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 CHANCERY DIVISION
(MR JUSTICE UNDERHILL)

		Royal Courts of Justice Strand London, WC2
		26th January 2007

1. LORD JUSTICE MUMMERY: On 9 November 2006 Underhill J sitting in the Chancery Division gave judgment on a preliminary issue which had been directed. He gave a ruling in favour of the claimants in the action. He gave permission to appeal. The preliminary issue arose on the construction of an agreement which was made between the parties to the action, compromising earlier proceedings which had been brought by the claimant in these proceedings for infringement of copyright. One of the defendants to those proceedings is the appellant in this appeal. The appellant is a Hong Kong-based company. It runs a retail business called CD WOW!, selling CDs and DVDs to members of the public in the United Kingdom. The infringement was of the kind which has come to be well-known as parallel imports. The settlement agreement is dated 20 January 2004. Pursuant to it the appellant gave undertakings to the court. The undertakings are contained in a consent order made by Master Bowman on 21 January 2004, that is, just one day after the date of the settlement agreement.
2. It is now alleged by the claimants in the action, who are respondents to this appeal, that the appellant is in breach of the undertakings. The respondents commenced the second action in respect of the alleged breaches of the undertaking, claiming that they were also breaches of contract. They also issued in a committal application October 2005. The preliminary issue which was directed by Master Winegarten on 27 July 2006 was whether, in the light of the issues which arose on the pleadings and on the assumption that there had been breaches, the appellant is liable for breach of contract as well as for contempt of court. Underhill J held that there was no relevant express term of the settlement agreement but that there was an implied term of the settlement agreement that, on the claimant's contentions, had been breached. I will come to his ruling straight away. In paragraph 25 of his judgment he said this:

"I therefore decide this issue in the Claimants' favour. I hold that it is open to each of the Claimants to bring a claim for damages against the Defendant for breach of the undertakings contained in the draft orders at Annexes A and B of the Settlement Agreement on the basis that, albeit by implication, the undertakings in question were given to them as well as to the Court."

He had referred earlier in his judgment to the wording of the preliminary issue which was directed. This was as follows:

"That the following issue (arising out of paragraph 16 of the Defence and paragraphs 4, 4.1, 4.2 and 5 of the Reply) be tried as a preliminary issue namely: 'whether any breaches by the Defendant of the undertakings it gave to the Court in the recital to the Order of Master Bowman dated 21 January 2004 in Claim number HC02C02413 are actionable by the Claimant by way of separate proceedings for breach of contract.'"

3. The crucial document in the case is therefore the settlement agreement. The judge quoted the important passages from it in his judgment. I will go straight to the settlement agreement where, after identifying the parties and setting out recitals and the formal words, "now it is agreed as follows", there are the following provisions.
4. Clause 1 was concerned with definitions and interpretations. It was provided that defendants included MTOL (HK), which is the appellant and was one of the defendants in the proceedings.
5. Clause 2 provided for payment. There was an agreement that the defendants would pay to Messrs Wiggin and Co on behalf of the named parties the sum of £100,000 in full and final settlement of all claims for damages including additional damages and/or an account in the United Kingdom proceedings, then a further sum of £330,000 in full and final settlement of legal costs incurred in the United Kingdom proceedings.
6. I pause to comment there that there is no question that that is a contractual obligation and that, if the money had not been paid as agreed, a claim for breach of the settlement agreement could have been made.
7. Clause 3 contains provisions relating to undertakings and is the most important provision for the purposes of the preliminary issue. It says: MTOL (HK) and other named defendants:

"… will each give undertakings to the Court in the form set out in the draft orders annexed hereto marked "A" and "B" such undertakings to take effect from 4pm on:

(a) 9 February 2004 in relation to dealings in products containing both audio and visual content including DVDs

(b) 27 January 2004 in every other respect."

The undertakings as stated there were set out in the annexes and they are contained in the order of Master Bowman. His order recited that, upon the parties having agreed confidential terms of settlement as set out in the agreement between the claimants and the defendants and other interested parties dated 20 January 2004, and upon the first, second and third defendants (the first one being the appellant) undertaking to the court that from 4pm on 27 January 2004 (and so on) giving the undertakings that they had promised to give that they would not without the express written consent of the relevant UK copyright owner or exclusive licensee whether acting by their respective directors, officers, employees or agents or otherwise howsoever do various specified acts.

8. Mr Philip Roberts in his submissions for the appellant says that only gives rise, once the undertakings have been given to the court, to liability for contempt if there are breaches of the undertakings. He says his client performed the promise by giving the undertakings. If, which is in dispute, there has been a breach, then the only remedy available to the respondents is contempt. There is no contractual liability. He points out that the undertakings were expressly to be given to the court. It does not state that they were undertakings to the claimants in the earlier action.
9. Before I come to deal with the arguments on construction in more detail, I should complete the review of the terms of the agreement. Clause 4 contains what Mr Roberts accepts is a purely contractual provision relating to interim trading and it provides that, in the period between the signature of the agreement and 4.00pm on 27 January 2004, the defendants will not cause any CD recording identified within its current top 75 chart as available for purchase by United Kingdom purchaser at £6.99 and/or by an Irish purchaser at €10.95 to be purchased for less than this price, and there are various other similar provisions. If not performed, they would give rise to a contractual liability but that obligation came to an end once the undertaking had been given.
10. We were also referred to clause 9 which deals with change of law. That says that the defendants are permitted to apply to the court on notice to the claimants to be released from any or all of the undertakings referred to at paragraph 3 if certain specific provisions of the Copyright Designs and Patents Act 1998 are revoked, supplemented, otherwise amended or interpreted by the Court of Justice in Luxembourg in such a way that the defendants consider that, as a matter of national or European Community law only, some or all of the activities of the kind prevented by the undertakings would not thereafter be an infringement of copyright. Mr Roberts pointed to that as a clause referring only to the undertakings that would be released if there was a change in the law, with no reference to any modification of a contractual obligation.
11. Clause 11 contains an entire agreement provision. Reference has been made to the confidentiality provisions of clause 14. 14.2 provides that:

"The parties and their advisers or agents on their behalf will not make any communication to, or give any comment to, any third party concerning the disputes between the Parties as at the date hereof and the settlement of the United Kingdom and Irish Proceedings save for communicating the terms of the agreed press statement annexed hereto at annex D."

Annex D, which is incorporated into the settlement agreement, is headed "Agreed Press Release" and it reads as follows in the second paragraph:

"The record industry claimed that CD WOW! was obtaining sound recordings from outside Europe and selling them to UK and Irish consumers. As a result of the settlement CD WOW! has agreed that it will not sell CDs that have first been placed on the market outside Europe to UK and Irish customers. It will only sell CDs that have first been placed on the European market to UK and Irish customers. All other details of the settlement are confidential."

That was the settlement agreement that had to be construed in order to answer the preliminary issue directed by the Master.

12. Turning now to the judgment of Underhill J, he set out the background to the settlement agreement. He quoted the relevant parts of the settlement agreement, referred to the consent order that had been made by Master Bowman on 21 January 2004, and explained how the preliminary issue arose on the pleadings and quoted -- as I have already quoted -- the terms of the preliminary issue which was directed. He then addressed the question of construction. What he concluded -- and I quote from paragraph 15 of his judgment -- was this:

"With some hesitation, I am persuaded that such an implication should indeed be made."

13. Now what he is referring there is to the submission which was made by Mr Spearman on behalf of the respondents to the appeal, who were the claimants in the action, that what should be implied were undertakings in favour of the claimants, in addition to the express undertakings in clause 3 and the annexe that were to be undertakings to the court. Underhill J then continued:

"In my judgment it is in truth inconceivable that the defendants, having been prepared to give undertakings to the Court, did not intend also - indeed primarily - to give the equivalent undertakings also to the claimants. An undertaking is a promise, in this case a promise to refrain from certain acts. There is, it seems to me, no rational basis on which the defendants could have said, or have been understood to be saying: 'We will make this promise to the court but not to you, notwithstanding that you are the persons whose rights would be infringed by the acts in question.' Putting it in terms of the case law, if the officious bystander had intervened at the point of contract and said, 'of course, these undertakings are given to the claimants as well as to the court?' he would indeed have been suppressed with a testy, 'of course.'"

14. In paragraph 18 Underhill J said this after summarising the various submissions that had been made:

"In the end the issue seems to me to depend on the simple assessment which I have sought to make above, namely whether the result contended for by the Defendant is so contrary to commercial common sense that I should be prepared to imply words imposing an obligation to the Claimants alongside the obligation expressly undertaken to the Court. The hurdle for any such implication is necessarily a high one, but I believe that the Claimants can clear it."

So although he held that there was no express term that an undertaking was being given by the defendants in the action to the claimants he said that, applying the officious bystander test, such a term or undertaking to the claimants should be implied.

15. The appeal has come on as a matter of some urgency because of the developments that have taken place at first instance. Mr Spearman's clients are applying for summary judgment in their breach of contract action based on the settlement, and the result of the summary judgment application will be affected by the outcome of the preliminary issue on the appeal. They have also, as I have mentioned, started contempt proceedings in relation to alleged breaches of the undertaking given in the earlier action pursuant to the settlement agreement, but those proceedings do not depend on the outcome of the preliminary issue.
16. These matters came before Lightman J on 29 November 2006. He gave directions for the service of evidence in the summary judgment application and the contempt application and he indicated that the appeal which we have heard this morning was suitable for expedition. We have been informed that the hearing of the application is floating from 13 February 2007. On the appeal Mr Roberts took us through the settlement agreement in detail and was able to relate the submissions which he has set out in his skeleton argument to the particular provisions that fall to be construed. His submission was that the undertakings given were actionable only as a civil contempt, not as breaches of contract. As there was no cause of action for breach of contract, the entire action failed. He says there were no express undertakings given to Mr Spearman's clients and he says none should be implied. He contended that if it had been the intention of the parties to include in the settlement agreement a contractual undertaking to Mr Spearman's clients, nothing would have been easier than to include it as one of the terms in a document which had been drafted in detail and in a legal form by experienced lawyers.
17. Mr Roberts' criticism of Underhill J was that he had failed to apply what he described in his skeleton argument as a general presumption against the implication of terms into written contracts, especially those which are detailed and apparently comprehensive, having been carefully drafted by lawyers and he said that it was for Mr Spearman's clients to rebut this presumption. He also said that the judge had failed to apply all the conditions which are necessary for the implication of a term into a contract such as the settlement agreement. He submitted that for a term to be implied a number of cumulative conditions had to be satisfied: it had to be reasonable and equitable to imply such a term; necessary to give business efficacy to the contract in question; so obvious that it went without saying; capable of being clearly expressed; and it must not contradict any term that was actually expressed in the contract. He said that the judge had only addressed the officious bystander test and that if he had addressed his mind to all the other conditions he would have found that they were not met and we would not have made the implication. He said -- and he emphasised this in his oral submissions -- that the settlement agreement functions perfectly well without the need for there to be included in it contractual undertakings to the claimant in addition to undertakings to the court. There is simply no necessity for such contractual undertakings. He submitted that the implied term found by Underhill J was not reasonable and equitable from the standpoint of both parties; certainly not from the standpoint of his clients. He also submitted that Underhill J had not correctly applied the officious bystander test. He said he had reached his decision by concluding that it would be nonsensical or absurd for the parties to have agreed that the undertakings were actionable by way of contempt proceedings only. Mr Roberts said that was not absurd. He instanced many cases of undertakings to the court given by defendants to proceedings which had no contractual effect.
18. Having considered the arguments that are set out in the skeleton arguments and heard Mr Roberts' arguments this morning, and some brief submissions that Mr Spearman made on an indication that we were only asking him to say anything if it was strictly necessary, I have come to the conclusion without much hesitation that this appeal should be dismissed. The decision of the judge just has not been shown to be wrong. In my view, on the true construction of the settlement agreement the appellant was contractually bound to the respondent not to do the acts which would breach the undertakings which they had agreed in the settlement agreement to give to the court. The settlement agreement has to be construed as a whole and in the context of all the surrounding circumstances -- the factual matrix, as it is often called – and the critical point is that the appellants gave the undertakings to the court in the agreement that settled the earlier proceedings.
19. This is not like a case, as was pointed out by my Lord, Lord Justice Lloyd in argument, where undertakings may be given voluntarily in the face of an injunction being sought against a defendant. It is not even like undertakings that may be given in a consent order made as a result of a defendant saying, without resisting a claim or having attempted but not very well to resist it, "Well, I consent to the order being made against me". In those types of cases there is not the contractual context that there is here. Here there was an agreement to give undertakings not to do certain acts which it had been alleged were infringing the copyright of the claimants in the first action. In my judgment, in agreeing to give such undertakings to the court, the appellant was also agreeing with the claimant in the action not to do the acts that they were undertaking to the court not to do.
20. The undertakings given to the court which were expressly provided for in clause 3 gave some kind of additional security to the claimants in the action and that was agreed between the parties. That was a kind of additional security, in my view, for the performance of what was agreed on in the settlement agreement. I read the settlement agreement as containing an agreement by the appellant with the claimant that they would not do what they were undertaking to the court not to do. This is looking at the matter in a slightly different way than implied term. It is looking at the matter purely as a construction of what was the effect of agreeing to give the undertakings to the court. If the approach of the implied term is correct -- and I am not saying that it is not -- then I see nothing wrong in the way that the judge approached it. What was implied was an undertaking in the same terms as the undertaking to the court save that it was an undertaking to the claimants. It seems to me a classic case where the officious bystander test is appropriate and is satisfied.
21. I agree with Underhill J that it makes no sense, certainly no commercial sense, for a party to agree with another party to give an undertaking to the court and not at the same time to be agreeing with that party that they are not going to do what they are promising the court not to do. In my view the judge was right. If there are breaches of the undertaking to the court, they are also actionable as breaches of contract with the claimants in the first action.
22. For those reasons I agree with the ruling of Underhill J on the preliminary issue and I would dismiss this appeal.
23. LORD JUSTICE RIX: I agree.
24. LORD JUSTICE LLOYD: I also agree. In deference to Mr Roberts' arguments, I mention a couple of points.
25. We were shown the other provisions of the agreements to which my Lord, Lord Justice Mummery, has referred and Mr Roberts based a submission particularly on clause 9, which is the provision under which, in certain circumstances, the defendants can apply to be released from the undertakings that they have given to the court. He made the point that there is no equivalent provision for release from any contractual obligation that matches the undertakings. It seems to me the answer to that point is that the contractual obligation which the learned judge and my Lord, in my judgment rightly, identified is an obligation to act as required by the undertakings, so that if the undertakings were released or modified the contractual obligation would by that very same process itself be released or modified.
26. I was struck by the contrast between clauses 3 and 4 of the agreement on Mr Roberts' submission. Clause 4, to which my Lord has referred, is an interim provision for the first seven days after the settlement agreement has been entered into, which is purely contractual and which has the sanction of a claim for breach of contract. It also has a particular sanction in that a breach accelerates the payments due under clause 2 which were otherwise due to be paid by four instalments. Clause 4 ran out on the 27 January at 4.00pm, to be replaced by the undertakings which, subject to one qualification, came into force at that moment. It seems to me that it would make no commercial sense at all for the claimants to have a contractual remedy for seven days in respect of the limited and interim arrangement and no contractual right or remedy in respect of the future thereafter if the defendants continued the acts which were said to be breaches of copyright. Those are two particular reasons why, in my judgment, on the reading of this contract the learned judge was right to conclude that the defendant did enter into a contractual obligation with the claimants, and owed to the claimants, not to do that which by the undertaking they promised to the court not to do.

Order: Appeal dismissed.