England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
INTELLECTUAL PROPERTY

		Royal Courts of Justice Strand. London. WC2A 2LL
		17th September 2009

MR. JUSTICE ARNOLD :

Introduction

1. In form, this is an application by the claimant ("Codemasters") for an order that paragraph 35 of the defence and counterclaim and certain paragraphs of the voluntary further particulars of the defence be struck out because they disclose no reasonable grounds for defending the claim. In substance, however, this is an application for summary determination of an issue as to the construction of clause 10.3 of an agreement between Codemasters and the defendant ("ACO") dated as of 24 November 2005, although in fact executed in about January 2006 ("the Agreement"). Counsel for ACO helpfully and realistically accepted that the issue of construction was one that was suitable for summary determination, subject to certain caveats, in particular relating to the relief that is sought by Codemasters and its effect upon other issues in the proceedings.

The factual matrix

2. There is no material dispute as to the relevant factual matrix, which may be briefly summarised as follows. Codemasters designs and sells computer games. The present dispute relates to a game that is marketed under the title "Race Driver: Grid" ("the Game"). ACO is the organiser of the famous endurance motor race properly known in French as "24 heures du Mans" and popularly known worldwide as "Le Mans". That race takes place over a 24 hour period near the town of Le Mans in France. ACO also organises a series of shorter endurance races at various circuits around the world under the collective title of "Le Mans Series".
3. Codemasters wanted to incorporate a reproduction of these races into the Game, including in particular the cars. The Game is not exclusively a Le Mans game; it also features other forms of motor racing. As I understand it, a substantial proportion of it features races either at Le Mans itself or at circuits forming part of the Le Mans series. It was to that end that Codemasters entered into the Agreement.

The Agreement

4. The Agreement provides in clause 4.1:

"Subject to the provisions of this Agreement, ACO hereby grants to Codemasters and Codemasters hereby accepts from ACO the non-exclusive right and license in the Territory to and to authorize other persons (including Affiliates, third party publishers, distributors and manufacturers) to use and reproduce the Endorsements in and in connection with the Commercial Exploitation of Endorsed Products during the Term."

5. It also provides in clause 4.4:

"Codemasters will be authorized to use audio works, still images, photographs, and drawings included in the Endorsement either as part of the Game or for its promotion and for its web site and documents, provided ACO is the owner of the intellectual property rights."

6. In clause 4.5 it provides:

"Codemasters will be entitled to use for the Game photographs and still images of cars, pilots, and sponsors, pilot's names and likeness, cars, car's liveries, teams' names and car branded models, and track sponsors, including any logos and trademarks associated with such cars, cars' liveries, or the cars' manufacturers, pilots, and sponsors who participated in the 2006 races and Championship."

It is not necessary to read the rest of clause 4.5.

7. "Endorsements" is defined in clause 1(d) of the Agreement as meaning collectively and severally the items referred to in Schedule A to the Agreement. Schedule A provides that these include the "Le Mans Series Championship" and the "24 Heures du Mans event for the 2006 season only which include". There is then a list of items which, most pertinently for the purposes of the present dispute, includes in the fourth bullet point "Car manufacturer names, marks and car designs for all participants in the Championships".
8. The key provisions of the Agreement for present purposes are clauses 10.1 and 10.3, but I shall also read 10.2:

"10.1. ACO represents, warrants and covenants to Codemasters that:

(i) has the legal right to enter into this Agreement, to fully perform all its obligations hereunder, and to grant all rights and licenses which it is granting under this Agreement, free, clear and unencumbered, and without violating or breaching the legal equitable or contractual rights of any person anywhere in the world;

(ii) the use and reproduction of the Endorsements as authorized hereunder will not infringe, violate or breach any intellectual or industrial property or moral right (or any rights of a similar nature) anywhere in the world.

10.2. Codemasters covenants, represents and warrants that it has the right and authority to enter into this Agreement and to perform all obligations provided for hereunder.

10.3. Each party (the 'Indemnifying Party') will indemnify, defend and hold harmless the other party and its affiliates, parent companies, subsidiaries, and their respective directors, officers and employees, from any and all claims, causes of action, suits, damages or demands whatsoever, arising out of any breach or alleged breach of any agreement or warranty made by the indemnifying Party pursuant to this Agreement."

The dispute

9. The cars which were raced in the 2006 Le Mans Championships include the following four models: (1) Porsche 911 GTR-RSR; (2) Ferrari F430GT; (3) Ferrari 550-GTS Maranello; and (4) Lamborghini Murcielago R-GT. On the strength of the Agreement Codemasters proceeded to include representations of each of those four cars in the Game. Prior to release of the Game, Codemasters also arranged for a promotional video to be created and distributed, which included a simulation of the Ferrari F430GT racing at Le Mans itself.
10. The dispute arises out of what Codemasters characterises as claims made by the manufacturers of the Ferrari, Lamborghini and Porsche cars featured in the Game. The details of these claims are not particularly important, but I will briefly summarise them.
11. The promotional video was released online on 14 February 2008. By that time, Codemasters had concerns arising out of some discussions that it had had with one of the manufacturers that ACO did not have the rights that it had purported to grant. In those circumstances it wrote to Ferrari on 7 April 2008 explaining the agreement that it had entered into with ACO, and received a telephone call from Ferrari saying that ACO had no right to license Ferrari trademarks and designs for use in video games. Codemasters' response to that was to remove the Ferrari cars from the Game. Even so, in June 2008, Ferrari issued proceedings against Codemasters in the Paris Commercial Court. Those proceedings have resulted in an agreement which includes a side licence under which Codemasters has a limited right to use three Ferrari cars online.
12. At around the same time as it was discussing the position with Ferrari, Codemasters met with a representative of Lamborghini, who took the same position. At that stage, ACO was involved in the discussions via its agent, a Mr. Houtman of Fast World Media. Lamborghini sent Mr. Houtman an e-mail stating that no one other than Lamborghini had the right to grant any third party with the right to use any Lamborghini intellectual property. The upshot was that Codemasters entered into a licence agreement with Lamborghini on 16 April 2008.
13. Also at around the same time, Codemasters raised its concerns with Porsche and received an email dated 29 April 2008 from a representative of Porsche, saying that Porsche had an exclusive licence agreement with Electronic Arts, which is a competitor to Codemasters. More recently, Codemasters has received a letter or claim from Porsche's US attorneys, Fish & Richardson PC. As a result, it has entered into settlement negotiations with Porsche. It has not yet reached any settlement, but is hopeful of doing so.
14. Against that background, Codemasters commenced these proceedings on 21 November 2008, alleging that the claims of Ferrari, Lamborghini and Porsche meant that ACO was in breach of the warranties contained in clause 10.1 of the Agreement and that, pursuant to clause 10.3 of the Agreement, ACO was obliged to indemnify Codemasters in respect of such claims. ACO has denied liability under either head.
15. The issue which is the subject of today's application is as to the correct interpretation of clause 10.3.

The law

16. There was little or no dispute between counsel as to the relevant legal principles. It is common ground that the Agreement falls to be interpreted in accordance with the well-known statements of principle of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 28, [1998] 1 WLR 896 at 912-913. Towards the end of that passage, Lord Hoffmann quoted a well-known dictum of Lord Diplock in The Antaios [1985] 1 A.C. 191 at 201, which expresses in different words what had previously been said by Lord Reid in Wickman Machine Tool v L. Schuler [1974] AC 235 at 251:

"The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear."

17. So far as the subject matter of the present dispute is concerned, my attention was drawn to a line of five cases as follows: (1) Biggin & Co. Ltd v Permanite Ltd [1951] 2 KB 314; (2) Comyn Ching & Co. (London) Ltd v Oriental Tube Co. Ltd (1979) 17 BLR 56; (3) DSL Group Ltd v Unisys International Services Ltd [1995] Masons CLR 5; (4) General Feeds Inc (Panama) v Slobodna Plovidba (Yugoslavia) [1999] 1 Lloyd's Rep 688; and (5) Siemens Building Technologies FE Ltd v Supershield Ltd [2009] EWHC 927 (TCC).
18. The principle which that line of authority stands for is conveniently set out in a passage from the judgment of Colman J in the General Feeds case at 690-692 in which he refers to the decisions of the Court of Appeal in the Biggin and Comyn Ching cases,:

"The key authorities on the relevant principles begin with Biggin & Co. Ltd v Permanite Ltd [1951] 2 KB 314. There the plaintiffs purchased goods for a purpose know to the seller, namely resale to a particular buyer. The goods delivered were defective and the sub-buyer claimed damages against the plaintiffs. That claim was referred to arbitration. A settlement was made in the sub-buyer's favour for £43,000. The plaintiffs claimed the amount of that settlement from the sellers. Mr. Justice Devlin held that the settlement was irrelevant and evidence of it inadmissible. The Court of Appeal reversed his judgment. Lord Justice Somervell, having referred to the direction to the jury by Lord Coleridge in Fisher v Val de Travers (1876) 45 LJ (CP) 479 where the plaintiff relied on a settlement of a third party's claim, by which two questions were left - were the plaintiffs acting reasonably in reaching a compromise? and was the amount of the compromise reasonable? - commented that the two questions were really one - was the compensation reasonable? - continued at p. 321:

'I think that the judge here was wrong in regarding the settlement as wholly irrelevant. I think, though it is not conclusive, that the fact that it is admittedly an upper limit would lead to the conclusion that, if reasonable, it should be taken as the measure. The result of the judge's conclusion is that the plaintiffs must prove their damages strictly to an extent to show that they equal or exceed 43,000L; and that if that involves, as it would here, a very complicated and expensive inquiry, still that has to be done. The law in my opinion, encourages reasonable settlements, particularly where, as here, strict proof would be a very expensive matter. .... '

Lord Justice Singleton said this (p. 324):

'The claim of the plaintiffs was for damages. They said that the damages should be the sum of 43,000L, the amount of the settlement, which t hey claimed was reasonable. They did not ask for more. The plaintiffs must prove t heir damages. It is not enough for them to say: 'We were advised to settle for 43,000, we did so, and we now claim that sum'. Before the court can award a sum as damages, there must be evidence on which it can act. Therefore, in a case such as this, the plaintiffs must call evidence to establish their case. If the evidence which they call satisfies the judge or jury that the settlement was a reasonable one, the damages awarded will be the amount of the settlement and the cost s reasonably incurred. ... The plaintiffs must establish a prima facie case that the settlement was a reasonable one. If the defendants fail to shake that case, the amount of the settlement can properly be awarded as damages. The position is much the same, though perhaps not quite so strong, as in the case in which damages have been assessed in a suit between other parties involving the same facts. The judgment is not binding, but the court will not lightly disregard it in the absence of fresh evidence or new factors.'

The effect of these judgments is, in my view, that, assuming that loss attributable to a payment in settlement is not too remote, the plaintiff must prove that the fact and amount of the settlement were reasonable in all the circumstances. Unless he proves that, he fails to establish that the loss was caused by the relevant breach of contract by the defendant, for it and to the extent that an unreasonable settlement has been entered into, the loss has been caused not by the breach but by the plaintiffs voluntary assumption of liability under the settlement. Proving the existence of the settlement thus goes only part of the way to proving the recoverable loss. It would also be consistent with the duty to mitigate a loss to hold that if and to the extend that a plaintiff is unable to establish that the settlement on which he founds his claim has been reasonably entered into, he has to that extent failed to mitigate his loss.

A broadly similar problem came before the Court of Appeal in Comyn Ching & Co. (London) Ltd v Oriental Tube Co. Ltd (1979) 17 BLR 56. The defendants had given to the plaintiffs a guarantee of the suitability of a particular product for a particular purpose in order to induce the plaintiffs to install that product in construction works for which the plaintiffs had contracted with a third party. The guarantee was held to indemnify the plaintiffs against all claims and liabilities in consequence of their using the product. Head contractors and the employer sued the plaintiff alleging that their losses were caused by negligent workmanship by the plaintiffs. In the course of the trial the head contractors and the plaintiff settled the employer's claim. The plaintiffs then sued the defendants on the guarantee to recover the amount of the settlement. The trial Judge held that the product was unsuitable for the purpose, the plaintiffs were not guilty of bad workmanship and the use of the product by the plaintiffs would not have continued if the defendants had not guaranteed its suitability. The Judge held that the defendants were not liable.

It was argued in the Court of Appeal on behalf of the defendants that they were not liable under the indemnity unless the plaintiffs were legally liable in respect of the claims settled, alternatively that the indemnity could not cover a claim which had no reasonable prospect of success. In reversing the trial Judge the Court of Appeal held that the indemnity covered 'all reasonable claims or all claims having a reasonable prospect of success,' per Lord Justice Goff at p. 80, or 'a claim which had some prospect of a significant chance of success', per Lord Justice Brandon at p. 92. Further, Lord Justice Goff held that the plaintiffs were 'facing a serious claim and an appreciable risk of failing on the issue' of bad workmanship. The plaintiff had to show that the employer 'had a case or might reasonably have established a case', per Lord Justice Goff at p. 83. He applied the double test indicated by the Court of Appeal in Biggin v Permanite, sup. Lord Justice Brandon stated at p. 92 that a loss would be sustained in consequence of a claim if it arose from a reasonable settlement of that claim.

In other words, when properly analysed, the overall exercise which the Court must do is to consider whether the specified eventuality (in the case of an indemnity) or the breach of contract (in a case such as the present) has caused the loss incurred in satisfying the settlement. Unless the claim is of sufficient strength reasonably to justify a settlement and the amount paid in settlement is reasonable having regard to the strength of the claim, it cannot be shown that the loss has been caused by the relevant eventuality or breach of contract. That is not to say that unless it can be shown that the claim is likely to succeed it will be impossible to establish that it was reasonable to settle it. There may be many claims which appear to be intrinsically weak but which common produce suggests should be settled in order to avoid the uncertainties and expenses of litigation. Even the successful defence of a claim in complex litigation is likely to involve substantial irrevocable costs."

19. As Colman J pointed out in that passage, the principle established by this line of authority applies equally in the case of a claim for damages for breach of contract and a claim for an indemnity properly so called. I say "an indemnity properly so called" because, as Staughton LJ pointed out in The Euros [1998] 1 Lloyd's Rep 351 at 357, there is a risk of confusion in this field if one does not define one's terms:

"The word 'indemnity' is likewise used in two senses. It may mean simply damages awarded for tort or breach of contract. I suspect that Mr. Justice Donaldson was using the word in that sense in A/B Helsingfors Steamship Co. Ltd v Rederiakiebolaget Rex [1969] 2 Lloyd's Rep 52 at p. 60, where he said of cl. 13 in the Baltime charter:

The indemnity afforded by this clause is clearly wide enough to cover loss incurred by reasonable settlement.

.....

Alternatively, the word 'indemnity' may refer to all loss suffered which is attributable to a specified cause, whether or not it was in the reasonable contemplation of the parties. There is precious little authority to support such a meaning, but I do not doubt that the word is often used in that sense."

20. It was common ground between counsel that this principle, whether one regards it as an aspect of the law of the interpretation of contracts or whether one regards it as an aspect of the law of causation and quantification of damages, is applicable to the Codemasters' claim under clause 10.3. It follows, as counsel for Codemasters accepted, that in order to recover the sums which Codemasters seek to recover, which Codemasters say arise out of the claims made by Lamborghini, Ferrari and Porsche, then Codemasters must prove that any settlements entered into with those third parties are reasonable.
21. It also follows, as I think counsel for ACO accepted, that clause 10.3, whatever its true construction, does not mean that Codemasters can claim an indemnity in respect of unreasonable settlements, for example, a settlement by Codemasters entered into for an inflated sum.

The issues

22. Against that background, I turn to consider the issues of construction that arise in relation to clause 10.3. In a nutshell, Codemasters says that clause 10.3 is an indemnity against claims by third parties such as those in respect of which it seeks to recover in the present proceedings by Lamborghini, Ferrari and Porsche. By contrast, ACO says in a nutshell that clause 10.3 is an indemnity only in respect of claims made under separate agreements, not under the Agreement itself. Those broad positions give rise to several points of interpretation of the wording of clause 10.3 which, to some extent, are interlinked, but nevertheless have for convenience been argued separately.
23. Before turning to those detailed points, it is right to start by recording that it is common ground, and in my judgment rightly so, that clause 10.3 is, on any view, not felicitously drafted. That is a point of some significance because it is easier to accept apparently uncommercial consequences if a clause is clearly drafted than if it is not.
24. The first and most important issue arises out of the words "pursuant to". Codemasters says that when clause 10.3 speaks of claims arising out of breaches or alleged breaches of any agreement or warranty made by the defined party "pursuant to this agreement", the words "pursuant to" mean "in". ACO contends that the words "pursuant to" mean "separate from and in consequence of". It seems to me that, as a matter of pure language, either reading is possible. Lawyers are perhaps slightly more inclined acontextually to regard the words "pursuant to" as having the latter meaning. Even in legal language, however, one can think of examples of "pursuant to" being used in the former sense. Accordingly, I do not consider that the wording drives one to either one conclusion or the other.
25. It is therefore necessary to stand back and consider the purpose of this clause and the commercial effect of the rival interpretations. In my judgment, the purpose of the clause, read in its context in the Agreement, is reasonably clear. It seems to me that the purpose of the clause is to provide an indemnity against claims and demands arising out of, so far as Codemasters are concerned, its exploitation of the rights granted under the Agreement. In my experience, it is common in intellectual property licence agreements, though by no means universal, for the licensor to indemnify the licensee against claims by third parties that exploitation of the licence rights has the consequence that the licensee has infringed, or is alleged to have infringed, the third party's rights. .
26. Not only is such an indemnity commonplace, but also there are good reasons why parties agree to such indemnities. Generally speaking, the licensor of intellectual property rights will be in a better position to assess whether the exploitation will infringe third party intellectual property rights. This is particularly true in the field of copyright. To a lesser extent, it is true of trade marks also. Furthermore, in terms of allocation of risk, generally speaking it will be commercially more acceptable for the risk of a claim of infringement by a third party to be borne by the licensor than by the licensee.
27. Turning back to clause 10.3, much of the difficulty that arises in its interpretation is attributable, in my view, to the fact that it has been sought to make it a bi-lateral or mutual indemnity. I do not see, however, that that detracts from the commercial considerations that I have just outlined. In my judgment, clause 10.3, in so far as it operates as an indemnity in favour of Codemasters, is quite capable of being read as

an indemnity against third party claims and it makes commercial sense for it to be read in that way

28. If one turns to consider the alternative interpretation put forward by ACO, it is actually extremely difficult to think of realistic situations to which the indemnity might apply. ACO's advisers were evidently alive to this difficulty and accordingly adduced evidence in opposition to this application from Mr. Houtman in which he said this:

"Wragge & Co. LLP has asked me to give some examples where the indemnity (given the construction in paragraph 22(a))" - which is, I interpolate, ACO's construction - "may be effective.

Example 1: The ACO enters into a contract with one of its sponsors which states that a certain image has to appear at a certain position and in a certain manner on the track. The ACO uses the wrong image. The sponsor makes a claim against the ACO for breach of contract, and seeks to join Codemasters into the dispute, because they have replicated the wrong image in the game. In that situation, it makes sense that the ACO would indemnify Codemasters as a result and has control over the complaint.

Example 2: Codemasters' game infringes someone's copyright. A retailer is sued for infringement, and makes a claim against Codemasters for breach of the warranty of quiet enjoyment. The retailer also seeks to include the ACO as a defendant to the proceedings on the basis that it is jointly responsible for the publication of the game. In those circumstances, it would seem reasonable to me for Codemasters to indemnity the ACO and have control over the dispute."

29. That, of course, is really not evidence at all, but rather an argument as to why ACO's construction should be preferred. Nevertheless, it has been helpful as a way of testing ACO's construction. Counsel for Codemasters submitted, and I agree, that, although these were evidently the best of the examples that ACO and its advisers and Mr. Houtman between them could come up with, they are distinctly unimpressive.
30. So far as the first example is concerned, it is difficult to see, even on the basis of ACO's construction, why a contract between ACO and one of its sponsors should be a contract entered into pursuant to the agreement between ACO and Codemasters. The two contracts appear to be completely unrelated. A lesser point perhaps is that it is very difficult to see why Codemasters should be joined as a party to such a claim, given that Codemasters would not be a party to that contract. Counsel for ACO pointed out that that of course is looking at matters through the eyes of the English law of privity of contract and that other legal systems might take a different view. I see the force of that. I do not think it provides an answer to the first point.
31. So far as example 2 is concerned, the position is similar. Here one can accept that there might be a contract between Codemasters and its distributor and that that might be regarded as a contract entered into pursuant to the licence agreement. Even on that basis, however, it is difficult to see why the retailer would have a claim against ACO. The distributor would be suing Codemasters for breach of contract.
32. I would add that it is evident from the history of the proceedings that, up until this hearing, it was going to be a substantial part of ACO's argument in support of its construction of clause 10.3 that Codemasters' construction would have the effect of exposing ACO to unreasonable claims. The wind of that point has been taken out of ACO's sails, however, by the point made originally by counsel for Codemasters as to the effect of the Biggin v Permanite line of authority which, as I have indicated, counsel for ACO accepted.
33. It is convenient at this juncture to mention a point which can be brought in either under this head or under one or two of the later heads. On the basis that "pursuant to" is interpreted as meaning "in", does the indemnity apply to claims of breaches of the agreement itself made by the other party? Counsel for Codemasters submitted that it did not. His justification for that submission, upon enquiry, was that when the clause refers to "any and all claims, causes of action, suits, damages or demands whatsoever", it must mean implicitly, although it does not say so explicitly, "claims, causes of action, suits, damages or demands by third parties". Accordingly, he submits, those words are to be understood or read in.
34. I accept that submission. That does seem to me to be the natural and correct way to interpret this clause, albeit that those words are not present. It would be quite unnatural to interpret the clause, and have surprising results if the clause were interpreted, as conferring an indemnity in respect of a mere allegation of breach by the other party.
35. I turn therefore to the next issue, which is the meaning of the words "breach or alleged breach of any agreement or warranty". There are two aspects to this issue. The first, and in my view more substantial one, is what is meant by "any agreement or warranty". The point here is that the claims being made by Lamborghini, Ferrari and Porsche are not, of course, claims of breaches of warranty by ACO. Their claims are claims of infringement of their intellectual property rights.
36. Counsel for Codemasters submitted, however, that construing clause 10.3 in its context, it was clear that an allegation by a third party of infringement of its intellectual property rights, and in particular, the rights that are relevant in the present dispute, which all relate to car manufacturer names, marks and car designs, would pro tanto amount to an allegation that ACO was not in a position to grant all the rights and licenses which it purported to grant under the agreement and, in particular, that contrary to the warranty in 10.1(ii), the use of the endorsements did infringe intellectual property rights. I agree with that submission. While again this is a respect in which the clause is not ideally worded, it seems to me that this interpretation makes sense of those words in their context.
37. The lesser point is what is meant by "alleged breach"? Counsel for ACO submitted that a mere allegation was not sufficient and that there had to be some justification. He sought to interpret the words "alleged breach" as meaning a breach which was presently alleged and, in due course, established. In my judgment, that is an untenable interpretation of the words "alleged breach" since it effectively reduces those words to the same meaning as "breach".
38. The third issue is as to the meaning of "any and all claims, causes of action, etc". In dealing with the points that I have already dealt with, I think I have really dealt with this one as well. The "claims, causes of action, suits and damages and demands" are to be understood as "claims, causes of action, suits, damages or demands made by third parties" which inherently involve a breach of alleged breach of any agreement or warranty made or given by the indemnifying party under the agreement.
39. That just leaves one point raised by counsel for ACO as to the width of the indemnity, which I will return to in a different context.
40. The final issue of interpretation is one that was raised relatively late by ACO by way of a proposed amendment to its voluntary further particulars. This relates to the words "indemnify, defend and hold harmless" and, in particular, the word "defend". ACO contends that the effect of the inclusion of the word "defend" is to impose upon the indemnified party, Codemasters in this instance, a requirement to entrust the defence of any claim to the indemnifier, here ACO.
41. In my judgment, that is not a tenable interpretation of clause 10.3. Read in context, while again it is not happily worded, it seems to me that the word "defend" is being used merely in the rather general sense of "protect from". At most, it may give Codemasters, as the indemnified party, the right to request that ACO take over the defence of any proceedings brought against it. I do not consider that it can be interpreted as imposing upon the indemnified party a mandatory requirement to hand over the conduct of the defence of any claim to the indemnifying party.
42. If that were the purpose of clause 10.3, much more would be required. One would have to spell out at what stage a claim should be notified - should it be notified when there is a letter before action or only when proceedings are formally issued or when proceedings are formally served; the basis upon which the proceedings have to be conducted, and in particular such matters as to who was going to have the conduct of any settlement negotiations; the basis upon which any settlement could be entered into; and so on. In short, if the intention of the parties had been to provide for a mandatory requirement that the indemnifying party had the conduct of any claim made by a third party, they would have needed to provide machinery to deal with that. They simply did not provide any of the machinery which would have been necessary. Accordingly, I do not consider that that can have been their intention.
43. That leads me on to counsel for ACO's fallback position, which was to contend that the absence of such machinery did not lead to the conclusion that ACO's construction was incorrect, but rather led to the conclusion that the clause was void either on the basis that it was just too uncertain or on the basis that it was tantamount to an agreement to agree. I do not accept that submission. In my judgment, the clause is not uncertain, nor does it amount to an agreement to agree. The answer to the postulated difficulty in relation to the word "defend" is the one that I have given, namely that it does not bear ACO's construction.

Conclusion

44. Accordingly, I conclude that, for all those reasons, clause 10.3 is to be construed in the manner contended for by Codemasters, not in the manner contended for by ACO.

Consequences

45. At this point, I need to return to the matter that I mentioned at the outset of this judgment, which is the consequences of that conclusion. As I related earlier, counsel for ACO did not dispute that in principle the construction of clause 10.3 was susceptible of summary determination. He did submit that no relief should be granted to Codemasters in consequence of such a determination which precluded ACO from advancing other points that it wishes to advance in the proceedings. His primary concern, so far as that is concerned, relates to an allegation by ACO that Codemasters is in breach of various provisions in the Agreement itself and that the claims by the third parties are attributable to, or at any rate were contributed to, by those breaches.
46. As was discussed in the course of argument, that contention can be put under a number of heads. One might frame it as a question of interpretation of clause 10.3. One might view it as a question of causation. One might view it as a question of remoteness. Or one might view it as a question of mitigation. The bottom line, as I understand it, is that counsel for Codemasters accepted that the consequence of a determination of the issue of construction of clause 10.3 in his client's favour would not prevent ACO from advancing that contention under at least one of those heads. Counsel for Codemasters was disposed to accept that it could at any rate be advanced under the heading of causation even if, as he was inclined to argue, it would not be open to ACO under any of the other three heads. At all events, he accepted that ACO should not be shut out at this stage from advancing that argument at a subsequent stage. Accordingly, I need not say any more about it now.

MR. JUSTICE ARNOLD: What next?

MR. CUDDIGAN: My Lord, should we look at the draft minute and, in particular, the directions? I think we all know where we want to get to. With the best will in the world, we should be able to navigate a pathway without too much difficulty.

MR. JUSTICE ARNOLD: Yes.

MR. CUDDIGAN: There is an order behind tab 2. The first recites that the particular paragraphs that put up the construction defence to the indemnity claim be struck out. That may not actually be necessary by the declarations and the judgment, but that is why it is there.

MR. JUSTICE ARNOLD: I have to say that I think it makes more sense to give you summary judgment on the issue of construction.

MR. CUDDIGAN: That would be entirely acceptable and, as you suggest, perhaps a neater approach. We have an order that summary judgment be given on the issue of construction of the clause 10.3 indemnity.

MR. JUSTICE ARNOLD: Correct.

MR. CUDDIGAN: That then leaves the question of whether any further declaratory relief is appropriate in relation to the specific allegations made by third party manufacturers. I would say that that relief is appropriate. I would commend the draft at paragraph 2 to my Lord to the end. It could be phrased: "With respect to clause 10.3". That might be more consistent with just giving summary judgment on the construction of that clause.

MR. JUSTICE ARNOLD: Yes. I would have thought that that would be better. I am going to wait to hear what Mr. Hicks has to say.

MR. CUDDIGAN: Yes.

MR. JUSTICE ARNOLD: I would have thought something that is more clearly tied in with 10.3 would be more appropriate.

MR. CUDDIGAN: Certainly the third declaration is more clearly tied in with 10.3.

MR. JUSTICE ARNOLD: Yes.

MR. CUDDIGAN: Perhaps that can be (inaudible due to coughing and sneezing) I do not need both of them. So long as I can go forward on the basis of the judgment, matters of causation can recover in respect of those losses.

MR. JUSTICE ARNOLD: Again, one has to be a bit careful about the wording. A declaration that you are entitled to an indemnity is apt to beg questions ----

MR. CUDDIGAN: Yes, it is.

MR. JUSTICE ARNOLD: ---- as to how far that goes. It is more a question of "these are claims within the scope of clause 10.3". I am not drafting when I say that.

MR. CUDDIGAN: Indeed. That is more in line with paragraph 2 actually.

MR. JUSTICE ARNOLD: Yes.

MR. CUDDIGAN: Paragraph 2 refers to clause 10.3 expressly. Perhaps that can ----

MR. JUSITCE ARNOLD: I would have thought that you wanted to combine the two ----

MR. CUDDIGAN: Yes.

MR. JUSTICE ARNOLD: ---- into one.

MR.

MR. CUDDIGAN: In any event, we have the benefit of your Lordship's very clear judgment. I think that will assist us going forward if there are any difficulties. We are plainly not going to be saying that we have won more than we have won; this was just about the construction and left the issues of causation for another day. I think I should probably let my Lord hear what my learned friend says.

JUSTICE ARNOLD: Yes.

MR. HICKS: My Lord, I would agree that the summary judgment is on a point of construction a better approach. I am concerned about the declarations and, in particular, modifying them on the hoof, so to speak. The problem is that they may build into them such which are not within your Lordship's judgment. At the moment, my view is that it is probably better just to leave it with your Lordship's judgment. That would be the normal course if this had been done in the course of a hearing because one would then have gone on to consider damages. It may be that we can agree some form of order which encapsulates your Lordship's judgment. I am concerned about doing that. It may generate more heat than light and it would have been better just to look at the judgment to decide issues rather than trying to summarise them in a few paragraphs.

MR. JUSTICE ARNOLD: I am sympathetic with that up to a point. I entirely agree that one has to be careful in making declarations not to go further than the judgment warrants and not to trespass into issues that are not before me today and are for another day. I am totally with you to that extent. On the other hand, I do think that it ought to be possible to summarise the effect of the judgment in a pithy way. If one grants summary judgment on the interpretation of clause 10.3,1 would have thought it ought to be possible, as indeed both of you really did do in different paragraphs of your respective skeleton arguments, to summarise the construction of clause 10.3 which I pronounced in favour of.

MR. HICKS: With that indication, I think my learned friend and I can probably agree something (inaudible). Perhaps we can —

MR. JUSTICE ARNOLD: What I am suggesting, in other words, is a declaration that "clause 10.3 is to be interpreted as meaning" ----

MR. HICKS: Yes.

MR. JUSTICE ARNOLD: ---- and then setting out the construction that I have pronounced in favour of.

MR. HICKS: We will work on that over the next few days.

MR. CUDDIGAN: Your Honour, I think the next issue is costs.

MR. JUSTICE ARNOLD: Yes.

MR. CUDDIGAN: We have provided a summary assessment to the other side, which I will hand up. The costs on this application have been very substantial. For our side, this has been a very important application because it will have had the effect of enormously restricting the scope of what was required of us in this action in order to recover our losses. In particular, my Lord, I refer to what would have been for us to plead and prove a myriad of third party IP rights. It is in relation to that danger that we have approached this application. The costs are very substantial. If my Lord considers that they are too highly assessed summarily, then we would be very happy to take a payment on account and proceed to detailed assessment in relation to the remainder.

MR. JUSTICE ARNOLD: I have to say that my immediate reaction is that that is a better way forward, and for two reasons. First of all, the amount claimed does strike me as being rather high. Secondly, I am quite sure that what Mr. Hicks is going to say is that quite a lot of these costs are not attributable purely to the issue of construction that I have determined but to other issues in the proceedings.

MR. CUDDIGAN: Those are the costs on this application as opposed to anything else that preceded this application in these proceedings. By way of comparison, my learned friend's costs are just under half that, £75,000. If one compares the difference in the extent of the evidence, then that would provide a basis for the discrepancy. Certainly we would be happy with a payment on account. The remainder can be subject to detailed assessment. We would suggest a payment on account of approximately half the bill.

MR. ARNOLD: Right.

MR. HICKS: The problem with (inaudible) costs application is that if it goes off to assessment, it is going to be difficult for the person doing this to estimate how relevant any of the work was to this application. I dare say that it may be possible to justify, which it would be, and say "all those hours". Let us assume that they were all spent in relation to this application. That does not tell you whether they were useful hours in relation to the application.

MR. JUSTICE ARNOLD: Quite.

MR. HICKS: That is a fundamental problem with this. What we would say is that just looked at objectively, we have had a short hearing on not the easiest point of construction but primarily a legal argument. The evidence has not been helpful except to verify what was said in relation to this application. If one looks at the amount of time, for example, spent on the documents, just on the second page (inaudible due to coughing) it might be better for your Lordship to say that this sort of application simply cannot be worth that sort of cost of the expenditure.

MR. JUSTICE ARNOLD: I am sympathetic to that up to a point. I think the problem is this. Look at Mr. Hansen-Chambers as a prime example. What you are saying is that Codemasters did not need that statement to win the issue on construction, therefore they should not recover the costs of the preparation of that statement. Let us just assume for the moment that you are right about that.

MR. HICKS: Yes.

MR. JUSTICE ARNOLD: Nevertheless, it does not follow that the preparation of that statement is wasted expenditure. That may well form a large chunk of the evidence that they lead on the damages enquiry. Actually, it covers an awful lot of the ground that they are going to need to cover. What they are going to do is probably just supplement it a bit.

MR. HICKS: The problem then is that it would be wrong for me to have to pay those costs.

MR. JUSTICE ARNOLD: To be sure. Equally, it would be wrong to say that they bear those costs regardless of what happens hereafter.

MR. HICKS: Quite. I respectfully agree. The difficulty is that if the costs of this application go to be assessed, that effectively means me picking up those costs even if they will subsequently be re-used at the trial. Of course, if the sums were small, we would not be worrying about it so much. With such large sums, the danger is that by a side wind, there will be an unfair order in relation to those £77,000. One approach is simply to say that I think the figure that is reasonable from this application is such and such an amount and the rest can be dealt with as part of the costs of the case on assessment but without directing that there should (inaudible due to coughing) or another ----

MR. JUSTICE ARNOLD: So what you are saying is that they get half of their costs now and half in the case.

MR. HICKS: The trouble is that we do not know whether that £77,000 is going to be completely wasted or not. That is the concern I have. It is such a large sum of money that it may be that if it is re-used, then of course it would become part of the costs of the case. If it is not re-used, and a completely new witness statement comes out, as may well be the case, then I end up paying for those but by a side wind.

MR. JUSTICE ARNOLD: Given that you have said my suggestion is no good, what is your suggestion?

MR. HICKS: My suggestion is that you come to a figure, or a proportion of this, which you think will be a reasonable amount for a payment in respect of this application, and I am accepting a loss on this application for the purpose of that, so there should be some costs to pay. One can either reserve those costs for the trial judge so that he can review the position or they would just have to pay the costs in the case subject to the normal rules of assessment. When it comes to assessment, somebody can look to see how much has been re-used. There has to be a direction from your Lordship, but that is something that should be done bearing in mind the very substantial costs (inaudible).

MR. JUSTICE ARNOLD: All right.

MR. HICKS: Looked at objectively, we say this application cannot be worth more than about tens of thousands of pounds. Looked at objectively, one asks oneself what was reasonably necessary for success in this sort of application.

MR. JUSTICE ARNOLD: Thank you.

MR. CUDDIGAN: I can respond to that point. The first thing is that apparently £75,000 of costs have been reasonably necessary in defending the application.

MR. JUSTICE ARNOLD: That does not necessarily follow.

MR. CUDDIGAN: That must be an important yardstick. Moreover, the evidence that we put before your Lordship would have been a good deal more necessary in front of a judge not experienced in IP law. My Lord is very experienced in IP law and, therefore, a lot of the background information was not a matter that you drew a lot from. In front of a general chancery judge, and we could have easily been in front of a general chancery judge without experience of intellectual property, that matter would have been enormously more necessary and more helpful. We do not know which judge we are going to come up with, so that was the justification to make sure that we had the material in front of the judge, all the material, to construe the contract. If the judge felt that there was some aspect of the matrix of fact that was absent, then the rug could have been pulled from the whole application. We were very careful in preparing the evidence to make sure that there was nothing contentious in it and that everything that could have been relevant to the matrix in fact was before your Lordship.

MR. JUSTICE ARNOLD: Yes.

MR. CUDDIGAN: Again, my Lord, as I say, the repercussions from losing this application in terms of the scope of the trial would have been calamitous. I dread to think how long the trial would have to have been if we had to prove all the IP infringements. That goes a long way to justify how seriously we took this application and the resources we devoted to it.

MR. JUSTICE ARNOLD: Yes. What about the point that I put to Mr. Hicks that you have actually done now - I am not saying by any means all the work - quite a lot of the work in preparing evidence for the next stage?

MR. CUDDIGAN: I absolutely accept that. In any event, we are very well advanced and we have a lot of evidence already assembled, in fact nearly enough, we would say, to conclude that the claims are reasonable; but not enough to conclude that the settlement agreement is reasonable but the claims are. We are well advanced in relation to that. I accept that those costs could be divided out. In any event, it must be left open to me to recover them if and when I win on quantum. They are properly incurred in relation to that issue. I am happy to have them split out, as long as I can get them in the end and as long as I can get a reasonable payment in relation to my success in this application.

MR. JUSTICE ARNOLD: Suppose I do what I suggest, and that is to say that I give you half of your costs now and make the other half costs in the case? If I proceed on that basis, do you then want a summary assessment of the half I am giving you now?

MR. CUDDIGAN: My Lord, yes.

MR. JUSTICE ARNOLD: Anything else, either of you?

MR. CUDDIGAN: No.

MR. HICKS: No.

MR. JUSTICE ARNOLD:

1. I now have to consider the costs of this application. Codemasters seeks its costs of the application, having been successful, and seeks a summary assessment of those costs in support of which it has put before me a costs schedule in the grand total of £164,560.

2. Counsel for ACO accepted that in principle ACO was liable to pay the costs of the application having failed, but submitted that the work that had been done in preparing for the application on Codemasters' side had gone well beyond what was necessary. In particular, he submitted that the work that had been done preparing the evidence for the application had gone well beyond what was necessary, given that the issue with which the court was concerned was a short point of construction which did not require much by way of factual matrix to enable the court to decide.

3. In my judgment, there is substance in that point. As I think counsel for Codemasters was disposed to accept, the evidence adduced by Codemasters in support of the application did not simply do the necessary exercise of setting out the factual matrix relevant to the issue of construction but instead went a considerable way towards setting out, albeit in reasonably non-contentious terms, Codemasters' case and evidence in relation to the dispute as a whole.

4. In my view, the work that was done by Codemasters and the consequent expenditure was disproportionate in relation to the issue that I have decided today, that is to say the construction of clause 10.3. By that, I do not mean that it was disproportionate in relation to the dispute as a whole. I am concerned that if I were to award all of the costs claimed by Codemasters and, in particular, in the amount claimed, then the effect would be unreasonable because it would be requiring ACO to pay at this stage costs much of which are really attributable, as I see it, to work that will be of great use to Codemasters in later stages of the proceedings.

5. There is no ideal answer as to how to deal with that difficulty, but the conclusion I have reached is that I will make an order that ACO pay 50% of Codemasters' costs of the application. The remaining 50% of Codemasters' costs of the application will be costs in the case. So far as the 50% that are to be Codemasters' in any event, I will make a summary assessment of those. Other than the points that I have already made, no particular points were made on the costs schedule. Looking at it in the round, I will summarily assess the 50% in the sum of £70,000.

MR. CUDDIGAN: Payment within 14 days?

MR. HICKS: I do not actually have any instructions that I can perhaps put forward, but could I ask you to say 28 days? My clients are in France and I am instructed through French lawyers.

MR. JUSTICE ARNOLD: The fact that they are in France does not seem to me to be a problem. The fact that you are being instructed through French lawyers, I appreciate, can slow things down, which I do not mean as an aspersion on them; it is just simply that every extra step in the chain of communication always slows things down.

MR. CUDDIGAN: Can we split the difference and say 21 days?

MR. JUSTICE ARNOLD: Yes, 21 days.

MR. HICKS: There are two issues. There was my application to amend the defence and my application for disclosure. I think it is probably sensible if we could just have permission to restore those (inaudible due to coughing).

MR. JUSTICE ARNOLD: Yes.

MR. HICKS: Then there is the question of permission to appeal. I would ask your Lordship for permission to appeal this issue on the point of construction (inaudible) and one

that is arguable in my submission and one which (inaudible due to coughing) a realistic and a real prospect of success (inaudible).

MR. CUDDIGAN: My Lord, in relation to that, I would simply say that my Lord has found that the opposing construction was not tenable throughout your judgment.

MR. JUSTICE ARNOLD: There were certain aspects of it which I said were untenable. I did not say that in respect of the main point.

MR. CUDDIGAN: The main point being "pursuant to", that was not consistent with any commercial objective, as was clear form your Lordship's judgment in relation to the evidence and the examples put forward. In those circumstances, I would say that there is not a realistic prospect of success of the appeal and there should be no permission.

MR. JUSTICE ARNOLD: So far as the question of permission to appeal is concerned, I will give permission to appeal on the basis that whilst some of the points that were advanced I do not think had a reasonable prospect of success, the main point of construction is one that I think is arguable. Therefore, it would not be right to shut ACO out purely on the basis of refusing them permission.

MR. CUDDIGAN: My Lord, we have a trial window in December which, on our side, we are anxious to make use of in relation to the indemnities. That may conflict with an appeal if the appeal proceeds at the normal speed. I am not entirely sure what my Lord is able to do to assist with ----

MR. JUSTICE ARNOLD: Nothing.

MR. CUDDIGAN: That is what I anticipated.

MR. JUSTICE ARNOLD: It would be up to ACO to apply for expedition.

MR. CUDDIGAN: Then there is nothing more I need ask you for.

MR. JUSTICE ARNOLD: Obviously, for the avoidance of doubt, that application has to go to the Court of Appeal and not to me. Is there anything else?

MR. CUDDIGAN: No.

MR. HICKS: No.

MR. JUSTICE AROLD: Thank you both.