Sawyer v Atari Interactive Inc

There are before the Court (i) an application for permission to appeal from an order made on 19 October 2006 by Mr Justice Cooke, sitting in the Chancery Division of the High Court, on an application made in proceedings brought by Mr Chris Sawyer against the applicant, Atari Interactive, Inc, and (ii) applications (by notice dated 8 December 2006) for permission to rely on further evidence which was not before the judge and for permission to amend the defence and counterclaim. Those applications have been listed to be heard with the appeal itself to follow, should permission to appeal be granted.

The circumstances in which the proceedings were commenced, and the relief claimed, are set out in the judgment handed down by Mr Justice Lawrence Collins on 1 November 2005 ([2005] EWCA 2351 (Ch)) on an earlier application. It is, I think, sufficient to summarise the position:

These proceedings were commenced by the issue of a claim form on 9 May 2005. The claims made included: (i) a claim that Atari was in breach of the licence agreements in failing to permit an audit in respect of the period January 1999 to January 2001; (ii) a claim that Atari was in breach of the licence agreements in failing to make available all records reasonably required for audit purposes in respect of the period following January 2001; (iii) a claim that Atari had failed to pay sums properly due under the agreements - as set out in particulars under thirteen heads – and had failed properly to account. The relief sought included specific performance of the obligations to permit an audit (in respect of the period before January 2001) and to make available all records reasonably required for audit purposes (in respect of the period after that date); payment of some $4.8 million in respect of the alleged under-accounting (as set out under the thirteen heads); an account of all sums due under the licence agreements in the period from January 1999 to date; and payment of further sums due upon the taking of the account. The sum claimed in respect of the alleged under-accounting included an amount of $1,742,663 in respect of what was said to be the wrongful deduction of 10% from total sales revenue before 2001.

Having failed in its application (before Mr Justice Lawrence Collins) for an order setting aside service out of the jurisdiction, Atari served a defence and Part 20 counterclaim on or about 26 March 2006. Paragraph 4 of that defence alleged that payments in excess of $39 million had already been made to Mr Sawyer under the licence agreements. Save that Mr Sawyer asserted (by way of reply) that the correct figure was some $36.5 million, the fact that very substantial payments have been made is not in dispute.

It was denied that Atari was in breach of any obligation to permit an audit in respect of the period before 26 January 2001. It was said that, on a true construction of the audit provision in the agreements, the right to an audit is limited by the terms of the limited obligation on the accounting party to keep the books and records necessary for the purposes of an audit. So, it was said, there was no right to conduct an audit in respect of any period earlier than the quarter commencing on 1 April 2001 – that being the relevant quarter two years prior to the notice given on 20 May 2003. The defence contained no assertion (in terms) that the temporal limitation on the right to an audit was matched by a corresponding limitation on Atari’s obligation to account: that is to say, there was no pleading (in terms) that Atari was not obliged to account (beyond statements already supplied) for royalties in respect of the period prior to 1 April 2001. But denial of the claimant’s right to have an account in respect of that earlier period is, I think, implicit in the denial (at paragraph 45 of the defence) that the claimant is entitled to the relief sought at paragraph 10 of the particulars of claim (which contained the claim for an account) and in the general traverse at paragraph 48 of the defence.

Paragraph 11 of the defence contained an averment that (save as specifically admitted) Atari was not in breach of the licence agreements by reason of a failure properly to account to the claimant “whether as alleged in paragraph 9 or at all”. Paragraphs 14 to 46 of the defence contained a point by point rebuttal of the claims in respect of specific underpayments made under the thirteen heads in the particulars of claim. In answer to the claim for wrongful deduction of 10% from total sales revenue (the $1,742,663 claim), Atari pleaded as follows (so far as material):

“31 . . .

31.1

it is admitted that in the period 1 January 1999 to 26 January 2001, the Defendant when called Hasbro Interactive Inc (which at that time was part of the Hasbro group) made 10% deductions from the royalties otherwise payable to the Claimant;

31.2

it is denied that there was no proper basis for such deductions whether as the Claimant contends or at all;

31.3

it is averred that the Defendant was entitled to make such deductions as being consequential upon: ‘… other customary trade and volume discounts actually given to customers…’ as permitted by the definition of Net Sales Revenue in each of the Licence Agreements . . .

31.4

. . . Hasbro Interactive Inc retained a flat deduction of 10% as a preliminary provision in respect of actual price protection, co-op, bad debt and other customary customer trade and volume discounts within the definition of Net Sales Revenue . . . and relating to the pre-April 2001 period

31.5

. . .

31.6

In fact, in the relevant 2 year period (1999 and 2000), Hasbro Interactive Inc gave its customers allowable (ie after capping under the terms of the Licence Agreements) customary trade discounts and credits in respect of actual price protection, co-op, bad debt and other customary customer trade and volume discounts amounting to an aggregate average of 19.4% of allowable net sales. Information about how these aggregated trade discounts and credits have been calculated is set out at Schedule A appended to this Defence.

31.7

Thus, since the allowable deduction was 9.4% greater than the 10% actually withheld, as shown in Schedule A, the Claimant was erroneously overpaid the sum of $1,646,000.00.

32

. . . For the reasons set out above, it is denied that the Defendant is liable to pay the Claimant this money [$1,742,663] or any part of it. The true position is that there has been an overpayment to the Claimant which falls to be returned as set out in the Counterclaim below.”

The case pleaded at paragraphs 31 and 32 of the defence is reflected in paragraphs 52 and 53 of the counterclaim:

“52 The Defendant repeats paragraphs 31 and 32 above.

53

The Defendant is entitled to and claims the sum of $1,646,000.00 erroneously overpaid by Hasbro Interactive Inc to the Claimant.”

Paragraphs 54 to 70 of the counterclaim contained allegations in support of Atari’s contention that Mr Sawyer acted in breach of an exclusive licence agreement in respect of the game RollerCoaster Tycoon 3 (RCT3). Put shortly, it was said that Frontier had developed an enhanced version of RCT3 (to be known as “the Thrills Game” or “Thrillville”) which it intended to license to a third party purchaser; that the Thrills Game constituted an Additional Format of the RCT3 software and so was within the exclusive licence granted by the Ancillary Rights Agreement; and that Mr Sawyer was in breach of his obligations under the Ancillary Rights Agreement in that he “must have assisted Frontier to develop the Thrills Game by providing Frontier with a licence to use graphical elements from the RCT3 Game for use in a demo version of the Thrills Game; [and] afforded Frontier such further or additional rights as has allowed Frontier to develop the Thrills game” (paragraph 66 of the counterclaim). On that basis Atari claimed damages for breach of the Ancillary Rights Agreement (or, in the alternative, an account of profits) and damages for what were said to be Mr Sawyer’s acts in wrongfully inducing Frontier to breach its contractual obligations under the development agreement.

By application notice dated 13 July 2006 Mr Sawyer sought (i) an order striking out the whole of Atari’s counterclaim and (ii) summary judgment on those heads of his own claim in relation to which the only pleaded defence was set-off. Atari’s response (in part) was to serve an application notice, dated 13 October 2006, seeking permission to amend the defence and counterclaim in accordance with the draft attached to that notice. The proposed amendment sought (at paragraphs 65A and 66) to rely on the letter of 1 March 2005 (“the Demo Licence Agreement”) to which I have referred earlier in this judgment. It was said (by the proposed amendment) that Mr Sawyer had failed to afford Atari the right of first negotiation and the last right to match to which it was entitled under the Ancillary Rights Agreement; and that, in entering into the Demo Licence Agreement, he had “assisted or caused Frontier to be able to market the Thrills game (which it could not have done with any effect without a Demo) and/or to elicit funding for the development of the Thrills game”. By proposed amendments to paragraph 67 Atari sought to rely on the outcome of proceedings which it had commenced against Frontier in New York and in London in respect of the alleged breach (by Frontier) of the development agreement. Those proceedings had been compromised on terms which were said to be “much less favourable than the terms which more likely than not [Atari] would have obtained had it obtained rights direct from [Mr Sawyer] in accordance with its rights under the Ancillary Rights Agreement”.

Those applications came before Mr Justice Cooke on 19 October 2006. He ordered that the Part 20 counterclaim be struck out. He struck out, also, paragraph 47 of the defence (which had raised the plea of set-off). He refused Atari’s application for permission to amend the defence and counterclaim. And he gave judgment for Mr Sawyer (in the aggregate sum of $151,296) in respect of those of his claims to which (in the absence of set-off) there was no longer a defence. It is from that order that Atari sought (by appellant’s notice dated 9 November 2006) to appeal to this Court.

The judge identified the claim in paragraph 53 of the Part 20 counterclaim as a claim in restitution. At paragraph 10 of his judgment he said this:

“[10] However inelegantly the point may be pleaded, and whatever criticisms may be levelled at it, it is clear, both from the way in which it is pleaded in paragraph 31, and from the counterclaim and prayer for relief, that this is a claim in restitution. The claimant contends, however, that this claim is bad, both in law and on the facts, since it is unsustainable on the evidence currently produced and will remain unsustainable, since no evidence will be forthcoming to make it good at any stage in the future.”

The judge went on to analyse the arguments which had been advanced to him on behalf of the parties. In addressing the demurrer he referred to the evidence of Mr Michael Rouette which was before him in the form of a witness statement dated 10 October 2006. He said this:

“[14] The bottom line, however, is this. [Mr Rouette] merely says that he made the 10 per cent deduction because Mr Parkinson told him to do so. There is no evidence at all from Mr Parkinson as to the basis upon which that order was given or what mistake, if any, he made when doing so. It may well be that he had in mind the terms of schedule 3 of the agreement, for all one knows. Save for the reference to ‘erroneous overpayment’, there is no mistake of fact or law pleaded. No amendment has been put forward and [Mr Rouette’s] evidence shows no mistake in law or fact as it currently stands. He does not appear in fact to be in a position in truth to give evidence as to the nature of any mistake that might have been made.”

Mr Parkinson was V P of Finance at Hasbro Interactive, Inc at the time when Mr Rouette was an accounting manager. In referring to schedule 3 to the agreements, the judge had in mind, I think, the provision (to which I have drawn attention earlier in this judgment) under which the licensee was entitled to withhold from the royalties due in respect of each quarter an amount (not exceeding 10%) as an allowance against returns of defective products. The judge concluded:

“[16] . . . It seems to me that there is no good evidence of what mistake was made because [Mr Rouette] simply did what he was told. The pleading and the statement do not tie together and it is impossible, on the basis of the material that has been produced, in the face of a specific challenge to the plea as it now stands, to see that there is a mistake of law or fact which falls within the authorities for the purpose of making a claim for restitution. If that is right, the part of the pleading that relates to this aspect must be struck out.”

The judge then turned to consider whether there was, or would be, evidence to support the claim of overpayment. He said this:

“[17] . . . The counterclaim depends on proving the actual discounts and expenses of the defendant in relation to the RCT products. It is said that a flat rate deduction of 10 per cent was made when in fact the entitlement was to a greater amount; 19.4 per cent being the figure pleaded. There is in fact no evidence before this court at all as to the appropriate figures for the discounts which were actually effected in respect of the products which are the subject matter of the royalties.”

He pointed out (as is the case) that the figures in schedule A to the counterclaim: “reflect the figures for all the products of the Defendant across the board”. They were not “figures which are directly related to the RCT products at all.” And he observed that it was Atari’s case that it had in its possession or control no records of discounts actually afforded on the RCT products to any of its customers: it was said that those records were in the hands of a Hasbro subsidiary. The judge rejected the submission made on behalf of Atari that documents might be forthcoming from that subsidiary “in due course and in time for trial”. He thought that if relevant documents could be obtained from a Hasbro subsidiary, those documents would have been obtained in the context of resisting the application to strike out. He concluded:

“[20] . . . For all practical purposes, therefore, it can be assumed that no further documents will be obtained and that there is no way in which the defendant can directly make good its contention that a figure of the order of 19.4 per cent represents the actual deductions which they were entitled to make as opposed to those which have actually been made on a flat rate basis at 10 per cent.”

For those reasons – that is to say, both on the law and on the facts – the judge held that “this element of the counterclaim [meaning paragraph 53] must be struck out as having no realistic prospect of success at all.”

The judge addressed what he described as “the third head of the counterclaim” – that is to say, the claim in respect of the Thrills Game – at paragraphs [21] to [43] of his judgment. At paragraphs [26] and [27] he analysed both the claim as originally pleaded and the claim which Atari sought to advance by way of the proposed amendments to the Part 20 counterclaim. At paragraphs [28] and [29] he said this:

“[28] What is clear from the way in which the case is put is that what is alleged is a breach of obligations of exclusivity owed by the claimant to the defendant under the [the Ancillary Rights Agreement]. That is said to have been breached by assisting Frontier to develop the Thrills game by providing Frontier with licences to use the graphical elements from RCT3.

[29] The problem which arises, so far as this way of putting the case is concerned, is that on any reading of the ARA, the licence which is granted does not cover RCT 3 at all.”

The judge gave two reasons for that conclusion. First, he accepted that, as a matter of construction, there was no provision in the Ancillary Rights Agreement by which Mr Sawyer granted Atari a licence – let alone an exclusive licence – to develop RCT3 in additional formats. The Ancillary Rights Agreement “merely gives a licence for use for specific purposes in respect of the RCT rights which the defendant has acquired from Frontier”. There is “no grant at all by the claimant to the defendant of any licence to develop RCT3 in additional formats, because [the ARA] records that this has already been given by the claimant to Frontier, albeit that those matters are also the subject of a licence from Frontier to the defendant”. As the judge put it (at paragraph [38] of his judgment): “The exclusivity which is referred to in the ARA, which is relied on by the defendant, refers simply to the position as between Frontier and the defendant and the purpose for which the license of ‘the catalogue products’ can be used”.

Second, the judge held that, on a true analysis, the Thrills game was RCT3 in an additional format and not a sequel to RCT3. The concepts “additional format” and “sequel” were mutually exclusive. “Additional format” was defined in the licence agreement. “Sequel” was “a new product which relies for its branding on an earlier product, but is clearly distinguishable from it”. So “RCT3 is a sequel to RCT2 which is in turn a sequel to RCT1”. The judge went on:

“[41] . . . If, as I have just determined, it cannot be both, and the terms are mutually exclusive, it is impossible to see how the defendant’s case can stand in this respect. If Thrills was a sequel, it would fall outside the contractual scheme altogether, as between the parties, because the defendant would have no rights in respect of publication. The evidence before me is that in fact no licence has been granted for any sequel to RCT 3 to any person at all. When, therefore, reliance is placed, as it is, upon the agreement between the parties that the defendant should be afforded the right of first negotiation, or the last right to match with respect to the licensing, development or publication of a sequel to the RCT 3 game, that can give rise to no potential counterclaim from the defendant as yet.”

The judge then turned to what he described as “the only alternative claim”: “inducement to breach of contract based upon the knowledge of the claimant of the sublicense arrangements, knowledge which clearly appears from the terms of the ARA”. He said this:

“[43] . . . The point is of no benefit to the defendant because, in order to make good such a claim, it is clear, in the light of the Court of Appeal decision in Mainstream Properties v Young & Ors [2005] EWCA Civ 861, that an intention to cause harm is an essential ingredient of that tort. Such an intention is not here pleaded, and I consider, rightly, because, on the basis of the agreements as they stand, it could not be pleaded. It is plain that what was going on in the context of the agreements is that the claimant was acting in its own interests and in pursuit of its agreement with Frontier at the time it did the acts which are complained of.”

The judge rejected the submission that there was a compelling reason why the matter should go to trial. He was satisfied that the third element of counterclaim – the claims in respect of the Thrills Game - should also be struck out.

Although, as filed Atari sought to appeal to this Court from those parts of the order of 19 October 2006 which struck out the counterclaim and the defence of set-off and from the refusal of permission to amend, the latter was not pursued at the hearing. The position, now, is that Atari accepts that so much of its counterclaim as relates to the Thrills Game cannot stand (whether as originally pleaded or as pleaded in the proposed amendment which was before the judge). We are asked to consider the counterclaim on the basis of the revised amended draft attached to the application notice dated 8 December 2006. It follows that the issues, as they developed in this Court, were: (i) should Atari have permission to appeal from so much of the order as struck out the restitution claim in paragraph 53 of the counterclaim and, if so, should that appeal be allowed; if that permission is not granted (or if that appeal is not allowed), (ii) should Atari, nonetheless, have permission to appeal from so much of the order as struck out the defence of set-off (in paragraph 47 of the defence) and, if so, should that appeal (and the related appeal from summary judgment) be allowed; (iii) should Atari have permission to amend its Part 20 counterclaim in the form attached to the application notice of 8 December 2006.

In support of its applications Atari seeks to rely on evidence (not before the judge) in the witness statements, each dated 5 December 2006, of Mr Ronald Parkinson and Mr Gary Lewis. We were taken, also, to a witness statement of Mr Frederic Chesnais, Chief Executive Officer of Atari, which is dated 11 January 2007. That evidence is not the subject of any formal application; but no objection was taken on behalf of Mr Sawyer.

The applications were adjourned into court, to be heard on notice, with appeal to follow forthwith if permission to appeal be granted, by an order which I made on 29 January 2007. In making that order I took account of the need for the matters to be heard and determined in this Court in sufficient time for the position to be resolved before the commencement of the trial, fixed for 19 March 2007. At the conclusion of the oral hearing we indicated to the parties the orders that we were likely to make.

The claim in paragraph 53 of the Part 20 counterclaim is for repayment of monies allegedly overpaid by mistake. I respectfully agree with the judge that a claim for repayment in that form – a restitutionary claim – cannot stand unless it is possible to identify the mistake which is relied upon. I agree, also, that it is not possible to identify a relevant mistake in Atari’s pleading as it now stands.

Paragraph 53 of the counterclaim (read with paragraph 52), refers back to, and relies upon, the allegations pleaded in paragraphs 31 and 32 – which I have set out earlier in this judgment. The explanation for the deduction of 10% in quantifying Net Sales Revenue (for the purposes of computing royalty payments under schedule 3 of the licence agreements) is found at paragraph 31.4:

“31.4

as set out in sub-paragraph 25.3 above, Hasbro Interactive Inc retained a flat deduction of 10% as a preliminary provision in respect of actual price protection, co-op, bad debt and other customary customer trade and volume discounts within the definition of Net Sales Revenue . . . and relating to the pre-April 2001 period”

Paragraph 25.3 is to the same effect:

“25.3

. . .

(a)

the Hasbro 10% Deduction was a flat price deduction taken by the Defendant when called Hasbro Interactive Inc (then part of the Hasbro group) as a preliminary provision in respect of actual price protection, co-op, bad debts and other customary customer trade and volume discounts within the definition of Net Sales Revenue . . . and relating to the pre-April 2001 period;

(b)

it was not a reserve sum within the meaning of Schedule 3 of the Licence Agreements;

(c)

. . . ”

Paragraph 31.6 contains the assertion that, in the relevant pre-April 2001 period, Atari (as Hasbro Interactive Inc) had given its customers allowable customary trade discounts and credits in respect of actual price protection, co-op, bad debt and other customary customer trade and volume discounts amounting to an aggregate average of 19.4% of allowable net sales. Paragraph 31.7 asserts:

“31.7

Thus, since the allowable deduction was 9.4% greater than the 10% actually withheld . . . the Claimant was erroneously overpaid the sum of $1,646,000.00.”

But, as the judge pointed out, at paragraph [11] of his judgment, the assertion, in paragraph 31.7, that the claimant was “erroneously” overpaid is inconsistent with the explanation given in paragraph 31.4. As he said:

“[11] The plea there [at paragraph 31.4] is of the retention of a preliminary provision in respect of actual price protection and the like. It is not, therefore, suggested in that pleading that the 10 per cent was deducted as a mistake in thinking that it was all that could be deducted. It was a preliminary provision only, with the possibility of further adjustment to be made.”

Atari seeks to meet the defect identified (correctly) by the judge, by the amendments proposed in the revised amended defence and counterclaim which it has put before this Court (and in respect of which it invites this Court to give permission). As amended, paragraph 53 would read:

“53

The Defendant is entitled to and claims repayment [of] the sum of $1,646,000.00 which Hasbro Interactive Inc paid by mistake to the Claimant when it misapplied the contractual formula for the calculation of Net Sales Revenue as provided in each of the Licence Agreements as set out in paragraph 31 above.”

It is proposed that the words “as a preliminary provision” be deleted from paragraphs 25.3 and 31.4; and that there be introduced, by amendment, a new paragraph (as paragraph 31.6A) in these terms:

“31.6A Hasbro Interactive Inc made a mistake when it deducted the above mentioned 10% from the royalties otherwise payable in that the then Vice President of Finance at Hasbro Interactive Inc, Mr Ronald Parkinson, mistakenly instructed the then accounting manager, Mr Michael Rouette, to make deductions at the flat 10% rate without having applied the contractual formula for the calculation of Net Sales Revenue. Had Mr Parkinson not mistakenly caused Mr Rouette to make the deductions on this basis, Hasbro Interactive Inc would have made the deductions allowable under the contractual formula, namely those deductions set out at Schedule A . . .”

An amendment to paragraph 31.7 is proposed: by the substitution of the word “mistakenly” for the word “erroneously”. I cannot see that anything turns on that.

It is relevant, therefore, at least in the context of the application to allow an amendment which seeks to rely on a mistake which Mr Parkinson is said to have made, to have regard to the witness statement which he made on 5 December 2006 – and on which Atari seeks to rely. At paragraph 3 of that statement, Mr Parkinson explained that: “As the VP of Finance at Hasbro Interactive Inc in 1996-1999, it was my job to direct the accounting staff at Hasbro Interactive”. At paragraph 2 of the statement he recorded that he had been asked for his recollection “as to why Hasbro in the period 1999-2000 made a 10% flat rate deduction from royalties otherwise payable to the claimant”. Paragraph 4 is in these terms:

“4

. Flat rate deductions and deductions based on the company’s average annual promotional deductions were common place in our contracts. The normal flat rate deduction that was being applied at the time was 20%. I have no specific recollection of the deduction taken for this product but the flat rate deductions on products in general were designed to cover all the discounts, promotional allowances, bad debts and rebates given to the retail channels on the product, and was not normally a reserve. No tracking of these costs were kept on an individual product because promotions on one product were used to sell other products in the line making it unfair to associate any promotion to only one product. For this reason we based all of our contracts on the aggregate average of these items at the time of the contract or at a negotiated flat rate. ”

At paragraph 6, Mr Parkinson explained that: “As normal, I would discuss with the staff, including Michael Rouette, the royalty manager, deductions to be made to the sales based on the contracts I had negotiated”. But he thought it unlikely that he had been involved in the negotiation of the RCT Licence Agreements (because they were prepared in the United Kingdom – paragraph 5) and that it was unlikely that he had seen those agreements or discussed the rate of deduction thereunder “because of the differences in those used and those in the contract”. He went on:

“6.

. . . I can confirm that the 10% rate is below the 20% normal reduction rate which Hasbro Interactive Inc was experiencing and was applying at that time and that, if such a cap of 10% has been applied while it is not in the contract, it is then a mistake.”

In my view Mr Parkinson’s witness statement provides no support for the case which Atari seeks to advance by the introduction of paragraph 31.6A to its defence and counterclaim. Mr Parkinson does not accept that he instructed Mr Rouette to make a flat rate deduction of 10% from royalties: his evidence is that “it is unlikely that I had . . . discussed the rate”. Nor does his evidence support the contention that, but for some mistake, Hasbro would have deducted 19.4% from royalty payments. The thrust of Mr Parkinson’s evidence is that: “The normal flat rate deduction that was being applied at the time was 20%”. There is no support, there, for the contention (which Atari seeks to advance in paragraph 31.6A) that, had Mr Parkinson not mistakenly caused Mr Rouette to make a flat rate deduction of 10% (if, indeed, he did), “Hasbro Interactive Inc would have made the deductions allowable under the contractual formula, namely those deductions set out at Schedule A . . .” Mr Parkinson’s description of Hasbro’s practice is that “we based all of our contracts on the aggregate average of these items at the time of the contract or at a negotiated flat rate.”

On the material before this Court, this is not a case in which it can be said that an employee of Hasbro Interactive Inc (as yet unidentified) misconstrued the contractual provisions in the Licence Agreements. The evidence (so far as it goes) suggests that no-one looked at the Licence Agreements. The practice was to make a flat rate deduction of 20%. That was a conventional rate, not based on the discounts, costs and allowances applicable to the particular product. For some reason (as yet unexplained) some one decided to make a flat rate deduction of 10% from the royalties payable under these Licence Agreements. There is nothing to suggest that that decision was based on a mistaken view of the contractual provisions. As I have said, there is no evidence that anyone looked at the contractual provisions. If it were said (which it is not) that someone took the view (mistakenly) that the contractual provisions were in what Mr Parkinson thought was the normal form – so that there was no need to look at them - the deduction (on his evidence) would have been 20%.

For those reasons I would refuse permission to amend the defence by the introduction of paragraph 31.6A. If, which is less than clear, the proposed paragraph does contain a plea that Hasbro Interactive Inc misconstrued the contractual provisions of the Licence Agreements, the evidence of those named (Mr Parkinson and Mr Rouette) does not support that plea. If some other mistake is relied upon, the paragraph does not disclose what that mistake is said to be.

Without paragraph 31.6A there is nothing to support the claim for restitution in paragraph 53 of the counterclaim. It follows that I would refuse permission to appeal from so much of the order as struck out that claim.

The conclusion that the claim to restitution in paragraph 53 of the counterclaim is not capable of being sustained does not lead, necessarily, to the conclusion that the defence of set-off (in paragraph 47 of the defence) must also fail; or that summary judgment should be given on those elements of Mr Sawyer’s claim to which there is no defence other than set-off.

It is important to keep in mind that it is not only in the context of the claim to restitution that issues as to the meaning and effect of the definition of Net Sales Revenues, in clause 1 of the Licence Agreements, are of relevance. Those issues are of relevance, also, in the context of Atari’s defence to the claim in paragraphs 9.18 to 9.20 of the amended particulars of claim – that is to say, to Mr Sawyer’s claim that royalties have been underpaid by reason of the flat rate deduction of 10% in the relevant period before April 2001. The judge did not strike out paragraph 31 of the defence. Paragraphs 31.2 and 31.3, which I have set out earlier in this judgment, are in point. In particular, it is pleaded at paragraph 31 that:

“31.3

. . . the Defendant was entitled to make such deductions as being consequential upon: ‘…other customary trade and volume discounts actually given to customers…’ as permitted by the definition of Net Sales Revenue in each of the Licence Agreements . . .”

Atari seeks to add to that plea by introducing a further paragraph (paragraph 31.3A) in these terms:

“31.3A Further, the [Defendant] will say that the definition of Net Sales Revenue in each of the Licence Agreements, insofar as it relates to volume discounts, is to be construed having regard to industry practice, by which volume discounts [are] passed back to a developer by reference to calculating the total volume discount percentage given to a specific retail customer in the period and then passing that discount percentage on across the range of products sold by the Defendant to all such retail customers.”

In that context Atari seeks to rely upon the evidence of Mr Gary Lewis (a witness with some twenty years experience in the computer games industry) in relation to “the custom and practice of the games industry when making deductions from gross receipts”.

That evidence is contained in a witness statement dated 5 December 2006. In paragraph 4 of that statement Mr Lewis expressed the opinion that it was not customary in the industry to apply a flat rate deduction in respect of returns, co-op advertising and bad debts. He said: “In my experience the industry practice is that these deductions are calculated by reference to each individual product”. But he went on to say that the position is different in respect of volume related discounts:

“4.

Not every company gives volume related discounts, and they are now even less common than they used to be, but if they are given, I cannot think of any other way in which they could be passed back to a developer other than by reference to calculating the total volume discount percentage given to a specific retail customer in the period and then passing that discount percentage on across the range of products sold by the Defendant to all such retail customers.”

It can be seen that that passage in Mr Lewis’s witness is the source of the plea which Atari seeks to introduce by paragraph 31.3A of the amended defence.

It is common ground that the Licensee was entitled, when accounting for royalties under schedule 3 of the Licence Agreements, to deduct from “the aggregate invoice price of sales” returns, co-op advertising (subject to a cap), bad debts (also subject to a cap) currency exchange fees and “other customary trade and volume discounts actually given to Customers”. It is, as it seems to me, open to argument whether that latter phrase is to be construed in the sense “trade and volume discounts actually given, customer by customer, in respect of the specific product” or in a sense which allows for some form of averaging. As I understand Atari’s contention it is that the volume discount that can be deducted in respect of the sales of the RCT products to each customer during an accounting period is to be calculated by applying to the amount of those sales a percentage ratio equal to the percentage ratio which total volume discount given to that customer bears to total sales (across the range of products sold) to that customer. But it may be that, on a true understanding of the plea, some wider form of averaging is contended for.

The judge took the view (at paragraphs [17] and [18] of his judgment) that it was necessary for Atari to establish the discounts actually allowed against the invoice price of RCT products. As he put it: “The counterclaim depends on proving the actual discounts and expenses of the defendant in relation to the RCT products”. It was because he found that there was “no evidence before this court at all as to the appropriate figures for the discounts which were actually effected in respect of the products which are the subject matter of royalties.” and that there was “no evidence of the discounts against the actual invoice price which are required for the definition of net sales upon which royalties are to be based” that he was able to hold that “there is no way in which the defendant can directly make good its contention that a figure of the order of 19.4 percent represents the actual deductions which they were entitled to make as opposed to those which have actually been made on a flat rate basis at 10 per cent.”

The judge’s reasoning, as it seems to me, ought to have led him to the conclusion that Atari’s defence to Mr Sawyer’s paragraph 9.18 claim in respect to underpayment was also bound to fail. Atari’s overpayment claim – that it under-deducted allowable discounts in computing royalties – and Mr Sawyer’s underpayment claim – that discounts were over-deducted - may be seen as two sides of the same coin. Each depends on ascertaining what amount the Licensee was actually entitled to deduct. And that, of course, is what Mr Sawyer invites the Court to do by claiming an account “of all sums due to the Claimant under the Licence Agreements in the period 1 January 1999 to date”: paragraph 3 of the prayer for relief.

The judge did not, I think, take the view that Atari’s defence to Mr Sawyer’s paragraph 9.18 claim in respect to underpayment was bound to fail. He was not invited to strike out paragraph 31 of the defence; and he did not do so of his own motion. As the pleadings now stand – and notwithstanding the views expressed by the judge when addressing Atari’s claim to restitution - issues as to the meaning and effect of the definition of Net Sales Revenues remain to be decided at trial. And, if those issues are decided in the sense for which Atari contends (and, perhaps, even if they are not) it may be that, on the taking of an account, it will be found that the Licensee has deducted (at the flat rate of 10%) an amount that is less than the amount that it was entitled to deduct on a true application of the definition of Net Sales Revenues to the facts which it can establish. If that turns out to be the case, then I can see no reason why Atari should not be entitled to set-off the amount overpaid against Mr Sawyer’s other underpayment claims.

It follows that I would give permission to appeal, and allow the appeal (at least in part), in relation to paragraph 2 of the order of 19 October 2006 – which struck out paragraph 47 of the defence. I would also allow the defence and counterclaim to be amended so as to introduce the new paragraph 31.3A. It seems to me that, if the true meaning and effect of the definition of Net Sales Revenues remains a live issue in these proceedings (as I think it does), the court should be prepared to hear evidence as to the practice in the computer games industry as an aid to construction of the words which the parties have used in their agreement.

As I have said, Atari now accepts that so much of its counterclaim as relates to the Thrills Game cannot stand (whether as originally pleaded or as pleaded in the proposed amendment which was before the judge). So there is no appeal from paragraph 1 of the judge’s order in so far as it strikes out those parts of the counterclaim. But we are asked to permit amendments to the counterclaim which put the two elements of Atari’s claims in respect of the Thrills Game – breach of contract and inducement to breach of contract – on what is said to be a new basis.

The amendments for which permission is sought - in so far as they relate to the claim for breach of contract - are found in paragraphs 58, 61 to 66, and 67 of the proposed revised amended defence and counterclaim. It is sufficient, I think, to set out the new paragraph 63A; which should be read in the context of paragraphs 58.3, 65A and 66:

“58

The Ancillary Rights Agreement contained the following further material provisions:

58.1

. . .

58.2

. . .

58.3

it further provided ‘Subject to the provisions of Clause 3(3), if [the Claimant] decides to publish, or to license the rights to develop or publish a sequel to the Game, it shall give [the Defendant] the right of first negotiation and the last right to match with respect to such development’ (Clause 17(4))”

“63

The RollerCoaster Tycoon PS2 game as commenced by Frontier and as licensed by the Claimant in March 2005 (per the licence referred to at paragraph 65A below) began as a sequel rather than an Additional Format of the RCT3 Game software . . .

63A Later, during the period after the time material to the Defendant’s claim under clause 17(4) of the Ancillary Rights Agreement, the game concept moved away from being a sequel to become an Additional Format of the RCT3 Game (as defined in the Ancillary Rights Agreement) to finally become a stand-alone game.”

“65A The Licence Agreement between the Claimant and Frontier (‘the Demo Licence Agreement’) is recorded in a letter of Frontier addressed to the Claimant and dated 1 March 2005. The letter states that by the Demo Licence Agreement, the Claimant has licensed Frontier to use visual design elements from the RCT games to develop working demonstration programs (‘Demos’) for the Roller Coaster Tycoon PS2 game for the purpose (amongst other things) of marketing its proposed development of the RollerCoaster Tycoon PS2 Game to third parties (such marketing to be conducted exclusively by the Claimant and Frontier’s common agent, Marjacq).”

“66

Thus by his own admission (through Marjacq) and by the terms of the Demo Licence Agreement between the Claimant and Frontier, the Claimant was in breach of his obligations owed to the Defendant under clause 17(4) of the Ancillary Rights Agreement in that at that time the Claimant decided to publish and/or to license for development or publication a sequel to the RCT3 Game.”

It can be seen that the object of the proposed amendments is to avoid the problem, identified by the judge at paragraphs [29] and [39] to [41] of his judgment, that if the Thrills Game was properly to be regarded as an Additional Format of the RCT3 Game - rather than a sequel to the RCT3 Game (the concepts being mutually exclusive) - then (i) there could be no breach of the exclusive licence granted by the Ancillary Rights Agreement (because the licence did not extend to Additional Formats) and (ii) there could be no breach of clause 17(4) of that agreement (because the Thrills Game was not a sequel). As the judge put it, at paragraph [41] of his judgement (in a passage to which I have already referred earlier in this judgment):

“[41] When, therefore, reliance is placed, as it is, upon the agreement between the parties that the defendant should be afforded the right of first negotiation, or the last right to match with respect to the licensing, development or publication of a sequel to the RCT 3 game, that can give rise to no potential counterclaim from the defendant as yet.” [emphasis added]

Atari now accepts, I think, that – as the game concept developed – the Thrills Game became an Additional Format of the RCT 3 Game. But it is said that “as licensed by the Claimant in March 2005 [the game concept] began as a sequel rather than an Additional Format of the RCT3 Game software” (paragraph 63); and that it was later “during the period after the time material to the Defendant’s claim under clause 17(4) of the Ancillary Rights Agreement” that “the game concept moved away from being a sequel to become an Additional Format of the RCT3 Game (as defined in the Ancillary Rights Agreement)” (paragraph 63A).

If the contentions which Atari seeks to plead in paragraphs 63 and 63A of the proposed revised amended defence and counterclaim can be made good on the facts, then (it is said) the letter of 1 March 2005 (the Demo Licence Agreement) does constitute (or evidence) a breach of the obligation in clause 17(4) of the Ancillary Rights Agreement: that is to say, a breach of the obligation to give Atari “the right of first negotiation and the last right to match” if Mr Sawyer were to decide “to publish, or to license the rights to develop or publish a sequel to the Game”. That turns, of course, on the meaning to be given to the letter of 1 March 2005 (the first paragraph of which I have set out earlier in this judgment); and, in particular, on the question whether that letter does evidence a decision by Mr Sawyer (on or about 1 March 2005) to license the rights to develop or publish a sequel to “the Game” (as defined in the Ancillary Rights Agreement). Atari relies on the fact that the purpose of the letter (as expressed in the first paragraph) is to license Frontier “to use certain design elements derived from the RollerCoaster Tycoon games . . . to develop working demonstration programs . . . based on its own simulation game concepts currently known as ‘Roller Coaster Thrills’ . . .”

I express no view on the question whether Atari will succeed in establishing the contentions which it now seeks to advance. But I am satisfied that, on the material now before this Court, those contentions cannot be dismissed as fanciful: it cannot be said that that element of the counterclaim would have no real prospect of success. In those circumstances, as it seems to me, Atari should be permitted to make the amendments which will enable those contentions to be advanced. Such prejudice as late amendment will cause to Mr Sawyer can, I think, be compensated by an appropriate order for costs.

The amendments for which permission is sought, in so far as they relate to the claim in respect of inducement to breach of contract, are found in paragraphs 66A, 68.1 and 68.2 of the proposed revised amended defence and counterclaim:

“66A Further, in order for Frontier to have proceeded with the Thrills game the Claimant:

66A.1 assisted Frontier to develop the Thrills Game by providing Frontier with a licence to use graphical elements from the RCT3 Game for use in a demo version of the Thrills Game;

66A.2 thereby assisted or caused Frontier to be able to market the Thrills game (which it could not have done with any effect without a Demo) and/or to elicit funding for the development of the Thrills game;

66A.3 . . . ”

“68

Further or in the alternative, the Claimant has by his acts set out above wrongfully induced Frontier to break its contract with the Defendant contained in the Development Agreement alternatively has facilitated and/or procured such breach of contract in that:

68.1

the Claimant either by himself or through his agent, Marjacq, had full knowledge of the contractual structure. . . .

68.2

the Claimant and his agent are both highly experienced in the interactive games industry and will have known alternatively must be taken to have known and intended that the or a likely consequence of his grant of the Demonstration Disc Licence to Frontier would be that Frontier would be able to break its contractual arrangements with the Defendant and develop the new game independently. Without the demonstration disc, Frontier would have had no option but to have continued to perform its obligations under the Development Agreement with the Defendant.”

As I have said the judge rejected the claim in respect of inducement to breach of contract - based (as it was) upon Mr Sawyer’s knowledge of the sublicence arrangements – on the ground that, in order to make good such a claim, it was necessary for Atari to allege that Mr Sawyer had had an intention to cause it harm. Atari did not - and, as the judge thought, could not – make that allegation. Atari accepts, on this appeal, that the judge was correct to take the view - in the light of the decision of this Court in Mainstream Properties v Young & Ors [2005] EWCA Civ 861 – that an intention to cause harm is an essential ingredient of the tort.

In reaching its decision in the Mainstream case, this Court had drawn heavily on the analysis in the judgment of the Court in Douglas v Hello! Ltd [2005] EWCA Civ 595 of the principles underlying what are commonly known as economic torts. We were informed by counsel that appeals in both Douglas v Hello! Ltd and the Mainstream case have now been heard by the House of Lords; and that judgments are awaited. In those circumstances, as it seems to me, we must consider whether – notwithstanding that the judge took a correct view on the law as it was when the matter was before him (and as it remains in this Court) – this is one of those unusual cases in which a claim which the court considers has no real prospect of success (as the law stands) should, nevertheless, be permitted to go to trial under paragraph (b) of CPR 24.2.

In my view this is such a case. This Court must recognise the possibility that, when judgments in Douglas v Hello! Ltd and Mainstream have been delivered by the House of Lords, it will be seen that the view of the law taken by the Court of Appeal in the Mainstream case was not correct. If that were the position, then there would be a potential for injustice if Atari’s claim in respect of inducement to breach of contract were struck out on the basis of the law as it is now understood. On one view Atari would, itself, need to appeal to the House of Lords in order to reinstate that claim; on any view it would, at the least, need to return to this Court to have the order set aside. In the meantime the trial might have proceeded on the basis that the claim was no longer capable of being advanced.

The more sensible course, as it seems to me, is to allow the claim to proceed on the basis that, by the time the issue comes to trial, judgments in Douglas v Hello! Ltd and the Mainstream case may well have been handed down by the House of Lords. If those judgments uphold the view of the law taken by this Court, then it may be expected that Atari will recognise that its claim in respect of inducement to breach of contract must fail; and the claim will be abandoned. Alternatively, Mr Sawyer can apply, again, for the claim to be struck out. If those judgments indicate that a different view of the law should be taken, then the trial will proceed on the basis of the law as revealed by the House of Lords.

I am, of course, conscious that a trial of these proceedings is fixed to commence in a few weeks time. It may be that the date fixed for the trial will be reached before the delivery of judgments in Douglas v Hello! Ltd and the Mainsteam case. If that is the position, then the trial judge will have a choice: (i) he can adjourn the trial; (ii) he can direct a split trial, so that the issues in relation to the Thrills Game are heard at a later date; or (iii) he can proceed to try all issues, making the findings of fact which would be necessary to determine the claim in respect of inducement to breach of contract if (in the light of the judgments to be delivered by the House of Lords) the need for an intention to injure were, subsequently, seen not to be a necessary ingredient of the tort. I have no reason to think that it will cause undue difficulty if the matter is allowed to proceed, at this stage, on the basis that the claim in respect of inducement to breach of contract is not struck out. On the contrary, I am satisfied that there are compelling reasons - in order to avoid potential injustice – why that course should be taken. On the basis that Atari’s claim in respect of inducement to breach of contract is not to be struck out, I would permit the amendments sought in so far as they relate to that claim.

I have thought it right – indeed, necessary – to have regard to the witness statement made by Mr Parkinson on 5 December 2006 in the context of the application to allow, by way of amendment, the introduction of a new paragraph (paragraph 31.6A) into the defence. For the reasons which I have explained Mr Parkinson’s statement does not support the case which that amendment seeks to advance. His evidence has no other relevance to the matters which are before this Court: in particular, it has no relevance to the appeal from the order of 19 October 2006.

I have thought it right, also, to have regard to the witness statement made by Mr Gary Lewis on 5 December 2006 in the context of the application to allow the introduction of the new paragraph 31.3A into the defence. As I have said, Atari relies upon Mr Lewis’ evidence to support the industry practice pleaded in that paragraph. We were urged to refuse to allow Atari to do so; on the ground that the evidence did not meet the first of the requirements in Ladd v Marshall [1954] 1 WLR 1489. It was said – no doubt correctly – that Mr Lewis’ evidence could have been obtained for use on the application to strike out before the judge.

We were referred to observations in the judgment of Lady Justice Arden in Aylwen v Taylor Johnson Garrett [2001] EWCA Civ 1171, [47] to [49]. She accepted that the need to meet the Ladd v Marshall requirements “should apply to amendments to statements of case adduced for the first time in the Court of Appeal to avert the unfavourable outcome of an application to dismiss a claim under CPR3.4 or CPR 24.2”. In making those observations (with which the other members of the Court agreed), Lady Justice Arden may not have had in mind the comments of this Court in Pearce v Ove Arup Partnership [1999] 1 All ER 769, 780-1, and Electra Private Equity Partners and others v KPMG Peat Marwick (a firm) and others (unreported, 23 April 1999) which (at the least) throw doubt on whether that is the correct approach. Nor, I think, did she have in mind the observations of this Court in The Royal Brompton Hospital National Health Service Trust v Hammond and others [2001] EWCA Civ 550, [19], [20]. There is no reference to those decisions in her judgment in the Aylwen case; and it seems unlikely that they were cited to the Court. Pearce and Electra were not then (and are not now) noted in Civil Procedure in this context.

It is important to keep in mind that, as I have sought to explain, the effect of the judge’s order in the present case is that issues as to the meaning and effect of the definition of Net Sales Revenues remain to be decided at trial. That definition includes the expression “other customary trade and volume discounts”. The judge’s order, itself, made provision (at paragraph 10) for the possibility that expert evidence might be called at the trial. In those circumstances it would be wrong, as it seems to me, to refuse to allow Atari to spell out, by way of an amendment to its counterclaim, the case which it seeks to make in relation to “customary trade and volume discounts”; and, in that context, to refuse to take account of the evidence on which it relies in support of that case.

I would refuse permission to appeal against so much of paragraph 1 of the order of 19 October 2006 as struck out paragraphs 52 and 53 of the Part 20 counterclaim. Subject to the deletion of those paragraphs, I would permit amendment of the counterclaim as set out in the revised amended draft annexed to the application notice of 8 December 2006; and I would give permission to appeal and allow the appeal from, and set aside, paragraph 1 of the order of 19 October 2006 so as to enable the Part 20 counterclaim to proceed to trial on that basis (but without prejudice to any further application to strike out in the light of the judgments of the House of Lords in Douglas v Hello! Ltd and the Mainstream case). I would permit amendment of the defence to introduce paragraph 31.3A in the revised amended draft; and I would give permission to appeal and allow the appeal from, and set aside, paragraph 2 of the order of 19 October 2006. I would give permission to appeal and allow the appeal from paragraphs 4, 5 and 6 of the order of 19 October 2006; and I would set aside those paragraphs. I would grant the permission to adduce further evidence sought by the application notice dated 8 December 2006 to the extent already indicated in this judgment (but not otherwise). I would permit the incidental amendments to the defence proposed in paragraphs 25.3(a) and 31.7 of the revised amended draft; but I would refuse permission to introduce paragraph 31.6A of that draft.

I agree.

I also agree.