England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CIVIL DIVISION

		Royal Courts of Justice Strand London, WC2
		22 January 2004

1. LORD JUSTICE BUXTON: This appeal arises out of a trademark licence that was entered into on 22nd January 2001 between the holder of the trademark, Kangol Limited, Kangol, a company engaged in the manufacture principally but not exclusively of articles of clothing, a company called Big Hit Limited, and in the third part, Hay & Robertson PLC, to whom we will to refer as the licensee.
2. It is necessary to make clear two points about the second party, Big Hit. Firstly, it is or was at the appropriate time a subsidiary of the licensee, and secondly, it had previously itself held a similar or identical licence from Kangol, and part of the purpose of the agreement, and indeed the purpose on the face of the agreement of Big Hit's participation in it, was to record that the Big Hit itself no longer had such licence.
3. A further aspect of Big Hit's involvement in these affairs was that it was apparently the instrument through which the licensee in fact administered its licence. That was of some importance in respect of a point that was ventilated before the judge but, in circumstances that I shall explain, we in this court are not required to address.
4. The agreement provided for the payment of royalty, as would be expected. In Clause 2.1, it set out firstly that the licensee would pay to Kangol a running royalty of 7.5 per cent of the wholesale price of the products bearing the mark. Secondly, in Clause 2.2, there was provision for payment of a minimum guaranteed royalty, drafted in terms that have been the subject of some criticism by the appellant, Kangol, but which for present purposes, amounted to £130,000.
5. Those terms ran until the end of the year 2005. Thereafter, there were provisions for the extension of the agreement, subject to, in particular, performance by the licensee, firstly, between the years 2006 and 2010, and secondly between the years 2010 and 2015. In the event of such extension taking place, a significantly extended and significantly increased minimum guaranteed royalty would be payable.
6. Those terms however only arose as provided by Clause 4.2 and 4.3 of the agreement if a certain level of sales had been achieved by the licensee. Provision for payment of royalty was made in Clauses 3.1 and 3.2:

3.1:

"The guaranteed minimum royalty should be paid in equal quarterly instalments within 30 days of each of the last day of March, June, September and December and continue yearly thereafter."

3.2:

"The running royalty mentioned in Clause 2.1 above shall be computed quarterly and be paid by the licensee within 30 days of each of the last day of March, June, September and December in each year. The licensee agrees to provide Kangol with a statement and calculation of royalties due to Kangol in respect of the statement.

"At the same time the licensee shall send a remittance to Kangol for the total amount of royalty shown by such statement to be due, save that the licensee may deduct the minimum royalty paid pursuant to Clause 2.2."

7. Then provision for actual form of payment is made. The provisions for termination of the licence are of importance and I must set them out verbatim. They are to be found in Clause 9.1 and Clause 9.2 of the agreement. 9.1:

"Without prejudice to any other right to which it may be entitled, either party may give notice in writing to the other party terminating this agreement with immediate effect if the other party is in breach of any of its obligations hereunder and fails to remedy such breach within a period of 3 months; or if the other party makes any composition with its creditors, or has an administrative receiver or other like officer appointed to the whole or any part of its assets, or if an order is made or a resolution is passed for the winding up of the other party."

9.2:

"In the event that the licensee fails to pay Kangol the minimum royalty level specified in Clause 2.2 of this agreement, Kangol may terminate this agreement forthwith unless the licensee pays Kangol such sums as are required to meet such minimum royalty level at the time such payments are due."

8. The dispute between the parties arises in this way. Payment was not made in accordance with the terms of the agreement. On 11th February 2003 Kangol wrote to Big Hit Limited, indicating that although they had not decided to exercise the right of termination that they asserted, they held open the possibility or likelihood of enforcing those rights in the future. Big Hit or its principal, the licensee, failed to keep within the terms of the agreement on the next occasion on which an instalment was due. On 1st May 2003 solicitors for Kangol wrote as follows:

"We are writing further to the court hearing this morning at which an administration order was granted in relation to Big Hit Limited, and pursuant to your email of yesterday to David Heys acknowledging the licensee's and Big Hit's failure to pay the royalties due for the first quarter of 2003. As a result of these matters, we are instructed by our client, Kangol Limited, that they have taken the decision to terminate the licence agreement in accordance with Clause 9 of the licence agreement. Please accept this letter therefore as notice of that termination which shall take place with immediate effect."

9. What was referred to there was the minimum royalty payment. That payment was in fact made on 14th May 2003, 14 days after the time limited by the agreement.
10. On 20th June 2003 the licensee applied to the court under Part 8 of the Civil Procedure Rules seeking a declaration and determination as to whether the purported termination of the licence agreement by the defendant's solicitors in their letter of 1st May 2003 was a valid termination. It was contended that those issues were unlikely to raise substantial disputes of fact and which were therefore suitable for determination under Part 8.
11. The judge did not feel able to determine the matter under Part 8, but he did in the course of his judgement reach an interpretation of Clause 9 of the licence, the termination provisions, which the present appellants, Kangol Limited, consider to be erroneous. In order to enable that matter to be brought to this court, as it now has been by Kangol, the judge allowed Kangol to apply for a declaration in the following terms: the termination of the licence agreement by the defendant's solicitors in their letter of 1st May 2003 was a valid termination and is effective.
12. The judge thereupon formally refused that declaration, for reasons set out in his judgement and to which I shall come, and it is from that refusal that Kangol appeals.
13. There are two grounds upon which that matter is pursued. The first is that the judge was incorrect in his construction of Clause 9.2 in particular, and wrongly withheld from Kangol the right to terminate by reason of non-payment on the due date of the minimum royalty level. The second ground that was ventilated before him related to the administration of Big Hit Limited: the second matter, it will be recalled, that was set out in the solicitors' letter. The judge was more attracted to that argument, even though it has the difficulty that what went into administration was not the licensee, Hay & Robertson, but a subsidiary of it, albeit an important subsidiary because it was the body that was operating the licence.
14. The appeal before us seeks to contest both grounds because the judge did not feel able to act on the administration point, but before us today Mr Prescott QC who appears for the appellant, has not sought to press the second ground, the administration ground, although he has made clear that he is not resiling from it. For reasons that will become apparent from the remainder of this judgement, the court does not think it necessary to pursue that issue further but we make it clear that it remains open.
15. All that by way of preliminary. We now turn to the judge's decision. But before we do so, however, we should say that in this appeal the respondent has not in fact appeared. The respondent was represented before the judge by solicitors and leading counsel. There was no response to the grounds of appeal, however, from the respondent, and when the matter was pursued by the court, the court was then informed that the respondent's solicitors had come off the record, and that the respondent was going to represent itself.
16. That only came to the attention, at least of myself, yesterday morning. Steps were taken by the office to attempt to communicate with those responsible for running the licensee, to explain that if they wish to appear in person as a company they must follow certain requirements laid down by the Civil Procedure Rules, and those were all faxed to their proper offices.
17. The latest news that we received was, first, that the previous solicitors had very properly informed the respondents of the time and place of this hearing, information that was reinforced to them by the court, but that it had not proved possible within the offices of the respondents to communicate with the gentleman who apparently had the conduct of this matter. For whatever reason, neither he nor anyone else has appeared on behalf of the respondents this morning.
18. In those circumstances, we have of course gone ahead and heard the appeal, and we are satisfied, first of all, that we have fully considered the matter; and secondly, that Mr Prescott has drawn our attention to any matter that even conceivably could be urged on the respondent's part.
19. We revert to substance. In order to understand the judge's reasoning, it is necessary and most convenient to set out some part of his judgement, starting at paragraph 15. The judge said this:

"The declaration that is sought is a declaration that the notice itself is invalid. In my judgement, what I have just said is enough to show that the notice itself was valid, but nevertheless in my judgement, so far as its effect is dependent upon non-payment of the minimum royalty level, it is in the events that have occurred ineffective because, as I have said, that minimum payment was made on 14th May."

20. Paragraph 16:

"If one pauses merely as the words which constitute the first two lines of Clause 9.2, such distinction could not arise, as Mr Prescott has rightly submitted. They read: 'In the event that the licensee fails to pay Kangol the minimum royalty level specified in Clause 2.2 of this agreement, Kangol may terminate this agreement forthwith'.

"Mr Prescott expressed two contradictory views as to whether the 'forthwith' meant that it was the termination that had to be forthwith, or the service of the notice of termination. I think he was right in his second view that 'forthwith' means the date at which the termination is to take effect subject, however, to the provisions contained in the rest of the clause which, I remind myself, read: 'Unless the licensee pays Kangol such sums as are required to meet such minimum royalty level at the time such payments are due'.

"That in my judgement means that the termination is immediate unless such payment is indeed made. It is in effect a termination whose effects can be brought to an end by payment within some reasonable further time, or in a time specified by the licensor in order to bring certainty to the effect of his notice."

At paragraph 23, having dealt with various arguments on the part of Mr Prescott, the judge said this:

"I think for that reason that the termination which the licensor is entitled to exercise on non-payment is a provisional termination to operate only if the non-payment is thus continued. I think that that follows exactly the pattern contemplated in Clause 9.1 in respect of other breaches such, for example, as a failure to make due payment of the running royalty, except that under that clause a particular period for the remedying of the breach is specified."

21. Clause 9.1 is then set out by the judge; we have already seen it. Clause 25:

"For those reasons I conclude that the non-payment, although entitling the licensor to serve a notice such as he did, brought the agreement to an end only provisionally and the condition to avoid the termination has been satisfied by the subsequent late payment of the minimum royalty."

22. That construction of the judge is criticised on two separate grounds. In my judgement, both of them are valid. The first is this: on the judge's reading, the latter part of Clause 9.2, "Unless the licensee pays Kangol such sums as are required to meet such minimum royalty at the time such payments are due", contradicts and is inconsistent with the interpretation that the judge himself accepted was the correct interpretation of the first part of clause 9.2.
23. As we have seen, he held in paragraph 17 of his judgement, that "forthwith" means actual termination, not the time of notice of termination, and is open to Kangol as soon as the minimum royalty is not paid. That in my view must be inconsistent with the latter part of the clause.
24. How should one approach that problem? In my judgement, this clause read on its own -- and for the moment, I do read it simply on its own -- is one of the rare examples to which the speech of Lord Hoffmann in the West Bromwich case applies. As it seems to me, this is a case in which one can say, as Lord Hoffmann said in his principle 5 on page 913 of that report, that one is driven to conclude that something must have gone wrong with the language. The clause cannot say two different things, and the principal part of the clause quite clearly is there to provide a forthwith termination.
25. There, of course, are other difficulties about the judge's construction, treating the power to terminate as provisional or as something that can be gone back on. Those difficulties are particularly pressing in the case of a trademark agreement such as this is. If termination can be set aside or become ineffective by a payment in the future, how long is to be allowed for that payment to be made? What is the significance of the phrase "at such time such payments are due"? What was the position in this case between 1st and 14th May? Was the licensee entitled, during that period, to use that mark or was he not?
26. All those are very pressing difficulties that the judge's construction, I have to say, does not meet. I would therefore, if one was obliged to look at Clause 9.2 in isolation, say that the latter part is simply mistaken surplusage, inconsistent with what is plainly meant to be the principal and guiding rule between the parties.
27. Secondly, however, it is not necessary to go that far because, as the second limb of their argument, the appellants have, in my judgement, plainly demonstrated that there is an arguable rationale for the words in the second limb of Clause 9.2. In a contract such as this, such arguable rationale is, in my judgement, sufficient to give the contract force.
28. It will be recalled that this licence provides for the payments of two different royalties: the minimum royalty and the running royalty, as already set out. That scheme clearly regards the minimum royalty as being what I would describe as the lead or principal payment, because that payment can be deducted in paying the running royalty but not vice-versa. I think, therefore, that the appellants are right in saying that one could reach a position where the licensee was substantially in credit when compared with the amount of minimum royalty but was still required actually to pay over that amount of minimum royalty because of the terms of Clause 3.1.
29. The licensee in my view cannot rely on Clause 2.3 in that situation because that only provides for the guaranteed royalty to be set off against the running royalty and not vice-versa. There is, therefore, a need for a further provision to protect the licensee where he has in fact paid the amount of minimum royalty, but under the head or guise of a running royalty.
30. Although it would be better in implementing that policy if the latter part of Clause 9.2 said 'paid' and not 'pays', I think, nonetheless, that it can be interpreted as making provision for the situation that I have just set out.
31. I think some support for that is also to be drawn from the phrase, "at the time such payments are due". The running royalty surplus must be in Kangol's hand by the due date for the minimum royalty payment if it is to excuse the licensee from the actual payment of the latter in full or in part.
32. I would therefore differ from the judge in his construction and differ from his finding that the termination in the letter of 1st May was not a valid termination.
33. I should mention two further points ventilated before the judge, by which I am not persuaded. We have seen that in paragraph 23 of this judgement, the judge drew a comparison with Clause 9.1. In fact, looking at Clause 9.1 and Clause 9.2 together, the comparison in my judgement assists Kangol. Time is specifically given for compliance in respect of all breaches except the breach that consists of a failure to come to pay the minimum royalty.
34. Second, the respondents argued before the judge, and sought to argue before us by way of a respondent's notice, that the phrase, "continue yearly", in Clause 3.1 does not mean, "go on to a yearly basis", but, "continue in the same way in each following year for which the licence is in force".
35. The latter, in my judgement, is clearly the correct interpretation of that. The judge himself found that the suggestion that Clause 9.1 and Clause 9.2 had been in some way translated into a yearly payment basis was unfounded. I respectfully agree.
36. Very properly exercising their obligation to the court, and anticipating non-attendance on the other side, Mr Prescott and his learned junior have provided us with a further skeleton argument suggesting possible arguments that might be deployed by the respondent were they to be here.
37. Those are two in number. Firstly, the construction of the clause. Mr Prescott points out that it might be thought to be a severe interpretation of the clause if the failure to pay was merely accidental or very temporary, or simply due to an oversight. He of course emphasises at the same time that that is not this case, as the facts that I have already set out demonstrate. He does, however, say that if that was so, it might be said that the officious bystander would think that there ought to be a term in the contract saying that a small delay in payment caused by a mere slip should not bring about termination.
38. That may or may not be so, though, for my part, I would doubt it in view of the fact that this was an agreement drawn by solicitors and, although somewhat criticised in its drafting, it clearly has had a good deal of legal and commercial input. Even, however, if that were the case, such a minimalist implied term does not translate into a wider implied term that payment should take place within a reasonable time. At the very most, all that could be implied was an extremely limited addition to Clause 9.2: an addition that could, in any event, not assist the licensee in this case.
39. Secondly, the question is raised as to whether this might be an appropriate case for relief against forfeiture; the effect of the termination being to forfeit the licence. Although it was interesting to investigate this matter, it cannot arise in this case because if the party wants relief against forfeiture, he has got to apply for it and there is no suggestion, either below or here, that any application has been made.
40. Quite apart from that, however, I for my part am entirely satisfied that relief against forfeiture is not appropriate in a contract such as this. For that, I rely simply on what was said by Lord Templeman in Sport International v Inter-footwear Limited [1984. The Weekly Law Report 776 at page 794] where he quoted the observations in the same sense of Lord Justice Oliver in the Court of Appeal in that case.
41. Now, true it is that an aspect of that case that influenced their Lordships was that it was a settlement agreement not a trademark agreement tout court. Nonetheless, Lord Justice Oliver certainly said that his view of the matter was a fortiori, because a trade mark licence was an inappropriate forum for the uncertainty and delay that relief against forfeiture necessarily brings with it.
42. That statement was approved in full by Lord Templeman. I have already pointed to the difficulties that would be caused in this case if there was any question of uncertainty as to whether the licence was in fact valid or not, and Mr Prescott graphically drew attention to other trademark licences dealing with what might be called more fugitive goods than those in which his client deals where such problems would be multiplied many times.
43. I would therefore allow this appeal on the first point that was in issue. As I have said, the second point is not pursued before us, it is not abandoned, but we do not need to refer to it.
44. For those reasons, therefore, the appeal is allowed.
45. LORD JUSTICE WALL: I entirely agree and, although we are disagreeing with the judge below, my Lord has covered the ground so fully that I have nothing I can usefully add.
46. MR JUSTICE HARRISON: I also agree.
Order: Appeal allowed with costs to be agreed. Final bill of costs to be prepared by appellants and sent to the court and to the respondents with a notice that any submissions are to be made within 14 days to the registrar. Declaration as sought agreed.