England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
(HHJ Jack QC, sitting as a Deputy High Court Judge)

		Royal Courts of Justice Strand, London, WC2A 2LL Thursday 26th April 2001

LORD JUSTICE RIX:

1. Carmaggedon is an interactive entertainment software product, or what my children would call a computer game. The cause of this litigation, however, is precisely the fact that sales have been affected by the perception that it is a game which is unsuitable for children. The essence of the game is that the player drives a car in such a way as to cause it to injure pedestrians or destroy property. In France public concern, spearheaded by a ginger group called Familles de France, has persuaded leading retailers to decline to stock it; while in Germany industry self-regulation has rendered it available in practice only to purchasers over 18 years of age. Sad to say, a similar 18 rating in the UK has, apparently, only served to fuel sales here.
2. The dispute before the courts is a claim by the licensor of Carmaggedon against its licensee. The claimant, SCI (Sales Curve Interactive) Limited (the "licensor"), appointed the defendant, Titus Sarl (the "licensee"), as the exclusive distributor of the game (in three versions or formats, known as Playstation, N64 and Colour Game Boy) throughout a long list of territories which seem to include much of the world outside the Americas and the Far East. The licence was dated 19 August 1999. It was for a five year term.
3. The licence provided for payment by the licensee of an advance of up to £2.2 million, in four instalments. These payments were described as non-returnable advances recoupable out of royalties otherwise payable to the licensor upon sales of the game. Although the licence described the advances as non-returnable, it also provided for two circumstances in which a partial return might become effective. Both depended upon a computation to be made as at a "Reconciliation Date" six months after the first release within the licensed territories of any of the three versions. If at that date royalties accrued were less than advances paid, the shortfall was to be repaid, unless the parties could negotiate a new licence for some other product by way of compensation to the licensee, up to a maximum of £356,000 held by way of escrow. Secondly, if there was a ban on sales of the game, in any version, in any territory, and as a result part of the shortfall between royalties accrued and advances paid was due to such a ban, then that part of the shortfall was to be measured by the difference between royalties earned and royalties projected on "target sales" within the applicable territory and was to be repaid to the licensee. I am here seeking to gloss, as concisely as possible, some quite complicated provisions of the licence which in due course I will have to set out verbatim. In glossing such provisions, I am not intending to determine any point of construction as to the interrelationship of these two sets of circumstances under which a shortfall of royalties accrued against advances paid as at the reconciliation date might lead to a return of some part of those advances.
4. What happened was that after the licensee had paid the first two advances, totalling £1.2 million, the third advance, of £0.6 million, became due on 26 October 1999, but went unpaid. The licensor gave the licensee due notice, under the contract, to pay within ten days. When the third advance remained unpaid, the licensor served a termination notice, as it was entitled to do "with immediate effect" under the contract's termination clause. Thus the licence terminated on 21 December 1999. That is not in dispute.
5. At that date the reconciliation date had not yet arrived. There is some dispute as to when the relevant six month period began and thus ended. The licensor's evidence is that the first release of any version occurred in October 1999 (no precise date was given) and that the six months therefore expired in April 2000. The licensee submitted that the six month period began on 17 September 1999 and thus expired on 16 March 2000, but that submission was based on nothing more than the fact that the licence contemplated that the parties would use their best endeavours to release all three versions of the game on 17 September "or as soon as is commercially possible". In the circumstances, the licensor's evidence is probably to be preferred to the licensee's submission, but, since there has been no trial as yet in proceedings which are currently concerned with the licensor's application for summary judgment, the point is formally open. Nevertheless, whichever date is chosen, the licence's termination on 21 December 1999 was long before the reconciliation date.
6. In the circumstances the licence terminated after the third advance was due but before any repayment obligation which might have been triggered by the licence's provisions relating to the reconciliation date had fallen due. The issues on this appeal are concerned with that basic combination of events.
7. There are three such issues. The first, is whether the terms of the licence relating to the reconciliation date and to the effect of a ban on projected sales, and thus the possible repayment of advances, apply even after termination. The second, is whether the right of repayment is an "accrued right" as of the date of termination, and thus cannot be lost by reason of the termination. The third issue is whether the failure of such terms to provide for repayment even after termination means that the contract exacts a penalty, namely the loss of the right of repayment, upon the licensee's breach.

The licence

8. The licence is in four parts: the principal agreement, the schedule of commercial terms, the schedule of standard terms, and appendices. It is unnecessary to quote from the principal agreement, save to mention that in the event of any inconsistency the commercial terms were to prevail over the standard terms, and that the "consideration for the appointment and grant of exclusive rights" to the licensee was the payment to the licensor of the advances and royalties provided for in the schedules.
9. The schedule of commercial terms provided inter alia as follows:

"4. Advances

4.1 The Licensee shall pay to the Licensor an advance equal to £2.2m sterling in return for the licence granted by clause 3 of the Principal Agreement, such sum to be payable as to:

(a) £600,000 on the date of delivery to the Licensee of the Gold Master of the Playstation version of the Product;

(b) £600,000 on the date of delivery of the Gold Masters of the N64 and CGB versions of the Product, having been approved for manufacture by the relevant Format Owner (Nintendo);

(c) £600,000 on the 60th day after the first release of the last format of the Product in any of the Territories, or the 90th day after Nintendo has given its approval of the N64 and CGB versions of the Product whichever is the earlier, provided that £178,000 of this amount shall be paid into an escrow account, to be released to the Licensor (or returned to the Licensee as the case may be) in accordance with the provisions of clause 6 below;

(d) £400,000 at any time after the release of the first format of the Product in any of the Territories, provided that the total Royalties accrued to the Licensor (whether or not already accounted for by the Licensee), as defined, calculated and accrued in accordance with clause 5 below over the three Licensed formats, have reached £1.8m.

4.2 The sums payable to the Licensor pursuant to clause 4.1 shall (subject to the terms of this Agreement) be non-returnable and shall be deemed to be advances ("Advances") recoupable out of Royalties payable upon Sales of the Products throughout the Territories (fully cross-collateralised as between the Products) pursuant to the provisions of clause 5 below.

"6. Reconciliation

6.1 For the purposes of this Agreement the date 6 months after the date of the first release within the Territories of the first of the three Licensed Formats to be released by the Licensee shall be referred to as the "Reconciliation Date". At any time on or after that date, the Licensee shall procure that a reconciliation is carried out to determine if, and to what extent, the Advances paid to the Licensor as at the Reconciliation Date have not been recouped, and shall procure the provision of a notice to the Licensor of such reconciliation in the form of a statement (the "Reconciliation Statement") at any time thereafter, setting out the calculation of such reconciliation (and, if applicable, the information referred to in clause 9 below). If the Reconciliation Statement shows a shortfall, the amount of such shortfall (up to a maximum of £356,000) shall be deemed credited to the Licensee, and the parties shall endeavour to negotiate the acquisition by the Licensee of distribution (or other) rights in one or more of the Licensor's other available products as at the relevant time, taking the amount of such credit into account, PROVIDED THAT if the parties are unable to reach agreement in relation to such other product within 60 days of receipt by the Licensor of the Reconciliation Statement ("the Reconciliation Payment Date"), the amount deemed credited to the Licensee hereunder ("the Shortfall") shall become payable to the Licensee out of the monies held in escrow pursuant to clause 4.1 above and clause 7.1 below. To the extent that the total amount held in escrow exceeds the Shortfall, the remainder of such monies (plus any interest which has accrued thereupon) shall be paid out of escrow to the Licensor upon the Reconciliation Payment Date. Any interest accrued to the funds whilst in the escrow account will be payable to either Licensor or Licensee depending upon where the escrow funds are eventually credited as a result of the "reconciliation".

"7. Option

7.1 In consideration for a non-returnable option fee equal to £400,000 sterling (the "option Fee"), which shall be payable as to:

£100,000 no later than 15th August 1999

£100,000 no later than 15th December 1999

£100,000 no later than 15th January 2000

£100,000 no later than 15th March 2000

(which sums the Licensee agrees and undertakes to pay to the Licensor no later than the dates so mentioned), the Licensor hereby grants to the Licensee the sole and exclusive option to acquire the Sony Platinum Rights to the Product, upon the terms set out in the form of exclusive licence attached in Appendix 2 (the "Platinum Licence"), PROVIDED THAT £89,000 out of each of the January and March instalments of the Option Fee shall paid into an escrow account as security for the Licensor's potential obligations under clause 6 above, to be released to the Licensor or (as the case may be) to be returned to the Licensee in accordance with the provisions of clause 6.

"9. Censorship

9.1 Both parties shall work with each other and in good faith to ensure that the Products meet the legal and regulatory requirements for each of the Territories in which they are distributed. The German and French versions of the Products shall be designed specifically for their local markets and will be marketed under another name if required to comply with local laws. The parties agree to use their best commercial endeavours to ensure that the Products are banned in any of the Territories. In the event that any Product is banned on any one of the Licensed Formats in any of the Territories, the Licensee shall ensure that the Reconciliation Statement referred to in clause 6 above includes a calculation of the amount by which any under- recoupment of the Advances, as at the Reconciliation Date, is attributable to such ban. Such calculation shall be in accordance with the provisions set out in clause 9.2 below. To the extent that, pursuant to such calculation, there is any such under-recoupment, the total of the Advances shall be deemed reduced by such amount, and the Licensor shall within 30 days of receipt of the Reconciliation Statement pay back such amount to the Licensee, free from withholding or set-off.

9.2 If there is any under-recoupment of the Advancers paid to the Licensor, and part of that under-recoupment is due to any of the Products in any of the Licensed Formats being banned in any of the Territories, the amount by which such under-recoupment shall be attributable to such ban shall be calculated as being an amount equal to difference between the Royalty which would have been due upon the Target Sales in the applicable Territory (as set out below), and the Royalty due upon actual Sales in such Territory.

Target Sales:

PSX N64 CGB

France 40,000 20,700 16,200

Germany 40,500 27,000 16,650

UK 90,000 27,900 16,200

Australia 20,000 12,000 1,800

Spain/Portugal 18,000 7,200 7,200

Remaining Territories 16,500 8,700 13,950

Totals 225,000 103,500 72,000."

10. The schedule of standard terms further provided inter alia as follows:

"5. ADVANCES AND ROYALTIES

The Licensee shall pay the Advances and accrue to the credit of the Licensor the Royalties in accordance with the Schedule of Commercial Terms, and account for the same in accordance with the provisions of clause 6 below

"6. ACCOUNTING

6.1 In respect of all the Territories, the Licensee shall furnish to the Licensor within thirty (30) days of each Quarter Day in each year a statement prepared in accordance with Licensee's standard accounting practice showing in reasonable detail the calculation of the Royalty that has accrued to the Licensor pursuant to this Agreement in the Quarter immediately prior to such date (the "Accounting Period"), together with such other information as the Licensor may reasonably requests (that being what the Licensee customarily provides, but which shall in any event include details of stock, returns, sell-through figures and status of collection of payments to be received), PROVIDED THAT after the expiry of the Term, the Licensee shall not be required to furnish any statements for any period in which payments have not accrued but such statements shall be provided on reasonable request by the Licensor. If any Royalties are shown to be due and owning pursuant to such statement, Licensor shall issue a corresponding invoice which shall be paid on receipt.

"10. TERMINATION

10.1 Either party shall be entitled to terminate this Agreement with immediate effect on written notice if the other party is in breach of any of its material obligations under this Agreement, which breach if it is capable of remedy, has continued unremedied for a period of 15 Working Days after the first party has served written notice on the other party specifying the breach and the steps required to remedy it, EXCEPT in the case of non-payment by any party of any cash sums due under this Agreement, in which case the other party shall be entitled to terminate this Agreement if the amount properly due is not paid within a period of 10 days after receipt of a notice to pay.

"11. EFFECT OF TERMINATION OR EXPIRY OF THE TERM

11.1 Any termination of this Agreement (however occasioned) shall not affect any accrued rights or liabilities of either party nor shall it affect the coming into force or the continuance in force of any provision of this Agreement which is expressly intended to come into or continue in force on or after such termination (including clauses 5, 6, 7, 8, 9 and 10) and shall not affect any sub- licenses granted by the Licensee hereunder.

11.2 Licensee shall be entitled to continue selling Units in its inventory or the inventory of its sub-licensees, or affiliates as well as those Units that are in production or on order or needed to fulfil outstanding orders at the date of termination or upon expiry of the Term for a period (the "Sell-Off Period") of 6 months immediately following the date of such termination or expiry, and the Licensee shall continue to pay the Licensor the payments due to it in relation to all such Sales and sub-licenses in the manner set out in this Agreement. The Licensor shall not be entitled to any injunctive relief or other equitable relief with respect to the any distribution; sale, licence or sub-licence by Licensee of the Product made during the Term."

11. I shall refer to clauses in the commercial terms as CT.1 and so on, and to clauses in the standard terms as ST.1 and so on.
12. It will be noted that CT.6 and 9 together contain the provisions relating to reconciliation; that the reconciliation date is there defined as the date "six months after the date of first release within the Territories of the first of the three Licensed Formats to be released by the Licensee"; that the "Target Sales" set out in CT.9.2 are target sales for the period ending on the reconciliation date; that CT.6 and 9 cross-refer to one another; that the CT.6 "shortfall" as there defined is only to be recouped up to a maximum of £356,000 and only from monies already paid into escrow by the licensee under CT.4(c) as part of the third advance (as to £178,000) and under CT.7 as part of the January and March 2000 instalments of the price for the option (as to £89,000 and £89,000 respectively), and even then only if negotiation on compensation in the form of a further licence is unsuccessful; and that it is unclear whether the repayment to be made as a result of a ban under the provisions of CT.9 (in an amount to be quantified by comparing actual sales with target sales in a territory where a ban has caused at least some part of an overall under-recoupment of royalties as against advances) stands clear of the £356,000 limit and escrow source provisions stipulated in CT.6.
13. The CT.6 shortfall is measured by comparing royalties accrued against advances paid, all as at the reconciliation date. The CT.9 under-recoupment caused by a ban is measured instead by comparing royalties actually accrued in the applicable territory against royalties which would have been accrued on targeted sales in that territory, as at the reconciliation date. It is unnecessary for the purposes of this appeal to decide whether the licensee's rights of compensation/repayment in respect of the CT.6 shortfall and in respect of the CT.9 under-recoupment are respectively cumulative, or overlap.
14. Despite that uncertainty, it is clear that the provisions of CT.6 and 9 form a carefully balanced code under which to a certain extent the risk for the licensee inherent in the non-returnability of the advances is mitigated by a limited right or rights of repayment, but no further. The risk of a ban on the game was clearly foreseen and allowed for, but, whatever the relationship of repayment under CT.9 with repayment under CT.6, the transfer of such risk from licensee to licensor was limited and curtailed. First, the comparison between targeted sales and actual sales was only to be made once during the entire term of the licence, as at the reconciliation date. Thus, it was not to be an ongoing reallocation of risk. A ban might continue beyond the reconciliation date, it might last throughout the five year term of the licence: however, there is no provision for any later or renewed cross-comparisons between revenue on targeted sales and actual revenue. Secondly, any fall-off in targeted sales in any territory affected by a ban would not matter at all if that fall-off did not result in an overall under-recoupment as between royalties as of the reconciliation date and advances. That is because CT.9 only begins to operate if there is "any under-recoupment of the Advances" as at the reconciliation date. Thirdly, the CT.6 concept of shortfall is itself limited by the maximum figure of £356,000 and the provision that the source of any money of repayment was to come from funds which the licensee had itself to provide and put into escrow.
15. The licensee also had a degree of protection in the provision in CT.4(d) that the fourth advance of £0.4 million only had to be paid when once accrued royalties had reached £1.8 million, the total of the three previous advances. That provision, however, only related to the fourth advance. There was nothing in the licence that protected the licensee from the need to pay the third advance of £0.6 million at its due date just because at that time accrued royalties only amounted as yet to something lower than the £1.2 million total of the first two advances.

The termination

16. The exercise of the licensor's right of termination under the termination clause is (no longer) in issue, at any rate for the purposes of this hearing. I can therefore deal with it very briefly.
17. The third advance was due on 26 October 1999. On 17 November the licensor's solicitors faxed the licensee to give it ten days' notice to pay £422,000 to the licensee and to place the balance of £178,000 into escrow. If that was not done, the licensee was warned that the licence would be terminated. The payments were not made. On 21 December the licensee's solicitors therefore wrote again, terminating the licence and informing the licensee that the licensor would "pursue a claim for damages against you". An up-to-date account showing all royalties accrued due to the licensor to date was requested.
18. On 30 December the licensee's solicitors requested that no action be taken before 21 January 2000. On 4 January 2000 the licensor indicated that it would stay its hand if payment were made by 21 January, and on 7 January the licensor's solicitors made it clear that that concession was without prejudice to the licensor's position that the licence had already come to an end on 21 December and that if payment were not made the licensor would commence proceedings seeking damages for breach of contract. Nothing was paid, and on 28 January these proceedings were commenced.
19. There has been some discussion as to whether the termination amounted to the acceptance of the licensee's repudiation of contract or whether it was merely that the licence came to an end under the contractual provisions for termination. On behalf of the licensee, Mr Ian Hunter QC has submitted that there was no repudiation, and has pointed out that the licensor's pleadings have made no express reference to repudiation or to any claim to damages for loss of bargain. He has also referred to CHITTY on Contracts, 28^th ed, 1999, at para 23-047, where the question is raised whether a contractual termination is accompanied by circumstances of repudiatory breach (by which I mean to include breach of condition). If it matters to the issues debated on this appeal, it is my view that the licensee's breach in failing to pay the third advance after a notice to pay, which in effect made time of the essence, was clearly a breach of condition and thus a repudiatory breach. Moreover, although the licensee has not spoken expressly of a claim for repudiatory damages, the correspondence which made clear that a failure to pay would result in a claim for damages, and the particulars of damage now given, which include a claim for damages in the amount of the option payments which would have become due under CT.7.1 in January and March 2000, are clearly premised on repudiatory damages for loss of bargain. The fact that such loss of bargain damages do not go on to claim damages for loss of royalty payments that might have accrued due to the licensor over the five year term of the licence is neither here nor there.

The licensee's reliance on a royalties statement as of 31 January 2000

20. In its defence and counterclaim, the licensee alleged that Carmageddon had been banned in both France and Germany and that it was therefore entitled to rely on the provisions of CT.9. The licensor disputes that what has happened in France and Germany amounts to a ban within the meaning of CT.9, but is content to press its claim for summary judgment on the hypothesis that the licensee's allegation of a ban is arguable.
21. The licensee also relied in its defence and counterclaim on a document headed "Carmageddon Sales", which is undated but which the licensee alleges gives an account of sales and royalty accruals as of 31 January 2000. Mr Hunter has also told the court on instructions that the royalty position shown in that statement has not changed to this day. That seems improbable, given the six-month sell-off period provided for under ST.11.2.
22. The royalty statement shows that actual royalties accrued on sales up to 31 January 2000 totalled £1,119,785, whereas royalties that would have accrued if sales had met the target figures for the whole of the reconciliation period set out in CT.9.2 totalled £1,521,720. As for France and Germany, royalty accruals on sales actually made totalled £206,051 as against projected royalties on target sales in those countries in the reconciliation period of £566,627, a shortfall of £360,576. The statement calculated that royalties on target sales in territories outside France and Germany were £955,094, whereas royalties on actual sales in territories outside France and Germany were £913,734, a shortfall of only £41,359. The statement was designed to show, in other words, that something special had occurred in France and Germany, viz a "ban", so as to depress sales there to only some 36% of projected royalties in the reconciliation period, whereas outside France and Germany royalties accrued very nearly matched such projected royalties.
23. It is important to remember, however, that as of 31 January 2000 the reconciliation period had not come to an end. That would not happen until sometime in April 2000 (on the licensor's case) or at earliest 16 March 2000 (on the licensee's case). If the licence had continued without the licensee's breach and thus without termination, sales outside France and Germany in the whole of the reconciliation period, for all one could tell, might have greatly exceeded the target sales. After all, the target sales in the territories outside France and Germany had nearly been met already by the end of January. Even sales in France and Germany might, by the end of the reconciliation period, have matched the target sales for that period. Even if sales in France and Germany had stayed more or less where they were at the end of January, sales outside France and Germany might, by the end of the reconciliation period, have more than made up for any shortfall in sales in France and Germany. In such circumstances there might even have been no shortfall within CT.6 at all, by the end of the reconciliation period. If there was no shortfall within CT.6, then there could be no claim for repayment within CT.9, even if sales in France and Germany had been affected by a ban (see CT.9.1's "any under-recoupment of the Advances" and CT.9.2's "If there is any under-recoupment of the advances").
24. It is not clear what use the licensee sought to make of its royalty statement. The terms in which it was communicated to the licensor are not in evidence. In its defence and counterclaim the licensee merely pleads that the statement indicates "details of the under-recoupment in the total amount of £80,214.97": it was therefore alleged that the licensor was entitled to no further sums under the licence, and that the termination was wrongful. On the same basis the counterclaim pleads that the licensee was "entitled to £80,214.97 due to under-recoupment of the Advances" and damages for wrongful termination.
25. None of this makes sense for present purposes. The termination is accepted as being valid. The royalty statement is not a reconciliation statement and is not drawn up for the whole of the reconciliation period. The statement makes no calculation in terms of any under-recoupment of £80,214.97. Where does that figure come from? It is the difference between the total of the first two advances, £1.2 million, a figure nowhere indicated on the statement, and the royalties accrued by 31 January 2000, namely £1,119,785.

The proceedings below

26. On 19 July 2000 the licensor's application for summary judgment came before Master Prebble. Much of the argument before him was directed to whether or not there had been a ban in France and Germany. It was argued by the licensor that since the £600,000 third advance was due before termination, there was no defence to the request for payment of at any rate £422,000. As for the licensee's alleged right of recoupment by reason of a ban in France and Germany, it was held that no such right could arise after termination. There is no sign from the licensee's skeleton argument before Master Prebble, nor from the note of Master Prebble's judgment, that the licensee placed any reliance on ST.11.2 to argue that under the express terms of the licence the reconciliation period provisions survived termination. In the event Master Prebble held that they did not. He is noted as saying that CT.9.1 "does not seem to bite because it contemplates the contract still being in force, when in fact it had been terminated". He therefore gave judgment for damages to be assessed, and made an order for interim payment in the sum of £422,000. He seems to have regarded that minimum figure as being due by way of damages rather than debt. He granted permission to appeal.
27. On appeal to Judge Raymond Jack QC, sitting as a deputy high court judge, the licensee appears to have argued for the first time that the provisions of CT.9 were kept alive after termination by the express provisions of ST.11.1. Judge Jack rejected that submission. He asked whether CT. 6 and 9 were "expressly intended…to continue in force" after termination, and concluded that they were not. That is the first issue which arises on this appeal. Judge Jack then went on to consider another argument raised by the licensee for the first time before him, to the effect that at the time of termination it had an "accrued right" to set off any under-recoupment whether under CT.6 or 9, and that the loss of that accrued right following breach was an unenforceable penalty. The judge rejected that submission as well. He pointed out that the reconciliation was to be carried out over a period of six months, and that no right could arise prior to the end of that period because nobody would know what the figures would be. The submission is repeated before this court, in the form of the second issue, but without much enthusiasm. A third point was then raised before the judge, which like the other two had not been raised before the master. This was that if the rights under CT.6 and 9 were not exercisable after termination, then the loss of the licensee's rights under those clauses following breach amounted to a penalty, so as to make the licensor's claim unenforceable. Judge Jack gave that argument short shrift. He said that the law relating to penalties had nothing to do with the situation before him: nothing was stipulated to be payable to the licensee upon breach. That is the third issue before this court.

Issue 1: Does ST.11.1 keep CT.9 alive after termination?

28. Mr Hunter made it clear that he was only concerned with the licensee's rights under CT.9, not CT.6. (He accepted that since repayment of any shortfall within CT.6 was only obtainable out of money paid into escrow, the licensee could obtain no relief under CT.6 in circumstances where it had paid no money into escrow, whether under CT.4.1(c) or CT.7.) For the purposes of repayment under CT.9, however, he emphasised ST.11.1's provision that termination "however occasioned" was not to affect "the continuance in force of any provision of this Agreement which is expressly intended to…continue in force on or after such termination…". He placed especial reliance on the very next phrase of ST.11.1 – "(including clauses 5, 6, 7, 8, 9 and 10)". He then pointed to ST.5, one of the clauses specifically referred to in that parenthesis. ST.5 begins – "The Licensee shall pay the Advances and accrue to the credit of the Licensor the Royalties in accordance with the Schedule of Commercial Terms…" Mr Hunter submitted that the express reference over to the Schedule of Commercial Terms in ST.5 thereby brought all of the provisions in the former which related to the payment of advances and the accrual of royalties within the scope of ST.11.1's reference to ST.5 as intended to continue in force after termination. Thus it was that CT.9 was intended to continue after termination. It followed that the licensee was entitled to set off against the advances otherwise due the under-recoupment due to a ban under CT.9, as quantified by the provisions relating to target sales under CT.9.2. He emphasised that for the purposes of CT.9.1, where under-recoupment was involved, it was not simply that such under-recoupment was to be repaid to the licensee but "the total of the Advances shall be deemed reduced by such amount…" More generally, repayment of the amount of under-recoupment because of a ban was just one aspect of the accounting function, and it was plain from ST.5 and 6 that accounting was intended to continue after termination. Thus ST.5 said that advances and royalties were to be accounted for in accordance with ST.6, and ST.6 showed that it was intended to survive termination: hence the proviso in ST.6.1 to the effect that "after the expiry of the Term" the licensee remained liable to furnish statements "on reasonable request by the Licensor".
29. In my judgment, however, this argument is unsustainable. I would seek to put the matter in the following way. (1) The general structure of the licence is that the advances are non-returnable. The only exceptions are the express provisions for repayment under CT.6 and 9. (2) Those exceptions depend upon a calculation to be made as of the reconciliation date after a period of six months from first release. (3) That calculation over that period is not a mere mechanism for a delayed calculation, but part of the working process of an ongoing contract. That is shown under the express terms of CT.9 by the comparison to be made between actual and target sales during the reconciliation period. It is also inherent in the very structure of the licence. (4) Thus, while the contract is alive, the licensee is the exclusive distributor of Carmageddon throughout the territories, and is under an obligation to maximise sales throughout those territories (ST.4). After termination, the licensee is neither protected by exclusivity nor obliged to sell. The whole concept of the reconciliation period makes no sense after termination. (5) While the facts do not of course enter into the process of construction, they illustrate that process. Thus a royalty statement as at 31 January 2000, itself drawn up nearly six weeks after the termination date of 21 December 1999 and at least a further six/seven weeks before the end of the reconciliation period, tells one nothing about what the position would have been like at the reconciliation date if the contract had continued in existence. (6) The primary remedy under CT.6, for negotiations for a further licence of some other product, itself assumes an ongoing relationship between licensor and licensee. It certainly makes no sense in a situation where the licensor has terminated the contract because of the licensee's breach. (7) The critical provision under ST.11.1 for the "continuance in force of any provision" after termination is that such provision is "expressly intended" so to continue. There is nothing in CT.9 to justify a conclusion that it is expressly intended to continue. There is nothing in CT.9 to justify a conclusion that it is even impliedly intended to continue. On the contrary, for reasons already stated, it is part of a scheme which assumes that the contract is still ongoing.
30. (8) The only express reference to any other provisions of the licence in ST11.1 is to ST.5/10: that is not a reference to any CT provision. (9) The reference to ST.5/10 is in the phrase "including clauses 5" etc. That is not an easy phrase to construe. In my judgment it is to be construed as subject to the primary phrase "any provision of this Agreement which is expressly intended to come into or continue in force on or after such termination". Thus the meaning is: "any provision of this Agreement (including ST.5/10) which is expressly intended…". (10) That is demonstrated by a consideration of ST.5/10 themselves. ST.10 deals with termination. It is plainly not intended to continue in force on or after termination. Perhaps it is thought of as expressly intended to come into force on termination, but I doubt it. Perhaps it is cited in error for ST.11 itself, since ST.11.2 contains what is among the most important provisions for the period after termination or expiry, namely the provisions relating to the six month sell-off period, when the licensee is entitled (but not obliged) to continue selling its inventory, as well as games in production or on order or needed to fulfil outstanding orders. Plainly the provisions of ST11.2 are intended to remain in force after expiry or termination. On the other hand ST.7 ("Representations, Warranties and Indemnities") is full of expressions that "during the Term" such and such will be the case. Those provisions are not intended to extend to a period after expiry or termination, save of course in the sense that every term of any contract does so, as the measure against which performance during the contract is measured and remedies may be claimed after breach. (11) The only other express references to the period after termination or expiry are in ST.6.1 (which refers to the circumstances in which there will be a need to account in the period after expiry: plainly even in the absence of a sell-off period there will be on-going accounts to be settled in the period after termination or expiry); and in ST.9.2 (where it is said that each party shall "both during and after the Term" hold each other's confidential information in confidence).
31. (12) It is submitted nevertheless that CT.9 is intended to continue in force after termination because it is incorporated into ST.11.1's reference to ST.5 via ST.5's statement that the licensee shall pay advances and accrue royalties "in accordance with the Schedule of Commercial Terms". That, however, takes the matter no further. CT.9 is not "expressly intended" to continue in effect after termination. The reference to ST.5 in ST.11.1 does not mean that every provision in ST.5 itself is intended to continue after termination. To the extent that ST.5 goes on to refer to accounting in accordance with ST.6 and to the extent that the accounting function in ST.6 is there expressly intended to continue after termination (see (11) above), it is possible to say that ST.5 is a provision which expressly contemplates its continued effectiveness after termination. But not in any other sense. Plainly the obligation to "pay the Advances" is not intended to continue in force after termination. A fortiori, there is no intention, let alone an express intention, that the reconciliation provisions of CT.6 or 9 are intended to continue in force.
32. (13) Finally, the licensee's case is in any event factually incoherent. Even if, against all these considerations, the reconciliation provisions were intended to continue in force after termination, it remains impossible to understand how those provisions are to be applied where termination occurs during the reconciliation period itself. Why should the sales as of 31 January 2000 be matched against the target sales for the whole of the reconciliation period? Why not the sales as of 21 December 1999? What if total sales over the whole of the reconciliation period would have exceeded £1.8 million? Or amounted, let us assume, to £1.7 million? Why would that justify non-payment of the third advance and in particular the sum of £422,000 claimed? Why in any event would a shortfall on royalties on target sales in France and Germany up to 31 January 2000 (or perhaps 21 December 1999?) amounting to £360,576 justify non payment of the whole of the third advance? The licensee has not sought to grapple with any of such questions in either its evidence or its submissions. This is in my judgment also symptomatic of a fundamental weakness in its submissions on construction.
33. For these reasons, the licensee's appeal on the first issue must be dismissed.

Issue 2: did the licensee have an accrued right to reconciliation under CT.9 as of 21 December 1999?

34. Mr Hunter submits that as of 21 December 1999 the licensee already had an accrued right to reduction or repayment of the advances under CT.9 for any under-recoupment by reason of a ban.
35. ST.11.1 states that termination of the licence, however occasioned, shall not affect accrued rights or liabilities. In so providing, the licence restates the common law, for it is the classic position that on termination of a contract, whether by expiry or by breach, the parties' accrued rights and liabilities are not affected. Other remedies may arise where termination occurs by reason of breach, but accrued rights and liabilities are not affected. Thus CHITTY at paras 25-050/1 states:

"Rights acquired before discharge. Although both parties are discharged from further performance of the contract, rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. Where, at the time of discharge, money is due under the contract by the innocent party but that sum remains unpaid, the innocent party is not required to pay that sum if it would then be recoverable by him in a restitutionary claim (for example, on the ground that there had been a (total) failure of consideration).Otherwise, the innocent party can retain or recover sums paid or due before the time at which the repudiation is accepted by him and may maintain an action for damages in respect of any cause of action vested in him at that time…

"Position of guilty party. Upon discharge, the primary obligations of the party in default to perform any of the promises made by him and remaining unperformed come to an end, as does his right to perform them. But for his primary obligations there is substituted by operation of law a secondary obligation to pay the other party a sum of money to compensate him for the loss he has sustained as a result of the failure to perform the unperformed primary obligations."

36. The reference in the earlier of those two passages to rights which have been "unconditionally acquired" is a reference to the judgment of Dixon J in McDonald v. Dennys Lascelles Ltd (1933) 48 CLR 457 at 476, unanimously approved by the House of Lords in Johnson v. Agnew [1980] AC 367 at 396E/F. Dixon J said:

"Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired."

Although that was said in the context of a contract discharged by the innocent party's election to accept a repudiation as putting and end to the contract, the same principle applies to termination under express provision, in the absence of contrary agreement.

37. As of 21 December 1999 the third advance was an accrued right, but the right of reconciliation as of the reconciliation date was not. The fact that as of the reconciliation date the advances might, or might not, have become subject to some adjustment is neither here nor there. If the licence had ended because of the licensor's breach, then the licensee might have had a claim in damages if it had been able to prove that it had been deprived of what would have been a valuable right of adjustment as at the reconciliation date. But it is accepted that the licensor was entitled to terminate.
38. In his half-hearted support of this submission, Mr Hunter did no more than refer to an authority in a different area of the law, namely Chief Adjudication Officer v. Maguire [1999] 1 WLR 1778. There the court of appeal had to construe the meaning of "accrued" in the context of section 16(1)(c) of the Interpretation Act 1978, which provides –

"(1)…where an Act repeals an enactment, the repeal does not, unless the contrary intention appears…(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under that enactment…"

39. The court of appeal held that for the purposes of the repeal of section 60 of the Social Security Act 1975 a claimant's right to claim special hardship allowance in respect of a period prior to that repeal was preserved once the claimant had satisfied all the preconditions to entitlement of the benefit prior to repeal save that of making the requisite claim itself, that claim, however, subsequently being made within the prescribed time under the repealed section. Simon Brown LJ considered the authorities on section 16(1)(c) and concluded as follows (at 1787H):

"A mere hope or expectation of acquiring a right is insufficient. An entitlement, however, even if inchoate or contingent, suffices. The fact that further steps may still be necessary to prove that the entitlement existed before repeal, or to prove its true extent, does not preclude it being regarded as a right."

40. It did not matter on the facts of that case, but at least a majority of the court of appeal seems to have thought that Mr Maguire's right was an "acquired" rather than an "accrued" right (see at 1788E, 1789C and 1791C, cf at 1787G).
41. It seems to me, however, that this line of authority has very little to do with contract. Contract is a matter of private treaty. In the absence of express provision, the position at discharge is a matter of the common law. Statutory rights, however, are creatures of statute and when statutory provisions are repealed it may be necessary for there to be complex transitory provisions. In the absence of such express provision, the rule is as stated in section 16(1)(c). It is not at all surprising to find that a statutory right to benefit is acquired or has even accrued in the absence of a claim, just as a contractual right will have accrued (subject to contrary provision) before it has been claimed or made the subject of proceedings.
42. In any event, the facts of this case do not come within the principle of Maguire. In this case, the relevant period (the reconciliation period) had not closed before termination; the conditions for entitlement had not been met; it was entirely uncertain whether they would ever have been met, even if the contract had continued in full force; as it was, with the licence at an end, the conditions for testing whether there would have been under-recoupment as at the reconciliation date were no longer even in existence; in the circumstances it is impossible to say that as at 21 December 1999 the licensee had more than a hope or expectation that, if the contract had continued, an under-recoupment due to a ban might have been proved. None of this, of course, has anything to do with the mere machinery of reconciliation. The reconciliation statement had to speak to the reconciliation date, but it did not have to be produced at the reconciliation date. If the licence had come to an end after the reconciliation date but before the production of a reconciliation statement, the licensee might well have been entitled to say that it had an accrued right to any reduction or repayment of an advance which a reconciliation statement could substantiate.
43. In my judgment, therefore, the second issue on this appeal must also be decided against the licensee.

Issue 3: Is the loss of the licensee's rights under CT.9 a penalty?

44. Mr Hunter submits that if he is wrong as a matter of construction of the licence, so that upon termination the licensee lost what would otherwise have been its rights under CT.9 to a reduction or repayment of the advances, then that result would amount to the enforcement of a penalty: that such a penalty is, however, in principle unenforceable, and that the licensor is thus restricted to such damages as it can prove but cannot enforce its claim (for £422,000) in respect of its third advance.
45. It is important to appreciate the limited nature of this submission. Mr Hunter has made it quite clear that he is not saying that the non-returnable nature of the advances (subject to the exceptions contained within CT.6 and 9) amounts, upon breach, to a penalty. He accepts that the advances are non-returnable (subject to those exceptions), and makes no complaint about that. He does not submit, as he expressly made clear, that the advance payments under the contract are a disguised form of penalty. His submission is rather that the inability to exercise the right to reconcile as at the reconciliation date, if that right does not survive termination, and where that inability follows breach, amounts to a forfeiture upon breach and thus an unenforceable penalty.
46. It is difficult to get hold of this submission. Ex hypothesi the licensor is entitled to payment of the third advance (it concedes that as to £178,000 that advance has to be paid into escrow rather than directly to itself). Ex hypothesi, the licensee has no accrued right to exercise the reconciliation machinery under CT.6 or 9. Ex hypothesi, the licensor's right to the third advance arises in advance of any breach and therefore cannot in itself amount to a penalty. Ex hypothesi, the reconciliation period provisions cannot be operated under the terms of the contract. Nevertheless, it is suggested that the licensor is relegated to claim such advances, in the premises such part of the third advance, as might have survived a reconciliation as at the reconciliation date, had the contract survived to the end of the reconciliation period. If that were right, the burden of proving what the licensee would have sold throughout the territories would have fallen upon the licensor. I asked Mr Hunter what term he could point to in the licence as representing the penalty clause in this case. He was unable to point to any: he repeated his submission that if the licence is construed so as to make CT.6 and 9 ineffective after termination, that consequence must be adjudged a penalty.
47. It is possible that the submission amounts to the complaint that termination prior to the reconciliation date amounts to a forfeiture of the licensee's rights under CT.6 and 9. If so, then that forfeiture could arise irrespective of breach, and if the licensee is in breach, only as a consequence of the licensor's independent decision to operate the termination provisions. The licence contains no forfeiture clause (unless the non-returnable nature of the advances is so termed, a point which Mr Hunter eschews). There is no property, no chattel, no money, no cause of action, which is lost as a result of breach, not even as a result of termination consequent on breach. The licensee does not have an accrued right, a cause of action, pursuant to CT.6 or 9, which is lost as a result of its breach or as a result of termination consequent on its breach. If the reconciliation date had passed before termination, then the licensee would have a cause of action and an accrued right, if there was an under-recoupment within the meaning of CT.6 or 9, to a remedy as provided by those clauses. But then its breach or termination could not harm that cause of action or right. It is because the licensee has, as it were, imperilled its licence as a whole, by acting in breach in such a way as to entitle the licensor to terminate the licence under its termination provisions and/or as an acceptance of the licensee's repudiation, that the licensee is in danger of having lost whatever it might (I stress might) have been able to prove (I stress that the burden would have been on it) under the reconciliation regime. By insisting on those contractual rights even after it has cast away its contract, the licensee is seeking to rewrite the contract in its favour. It is not in my judgment asking the licensor to prove its real damages, or asking the court to give relief against a penalty or a forfeiture.
48. The classic statement of a penalty comes from the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd [1915] AC 79 at 86/88. He there said that the "essence of a penalty is a payment of money stipulated in terrorem of the offending party", that the issue is "a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of making the contract", and that the provision will be held to be a penalty "if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid". Mr Hunter, as I understand him, would gloss "a payment of money" as including "a forfeiture of rights", and relies upon the loss of rights under CT.6 and 9 as being in terrorem and as amounting to forfeiture of a sum greater than the sum which ought to have been paid, which he characterises as interest upon the advance sum due.
49. I am prepared purely for the sake of argument to assume that in the appropriate circumstances a forfeiture of rights is proscribed as much as a payment of money (although I think that assumption goes further than the law currently allows), but for reasons which I have sought to explain I do not think that at the time of termination the licensee's future rights under the reconciliation provisions were rights such as the law on penalties protects. Secondly, I do not accept that the termination provisions, or the classic effect of them, namely to leave accrued rights in place but only accrued rights, are stipulated in terrorem. If that were so, then there could hardly be any termination provisions which would be immune from attack. In Scandinavian Trading Tanker Co AB v. Flota Petrolera Ecuatoriana (The Scaptrade) [1983] AC 2 AC 694 the House of Lords held that a withdrawal clause under a time charter, exercised on the ground of the charterer's failure to make punctual payment of an instalment of hire, was not subject to the equitable right to relief against forfeiture, even though it involved the loss of a valuable charter (since classically such rights of withdrawal are exercised where the market rate of hire is substantially above the charter rate). The House of Lords distinguished, however, between such merely contractual rights, and contracts concerning the transfer or creation of proprietary or possessory rights (at 702C). In Sport International Bussum BV v. Inter-Footwear Ltd [1984] 1 WLR 776 the House of Lords applied the ratio of The Scaptrade to "mere contractual licences" to use certain names and trade marks and refused to give relief. Thirdly, the termination provisions of the licence were not exercised because of a breach which "consists only in not paying a sum of money", but because of the failure to make a payment where time was of the essence and thus because of a repudiatory breach of contract. Nor is the consequence the stipulation of a sum greater than the sum which ought to have been paid. What the licensor wants, and is entitled to, is the payment of the third advance, which was already due before termination.
50. If I have mistaken the nature of Mr Hunter's submissions, it may be that they will become clearer in the light of the authorities on which he relies. He begins with CHITTY at para 27-113:

"It is uncertain how far the law applies to a clause which imposes on the contract-breaker adverse consequences other than the payment of money or forfeiture of money already paid, or of proprietary or possessory rights held by him…"

That is not of much assistance. The passage continues –

"The law does not apply…where a member of a pooling agreement failed to pay his levy to finance litigation and was excluded from sharing in the proceeds of the litigation…"

citing Nutting v. Baldwin [1995] 1 WLR 201. In an admittedly very different context, that authority has echoes of the facts of the present case. In para 27-122 the learned authors go on to cite the authorities on forfeiture, such as The Scaptrade and Sport International v. Inter-Footwear, to which I have referred above.

51. Mr Hunter's principal authority was Jobson v. Johnson [1989] 1 WLR 1026. The court of appeal there held that a clause in a contract for the sale of shares, whereby the purchaser had to retransfer the shares if he defaulted in the payment of any instalment, irrespective of the value of the shares, was a penalty. The essence of the decision is, in Dillon LJ's words at 1034H, that –

"In principle, a transaction must be just as objectionable and unconscionable in the eyes of equity if it requires a transfer of property by way of penalty on a default in paying money as if it requires a payment of an extra, or excessive, sum of money."

52. That does not seem to me to apply to this case. The licence does not stipulate for the transfer of property by way of penalty upon breach. It merely permits the innocent party to terminate the licence for breach of condition.
53. Mr Hunter also relied on Commissioner of Public Works v. Hills [1906] AC 368. There a railway construction contract expressly provided that in the event of the failure to complete the line within the specified period the contractor would forfeit retention moneys retained as a fund by the employer on not only that contract but two other railway contracts as well. The Privy Council had no difficulty in finding that this forfeiture was not a genuine pre-estimate of loss, and that the amount of the retention moneys were entirely unconnected with the gravity of the breach. That has nothing to do with the instant case, where the ultimate value of the rights lost by the licensee, if any, because of its own repudiation of the contract, are uncertain for the very reason that it has put itself in a position where it is unable (as well as being unwilling) to carry out the terms of the contract.
54. Thirdly, Mr Hunter relied on Workers Trust & Merchant Bank Ltd v Dojap [1993] AC 573. There a 25% deposit had been made under a Jamaican contract for the sale of land. The deposit had been forfeited on the purchaser's failure to complete the contract. The Privy Council held that the anomalous exception to the law of penalties represented by the ancient law regarding deposits as an earnest of performance was not to be extended to cover a situation where the 25% deposit was neither a true earnest of performance nor shown to be reasonable in the circumstances of the contract in question. Again, the case illustrates the fact that a forfeiture upon breach may be as much of a penalty as a stipulation for the payment of a sum of money on breach; but it goes no further to support Mr Hunter's submissions in this case.
55. Finally, Mr Hunter relied on Gilbert-Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd [1974] AC 689. One of the clauses considered in that case was a provision which entitled the employer to "suspend or withhold payment of any monies due or becoming due" in the event of any breach by the contractor of any kind. As Lord Salmon said (at 723H) –

"it would enable the contractors to suspend or withhold payment of very large sums of money due by them to the sub-contractors in the event of the sub-contractors committing some minor breach of contract causing only trivial damage in no way comparable to the amount owed by the sub-contractors. The paragraph is therefore unenforceable since it provides for the exaction of a penalty."

56. Again, this authority merely illustrates that a provision can amount to a penalty without stipulating for payment of money. That, however, does not answer the difficulty in the licensee's path. Here there is no prospect of any sum due to the licensee until the end of the reconciliation period. Under the terms of the licence the reconciliation date was necessarily going to be a date no earlier than mid March 2000, whereas the third advance was necessarily going to be a date no later than 26 October 1999: that was because under CT.4.1(c) the third advance was due at latest 90 days after Nintendo had given its approval of the N64 and CGB versions, and that approval had already been given prior to the date of the licence, on 28 July 1999. Therefore the amount or even the possibility of any under-recoupment as at the reconciliation date must have been entirely uncertain as of the date for the payment of the third advance. In the meantime termination may occur, not for any breach by the licensee, however minor, but only because of an unremedied breach of a "material" obligation capable of remedy and only after a notice to pay had been neglected.
57. Finally, Mr Hunter raises the example of a termination for breach on the eve of the reconciliation date, in circumstances when it might be certain that the licensee would become entitled to a substantial reduction or repayment of the advances. That, however, does not answer any point of principle. The third advance would have been outstanding since 26 October 1999. Of course, if it looked from an early stage that because of bans in numerous countries the adventure had gone horribly wrong, it would be open to the parties, if they wished, to come to some accommodation with each other. For the rest, it is a matter of cash flow. Under the licence, the cash flow risk is put, but only for a relatively short period, upon the licensee, pending the reconciliation date and the relief, such as it might turn out to be, to be obtained under the provisions of CT.6 and 9. That is no reason for subverting the law on penalties.

Conclusion

58. It follows that the licensee has failed to persuade me that it has a realistic prospect of any defence on any of the three issues raised on this appeal. In truth, however, this appeal has not been argued on the basis that an arguable defence might suffice. On matters of pure law or construction, the parties have wanted to know the court's view. In my view this appeal must be dismissed. The licensor is entitled to judgment on issues of liability, with the quantum of its entitlement, whether in debt and/or damages, to be assessed. It is entitled to payment of at least £422,000, a sum which I would regard as due to it in debt, rather than in damages.

LORD JUSTICE MAY:

59. I agree with Rix LJ that this appeal should be dismissed. I gratefully adopt his account of the facts and I will not again set out at length the terms of the license agreement to which he has referred.
60. The essential structure of the license agreement is as follows. The claimants appointed the defendants as exclusive distributor of some arguably offensive computer games. The parties agreed to work together to market the products and the defendants were obliged to use all reasonable commercial efforts to maximise sales. They were obliged to spend a minimum of £500,000 in the first month or so on marketing. The term of the agreement was 5 years. The claimants were entitled to receive royalties on sales and the defendants had to account for the royalties. The defendants had to pay "Advances" amounting eventually to £2.2m. in four instalments. Subject to the terms of the agreement, the advances were "non-returnable" but recoupable out of royalties (clause 4.2 of the Commercial Terms). Thus the Advances were in part payments on account of royalties. If all went well, once the royalties exceeded £2.2m, the Advances would be paid off and would cease to have significance. After 6 months, there was to be an exercise to see how things were going. Essentially, if at that date – the "Reconciliation Date" – the royalties were less than the Advances, part of the Advances were to be paid back up to a maximum of £356,000. The £356,000 was to come from an escrow account whose money was in part to come from the third instalment of the Advances and in part from separate payments of an Option Fee for additional distribution rights (clauses 6 and 7 of the Commercial Terms). The defendants did not make the relevant payments, so that the escrow account did not come into being. In addition to a comparison at the Reconciliation Date between royalties and Advances, there was to be another exercise if sale of the products was banned in any of the territories. In that event, there was to be a comparison between the royalties received for those countries and the royalties that would have been received on Target Sales for the six month period (clause 9 of the Commercial Terms). To the extent that the value of actual sales was less than the Target Sales, the Advances were to be reduced by the amount of royalties attributable to the difference and this calculation was to be included in the Reconciliation Statement.
61. In my view, it is clear that the only material respects in which clause 9 of the Commercial Terms enlarged clause 6 was that (a) the comparison in clause 6 was between royalties and Advances, but the comparison in clause 9 was between royalties on sales and Target Sales – so that in theory the mathematics might be different; and (b) that the clause 9 calculation was not subject to the maximum of £356,000. If clauses 6 and 9 of the Commercial Terms had become operative (as, in my view, they did not), difficult questions might have arisen as to whether the clause 6 and 9 adjustments were cumulative or distinct; and as to the operation of the clauses, if adjustments were to be made but there was no escrow account. It is not, in my view, necessary to resolve these difficulties on this appeal.
62. The Advances were, as I have said, in the nature of payments on account whose significance was expected to be temporary. In the same way, the Reconciliation was a temporary adjustment of a temporary position if, as was obviously hoped, the time would soon arrive when the royalties exceeded the Advances. Since, if the contract were to run its expected course, the Advances would cease to be relevant once the royalties exceeded the Advances and since the parties no doubt expected that this would happen, they only contemplated that the Advances would be non-returnable if (a) there were a commercial disaster and the product did not sell, or (b) there was an early termination. Mr Hunter QC on behalf of the defendants accepted that "non-returnable" means what it says, subject to his submissions about clause 6.1 and 9.1 of the Commercial Terms. In this context it is pertinent that clause 7.1 of the Commercial Terms also provided that the payments of the Option Fee for additional distribution rights should be non-returnable.
63. Clause 10 of the Standard Conditions entitled either party to terminate the agreement immediately, if the other party was in breach of any of its material obligations and if the breach continued unremedied for a specified period after an appropriate notice had been given. As it happened, the defendants failed to pay the third instalment of the Advances on the due date and the claimants lawfully terminated the agreement under this clause. The claimants became entitled to damages, although the nature and extent of the damages may be debatable. By clause 11 of the Standard Conditions, the termination did not affect accrued rights or liabilities and those provisions of the agreement which were expressly intended to come into force or continue in force were unaffected. For a period of 6 months, the defendants were entitled, but not obliged, to continue selling units in their inventory or in production or needed to fulfil outstanding orders at the date of termination. Clause 11 was capable of applying to any termination, including termination upon the expiry of the term of the agreement.
64. Mr Hunter has two essential submissions. First, he submits that the reconciliation provisions of clauses 6 and 9 of the Commercial Terms survived the termination and so entitled the defendants to a reduction of the Advances in accordance with those clauses. He submits that this was an accrued right or, if not accrued, a continuing entitlement. Alternatively he submits that, if the defendants do not have the benefit of these provisions, there is in the result an unenforceable penalty. He struggles to find the term of the contract stipulating the consequence of its breach which the law would characterise as a penalty, but, if I correctly understand his submission, he says that this is to be found in the denial of the right to have the reconciliation adjustments made.
65. I agree with Rix LJ that the agreement is not to be construed so that, if it is lawfully terminated by the claimants before the Reconciliation Date as a result of the defendants' breach of contract, the defendants are entitled to a reduction of the Advances by the mechanism of clauses 6 and 9 of the Commercial Terms. The Reconciliation Date had not arrived. The calculations which those clauses required could not be carried out. The Reconciliation Statement which the defendants did produce on a date earlier than the Reconciliation Date did not make, and was not capable of making, appropriate comparisons for the appropriate period. The parties cannot have intended that the defendants would have the benefit of a reduction of the Advances by an exercise carried out when the Reconciliation Date eventually arrived after termination, since during the period between termination and the putative Reconciliation Date they were no longer obliged to maximise sales or, indeed, to make any sales at all. More generally, Mr Hunter's submission overlooks the nature of the Advances and the structural purpose of the Reconciliation. These were temporary provisions relating to payments on account which necessarily assumed that the agreement would continue in force. Upon termination of the agreement payment on account ceased to be relevant. The financial balance between the parties had to be struck by accounting for royalties and calculating the claimants' entitlements to damages, if they chose to claim them. The claimants remained entitled to payments due under the contract, including Advances, which ought to have been paid before the date of termination. If the royalties exceeded the Advances, the claimants were entitled to the excess. If the royalties did not exceed the Advances, the Advances were non-returnable – see clause 4.2 of the Commercial Terms.
66. I am quite unpersuaded by Mr Hunter's submission about penalties. This agreement does not stipulate any sum as payable upon the defendants' breach of contract. The fact that, as I think, clauses 6 and 9 of the Commercial Terms do not avail the defendants after termination before the Reconciliation Date is not such a term. Nor can this circumstance be elevated to the status of a forfeiture. The critical point is that, if the agreement is terminated for the defendants' breach before the Reconciliation Date and if the royalties do not then exceed the Advances, the difference is non-returnable. That is not a stipulation in the nature of a penalty, but a contractual entitlement to part of an agreed minimum price. Clause 4.2 of the Commercial Terms would equally have operated, if the agreement had run its 5 year term, there had been no ban in any territory, but the royalties were more than £356,000 less than the Advances.

LORD JUSTICE WARD:

67. I agree that this appeal should be dismissed for the reasons given by Rix and May L.JJ.
ORDER: Appeal dismissed with costs in the sum of £17,630; permission to appeal to the House of Lords refused. (Order does not form part of approved Judgment)