England and Wales High Court (Patents Court) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISON
(PATENTS COURT)

		Royal Courts of Justice Strand, London WC2A 2LL
		5 July 2005

1. The second to fourth defendants seek summary judgment under CPR rule 24.2 and certain consequential relief. The third and fourth defendants in the alternative seek an order that they should be struck out as parties to the proceedings under CPR rule 3.4.

Background

2. The claimant's business relates to the exploitation in various formats of computer games. The first defendant (Plc) is the parent company of the second defendant (Software) and until it went into liquidation (23 February 2005) was or held itself out to be a developer of computer games. By an agreement in writing dated 4 August 2004 Plc agreed to develop a computer game to be named "Roll Call" referred to as the game. The terms of the agreement are of considerable detail. Of relevance to this application are the following:

(1) Plc as Developer shall ensure that the Development Team will comprise appropriately qualified and experienced people employed by Plc on a full-time basis on the game (clause 6.1) The members of the team are specified in Schedule 3 of the agreement and clause 6.2 provides that in the event of any change, the claimant will be notified immediately and will have the right to approve of any replacement.

(2) Subject to certain Subroutine Technology (as defined) all intellectual property rights in and to the game shall belong to the claimant (clause 8).

(3) The claimant shall have an exclusive, irrevocable, royalty free licence to exploit and enhance the Subroutine Technology for the purposes of or in connection with the development and exploitation of the game (clause 7.1).

(4) In consideration of Plc developing the game, the claimant shall pay to Plc by way of an advance of royalties (35 per cent of the claimant's net receipts in respect of the exploitation of the game) certain sums specified in the Milestone Schedule (Schedule 1) on the dates therein specified (clause 4). Such payments shall be paid directly to Plc's bank account, which somewhat perplexingly is named as that of Software (the second defendant).

(5) By clause 10.1 Plc warrants inter alia:

10.1.2 that the Developer has the full power and authority … to enter into this agreement and to grant the rights and to perform its obligations under this agreement …

10.1.8 the Software Materials and the Materials (as defined) are original copyright works developed by the Developer or the Developer's employees.

(6) Clause 13.2.3 provides that either party shall have the right to terminate the agreement forthwith at any time by giving notice in writing if the other party shall cease to carry on its business permanently.

(7) In the event of termination of the agreement by the claimant clause 14.1 provides inter alia:

14.1.2 SCi (the claimant) shall have no further obligation to pay any advance sums to the Developer.

14.1.3 Plc shall hold all computer software and hardware relating to the relevant versions of the game in respect of which the claimant has exercised its right to terminate as the claimant's bailee and the claimant shall have the right to immediate access to all such materials.

14.1.5 Plc shall deliver to the claimant within two working days after written notice of termination any materials created by Plc pursuant to the agreement including all Software materials, Materials, Subroutine Technology, Engines and Third Party IPR's whether completed or not for the purpose of completing the game only.

(8) Provision is also made whereby Plc shall co-operate with the claimant in placing the Source Code in escrow (with the claimant's appointed escrow agent) during the development and in the event that Plc ceases to trade Plc would procure the escrow agent to release the Source Code to the claimant. (clause 8.3).

(9) Finally it is provided that neither the benefit nor the burden of the agreement can be transferred or assigned without the prior written agreement of the other (clause 16.2). However this provision is subject to clause 16.3 which allowed the claimant to perform any of its obligations or exercise any of its rights through any other Group Company. It is to be noted that there was no reciprocal provision for Plc to operate the agreement through any of its Group companies.

3. Pursuant to the agreement the claimant has paid £180,000 to Plc/Software on entering into the agreement and a further £180,000 on satisfactory completion of PS2 Milestone 2. In addition, the claimant accepted PS2 Milestone 3 on 3 September 2004 but for reasons not explained to me has not paid the £40,000 due in respect of this Milestone.
4. On 15 October 2004 PS2 Milestone 4 was delivered on the day that Plc's shares on the London Stock Exchange were suspended. Meetings took place between Plc and the claimant on 1 and 20 October with a proposal to transfer the agreement to a new company a proposal that was not acceptable to the claimant.
5. At or about this time the claimant became aware that the development work on the game had been undertaken not by Plc but by Software (the second defendant) who employed the Development Team. The four directors of Software were also directors of Plc.
6. On 22 October the third and fourth defendants were appointed joint administrators of Software but not of Plc. On the same day the claimant requested Plc to place the Source Code into escrow as provided for in the agreement. Difficulties were encountered by the escrow agent in getting an escrow agreement with Plc and taking the Source Code off-site. Plc has never honoured its obligations.
7. On 29 October all of Software's employees were made redundant due to lack of funds to continue operations. On the same day Plc delivered Milestone Xbox Ml to the claimant.
8. By a letter dated 5 November 2004, the claimant terminated the agreement with immediate effect and demanded Plc to deliver up the materials relating to the game created by Plc pursuant to the agreement in accordance with clause 14.1.5. At the same time the claimant rejected both Milestone PS 2 M4 and Milestone Xbox M1, A dispute (not relevant to this application) has arisen as to whether such rejection was one validly made.
9. The third and fourth defendants claim as joint administrators of Software that the materials relating to the game the subject of clause 14.1.5 of the agreement were in fact created and developed by Software rather than by Plc and consequently are realisable as Software's property.
10. On 11 November the claimant sought an injunction restraining Software and the joint administrators from disposing of the materials relating to the game. A compromise was reached preserving the materials in question until 17 December (the return date of the claimant's application).
11. On 17 December a further compromise was reached whereby the materials in question were to be delivered up to the claimant against payment by the claimant into a joint account of £340,750 (being the amount of the milestone payments in relation to milestones PS 2 M3, PS 2 M4 and Xbox M1). After a copy of the materials had been delivered up a dispute arose as to what were the precise terms of the delivery up. This was resolved at a hearing on 14 February 2005 – effectively preventing the second to fourth defendants from disposing of, copying or dealing with any copy of the materials that they retained.
12. Pursuant to CPR rule 24.2(a) to succeed on its application the second to fourth defendants must establish that the claimant has no real prospect of succeeding on the claim.
13. No real prospect of success is a negative test which removes cases which whilst being arguable have no real prospect of success. However in such a hearing as stated in the footnotes (24.2.3) the court "will consider the merits of the respondent's case only to the extent necessary to determine whether it has sufficient merit to proceed to trial. The proper disposal of an issue under Pt 24 does not involve the court conducting a mini trial."
14. The claimant's case as set out in paragraph 12 of the amended particulars of claim is that in the absence of any express contractual arrangement between Plc and Software to carry out the development work in the game that Plc was obliged to carry out under the agreement, in order that Software could lawfully carry out the development work in Plc's shoes, it can be implied that between Software and Plc there must have been a contract which required Software to comply with the terms of the agreement with Plc and the claimant. In other words there must have been some sort of a back to back arrangement.
15. As already noted Software were to be paid the sums payable under the agreement which were due to Plc. In consideration of such payments or promise of payments it is contended that Software must have impliedly agreed with Plc that it would perform Plc's obligations under the agreement in relation to the writing and development of the Design Document, the Specification and the game (including each Milestone).
16. It is further contended that Software would also have agreed with Plc to:

(a) assign the copyright in the SCi materials and the game to Plc; and

(b) otherwise at all times act in such a manner as to ensure (so far as possible) that Plc complied with its obligations under the agreement.

17. Paragraph 13 of the amended particulars of claim sets out the factors relied upon in support of such implied contract between Plc and Software. Compendiously, as a consequence of the common directorship of Plc and Software and therefore the awareness of Plc's full obligations to the claimant anything short of a full acceptance of such terms by Software would put Plc in breach of its obligations and warranties with the claimant.
18. Given the de facto seamless transfer of obligations from Plc to Software without either the knowledge or consent of the claimant, to give business efficacy to the arrangement, I do not believe that there is no real prospect that at trial a court could conclude that there was such an implied contract between Software and Plc.
19. The second to fourth defendants' contention that Software can assert ownership of all the rights to the materials developed by them in relation to the game free from the obligations binding on Plc seems wholly unattractive. This is particularly so when Mr Joss Ellis, a director of both Plc and Software and chief operating officer of Software states in his witness statement (paragraphs 11 to 14) that he drew no distinction between Plc and Software and that he considered both companies had "an interest in the terms of the contract".
20. What Mr Ellis goes on to say and this was the contention of Mr Onslow, counsel for the second to fourth defendants, was that there was no need for any sort of contract (express or implied) because of the control Plc had over Software. It seems to me there is a significant difference between operational control in the working of the agreement on the one hand and the question of the rights and warranties on the other hand, especially having regard to the termination provisions. I do not consider Mr Onslow's "control" contention is an answer to what happens on termination vis a vis Plc and Software.
21. I consider there is a real case to be determined as to whether applying the "officious bystander/goes without saying" test it could be said that the court. should imply a contract between Software and Plc to the effect that such termination provisions and rights to the game which Plc have agreed with the claimant must of course equally apply to Software as if Software had been negotiating the original agreement (as indeed Mr Ellis believed they were).
22. I was referred to certain e-mails passing between Mr Ellis and Mr Murphy, finance director of the claimant, on 28 October regarding the escrow arrangements. Mr Murphy requests the third defendant and Mr Ellis to confirm that Software is going to comply with its contractual obligations to which Mr Ellis responds that they are definitely going to honour their contractual obligations. It is no answer to say that by this time Software was under administration. Mr Ellis's response is indicative of his understanding that Software were obliged to honour the obligations binding on Plc. An e-mail on 31 October from the third defendant to Mr Murphy similarly acknowledges Software's obligations regarding the escrow arrangements.
23. Mr Onslow relied on Baird Textiles Holdings Ltd v Marks and Spencer Plc [2002] 1 All ER (Comm) 737, where the Court of Appeal stated that a court would imply a contract by reason of the conduct of the parties only if it was necessary to do so. On the facts of that case the court found that the terms to be implied were insufficiently certain to found any contractual obligations because there was no objective criteria by which the court could assess such terms. As such there was a lack of clear evidence of any intention to create legal relations.
24. The facts of that case bear no relation to the facts of this case. As May LJ stated in The Elli 2 (1985) Lloyds CR 107 at 115:

"As the question whether or not any such contract is to be implied is one of fact, its answer must depend upon the circumstances of each particular case – and the different sets of facts which arise for consideration in these cases are legion. However, I also agree that no such contract should be implied on the facts of any given case unless it is necessary to do so: necessary, that is to say, in order to give business reality to a transaction and to create enforceable obligations between parties who are dealing with one another in circumstances which one expect that business reality and those enforceable obligations to exist."

25. In this case the necessity to create legal relations seems to me as a matter of business reality to arise from the acceptance by or the need for acceptance by Software of the obligations binding on Plc which include those rights arising out of the agreement accorded to the claimant and those obligations binding on Plc on termination. Such terms to be implied are clearly set out in the agreement.

Unlawful interference

26. The claimant's case against Software is that Software has unlawfully interfered in the performance by Plc of its contractual obligations owed to the claimants under the agreement. In a reply to a request for further information, the claimant (paragraphs 15(b) and (c)) contends first with regard to the act of interference:

(a) Software, which has possession of the SCi materials, has prevented Plc from delivering up those materials to SCi. Secondly, with regard to the unlawfulness of such act:

(b) Software's acts are unlawful in that they are in contravention of SCi's rights as against Plc, which rights (as is alleged in paragraphs 12 and 13 of the particulars of claim) Software is obliged (as against Plc) to respect.

27. Mr Peacock, counsel for the claimant, in the course of his oral submissions indicated that in addition to the unlawfulness resulting from the implied contract between Plc and Software, Software's acts are unlawful in any event in that they are in contravention of SCi's rights as against Plc given that Software was well aware of such rights – (the inconsistent dealing, unlawful interference case). In support of this latter contention Mr Peacock referred me to the case of Unique Pub Properties Ltd v Beer Barrels & Minerals (Wales) Ltd [2004] All ER 181 at 191 to 193 Chadwick LJ (giving the judgment of the court) in referring to the judgment of Jenkins LJ in DC Thomson & Co Ltd v Deakin with regard to the defendant's knowledge of the terms of contract stated as follows:

"The passage in the judgment of Jenkins LJ in Thomson & Co Ltd v Deakin which identifies most clearly the need for knowledge, and the nature of the knowledge required is, I think, that at [1952] 2 All ER 361 at 377–78:

'But the contract breaker may himself be a willing party to the breach, without any persuasion by the third party, and there seems to be no doubt that if a third party, with knowledge of a contract between the contract breaker and another, has dealings with the contract breaker which the third party knows to be inconsistent with the contract, he has committed an actionable inference …'"

Chadwick LJ (in paragraph 28) goes on as follows:

"The present case, as it seems to me, is one in which – if the purchase of tied products from the defendant company by one of the claimant's tenants was or would be in breach of the terms of trading in the lease under which that tenant held – the tenant (as the contract breaker) is a willing party to that breach. It is a case which falls within the second class to which Jenkins LJ referred in the passage which I have just set out. In such a case the tort of actionable interference will not be made out unless the breach of contract by the tenant is brought about by some act of the defendant company which is itself unlawful but that requirement will be satisfied where the defendant with knowledge of a contract between the contract breaker and another, has dealings with the contract breaker which the third party knows to be inconsistent with the contract. It is the defendant's knowledge that the supply of tied product to the tenant is inconsistent with the tenant's contract with the claimant that makes the act of supply unlawful. And it is the knowledge that the supply of tied product is inconsistent with the tenant's contract with the claimant, coupled with the supply made in that knowledge, which satisfies the requirement that the defendant must act with the intention of bringing about a breach of the tenant's contract."

28. Mr Onslow sought to differentiate the present case from that case which was he said a "dealing" with the supply of goods case. Whilst that may be so it seems to me at least well arguable that the principle Chadwick LJ enunciates is equally applicable to the facts of this case where Software are fully aware of the fact that its refusal to deliver up the relevant materials to the claimant is inconsistent with the terms of the agreement between the claimant and Plc and that such a refusal to deliver up (so it is contended) will and has caused a breach of the termination provisions.
29. The claimant's primary contention is that in failing to deliver up the relevant materials and thereby interfering with the termination provisions between Plc and the claimant, Software have acted unlawfully in that they are in breach of the implied contract between them and Plc.
30. I have already concluded that the defendants have not established that such an implied contract has no real prospect of succeeding at the trial. That being so it must follow that the second defendant has not established that there is no real prospect of a court holding that the breach of termination provisions by the second defendant's refusal to deliver up the relevant materials does not constitute an unlawful interference with Plc's agreement with the claimant – the unlawful act being a breach by Software of its implied contract with Plc in that Software having stepped into Plc's shoes as the party to the agreement it would honour Plc's obligations to the claimant and those rights accorded to the claimant.

Strike out of third and fourth defendants

31. Pursuant to CPR r 3.4(2)(a) the third and fourth defendants seek to be removed as parties to the action on the basis that the particulars of claim disclose no reasonable grounds for bringing the claim against them. Alternatively, they seek summary Judgment under CPR r 24.2 that the claimant has no real prospect of succeeding in its claim for damages against them. The test to be applied under r 34(2)(a) is the same as that under r 24.2 and is set out above.
32. The claim against the third and fourth defendants is one for damages in that as administrators of the second defendant as from 22 October 2004 they unlawfully interfered in the performance by Plc of its contractual obligations owed to the claimant under the agreement (see paragraph 16 of the amended particulars of claim). The claimant's reply to a request for further information relating to such allegation (paragraph 17) is that since 22 October 2004 Software has acted (and only acted) at the direction of the third and fourth defendant. The claimant relies on the same acts of unlawful interference alleged against the second defendant as against the third and fourth defendants.
33. Mr Onslow with the assistance of Mr Briggs addressed me on the role and duties of administrators under the Insolvency Act 1986, Schedule B 1 paragraph 5 and 69. Respectively an administrator is both an officer of the court and an agent of the company. As such he acts on behalf of the creditors. On his appointment he is obliged to take custody or control of all property to which he thinks the company is entitled (Schedule B1 paragraph 67 and 68). The administrator's powers include the disposal of company property, convene creditors meetings and make payments to them.
34. Mr Peacock referred me to Barclays Mercantile v Sibec [1992] 1 WLR 1253 in which there was a claim for damages against the administrators for wrongful interference with goods (conversion). Millett J at page 1257 stated the position as follows:

"I will deal first with the claim for damages against the administrators for wrongful interference with goods. The applicant's case is as follows. (1) An officer of a company is liable if he procures the commission of a tort by the company (2) On this basis a receiver may be liable in damages for conversion see Clough Mill Ltd v Martin [1985] 1 WLR 111. Neither of these propositions is in dispute. (3) It is implicit in section 234(3) and (4) of the Act that an administrator may be liable in tort. (4) There is no reason in principle why an administrator should not be liable for unlawful interference with goods if he procures the company to commit acts which amount to that tort. Subject to the effect of section 11 of the Act (the moratorium provisions), none of those contentions is challenged."

35. It is to be noted that the above propositions relate to the conversion of goods, namely the wrongful retention of goods in a manner adverse to the rights of an owner having an immediate right to possession. Whilst Software's retention of the materials sought to be delivered up by the claimant on the face of it could have been so alleged to be an unlawful interference with goods, no such allegation is pleaded by the claimant.
36. Mr Onslow referred me to the rule in Said v Butt [1920] 3 KB 497 which has been considered by the Court of Appeal in Welsh Development Agency v Export [1999] BCC 270. In the field of interference with contract McCardie J in Said v Butt stated (at page 506):

"If a servant acting bona fide within the scope of his authority procures or causes the breach of contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken."

Dillon LJ (at pages 288 to 290) whilst himself having grave reservations over the reasoning of McCardie J nevertheless accepted that the rule has stood the test of time. As Dillon LJ stated:

"In exercise of the powers given to him by the debenture a receiver can, without incurring any tortious liability for interference with contract, close down the mortgage company's business not withstanding that he thereby causes the company to break its contract made before the receiver's appointment... ."

Dillon LJ went on to dismiss the defendant's counterclaim against the receivers on the ground that they could not be held liable for the tort of wrongful interference with any contract made by the company in receivership and a third party, namely the defendant.

37. Ralph Gibson LJ (at pages 295 to 298) also accepted the principle or rule in Said v Butt. At page 295 he states that the rule may be read as follows:

"If a servant or agent acting bona fide within the scope of his authority, procures or causes the employer or principal to break a contract which the employer or principal has made with a third party, the third party cannot sue the servant or agent for interference with the contract; for he is the alter ego of the employer, and the employer cannot be sued for inducing himself to break a contract."

Ralph Gibson LJ went on to consider whether such a rule should be extended to afford protection to a receiver where the receiver procures someone other than his or her principal to break its contract when the company under receivership was not a party to the contract in breach (referred to as a tripartite situation rather than the bipartite situation the subject of the rule in Said v Butt). It does not appear that Ralph Gibson LJ accepted such an extension of the rule in Said v Butt. Certainly the ratio decidendi was that Said v Butt applied to a breach of contract to which the company in receivership (Parrot) was a party (a bipartite situation).

38. Staughton LJ (dissenting) held that the receivers could not rely on immunity from suit for procuring breaches of a contract in respect of which the company in receivership (Parrot) was not a party (a tripartite situation). Like Dillon LJ he considered the rule in Said v Butt if it exists at all, was anomalous.
39. I do not consider on a strike out/summary application it would be appropriate to decide whether or not the rule in Said v Butt should be extended. That being so I do not consider that the third and fourth defendants have established that there is no real prospect of the claim against them not succeeding because of the rule in Said v Butt.
40. Mr Briggs referred me to the judgment of Peter Gibson LJ in OBG Ltd v Allan [2005] 2 WLR 1174 at 1188 (paragraph 47) where he states:

"I am not aware of any case where the tort (of wrongful interference with contractual relations) has been held to apply to an act of a third party who, although aware of a contract between the contracting parties, was not intending to procure a breach of the contract or other actionable wrong or to prevent or hinder the performance of the contract …"

41. The third defendant, Mr Miller, as is apparent from his first witness statement, at all material times from at least the date of his appointment as a joint administrator of the second defendant, was aware of the terms of the agreement between Plc and the claimant. He was also aware of arrangements between Plc and the second defendants to develop the Software, although he states such arrangement were never expressly agreed or set down in writing (paragraph 6(a) to (c)). It is also apparent from his witness statement that after termination of the agreement between Plc and the claimant, the third and fourth defendants as joint administrators refused the claimant's request to deliver up the Software in the second defendant's possession even though they were well aware of the obligation on Plc to do so (paragraphs 9 to 16).
42. From the foregoing I do not believe that the third and fourth defendants have established that the claimant has no real prospect of succeeding at the trial in establishing that their refusal to deliver up the software materials was an unlawful interference with the contractual relations between the Plc and the claimant for which they are personally liable in directing the second defendant in the manner they did. The third and fourth defendants may seek to contend that in refusing to deliver up the software materials, they had reasonable grounds for believing that they were entitled to hold onto and/or dispose of such materials relying on their statutory protection under section 234(3) and (4) of the Insolvency Act 1986. This is not the subject of any defence but even if it were, it would clearly be a matter for investigation at trial rather than by way of a summary application.

Conclusion

43. For the reasons set out herein:

(1) The second to fourth defendants have failed to establish that there is no real prospect of the claimant's claim for unlawful interference with its contractual relations with Plc succeeding at trial.

(2) The third and fourth defendants have failed to establish that there is no real prospect of a claim for damages against them succeeding at trial.