England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		St Dunstan's House, 133 – 137 Fetter Lane, London, EC4A 1HD
		17 August 2005

 


HH Judge Thornton QC:

1. Introduction

1. This judgment is concerned with two summary judgment applications that are made by the claimant ("Valeo"). In the first application, Valeo seeks summary judgment for £200,000. This is Valeo's entire claim against the defendant ("VTL"). In the second application, Valeo seeks the dismissal of VTL's claim for £800,000 being made against Valeo. If Valeo succeeds in its first application, the action will only proceed to a trial on VTL's Part 20 counterclaim. If Valeo also succeeds in its second application, only one of VTL's two counterclaims will have been dealt with and its second counterclaim for £1.4m will remain to be dealt with at the trial.
2. Valeo is a French company which has, in recent years, developed a wet friction material for use as a moulded coating on synchronizer rings used in car gearboxes. Valeo owns technical information, patents and copyrights associated with this material whose trade name is W2. VTL is an English company that applies the W2 material to synchronised rings using a moulding process.
3. Valeo SA is the principal company in the Valeo group of companies that, before November 2001, also comprised both Valeo and VTL. VTL's shares were subject to a management buyout by a team headed by Mr Jouan which was concluded on 1 November 2001. VTL's shares were sold to Stagewalk Ltd, a company owned by those engaged in the buyout. This buyout of VTL's shares occurred simultaneously with a further agreement whereby Valeo and VTL agreed to cooperate in the commercial exploitation of the W2 material and a Cooperation and Licence Agreement ("CLA") between Valeo and VTL was also entered into on 1 November 2001.
4. W2 technology involves two separate stages of manufacture and application. The first stage involves the selection of the component materials and substances used to manufacture the W2 material and the manufacture of the W2 material using those primary ingredients. The second stage involves the application of W2 onto synchronizer rings which involves a complex moulding process.
5. Both the manufacturing and moulding processes had to be developed and much of the development work for both had been undertaken by Valeo before the buyout of VTL. Valeo had been the exclusive manufacturer of the W2 material, certainly for use in conjunction with the moulding process developed by Valeo to manufacture synchronized rings coated with the W2 material for use in car gearboxes.
6. Both processes are complex and highly technical and require considerable technical knowledge and the experience acquired during the development periods of each process. It follows that a buyer of the W2 material must also obtain the benefit of much of the technical knowledge and experience acquired by Valeo during the development of both the manufacture and moulding processes of the W2 material.
7. Until November 2001, Valeo was responsible for developing both the manufacturing and moulding processes but, following the buyout and the signing of the CLA, the development of W2 remained the responsibility of Valeo based in France but the responsibility for the continued development of the moulding process of the W2 material onto synchronised car gearbox rings passed to VTL based in England.
8. Thus, prior to the buyout and its associated CLA, the W2 material was still being developed. It had not yet reached industrialisation, being the point in time when the W2 material was being fully manufactured and marketed. Because the W2 material was still in the course of development, it had not yet reached its optimised or stabilised state.
9. The buyout itself involved prolonged negotiations. During these negotiations, Mr Jouan compiled a business plan based on information supplied to him by Valeo SA. This plan included projections of both the volume of W2 that would be supplied to VTL and of the volume of sales in the periods preceding and following the proposed buyout. These projections were based on the short history of W2 product development by Valeo, commercial discussions with potential customers and the supply of samples of W2 material to, and the testing of such material in conjunction with, those potential customers. The business plan therefore contained and was partly based on information supplied by Valeo about the W2 material and its commercial history and the plan had, to Valeo's knowledge, been used by VTL's buyout team to obtain financing for the management buyout of VTL. Furthermore, much of this information was also incorporated into Annexure D of the CLA which dealt with the sales objectives of VTL. These sales objectives were built into the CLA and VTL had a contractual obligation to seek to use all reasonable means to seek to attain them.
10. The CLA is a complex commercial agreement. It provides for the supply of the W2 material by Valeo to VTL and for the marketing by VTL of a defined minimum number of units of the product following an initial 28-month development period. It also provides for the supply by Valeo to VTL of a licence containing technical information about the W2 material and a worldwide exclusive licence in favour of VTL to use the technical information, copyright, patents and the W2 material itself. It finally provides that Valeo will transfer certain equipment to VTL for VTL's use in the moulding process and will also provide to VTL certain technical assistance and training.
11. The CLA provided for a consideration of £1 million, to be paid by VTL to Valeo in three instalments. These instalments were, first, an initial payment of £300,000 payable on the Effective Date which was defined in the CLA as being 1 November 2001; secondly, a payment of £200,000 payable on 1 November 2002; and thirdly, a payment of £500,000 payable on the earlier of two dates being the completion by VTL of the sale of 700,000 units of the product or the expiry date of the initial period which was defined as being 1 March 2004.
12. As it has turned out, no units of product have been sold by VTL. Nonetheless, Valeo contends that the second and third instalments of the contract consideration remain due and payable. VTL has already paid the second instalment and £300,000 of the third and last instalment but has withheld payment of the balance of £200,000 of the last instalment because it contends that it has a substantial abatement, set off or cross-claim.
13. VTL's claims are based on its allegation that Valeo had an obligation to supply not merely W2 material but W2 material that was fully optimised and stabilised. VTL contends that the material that was supplied was not of this kind, particularly because it suffered from inconsistent dynamic friction both from one unit to anther and when used with different lubricants. The W2 material is also alleged to have suffered from inconsistent density and from material de-bonding and to have been generally unsuitability for commercial use or exploitation. These deficiencies give rise to alleged breaches of the requirement that VTL contends is contained in the CLA that Valeo was to supply W2 material which was in an optimised and stabilised form on the basis of the formula of the W2 material defined as the current W248 formula.
14. VTL's allegations are denied by Valeo who contended that the particular formula it adopted for use in manufacturing the W2 units supplied to VTL, being the W248 formula, was in fact optimised and stabilised and of the required and specified density in conformity with the approved Technical Specification referred to in the CLA.
15. VTL contended that it was entitled to withhold payment of the balance of the third instalment pending resolution of its claims arising out of these alleged breaches of the CLA by Valeo. These claims are pleaded in two ways.
16. First, VTL mounts a defence to Valeo's claim for the balance of the third instalment on three alternative grounds. These grounds are firstly that the sum is not due and will never be due because there has been a total failure of consideration by virtue of Valeo's total failure to perform its contractual obligations; secondly that the sum is not yet due because of the non-performance by Valeo of a condition precedent to the sum becoming due; and thirdly that the sum was once but is no longer due because Valeo was in fundamental breach of contract and that fundamental breach has been accepted by VTL and the CLA has been brought to an end.
17. Secondly, VTL mounts a set off arising from its cross claim for damages for breach of contract. This sum is quantified in a global and unparticularised claim for £1.4 million. VTL also claims, as an additional or alternative claim and as a corollary to its contention that there has been a total failure of consideration, a restitutionary claim for the return of the sums already paid, amounting to £800,000, on the grounds that there has been a total failure of consideration arising out of Valeo's non-performance of its contractual obligations.
18. Valeo started the present proceedings by issuing a claim form on 8 January 2005 claiming £200,000. VTL served a defence and counterclaim. The counterclaim is for £1.4 million for damages for breach of contract and for £800,000 by way of restitution. Valeo issued its summary judgment application on 11 May 2005 claiming summary judgment for £200,000 plus interest and also claiming a defendant's judgment dismissing VTL's restitutionary counterclaim for £800,000.
19. Valeo's applications give rise to five issues:

(1) What are the nature and extent of Valeo's obligations under the CLA?

(2) What, if any, condition precedent or other contractual requirement must be fulfilled before the third instalment becomes due and payable?

(3) Are any of the terms of the CLA that VTL alleges were broken of a type that could give rise to a repudiation of the CLA by Valeo that could be accepted by VTL? If so, was the CLA terminated and, if it was, does that relieve VTL of the obligation to pay outstanding instalments?

(4) Is it arguable that there has been a total failure of consideration of Valeo's obligations that gives rise to a restitutionary claim for the return to VTL by Valeo of £800,000?

(5) Is Valeo entitled to summary judgment in the light of these findings?

20. Since I am concerned with two summary judgment applications, the following principles are applicable to my decision:

(1) The applications are made under CPR Part 24. Valeo is entitled to judgment on each application if Valeo can demonstrate that VTL's defences have no real prospect of success and there is no other compelling reason for a trial.

(2) It is not sufficient for VTL to demonstrate that its case is arguable. The test is as stated by Lord Woolf MR in Swain v Hillman:

"The words 'no real prospect of succeeding' do not need any amplification, they speak for themselves. The word 'real' distinguishes fanciful prospects of success … they direct the court to the need to see whether there is a 'realistic' as opposed to a 'fanciful' prospect of success." ^[1]

(3) For the purposes of these applications, I must accept the correctness of VTL's factual allegations as to the shortcomings of the W2 material that I have already summarised.^[2]

2. Valeo's Contractual Obligations

21. The CLA, in its recitals, provided that Valeo was the beneficial owner of rights of confidence in the W2 material and would, from the moment Stagewalk Ltd completed on the purchase of VTL's shares, provide technical information, equipment, technical assistance and training services, a licence to use the W2 material for moulding of that material, and for the manufacture of, synchronised rings for gearboxes. This licence was exclusive to VTL subject, after an initial period of 28 months, to Valeo satisfying the sales objectives of Valeo that were set out in Annexure D to the agreement.
22. The agreement itself covered the provision by Valeo of technical information, technical assistance and training and the transfer of equipment to VTL. The provision of these services was coupled with an obligation imposed on Valeo to sell the W2 material to VTL and obligations imposed on VTL to pay Valeo the consideration provided for in the CLA and royalties determined by the volume of sales of the W2 material obtained by VTL. The CLA also imposed an obligation on VTL to use all reasonable endeavours to promote the distribution and sale of the W2 material.
23. The CLA contained a structured and complex series of clauses covering such matters as the terms of the licence being provided by Valeo to VTL to enable VTL to use the technical information, copyright and patents being provided by Valeo; who paid for improvements in the W2 material brought about during the currency of the CLA; confidentiality; patents and intellectual property; Valeo's warranties given in relation to its licences being granted for patent, copyright and technical information rights in the W2 material; indemnities; termination; force majeure and limits on liability.
24. It is clear that the intention of the CLA was to provide the necessary framework for the licensing by Valeo in favour of VTL of all such intellectual property rights in the W2 material as would be necessary to assist VTL in exploiting and marketing the W2 material being supplied by Valeo under an exclusive world wide licence.
25. The parties were at odds as to the effect of material provisions of the CLA. Valeo's contention was that the CLA imposed no obligation on Valeo to sell the W2 material to VTL. If Valeo agreed to sell W2 material to VTL, it was entitled to royalty payments from VTL based on VTL's subsequent commercial exploitation of that material. The licence payment required by the agreement were neither dependent on sales of W2 material to VTL nor on the supply of W2 material of a quality defined as being stabilised and optimised material.
26. Valeo also contended that the instalment payments provided for by the CLA constituted the consideration that was payable in return for the provision by Valeo of the various services and intellectual property rights provided for by the CLA. These instalment payments neither related to nor were subject to sales of the W2 material to VTL or to third parties. Moreover, these payments were not affected by nor dependant on the quality of any sample of W2 material supplied by Valeo. Further, these instalment payments could not be subject to any set off nor to any precondition that the W2 material that was supplied had conformed to any contractual stipulation as to quality. Finally, the right to terminate given to each party by the CLA was the exclusive means whereby either party could bring the CLA to an end so that VTL could not mount a claim for damages arising from a common law repudiation of the CLA.
27. VTL contended that the licence provisions of the CLA were closely inter-dependent upon the sale of sufficient quantities of W2 material that conformed to the contractual requirements as to quality provided for by the CLA. The purpose of these sales was to enable VTL to fulfil its marketing objectives provided for by the CLA. If the material was not of the appropriate quality, the CLA payment instalments did not become due and, if no material of appropriate quality was delivered, there would be a total failure of consideration and any paid instalment could be reclaimed. The CLA provisions that limited Valeo's liability and VTL's entitlement to set off against claims for payment of the contractual instalments were only applicable to W2 material that conformed to the contractual quality defined by the CLA. This quality was defined as being W2 material which was both optimised and stabilised on the basis of the formula whose reference was W248.
28. These contentions give rise to the following questions of construction:

(1) What are the obligations to sell W2 material provided for by the agreement?

(2) What obligations as to quality are imposed for such sales as take place under the agreement?

3. Issue 1 – The CLA Sale Obligations

3.1 Valeo's Obligation to Supply W2 Material

29. The CLA provided that:

"3. Licence

3.1 [Valeo] hereby grants to [VTL] a worldwide exclusive licence to use the Technical Information, Copyright and the Patents to use the W2 Material for the Process [being the moulding of the W2 Material onto synchronised rings for gearboxes] and to manufacture and sell Products [being synchronised rings for gear-box applications with or containing W2 Material] worldwide …".

3.2 [Valeo] hereby grants to [VTL] an exclusive Licence to use its Technical Information, Copyright and the Patents to use the W2 Material for the Process …"

1.1 Definitions "Technical Information" meant "all identifiable know-how, experience, data and all other technical or commercial information relating to the W2 Material or the Process … including but not limited to that information identified in Annexure C to this Agreement." Annexure C included "A detailed description of the W2 moulding process on synchronised rings including but not limited to manuals, operating manuals and instructions, drawings and maintenance contracts; Operating instructions and procedures in connection with vehicle testing devices; Procedures in connection with data collection and analysis following vehicle testing; and Specifications of the W2 Material."

3.1.3 [VTL] shall have the benefit of an exclusive Licence subject to the satisfaction of the sales objectives of [VTL] which shall apply after the Initial Period and which are set out in Annexure D to this Agreement."

6. Performance

6.1 During the continuance of this Agreement [VTL] shall:

6.1.1 use all reasonable endeavours to promote the distribution and sale of Products as widely as its resources reasonably permit …".

8. Obligations of [Valeo]

8.1 [Valeo] shall manufacture and sell to [VTL] the W2 Material for supply.

8.2 [Valeo] shall sell and [VTL] shall purchase the W2 Material subject to the terms and conditions existing between [Valeo] and [VTL] for the sale and purchase of W2 Material as at the Effective Date; the price of the W2 Material contained in such terms at the Effective Date is 30.5 Euros per kilo ("the Price")."

30. These provisions must be interpreted against the common factual background that was known to both Valeo and VTL at the time that the CLA was entered into. This background was to the effect that Valeo was the sole manufacturer of the W2 material, that it was intended for use for moulding onto synchronised rings for use in car gearboxes, that this was its only known use; that both the formula of and the manufacturing process for the W2 material and the associated moulding process for the creation of car gearbox synchronised rings were relatively new and were still being developed by Valeo; that VTL had been the subject of a related management buyout agreement which had been negotiated and financed on the basis that VTL would be granted an exclusive licence to market the W2 material worldwide for use for moulding onto car gear-box synchronised rings using the moulding process developed by Valeo; that royalty payments would be made to Valeo on the basis of sales volumes of the W2 material by VTL; and that VTL was subject to minimum sales requirements which, if not fulfilled, would entitle Valeo to terminate the CLA after an initial 28-month period
31. In the light of these contractual provisions, when construed against this commonly known matrix of fact, the sale obligations of Valeo were, in summary, as follows:

(1) Valeo was required to sell, and to be in a position to sell, such quantities of the W2 material as VTL in fact ordered. There would be a ceiling as to the overall quantity of that material that VTL could order over any particular period of time and also limits as to the minimum period of notice for any order, the quantity of W2 that could be ordered in any one call-off and the minimum period of time that could elapse between successive orders. These limits would be set by the standard of reasonableness which itself would be determined by reference to the expectation of the parties as reflected in the CLA in general and by Annexure D to the CLA in particular.

(2) VTL was not subject to an express obligation to buy or to buy any defined quantity of the W2 material but since there was no other known supplier and since VTL had an obligation to use reasonable endeavours to maximise its own sales of the synchronised rings containing the moulded-in W2 material, there was an obvious implication that VTL would order, as a minimum, a sufficient quantity of W2 material to enable it to perform its contractual marketing obligations.

(3) The requirement imposed on Valeo to sell the W2 material ordered by VTL was in the nature of a call-off. The sale of W2 would in consequence be subject to a series of call-offs by VTL, each of which would be subject to the same conditions of sale. These conditions were to be established as a matter of fact and were defined by the CLA as being those conditions that had in fact been applicable to the sale of W2 material to VTL at the time of the CLA, namely those applicable to W2 sales to VTL at the time of the management buyout on 1 November 2001.

(4) If no conditions of sale for the sale of W2 had in fact been applicable at that time, either because none had been on 1 November 2001 or because there had been no sales of W2 material by then, it would be necessary to determine whether the position was that no conditions of sale applied, or that the conditions that applied to any particular sale were those as had in fact been incorporated into that particular sale at the time of that sale or that the CLA, by virtue of its express terms or by implication, had had the effect that no terms or only modified conditions of sale could be incorporated into any particular sale contract.

(5) The provision contained in clause 8.1 was not itself a sale of goods obligation. That clause merely provided that:

"[Valeo"] shall manufacture and sell to [VTL] the W2 Material for supply … subject to the terms and conditions existing between [Valeo] and [VTL] for the sale and purchase of the W2 Material as at [1 November 2001]."

The effect of this obligation was, therefore, that Valeo had to be in a position to fulfil such orders as were in fact received and could not decline to fulfil such orders, subject to the limitation of reasonableness already referred to.

32. I reach these conclusions because of the clear purpose and intent of the CLA. First and foremost, the CLA would make no commercial sense if it was merely an agreement providing for the provision of certain services and intellectual property rights in connection with the process of moulding W2 onto car gearbox synchronised rings. If Valeo had no associated obligation to supply the W2 material to VTL, and it declined or was unable to supply VTL with W2 material, Valeo would obtain a large payment for the provision of associated services in circumstances in which those services would be worthless.
33. Moreover, the agreement would make no commercial sense if it imposed no obligation on Valeo to manufacture the W2 material or to sell it to VTL. The management buyout was clearly intended to provide a means whereby Valeo transferred the work involved in the W2 moulding process and the commercial marketing of W2 outside the Valeo group of companies whilst continuing to participate in the commercial exploitation of W2 by manufacturing it for VTL. Valeo was selling VTL an exclusive worldwide licence to mould and sell W2 material as part of moulded synchronised rings for use in car gearboxes. Both the CLA and the contracts for the sale of the W2 material to VTL were part of a single commercial package involving a pairing of Valeo's manufacturing process and VTL's moulding and selling process. The fruits of that arrangement were to be shared by means of royalty payments that VTL would make to Valeo that would be based on the number of units sold by VTL following moulding of individual W2 samples into completed synchronised rings.
34. Valeo contended that no obligation to sell the W2 material to VTL had been expressed in the CLA and, therefore, no such obligation was intended. This contention was advanced even though Clause 8.1 stated in unequivocal terms that: "[Valeo] shall manufacture and sell to [VTL] the W2 Material for supply". Valeo contended that that provision created no contractual obligation to sell the W2 material to VTL.
35. However, the clear purpose of the CLA, whereby VTL would market synchronised rings moulded with W2 material, would remain unfulfilled if, as Valeo suggested, clause 8.1 of the CLA imposed no contractual obligation on Valeo to sell W2 material to VTL but instead amounted to no more than a statement of a non-contractual hope that if VTL ordered W2 material, Valeo would comply with that request without being under any contractual obligation to do so.

3.2 Terms as to Quality

36. I now turn to the terms as to quality that are imposed on Valeo under the CLA in relation to its obligation to sell W2 material. The present cross-claims of VTL are not made, additionally, under any sale of goods contract entered into with Valeo for the sale of that material nor are they based on any express or implied contractual obligation based on the suitability, merchantability or fitness for purpose of the W2 material supplied under either the CLA or any contract of sale.
37. VTL contends that the CLA contains an obligation that such W2 material as is in fact supplied under contracts entered into had to be in a form that had been optimised and stabilised and which had been manufactured in this way on the basis of the current W248 formula. This obligation is created, according to VTL, by clauses 3.2 and 3.4 of the CLA notwithstanding that these clauses form part of a detailed contractual code for the granting of licences to use intellectual property rights associated with the W2 material.
38. The basis of this contention is that Valeo's obligation under the clause providing for the licence is as follows:

"3.2 [Valeo] hereby grants to [VTL] an exclusive Licence to use its Technical Information, Copyright and the Patents to use the W2 Material for the Process …

3.4 The Licences granted to [VTL] under [the CLA] apply to the W2 Material in an optimised and stabilised form on the basis of the [W248] Formula of the W2 Material."

Clause 3.4 also provides the means whereby VTL may develop a new formula for the purpose of satisfying a specific customer requirement.

39. Valeo contended that this provision relates to the licensing requirements in relation to the licences it was granting VTL to enable VTL to engage in the commercial exploitation of the W2 material. Valeo also contended that these licences, and their associated provisions as to royalty payments, sales volumes and the like, were only to apply to material produced in accordance with the W248 Formula. The words "in an optimised and stabilised form" merely described the material produced in accordance with the W248 formula but created no contractual obligation as to the type or quality of W2 material to be supplied.
40. I do not accept that either VTL or Valeo's contention accurately summarises the content of the obligation imposed on Valeo by the CLA.
41. VTL's contention was, in effect, that a clause providing for the licensing of W2 material imposed an obligation on Valeo to supply W2 material that was both stabilised and optimised and accorded to the W248 formula. The more natural meaning of clauses 3.2 and 3.4 is that the licence provisions, relating to royalty payments, prohibitions on sale and resale and all other matters pertaining the issue of the licences, were only apply to W2 material which was both stabilised and optimised on the basis of the W248 formula. If W2 material was supplied which did not conform to these requirements, there would not be a breach of clause 3 of the CLA. Instead, clause 3 would not apply to that material and VTL would be free to use and profit from that material as it saw fit without having to account to Valeo for a royalty payment for any such non-conforming material.
42. Valeo's contention was, in effect, that the CLA contained no contractual obligation as to the qualities that the supplied W2 material should have. If such an obligation had been intended, it would have been provided by the terms of clauses 2.5 and 2.9 which spelt out the warranties being supplied as an adjunct to the licensing arrangements provided for by the CLA.
43. Moreover, Valeo contended that the limitation of liability provisions contained in the CLA would have referred expressly to any warranty as to quality had it been intended that Valeo was providing such a warranty. However, although the relevant limitation covered all other warranties, it did not cover a warranty as to quality if such was provided for. Thus, Valeo would be subject to an unlimited liability for breach of the suggested quality warranty, if it was provided for. This potential omission was clearly unintended and this possible consequence pointed to there being no such warranty.
44. However, Valeo's contentions overlook the fact that the CLA is careful in defining what material is to be licensed and supplied. That material is expressed to be a particular form of W2, namely W2 in an optimised and stabilised form on the basis of the Formula. Thus, the material to be supplied by virtue of clause 8.1 was not "any old" W2 material but was to be the W2 Material (the CLA always referred to W2 material with a capital "W") with these stated characteristics. Only that type of W2 material would be capable of being moulded onto synchronised rings using Valeo's equipment, established techniques and procedures. Thus, Valeo was obliged, both expressly and by necessary implication, to provide that type of W2 material.
45. This requirement did not arise as a warranty imposed by clauses 3.2 and 3.4 but by virtue of the requirement imposed by clause 8.1 requiring Valeo to supply that particular type of W2 material. This was the material with which the CLA was concerned. It was also the type of W2 material which had been shown, during development, to be capable of being moulded onto synchronised rings. That moulding process required fully stabilised and optimised W2 material and it was on the basis of that type of W2 material, manufactured using the W248 formula, that the sales forecasts and royalty payment provisions of the CLA and the price of W2 material provided for in the CLA had all been based on.
46. Thus, Valeo had an express obligation to supply such quantities of W2 material as were reasonably ordered by VTL. All W2 material supplied under separate sales entered into by virtue of this obligation had to be in an optimised and stabilised form on the basis of the Formula W248. Any delivery of material which was supplied pursuant to this obligation which did not so conform constituted a breach of clauses 8.1 and 8.2 of the CLA as well as being a potential breach of any relevant express or implied terms concerned with quality found in the relevant sale of goods contract created by VTL's call-off for that material.
47. This obligation arose under the CLA by virtue of this composite express contractual obligation:

"[Valeo] shall manufacture and sell to [VTL] … the W2 Material for supply… [Valeo] shall sell and [VTL] shall purchase the W2 Material".

This obligation arose by virtue of both clauses 8.1 and 8.2. These words in those clauses are to be construed in the context of both the terms of the CLA and of the relevant and admissible commonly known factual matrix since they are potentially ambiguous. When considered in those two contexts, the wording of this obligation is clear and unambiguous. It means:

"[Valeo] shall manufacture and sell to [VTL] W2 Material in an optimised and stabilised form on the basis of the Formula [for] the W2 Material [provided by Formula W248] for supply … and [VTL] shall purchase that material" (see the wording defining the subject matter of the licence used in clause 3.4 of the CLA).

This was the type of W2 material for which Valeo was providing intellectual property rights. Only such material, and no other W2 material, when sold on by VTL entitled Valeo to a royalty payment. The obligation to sell this type of W2 material arose not from a warranty but from the contractual description of the W2 material contained in the CLA.

4. Issue 2 – Instalment Payment Conditions

48. VTL contended that the obligation to make payment of each instalment only arose after Valeo had fulfilled its contractual obligations with regard to the delivery of W2 material of the appropriate contractual quality. The third instalment payment was defined as being payable by clause 3.1.1(c) of the CLA in these terms:

"3.1.1 [Valeo] hereby grants to [VTL] a worldwide exclusive licence to use the Technical Information, Copyright and the Patents to use the W2 Material for the process and to manufacture and sell Products worldwide subject to the further provisions of this clause 3.1.

3.1.1 [VTL] shall pay to [Valeo] as consideration for the rights granted in this clause 3.1 a lump sum of £1,000,000 in the following instalments ("the Consideration"):

(1) as to £300,000, on the date which is six months after the Effective Date;

(2) as to £200,000, on the first anniversary of the Effective Date;

(3) as to £500,000, on the earlier of the completion by [VTL] of the sale of an aggregate of 700,000 Units of the Product or the expiry of the Initial Period."

49. VTL's contention was that clauses 3.4 and 3.5 of the CLA obliged Valeo to produce W2 material that was in an optimised and stabilised form. The entire framework of contractual rights and obligations contained in the CLA depended on Valeo fulfilling this obligation. The payment provisions relating to the third payment of £500,000 were related to the consideration payable to Valeo for its performance of its contractual obligations including this obligation and were dependent upon adequate performance of that obligation since, without adequate performance of it, VTL would be unable to sell units of the product. Thus, adequate performance of the obligation to sell W2 of appropriate qualify by Valeo was a condition precedent to the payment of this instalment.
50. This contention is unsustainable for these reasons:

(1) The consideration of £1 million, and its three constituent parts, payable under the CLA, was to be consideration for the provision of training services, intellectual property rights and other services associated with the W2 material. This is made clear by the opening words of clause 3.1.1 which state that the sum of £1 million is payable "for the rights granted in this clause 3.1" and by the title to clause 3, which is "Licence". By way of contrast, the right to receive delivery of W2 material arose as a consequence of clause 8. It was not a right granted by clause 3.1. It follows that due performance of Valeo's clause 8 obligations is not a condition precedent to VTL's obligation to pay the instalment payments required by clause 3.

(2) Clause 3 makes it clear that if inappropriate W2 material is delivered by Valeo, the consequence is that royalty payments will not become due or payable when that material is sold on in the form of moulded synchronised rings. The CLA clearly distinguishes between Valeo's clause 3 obligations, which are linked to the lump sum consideration of £1 million, and its manufacturing and sale obligations which are linked to royalty payments. There is no scope, therefore, to link due performance of Valeo's manufacturing obligations with VTL's obligation to pay the lump sum consideration of £1 million.

(3) VTL's suggested construction of clause 3 would give rise to an anomaly. First, the suggested precondition to the payment of the third instalment does not appear to apply to the first two instalment payments. Secondly, this precondition would not apply to the second limb of the third instalment payment, providing for payment after the expiry of the Initial Period. The expiry of this period of time is not dependent on due performance of Valeo's manufacturing obligations.

(4) On VTL's construction of clause 3, the failure to deliver appropriate material would not prevent the obligation to pay the first £500,000 arising in any event nor would it prevent the obligation to pay the balance of the consideration arising once the Initial Period had expired. All that the suggested precondition could do would be to postpone that obligation from arising on the date on which 700,000 units of material had been sold on by VTL to the date, if later, on which the Initial Period expired. This construction makes no commercial sense.

51. I conclude that there is no precondition to VTL's obligation to pay all or any part of the third instalment that is dependent upon Valeo's due or any performance of its obligations arising under clause 8. The payment of this instalment is not linked to any performance obligations of Valeo associated with the delivery of stabilised and optimised W2 material and the sum itself is not related to those services but to the services provided for in clause 3.

5. Issue 3 – Condition and Repudiation

52. VTL contended that Valeo's obligation to deliver W2 material of appropriate quality was of such importance that any substantial failure to make appropriate deliveries of that material would constitute a repudiatory breach. This would entitle VTL to treat the CLA as at an end and to withhold payment of outstanding sums otherwise due or to become due to Valeo.
53. These contentions are unsustainable for the following reasons:

(1) At present, VTL is primarily advancing its claim for damages pursuant to alleged breaches of clause 3 of the CLA. Such claim as VTL has for damages arising out of any breach by Valeo of its manufacturing and delivery obligations arises, as I have already decided, under clause 8. Unless and until the claims are fully pleaded as breaches of clause 8, no possibility of the suggested entitlement to withhold or to cross-claim for damages can arise.

(2) The material advanced by VTL is at present insufficient to enable it to establish a reasonable prospect of success on the facts. No particulars are given of the dates of delivery or of the batches of W2 material that were defective or of poor quality, no evidence is advanced to show that this defective material had the essential shortcomings summarised in VTL's pleaded case, no explanation is given as to the causes of these shortcomings or as to why they constituted breaches of the obligation to supply optimised and stabilised W2 material, no explanation is given as to the losses that these breaches caused or as to the causal link between these losses and the breaches and no particulars or breakdown of the lump sum of £1.4 million allegedly lost as a result of these breaches have been provided. VTL has not even attempted in its witness statement served in opposition to the summary judgment application to fill any of these factual lacunae.

(3) Assuming that there is a substantial claim and that it is being advanced under clause 8, VTL would need to show that it had accepted Valeo's alleged repudiation of the CLA. However, no explanation was given as to why £300,000 of the third instalment was paid without protest nor as to why the first intimation of a claim occurred long after Valeo had demanded payment of the balance of £200,000 and, therefore, long after the alleged breaches of contract had occurred. Thus, VTL appears to have affirmed any breach of contract that might have occurred that might have given rise to a repudiatory breach of contract by Valeo.

54. Finally, even if VTL can be taken to have a valid and sustainable claim for damages for breach of clause 8 of the contract, that claim cannot be set off against the claim for the unpaid balance of the consideration of £1 million. This is as a result of clause 12.8 which provided:

"12.8 All sums payable by [VTL] hereunder shall be paid in full without any deductions whatsoever except for such tax as [VTL] is legally bound to withhold in which event [VTL] shall furnish [Valeo] with such certificate of the tax withheld in such form as [Valeo] may reasonably require."

55. Valeo, relying on Mottram Consultants v Sunly & Sons Ltd; Nile Co For Export of Agriculture Crops v H & JN Bennett (Commodities) Ltd; Marubeni Corp v Sea Containers Ltd; and BOC Group Plc v Centeon LLC^[3], contended that clause 12.8 precluded any set off or withholding being made against the sum of £200,000, whatever the potential merits of VTL's claim or cross-claim might be. Valeo contended that these authorities, and several further authorities, clearly established the principle that if words are used in the contract that clearly and unambiguously exclude the right of set off, equitable set off or other means of withholding payment, the court would uphold that contractual provision and give judgment in favour of the claiming party notwithstanding an apparently valid set off being advanced by the paying party as the basis for withholding payment.
56. VTL accepted the principle established by these cases but contended that the words "without any deductions whatsoever" where not sufficiently clear to exclude its right of setting off against a claim for the unpaid balance of the consideration a cross-claim for damages for breaches of the obligation to provide appropriate quality material. Reliance was placed on Connaught Restaurants Ltd v Indoor Leisure Ltd^[4] where it was suggested that the word "deduction" in the relevant provision in the lease in issue in that case was not sufficiently clear in context to exclude a right of set off. However, the Court of Appeal has made it clear that each clause had to be construed in the light of the contractual provisions it was contained within to ascertain whether the contended for set off had or had not unequivocally been removed by the words of the contract. In that case, the looser phrase "without any deduction" could have been referring to the process of subtraction, which would not involve set off, or to the more general process of striking a balance, which would.
57. In this case, the context and the phraseology are very different. The expression "all sums due shall be paid in full without any deductions whatsoever" is in context, as wide as it could be and clearly covers set off against an instalment of the consideration that has fallen due. Moreover, the suggested operation of this provision arises in the context of a contract where the sum that is due and payable relates to payment for services and licence fees and the proposed deductions relate to claims for damages arising out of a different type of obligation arising under totally different contractual provisions to those giving rise to the indebtedness.
58. Thus, the language is clearly intended to prohibit any form of deduction or set off from the licence payment that are due for payment and the context of the proposed deduction is such that that the right to set off or deduct is clearly excluded whether a broad or a narrow interpretation is placed on the word "deduction" where it appears in clause 12.8.
59. Valeo also contended that VTL had no entitlement to damages arising from the alleged repudiation of the CLA. This is because the claim for damages is based entirely on VTL's alleged common law right to treat the CLA as having been repudiated. Valeo contended that the CLA contains a clear and full contractual code governing the termination of the contract in circumstances where there has been a breach of contract by Valeo. Where such a contractual code exists, it will usually be construed as excluding any common law entitlement to treat the contract as having been terminated unless clear words are used which provide for a continuation of those common law rights in parallel with the contractual code.
60. A careful consideration of the detailed provisions of clause 10, the termination clause, shows that Valeo's contentions are correct. The clause provides that:

"10.1 This Agreement shall continue unless terminated earlier in accordance with the following provisions of this clause 10 and the other terms of this Agreement."

61. The clause then goes on to provide what appears to be a complete code governing the circumstances in which either party may treat the contract as having been terminated. It follows that the parties have clearly intended that clause 10 should supersede the right of either of them to invoke the common law doctrine of repudiation and to exercise the common law right of the innocent party to accept a fundamental or significant breach of contract, thereby bringing the contract to an end.
62. It follows that such cross-claim for damages as VTL has may not be set off against Valeo's claim for the unpaid balance of the third instalment of the contract consideration. Any claim for damages for breach of contract or arising from a termination must therefore be made through clauses 8 and 10, in the latter case following the correct use of the procedures clause 10 provides for termination.

6. Issue 4 – Total Failure of Consideration

63. This issue questions whether it is arguable that there has been a total failure of consideration of Valeo's obligations giving rise to a restitutionary claim by VTL for the return to VTL by Valeo of £800,000.
64. VTL contended that the obligation to provide W2 material of appropriate quality was so fundamental that if none of the material supplied conformed to that contractual quality, there would have been a total failure of consideration.
65. This argument is untenable for the following reasons:

(1) The CLA provides for a range of services that must be performed by Valeo, most of which are not directly related to the performance of its W2 material obligations. These services include the provision of various licences and the supply of training services. Most, if not all, of these services have been performed and, on that ground alone, there has been no total failure of consideration.

(2) VTL has already made substantial payments towards the lump sum of £1 million. These were made voluntarily following, at least in relation to the second and third payments, the performance of irreversible services provided for by the VTL. It follows that VTL has affirmed the contract and has affirmed that it has received benefit from the contract.

(3) The court is not concerned with the adequacy or excessive nature of any consideration. Once some benefit has been provided, the consideration provided for is no longer to be regarded as having failed and VTL's remedy, if any, is to seek to recover excessive payments by resort to such doctrines as misrepresentation, negligent advice, unconscionable, unenforceable or unfair terms or breach of contract.

(4) VTL's contention is dependent upon it showing that the obligation to provide W2 material is part and parcel of the obligations provided for by clause 3 relating to the provision of a licence. Only then could it be even arguable that there has been a total failure of consideration if the obligations concerned with the supply of material are not performed at all. However, as has already been determined, these two obligations are entirely separate and are in no way inter-dependant.

66. For all these reasons, VTL has not demonstrated that it has any arguable claim for the return of £800,000 on the restitutionary basis that there has been a total failure of consideration.

6. Issue 5 – Valeo's Summary Judgment Applications

67. This issue raises the general question of whether Valeo is entitled to summary judgment in the light of these findings.
68. The answer is that Valeo is entitled to summary judgment for £200,000 plus appropriate interest and also to a judgment dismissing Valeo's restitutionary claim for the return of £800,000 on the basis that there has been a total failure of consideration.

HH Judge Thornton QC

Technology and Construction Court

St Dunstan's House

Fetter Lane

London

EC4A 1 HD

17 August 2005

Note 1    [2001] 1 All ER 91 at 92j.    [Back]

Note 2    Paragraph 11 above.    [Back]

Note 3    Respectively: [1975] 2 Lloyd’s Rep 197 at 209 – 210, HL; [1986] 1 Lloyd’s Rep 555 at 558 – 559, Evans J; Unreported, 17 May 1995, Waller J; and Unreported, 29 April 1999, Evans LJ.     [Back]

Note 4    [1994] 4 All ER 834, CA.    [Back]