
terms of the contract, but should be read as equally appropriate to the task of
constituting a notice to accept Husco's repudiation as from 28th February. I
cannot regard it as so apt. While I do not accept Mr Field's second submission
that the machinery of the contract is such that it should be read as
excluding the right of either party to accept a clearly expressed
intention by the other party to break the contract as an anticipatory
(repudiatory) breach, it does seem to me that, in the light of the contractual
machinery provided, the onus is clearly on the party purporting to rely on that
right to make clear that it is doing so. In this respect, it seems to me that
EHT made clear at every relevant stage that it was relying on the contractual
machinery rather than treating the contract as discharged at common law and, in
this respect, I accept the analysis and argument of Mr Field under his third
submission as set out paragraph 42 above.
46. I also accept Mr Field's fourth submission (see paragraph 43 above). It is
plain that, as at 30th January, EHT was content, and purported, to
invoke the contractual machinery of termination; further, because of their
ignorance that payment had been received from Husco prior to that notice
being sent, EHT apparently continued so content. Thereafter, EHT never
purported to identify, let alone accept, any additional conduct of Husco
as amounting to repudiation. This was a deficiency not broached by EHT till
the pleading of the claim endorsed on the writ. However, that pleading was not
in a form appropriate to effect a cure, in that the only acceptance identified
in the pleading was the notice of 30th January, the terms and effect
of which were reasserted.
47. Mr Smith's Skeleton Argument on this appeal stated that EHT relied on the
judge's findings and did not seek to cross-appeal. However, at the very end of
his argument, in the face of the difficulties I have described, he sought the
leave of the court to make a belated re-amendment to the Reply and Defence
Counterclaim. The proposed amendment sought to plead that, by its resumed
stance in relation to EHT's services and the non-payment of the sum due on
10th February, Husco was in repudiatory breach `which breach the
Plaintiff accepted by its letters of 18th February 1998 and
3rd March 1998 or by the issue of these proceedings and the claims
formulated therein'. This amendment was vigorously opposed by Mr Field. As to
the letters relied on, he correctly pointed out their inadequacy for the
purpose pleaded. The first only reasserted the 30th January notice,
and the second merely pressed for a reply. As to the purported acceptance by
issue of the writ, as Mr Field pointed out, EHT had been afforded ample
opportunity to plead such acceptance prior to judgment below: indeed Mr Field
suggested that it was EHT's failure to do so which drew the judge into adopting
the impermissible line of reasoning by which he treated the contract as legally
at an end. Mr Field expressly accepted and asserted that the effect of holding
the 30th January notice invalid, both as a contractual notice and as
acceptance of Husco's repudiation, meant that the Services Agreement remained
in existence, despite the fact that the parties had since 1998 mutually failed
to carry out its terms. He pointed out that Husco had clearly and expressly
stood upon its assertion since 5th February that the Services
Agreement remained binding on the parties and had, since that time, conducted
its affairs, including lengthy litigation, on the basis that the
30th January notice was invalid to terminate the Services Agreement.
I accept Mr Field's submission that it would not be right to permit further
amendment at this stage. Even now, I note that Mr Smith's application is not,
as one might have expected, an application to amend the writ to plead in terms
the acceptance of the repudiation therein, but simply to assert in the Reply
that the writ achieved that effect, whereas it did no more than rely upon the
30th January notice as constituting such acceptance. I would refuse
leave to amend.
THE MEANING OF `LINEAR MOTOR VALVES'
48. Since I would hold that the Services Agreement has still not been
terminated, Clause 10(b), which warrants that neither Husco nor its affiliates
will engage in the development, manufacture or marketing of linear motor valves
for a period of forty-eight months from the date of termination, has not become
operative. However, in the light of the importance of the issue to the parties
and for the purpose of assisting them to resolve any future litigation or
negotiations, it is appropriate nonetheless to deal with the finding of the
judge that, in Clause 10(b), the phrase Linear Motor Valves is used in a broad
generic sense and is not restricted to linear motor valves incorporating or
produced or developed from the `Linear Motor Valve Technology' referred to in
Clause 1a) or b) of the Services Agreement. The question is one of importance
to the parties because the distinction is vital as to whether or not EHT were,
or (following any future termination of the Services Agreement) will be,
entitled to damages from Husco in respect of its continued manufacture of the
Husco valve, which the parties are agreed is not itself a development from
EHT's technology but is the product of Husco's own invention.
49. The judge rested his conclusion upon three short passages of reasoning.
First he referred to the expert evidence. He said:
"The first question is one of construction: the meaning of the expression
"linear motor valve". From the evidence of Mr Bowler [for EHT] and Professor
Labus [for HUSCO], it is not difficult to attach a meaning to that expression:
it is a valve driven by a linear motor. For the meaning of the word "motor", I
can adopt the definition in the Report of Professor Labus and for the basic
assembly, the evidence of Mr Bowler.
While Professor Labus had not encountered a linear motor valve, it being new
technology, he did not, on further questioning, dissent from the evidence of Mr
Bowler. His point really was that it had not become an expression in general
use in relation to hydraulic control valves.
It was, however, the type of valve with which this agreement was concerned and
with which both parties had themselves become familiar over the preceding
twelve months."
50. Second, he referred to the text of the agreement in the following terms:
"Turning to the Agreement itself, although there is no definition of "linear
motor valves", as such, the definition of Mr Jennins' "Linear Motor Valve
Technology" does refer to a "hydraulic valve in which a spool is directly
driven by a linear motor" clearly recognising that there is such a thing as a
linear motor.
The reference to "Linear Motor Valves" in Clause 10(c) is therefore to Linear
Motor Valves which answer that description.
It was then suggested that it was confined to Mr Jennins' Linear Motor Valve.
There are many objections to that.
First, it is a generic description. It may be contrasted with the words
"the Linear Motor Valve Technology" of Mr Jennins" which are
specific."
51. Thereafter, the judge made no further textual analysis, but moved to the
surrounding circumstances and, in particular, the commercial considerations
which, in the judge's view, must have governed the meaning intended by the
parties. He observed:
"Secondly, the only sensible purpose of the Clause would be to exclude Husco
from competing by developing or marketing other linear motor valves. In
relation to the EHT valve, either Husco was excluded by not taking up the
License or it was free to act by the terms of the License. The danger to EHT
was that its own technology and know-how, which had been divulged to Husco,
might be used against it by Husco to support a rival product at the same time.
It may well be, and indeed it appears from the evidence, that the parties were
unaware of a rival product being available, but that factor serves only to
strengthen the need for protection.
Third, if it had been intended to confine the Clause to the licensed product or
to the EHT linear motor valve technology, those terms were readily available
within the Agreement and the Exclusive License.
It was then suggested that a more restricted meaning could be gleaned form the
context of the background, the matrix of facts. I can only say that having
considered all the documentation and oral evidence, I do not find that it leads
me to any different construction."
52. Mr Field's first complaint is that the judge treated the expert evidence
before him both simplistically and incorrectly. For reasons of convenience,
Husco's expert, Professor Labus, who had twenty-nine years' experience in
hydraulic engineering including valve technology, gave evidence first. As the
judge acknowledged, Professor Labus had not encountered `linear motor valve' as
a term in the hydraulics field. He made the point that the terms `linear motor
valve' and indeed `linear motor' were not in general use and, so far as he was
aware, had not been used in any instance save in connection with EHT's valve.
He concluded that such terms would not in themselves be recognised as having
any clear meaning or particular characteristics by a practitioner in the field.
His evidence in that respect was not challenged in the sense that any example
was put in evidence, or any suggestion made to him in cross-examination that
the term `linear motor valve'" had been used prior to December 1993 other than
by EHT in describing its own valve. Professor Labus did not agree with the
evidence of Mr Bowler in attaching a wider meaning to `linear motor valve' and
the judge simply misstated the effect of the evidence when he observed that
Professor Labus did not dissent from the evidence of Mr Bowler. Mr Bowler's
evidence containing the proposition accepted by the judge was neither
contained, nor even indicated, in his written report served prior to trial and
was given by way of supplementary oral evidence in chief after Professor Labus'
evidence had been completed and despite objection by Husco. Mr Field submitted
that the judge should have recognised that the evidence of the two experts was
in conflict and should have preferred that of Professor Labus, Mr Bowler
lacking qualifications or experience in fluid mechanics, being an electrical
engineer. Mr Field also submitted that, when the judge stated that a linear
motor valve was the type of valve with which the agreement was concerned and
which the parties had become familiar over the preceding twelve months, he
simply begged the question (a) as to whether there was in fact current within
the industry a recognised meaning of the term wider than that used by EHT in
the contractual description of its product and in Mr Jennins' patent
application (Exhibit D); (b) if so, whether the parties intended such wider
meaning or the EHT description to be the meaning of the term in Clause 10(b).
Since the judge expressly found elsewhere that the parties were unaware of the
existence or development of any similar product at the time of the Agreement,
Mr Field submits that they could scarcely have been aware of any `linear motor
valve' technology other than that developed by Mr Jennins.
53. Turning to the question of the textual analysis accorded to the Agreement
by the judge, Mr Field complains that the judge failed to refer, or apparently
to attach any weight, to a number of specific points made for EHT upon the text
of the Agreement. They were and are as follows:
(1) The restriction in Clause 10(b) relates to `Linear Motor Valves', the use
of the capital letters L,M and V suggesting a term specific to and defined
within the Services Agreement, as opposed to a broad genus wider than, and
independent of, it. Whilst the term Linear Motor Valves is not itself the
subject of express definition, the Services Agreement relates in its entirety
to the development of `Linear Motor Valve Technology' which is defined in
Clause 1(a) in terms of `all drawings, written descriptions, documents ... etc.
communicated by Mr Jennins and EHT for manufacturing and using a hydraulic
valve in which a spool is directly driven by a linear motor'. Thus it is plain
that the term Linear Motor Valves is intended to be read as relating to any
design of valve developed by EHT from its Linear Motor Valve Technology.
(2) The opening recital of the Agreement indicates that the technology the
subject of the Services Agreement is the technology described within the
definition section. In addition the following words of the recital refer to
patent grants relating thereto and applied for by Mr Jennins on behalf of EHT,
in respect of which the second such patent application itself describes its
subject matter as a `Linear Motor Valve' (see Exhibit B).
(3) The overall structure of the Services Agreement confirms that position.
The service to be provided by EHT relates to the Linear Motor Valve Technology
(Clause 4), as does the option for an Exclusive License (Clause 5). That being
so, consistency alone suggests that the restraint after termination imposed in
Clause 10(b) should be construed and applied as referring to EHT's Linear Motor
Valve.
(4) The judge's observation that the definition of Linear Motor Valve
Technology recognised that there was such a thing as a `linear motor' afforded
no solid basis upon which to conclude that the reference to Linear Motor Valve
in Clause 10(b) was therefore a general reference to any valve driven by a
linear motor. The judge simply plucked the words `linear motor' from within
the overall description of the technology (which fell to be considered as a
whole), in order to bestow on them a prior independent existence as a generic
term when employed in conjunction with the word `Valve' in Clause 10(b). The
result was contrary to the host of textual indications to the contrary.
54. In relation to the circumstances surrounding the Services Agreement, Mr
Field submits as follows:
(5) The judge overlooked the fact, earlier narrated by him, that on
15th December 1993, prior to the discussions on 16th
December at which agreement was reached, Mr Jennins had presented to Husco a
specially prepared brochure describing at length the characteristics and
advantages of linear motor valve technology, in which he referred to the valves
he had designed as `Linear Motor Valves'. In doing so, he was simply repeating
the term which he had also used when first putting to Husco the terms of their
proposed collaboration in April 1993. In the December brochure, Mr Jennins
described the superiority of the Linear Motor Valve over the proportional
solenoid valves hitherto used in the industry and recorded that there were no
known potential competitors. Mr Field submitted that this was plainly a
document forming part of the matrices of the agreement (indeed it was included
within the documents referred to in Clause 1a), which the parties no doubt had
in mind when the agreement was drawn up and signed. As such, Mr Field
submitted it was cogent evidence of a consistent intention on the part of EHT
and Husco when employing the same expression in Clause 10(b).
(6) The judge was wrong to conclude that the only sensible purpose of the
Clause was to exclude Husco from developing `other linear motor valves, not the
product of the technology'. So to hold was to concentrate solely on EHT's
interests and to leave out of account those of Husco. Assuming, contrary to Mr
Field's submission, that the parties were aware of and intended to exclude
Husco from producing other types of linear motor valve, it would lead to the
following uncommercial consequences.
(7) Although (as the judge found) Mr Jennins did not claim a originality for
the principle of the linear motor, or its particular application in relation to
valves, once the Services Agreement was terminated Husco would be excluded from
itself making use of any technology prior to or differing from that of EHT in
order to develop and utilise its own linear motor valve, as indeed it did when
inventing and developing the Husco valve. Mr Field submitted this was most
unlikely to have been intended.
(8) Given that there was no restriction imposed on Husco by Clause 10(b) during
the currency of the agreement, the effect of the judge's finding was to produce
the curious and uncommercial result that Husco was free to develop and sell
other linear motor valves (including the Husco valve), so long as the agreement
continued, but not when it was over. Again this was most unlikely to have been
the parties' intention. On the other hand, the intention attributed by Husco
on the basis that the restriction was limited to Linear Motor Valves developed
from EHT's technology, made good commercial sense. So long as the Services
Agreement subsisted, then Husco was not prevented from such development. On
the other hand, upon termination, EHT would be protected from Husco's using
EHT's technology for the purposes of Husco's own business, in a situation where
it had no continuing obligation to make monthly payments under the Services
Agreement in connection with such use.
55. Mr Field made a number of further submissions as to the unreasonable effect
of the judge's finding if the agreement ran to its full term in 2014 or
somewhere near it, and was then followed by the operation of the restriction in
Clause 10(b). However, those submissions primarily went to the question of
whether or not the restriction as found was in restraint of trade. That
question only arises if this court affirms the judge's decision upon the
meaning of Linear Motor Valves as used in Clause 10(b). I do not propose to
deal further with those submissions because I am wholly persuaded by the
submissions of Mr Field set out in paragraphs 53 and 54 above.
56. As to Mr Field's criticism of the judge's treatment of the expert evidence
(see paragraph 52 above), it does seem to me that the experts were essentially
in conflict rather than agreement in the manner analysed by Mr Field. However,
it also seems to me unnecessary to examine which of the two experts the judge
should have preferred, since I do not consider that the true construction of
the agreement depends upon the evidence of the experts. I am prepared to
assume for the purposes of that exercise that the broad description `linear
motor valve' has a free standing meaning outside the terms of the agreement and
wider than Mr Jennins' application. However, the question still remains
whether, upon proper principles of construction, the presumed intention of the
parties was to refer to such wider meaning or to use the term Linear Motor
Valves as shorthand for valves which were a product or development of Mr
Jennins Linear Motor Valve Technology. I have no doubt that the latter is the
case.
57. It is of course important not to treat the textual analysis of the
agreement as an exercise isolated from those circumstances surrounding the
agreement. However, confining myself to such analysis for a moment, I consider
that the use of capital letters in Clause 10(b) in relation to the term `Linear
Motor Valve' in the context of an agreement relating to the `Linear Motor Valve
Technology', which is itself clearly defined in terms of Mr Jennins' drawings,
written descriptions and documents, is the strongest possible indication of the
parties' intentions and a clear textual pointer towards a construction
harmonising with the wording and intention of the remainder of the agreement. I
attach no importance to the contrast made by the judge between the generic use
of the words `Linear Motor Valves' and the use of the definite article
`The Linear Motor Valve Technology' of Mr Jennins in Clause 1a). It
seems to me that the use of that definite article was no more than a function
of the grammar used in what was avowedly a definition clause.
58. I also accept Mr Field's submissions as to the surrounding circumstances
and in particular the relevance of the parties use of the term Linear Motor
Valve in their negotiations, which centred upon the product and development of
Mr Jennins' technology without any knowledge of any similar or competing
products in the field. It also seems to me, contrary to the view of the judge,
that, if it be correct that Clause 10(b) imposed a restriction only in respect
of a development from EHT's design, it was commercially perfectly sensible that
Husco should be free to produce motor valves which were a product of that
development during the existence of the agreement, but should be subject to
restriction if the agreement were terminated prior to Husco's exercise of its
option under Clause 5. That protection would be necessary if, by the date of
termination, Husco had not exercised its option under Clause 5 of the Services
Agreement and would thus be free to compete with EHT, making use of its
acquired knowledge of EHT's technology. If, on the other hand, Husco had
exercised its option, EHT would then be compensated for Husco's use of its
technology by its right to royalties under the License Agreement
59. In arguing to the contrary, Mr Smith for EHT has submitted that the judge
was correct to conclude that the purpose of the clause was to exclude Husco
from competing by developing or marketing any type of linear motor valve which
might compete with that of EHT. He submits that it was intended that the
clause would protect against the very situation which arose with Husco
manufacturing and selling its own design of valve. He argues that the wide
scope of the clause was the price which Husco was prepared to pay in order to
obtain the right to EHT's technology. I do not find those arguments
persuasive. First, of course, it is the position that the parties are agreed
that the design of the Husco valve does not involve use of the EHT technology.
The question thus becomes whether the agreement on its true construction
excludes Husco from selling a product of its own or indeed of another
manufacturer, developed independently of EHT's technology, after termination of
the agreement, when the parties did not consider it appropriate to do so during
the period of the Services Agreement. I do not think it is. In my view,
Clause 10(b) primarily contemplates the situation where the Services Agreement
might be terminated prior to the exercise of Husco's option. In that event,
the parties no doubt intended and accepted that Husco should be prevented from
making use of the EHT technology if it had not entered into the License
Agreement which was contemplated as the long-term intention of the parties. On
the other hand, upon entry into the License Agreement the parties would have
contemplated that EHT's protection would be superseded by the terms of that
agreement, which not only entitled EHT to royalties but contained a clause
requiring Husco to use its best efforts to promote the sale and distribution of
the Licensed Products. Despite the skilful submissions of Mr Smith in support
of the judge's decision I have no doubt that Mr Field's submissions should
prevail.
WAS EHT ESTOPPED FROM ASSERTING THE BROADER MEANING OF CLAUSE
10(b)?
60. Hitherto I have considered the meaning of `Linear Motor Valves' on the
assumption that EHT was not estopped from asserting the broader meaning for
which it contended. In the light of my conclusion, the necessity to consider
the question of estoppel does not arise.
ASSUMING THE BROADER MEANING, WAS THE RESTRAINT IN CLAUSE 10(b)
ENFORCEABLE?
61. This issue does not now arise. Nor has it been argued by either party
that, if the meaning of `Linear Motor Valves' was (as I have concluded)
restricted to the EHT technology, any issue of unreasonableness arises.
INJUNCTION/DAMAGES/EQUITABLE DEFENCES
62. In the light of my above conclusion, EHT in any event has no right to the
injunction sought and the issues canvassed under this heading do not arise.
CONCLUSION
63. The result of EHT's failure to establish that the Services Agreement has
been terminated either pursuant to notice under the contract or by reason of
Husco's repudiation, is that the Services Agreement is still in being and the
right of EHT to payment at the rate of £3,000 per month has continued to
date. However, EHT's claim has not been pursued as a claim for payments
falling due under the agreement but has been asserted by way of a claim for
damages for loss of the monthly fee of £3,000 payable under Clause 4 of
the Services Agreement until such time as the royalties payable under the
Exclusive License Agreement reached or exceeded £36,000, alternatively
until the expiry of the agreement in some fifteen years time. That being so,
EHT has failed in its claim as pleaded and Husco is entitled to judgment in
relation to the claim for damages for breach of the Services Agreement.
Equally, because the agreement has not been terminated, Husco is entitled to
judgment in relation to EHT's claim under Clause 10(b) of the Services
Agreement for damages in lieu of an injunction. Finally, as claimed in
paragraph 2 of its counterclaim, and subject to final submissions as to the
appropriate form of wording, Husco is entitled to a declaration that the
reference to `Linear Motor Valves' in Clause 10(b) of the Services Agreement is
a reference to valves which are a product or development of EHT's `Linear Motor
Valve Technology' defined in Clause 1(a) of the Services Agreement. I would
allow the appeal and make an order to that effect.
Lord Justice Mance: I agree
Lord Justice Kennedy I also agree
Order: Appeal Allowed; claimant to pay £2,000 to Defendant; order for
stay to be removed; £50,000 paid out of court; repayment of interim
payment of £150,000 with interest at 1 per cent subject to set-off to
account for 30 months at £3,000 per month; appellant to recover half of
costs below and 90% of the costs in appeal; detailed assessment; permission to
appeal to the House of Lords refused; time extended until 25th of
August.
(Order does not form part of approved judgment.)
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