Kason Kek-Gardner Ltd v Process Components Ltd

Before the end of June 2009 Kemutec Powder Technologies Ltd (“KPTL”) operated in the field of powder processing and handling. That is a branch of technology used in industries such as food manufacturing, agro-chemicals, pharmaceuticals and powder coating. Its business consisted of four areas:

Most of KPTL’s business was done under the brand names “KEK” and “Gardner”. In relation to the former KPTL was the proprietor of a registered trademark (No 2506657). It also owned a number of other intellectual property rights (“IPR”) relating to its business.

KPTL ran into financial difficulties in 2007 and by June 2009 those difficulties had become acute. On 12 June 2009 the board resolved that KPTL should enter administration, although it did not formally do so until 30 June. In preparation for its entry into administration the future administrators invited bids for KPTL’s saleable assets. In the event, on 29 June 2009 the administrators accepted a bid for certain assets from Process Components Ltd (“PCL”), a new company formed by former directors of KPTL with the backing of KPTL’s largest creditor, EPIC, and entered into a written sale contract with PCL on the following day (“the PCL agreement”). Nearly two weeks later, on 10 July 2009, the administrators entered into another sale agreement with Kason Kek-Gardner Ltd (“KGL”), another new company formed by those directors of KPTL who did not want to throw in their lot with PCL (“the KGL agreement”).

By an agreement bearing the same date and operating from that date (but in fact executed some days later) PCL and KGL entered into a licence agreement under which PCL licensed KGL to use IPR that had formerly belonged to KPTL. That licence agreement contained contractual mechanisms for its termination.

The first issue on this appeal is whether under the terms of the KGL agreement KGL has acquired any (and if so what) IPR formerly belonging to KPTL. The answer to that issue depends at least in part on what IPR PCL acquired under the PCL agreement. The second issue is whether (on the assumption that KGL has acquired such rights) it is estopped from so asserting. The second issue does not arise if the first issue is decided against KGL. The third issue is whether PCL has validly terminated the licence agreement. There is a fourth issue, relating to the scope of the licence agreement. That issue is only live if the licence has not been terminated.

The PCL agreement is a tripartite agreement, the parties to which are (1) KPTL (2) PCL and (3) the administrators. It begins with some recitals of which recital (B) reads:

“The Seller has agreed to sell whatever right title and interest it may have in certain assets currently used in the Business…”

Clause 1 is a definitions clause. Relevant definitions include:

Neither the “Mucon business” nor the “Spares business” is expressly defined by the PCL agreement.

Clause 2 of the PCL agreement provides that on the terms of the agreement “and so that the Business is transferred as a going concern” PCL would purchase “whatever right, title and interest the Seller may have at [Completion] in the Sale Assets”.

The KGL agreement is quadripartite. The parties were (1) KPTL (2) KGL (under a previous name) (3) the administrators and (4) four named directors of KGL as guarantors. It is in much the same format as the PCL agreement. It, too, begins with a series of recitals including:

“The Seller has agreed to sell whatever right title and interest it may have in certain assets previously used in the Business…”

Another recital acknowledged that the risk of good title not passing was that of the Buyer. Clause 1 of the KGL agreement also contains definitions of which the following are relevant:

The original argument for KGL was that since both agreements were made as part of the same administration, they must be read together. When this is done the obvious ways of giving effect to both of them are either (a) that PCL acquired the KPTL IPR for the purpose of the parts of the business that it bought and KGL acquired the same IPR for the purposes of those parts of the business that it bought; or (b) that PCL acquired the KPTL IPR relating to those parts of the business that it bought, namely the Mucon and Spares parts of the business, whereas KGL acquired the KPTL IPR relating to those parts of the business that it bought, namely the design and assembly parts of the Unit Machine and Systems parts of the business.

One question, then, is whether the two agreements can or should be read together. The KGL agreement was made some 10 days after the PCL agreement. The general rule is that the subsequent conduct of the parties to an agreement cannot affect the true interpretation of the agreement. Still less can subsequent conduct of strangers to the agreement. Where there are contemporaneous contracts made between the same parties, which form part of a single composite transaction between the same parties, then the several documents can be read together: Smith v Chadwick (1882) 20 Ch D 27, 62. That is not this case. Mr Mill QC did not contend otherwise, and did not suggest that the two agreements could be read together as what he called “a suite of documents”.

His argument was that the factual background known to all relevant parties was that KPTL was in administration. PCL and the administrators also knew that certain assets were excluded from the sale under the PCL agreement. The excluded assets were the “Unit Machine” and “Package” businesses. The administrators had an obligation to realise all KPTL’s assets for the best price they could; and it must have been obvious that to sell the Unit Machine and Package businesses without the IPR necessary to carry on those businesses would seriously depreciate their value. In those circumstances, it would be very surprising if the reasonable reader of the PCL agreement would have understood it to transfer to PCL IPR that went beyond that which was necessary for the businesses that it bought. Had that been the intention it would (and should) have been expressly stated in the agreement. In those circumstances the PCL agreement should be interpreted as limiting the transfer of IPR to PCL in either of the two manners I have summarised.

The correct approach to the interpretation of contracts has been most recently discussed by the Supreme Court in Wood v Capita Insurance Services Ltd [2017] UKSC 24; [2017] 2 WLR 1095. I will not attempt to summarise or paraphrase it. As Lord Hodge said at [9] the legal profession has sufficient judicial statements of this nature.

However, it is necessary to say something about the admissible background. First, admissible background is limited to facts that were known or reasonably available to both (or all) parties. It is not right to take into account facts that were only known to one of them: Arnold v Britton [2015] UKSC 26, [2015] AC 1619 at [21]. The judge fell foul of this principle at [29] by taking into account as part of the background a series of offers made to the administrators by various entities without considering whether those offers were known to all parties to the PCL agreement or the KGL agreement as the case may be. Second, declarations of subjective intention are not part of the admissible background. But the subjective intention excluded by this principle is subjective intention about what the contract in question means. I do not consider that this exclusion extends to a statement of what one party intends to do outside the contract and after it has been executed.

Mr Mill accepted that there was nothing in the language of the PCL agreement that would lead a reasonable reader to suppose that the IPR to which it referred was to be divided by purpose. This is not a promising start. Reliance on commercial common sense and background should not be used to devalue the importance of the language of the provisions to be interpreted: Arnold v Britton [2015] UKSC 26, [2015] AC 1619 at [17]. The interpretation for which Mr Mill contends is entirely dependent on background and commercial common sense. Second, it is not possible to assess the validity of the argument based on the alleged depreciatory effect on the excluded assets without considering the potentially appreciatory effect of including the IPR in the PCL agreement. The administrators’ duty was to obtain the best price for KPTL’s assets as a whole. If they got more under the PCL agreement as it stands than they would have done for more limited IPR, the overall effect of depreciating the value of the excluded assets may have had no depreciatory effect on the overall outcome of the administration. It is worth pointing out, in this connection, that the book value of the entirety of KPTL’s IPR was £300,000 whereas the apportioned price that PCL paid for the IPR that it acquired (together with goodwill and the IT system) as was recorded in the PCL agreement itself was £1.35 million. That is at least consistent with the case that PCL now advances.

In addition, it must not be overlooked that the primary case that PCL advanced was that it acquired all the IPR belonging to KPTL. The judge did not, however, accept that case. She held at [60] that the PCL agreement included only IPR used in the Mucon and Spares businesses. To that extent, therefore, she accepted a modified version of the second of the interpretations for which Mr Mill contended. It is also something of an overstatement to say that the KGL business could not be operated without ownership of the IPR. I accept that the use of at least some of the IPR was essential, but ownership was not. It may well have been in the contemplation of the parties at the time of the PCL agreement that PCL would grant a licence to whoever bought the Unit Machine and Package businesses to use the IPR in those businesses, as indeed it did. In fact the mutual intention to enter into a licence of that kind was known to all parties (by which I mean the administrators, PCL and KGL) before the PCL agreement was made. That is shown by an e-mail dated 26 June 2009 from Mr Thomson, the sales director of KPTL, to (among others) Mr Tunnicliffe of KGL. What Mr Thomson said was:

“As discussed, we aim to put in place a management led offer as one of the options going forward out of administration. This option is known to EPIC, Tenon’s and [PCL] and is seen by both EPIC and PCL as a beneficial vehicle to operate alongside PCL.

The deal would be structured out of administration and involve a minimal cash payment alongside a deferred cash consideration. This would be broken down as follows:

•

Purchase of the current order book …

•

Licensing arrangement with EPIC for use of the IP (designs, Company name, website etc) with a mechanism to buy out the IP over a number of years (to be defined)

•

Purchase of the plant and machinery …”

I do not consider that the division of the IPR by purpose can be found either in the language of the PCL agreement or be conjured out of the admissible background coupled with commercial common sense. The meaning of the PCL agreement is, in my judgment, that it transferred to PCL the IPR used in the Mucon and Spares businesses as at the completion date.

As I have said, the PCL agreement did not define the word “Spares”, although it is used in the PCL agreement in inverted commas. However, the word “Spares” as part of the phrase “Spares business carried on by the Seller” describes the subject matter of the contract. In addition as the judge correctly said at [58]:

“The IP Rights as defined refer to “used by [KPTL] in the Business on Completion”. In the definition of the Brand Names the expression is “commonly used by [KPTL] in connection with inter alia the Business”. It is therefore essential to discover what IP was actually used in KPTL's Spares business.”

Extrinsic evidence is admissible to identify the subject matter of a contract (e.g. Macdonald v Longbottom (1859) 1 E & E 977, (1860) 1 E& E 987 (“your wool”)). The judge considered what was comprised in the “Spares business” and in particular what IPR were used in connection with it. There are two parts of the judgment in which she dealt with that question.

First, at [61] she said:

“I therefore find as a matter of construction … that the PCL Sale Agreement did not operate to sell to PCL the whole of the IP. The test data, the user manuals and the general assembly drawings would not have been used in the spares business so that the KGL IP consisted of copyright in those materials.”

Second, at [74] she said:

“It therefore seems to me that Mr Pritchard is correct as to the scope of the Spares as a matter of construction. Thus PCL's definition of “Spares” encompasses all the matters referred to in Annex B to Mr Pritchard's closing written submissions.”

Annex B to Mr Pritchard’s closing submissions (reproduced in the judge’s eventual order) included, among other things: the test data, general arrangement drawings and manuals (referred to as installation, operation and maintenance documents); that is to say the materials referred to at [61]. On the face of it, therefore, the judge has reached two contradictory conclusions.

The unsatisfactory tension between these two conclusions is not ameliorated by the circumstances in which paragraph [61] came to be included in the final judgment. The draft judgment which the judge circulated did not include the final sentence of [61]. Without that sentence the two sections of the judgment hang together. Between [58] and [61] (in its original form) the judge considered the interpretation of the contract. At [60] she rejected the primary construction advanced by PCL that all the KPTL IPR was transferred by the agreement. On the contrary it transferred only IPR used in the Mucon and Spares businesses. That led on to the conclusion in the (original) [61] namely that “as a matter of construction” the PCL agreement did not operate to sell to PCL the whole of the IPR. But simply to stop there would not have been enough. It was necessary, on the basis of the judge’s construction, to go on to decide, not as a question of construction, but as a question of fact, what IPR were in fact used in the Mucon and Spares businesses so as to give content to her construction.

However, on receipt of the draft judgment Mr Mill made written submissions. They appear to have been made on the last working day before the hearing convened for the purposes of handing down the judgment. Those written submissions raised certain alleged gaps in the judge’s reasoning and invited the judge to amend her draft judgment in order to record expressly “the scope of the KGL IP”. Although Mr Pritchard objected on behalf of PCL, the judge did amend her draft by adding the last sentence of [61]. That meant that [61] (after amendment) and [74] now contained discrepant conclusions.

This discrepancy was pointed out to her on the hand-down of the judgment. She said on that occasion (twice) that [74] was “supposed to override” [61]. The order that she made reflected that intention on the judge’s part. It is unfortunate that the judge did not re-amend her judgment to incorporate that conclusion and to explain the reasoning behind it. I agree with Mr Mill that simply to say that [74] was supposed to override [61] was not (to say the least) best practice. The judge seems to have been under the impression that because she had handed down her judgment it was too late to amend it. However, that impression was erroneous. A judge may always amend her judgment, especially to clarify obscurities, before an order is made; and in rare cases may even reverse it afterwards: Re L and Another (Children) (Preliminary Finding: Power to Reverse) [2013] UKSC 8, [2013] 1 WLR 634.

I also agree with Mr Mill that these two parts of the judgment are not as clear as they ought to have been; and we have had to look closely at the judgment in order to try and make sense of the two apparently contradictory conclusions.

The conclusion that the judge reached at [74] was reached after hearing evidence, which she had herself said at [58] was essential to defining the scope of the agreement. Mr Mill argues that in reaching her conclusions on the evidence the judge was wrong not to have drawn an adverse inference against PCL because it did not call certain witnesses who could have given evidence about the scope of the Spares business. Two of those potential witnesses were Ms Sandbach and Mr Rowe both of whom worked in the Spares business. PCL did call another witness (Mr Goodwin) who did not deal day to day with the Spares business. However, at [66] the judge pointed out that Mr Goodwin attached “very many emails” from Ms Sandbach and Mr Rowe showing what IPR had been used in the Spares business. Mr Mill argued that this was a selection of documents which Mr Goodwin had cherry-picked and that that fact reinforced the desirability of drawing an adverse inference against PCL. But the judge declined to draw any adverse inference from the fact that Ms Sandbach and Mr Rowe had not been called as witnesses. Where one party fails to call a witness who might have given relevant evidence on a fact in issue the court may draw an inference adverse to that party if there is no good reason for that failure. However, the law does not require the court to draw an adverse inference: it merely permits the court to do so. It follows that the mere fact that the judge declined to draw an adverse inference is not in itself indicative of any error. In addition where the judge is satisfied that there was a good reason for not calling the witness in question (and even where the reason is not wholly satisfactory) the judge may decline to draw an inference. The judge’s principal reason, namely that there was ample contemporaneous documentary evidence, is an adequate reason for her decision in that respect. Whether to draw an adverse inference is essentially a value judgment for the trial judge, with which an appeal court should not interfere unless the trial judge has applied the wrong principle. The judge was referred to the leading authority, which she cited in the course of her judgment; so I do not consider that she can be said to have applied the wrong principle. This ground of appeal is nothing more than a disagreement with her value judgment. I do not consider that this court can or should interfere.

Accordingly, in my judgment, the judge’s conclusion at [74], having heard the evidence, is not susceptible to successful challenge in this court. What, then, should we make of the tension between [61] (as amended) and [74]?

At this point it is important to understand how PCL put its case at trial. In his closing submissions Mr Pritchard argued (at paragraph 37) that the natural reading of the PCL agreement was that it covered all IPR as they existed at the date of the PCL agreement. From paragraph 45 onwards he addressed the position on the assumption that PCL was wrong on that question of construction. This section broke down into three parts:

It was in the context of that secondary case that he argued that when those questions were examined the IPR used in the Spares business were those items listed in Annex B.

The judge first referred to Annex B at [59]. However, at that stage in her judgment she seems to have overlooked the fact that Annex B was deployed in support of PCL’s secondary case rather than its primary case on construction. Paragraph [59] also contains the judge’s recitation of Mr Mill’s submissions and certain evidence, but without saying whether she accepted those submissions or that evidence. Tucked away in [59] is:

“On the assumption that the Spares business consisted of all replacement parts, the components supplied by the Spares business would already have been selected for use in the customer's machine.”

In the course of his reply in this court Mr Mill drew attention to a paragraph in Mr Pritchard’s closing submissions at trial as part of PCL’s secondary case in which he wrote:

“PCL’s position is that the scope of the Spares Business … was not confined to consumables… but rather encompassed the supply of replacement parts, and the associated services, for unit machines, for example for repair, service or upgrade, and effectively amounted to everything which happened after the initial sale of a Unit Machine.”

Although Mr Mill submitted that this description of the Spares business corresponded with the assumption that the judge made at [59], in my judgment it plainly went much further than merely the supply of consumables and replacement parts. Indeed, it was this description of the Spares business that the judge recorded at [68] in the course of her consideration of PCL’s secondary case.

The judge’s statement at [61] was made without express reference to the evidence that she summarised and discussed in the succeeding paragraphs. The question of construction that she addressed in that paragraph was, in my judgment, limited to her conclusion that the PCL agreement did not encompass all KPTL’s IPR (PCL’s primary case), but encompassed only those IPR used in the Mucon and Spares businesses, as stated at [60]. In addition, in agreement with Mr Bloch QC, I consider that the section of the judgment culminating in paragraph [61] was made on the assumption (recorded at [59]) that the Spares business consisted of all replacement parts, rather than anything wider. The final sentence deals with what “would not have been used” rather than what was in fact used. I do not consider that it can be read as a finding of fact. Rather, it is expressed in the subjunctive mood which is consistent with the answer to the hypothetical question implicit in the assumption that she made.

Paragraph [72] makes it clear that in the section of her judgment running from [62] to [74] she was considering what was in fact used in the Spares business which, she found, was wider than the mere supply of replacement parts. Since, as I have said, the scope of the contract is determined by extrinsic evidence where it is otherwise left uncertain, and the judge herself considered that evidence was essential to understand the scope of the PCL agreement, I consider that we should accept her view that [74] overrides [61]. Since the order that the judge made corresponds with the view she expressed at [74], that part of her order must stand.

There is one other point about the detailed content of the PCL agreement. The PCL agreement referred to a number of registered trademarks. One of these was 46553 KEK. However, the evidence before the judge (principally that of Mr Woodside, who was one of the joint administrators) was that 46553 was not a registered trademark. It had in fact expired and had been removed from the register. For the PCL agreement to have described it as a “registered” trademark was plainly an error. The only “live” (and registered) trademark relating to the KEK brand (which was one of the brand names to be transferred to PCL under the PCL agreement) was 2506657. The judge found at [29]:

“It was also part of the relevant factual matrix that one of the Trade Marks listed as sold was the “dead” Trade Mark for the name “KEK”, so that there must have been a mistake. The only “live” Trade Mark was number 2506657.” (Emphasis added)

Earlier in her judgment at [17] the judge had referred to the principle in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 in which the House of Lords had reaffirmed the principle that:

“… where it was clear both that there was a mistake on the face of the document and what correction ought to be made to cure it, in that it was clear what a reasonable person having all the background knowledge which would have been available to the parties would have understood the parties by using the language in the contract to have meant, the court was able to correct the mistake as a matter of construction.”

At [18] she quoted Lord Hoffmann:

“What is clear…is that there is not…a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.”

Although she did not explicitly link that principle to her conclusion at [29] that must be her underlying process of reasoning. Otherwise there can have been no purpose in her having set out that principle. There is another related principle of interpretation which is applicable on the facts as found. This is a case in which there is nothing which is completely and accurately described as a registered trademark 46553 KEK. There is a trademark 46553 KEK, but it is not registered. On the other hand, there is a registered trademark KEK, but it has a different number. In those circumstances the court is entitled to apply the ancient principle falsa demonstratio non nocet (“a plain misdescription does no harm”). Either the number of the trademark mentioned in the PCL agreement must be rejected or the description of the trademark as “registered” must be rejected; for the two cannot stand together. The trademark relating to KEK is one of a number of trademarks all described as registered; and in those circumstances the judge was entitled to place weight on that part of the description and to reject the number.

In this connection, it is important to note that when the court applies these principles it is not rectifying the contract (in the sense in which that expression is used when dealing with the equitable remedy of rectification). It is interpreting the contract, which has the same meaning both at common law and in equity. If it were a question of the grant of the equitable remedy of rectification, the intervention of third party rights might lead a court to decline to grant the remedy. But where it is a question of interpreting the contract, there is no such discretion: see Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736, [2013] Ch 305 at [99] and [122]. There is no direct attack on the judge’s decision that there was a mistake in the PCL agreement (indeed Mr Mill accepted that there was), or on the court’s ability to correct a plain error by interpretation.

Instead, Mr Mill points to paragraph [54] of the judgment. In that paragraph the judge rejected his submission that the live trademark passed to KGL under the KGL agreement. She said:

“However I do not think that he is right that the KGL Sale Agreement assigned the live Trade Mark to KGL. The PCL Sale Agreement would in my view have transferred the live Trade Mark number 2506657 to PCL as the only live Trade Mark relating to the KEK name. Although the rule would normally apply that KGL's supervening rights would take priority over PCL, it is evident from what Mr Tunnicliffe said (see below) that KGL did not believe that it acquired any IP Rights under the KGL Sale Agreement. Thus the usual rule is displaced. In other words, it was not a bona fide purchaser without notice of PCL's IP Rights.”

Mr Mill submits that this paragraph does not make sense. The question was not whether KGL was a bona fide purchaser without notice. It was whether the PCL agreement had already operated to transfer the live trademark to PCL. Regretfully, I agree. If the PCL agreement had already transferred the live trademark to PCL there was nothing of that trademark left to “purchase” with the consequence that KGL’s bona fides or lack of notice was irrelevant. The final two sentences of the quoted passage were both irrelevant and unnecessary in view of the judge’s conclusion about the scope of the PCL agreement. However, Mr Mill goes on to say that in the first part of the paragraph the judge was not saying that that the PCL agreement did pass the KEK trademark to PCL: merely that it would have done. She was not, therefore, adopting a corrective interpretation of the PCL agreement.

I do not agree. Although there may be said to be a certain conditionality in “would have done” the judge did not spell out what, if any, conditions she had in mind. None was suggested before us. In addition, the judge had already decided at [29] that there had been a mistake; and reading the judgment as a whole it was her finding at [29] that she must have carried forward into [54]. This part of the judge’s order must therefore stand.

If the PCL agreement is interpreted in the manner in which the judge interpreted it, and without reference to the KGL agreement, I do not understand it to be disputed that KGL did not acquire the IPR that it subsequently claimed to have acquired. Moreover, the KGL agreement only purported to sell “whatever right title and interest it may have in certain assets”; and another clause in the KGL agreement expressly addressed the risk that good title might not be made.

Accordingly, in my judgment, PCL succeeds on the first issue, with the result that the second issue does not arise. I would not wish to imply, however, that the judge’s reasoning on this question was correct. I have grave doubts about both her legal analysis and her application of the correct legal principles to the facts found, but it is not necessary to go into the details of those parts of the legal or factual analysis which give rise to those doubts.

The next question is whether PCL was entitled to terminate the licence. The licence agreement between PCL and KGL contained the following relevant terms:

“10.1

Each party agrees to keep the terms of this Agreement confidential…

10.5

The provisions of this clause 10 shall survive termination of this Agreement for any reason.

11.1

This Agreement shall continue in force for a term of fifty four months…and shall continue thereafter until terminated by not less than six months' notice in writing from either party to the other…

11.2

Either party shall be entitled to terminate this Agreement immediately by written notice to the other in the event of:

(a)

any material breach by the other party of any of its obligations under this Agreement which, being a breach capable of remedy, is not remedied within 30 days of notice to the party in breach specifying the breach and requiring its remedy. (For this purpose, non-payment of any royalty under clause 5 constitutes a remediable material breach and breach of the confidentiality obligations under clause 10 constitutes a non-remediable material breach);

19 Each party confirms that this Agreement constitutes the entire agreement between the parties as to its subject matter and supersedes all prior or contemporaneous agreements with respect to its subject matter, except in respect of any fraudulent misrepresentation made by either party;”

On or about 28 August 2015 Kason Industries Inc (“Kason”) bought all the shares in KGL. It is important to note that the transaction was a sale by KGL’s shareholders of their shares in KGL: not a sale by KGL of the business. As part of its due diligence process Kason asked KGL for a copy of the Licence Agreement and KGL provided it. PCL relies on the disclosure of the Licence Agreement as amounting to a breach of clause 10.1. Accordingly, it says that the breach of clause 10.1 was, as provided by clause 11.2 (a), a non-remediable material breach of the agreement giving rise to a right to immediate termination. It claims to have exercised that right on 2 October 2015.

KGL takes two points in response. I take them in what seems to me to be the logical order. First, in its written argument it argues that clause 10.1 was subject to an implied term which permitted it to disclose the Licence Agreement for reasonable business purposes, and that would include disclosure to a would-be purchaser. There was therefore no breach. Second, it says that clause 11.2 only means that a material breach of clause 10.1 is treated as non-remediable. It does not mean that any breach of clause 10.1, no matter how trivial, justifies immediate termination.

As developed in oral argument, Mr Mill reformulated the implied term as one permitting disclosure where it was reasonable to do so for necessary business purposes. Although this was not part of the implied term itself, Mr Mill submitted that in considering whether disclosure was reasonable it would be necessary to ensure that confidentiality would be maintained by a third party, either because the circumstances in which disclosure took place implicitly required confidentiality to be maintained (e.g. disclosure to a lawyer) or because the maintaining of confidentiality was an obligation expressly imposed on the third party (e.g. by a non-disclosure agreement).

The judge’s first observation about the implied term at [93] was “KGL first has to get round the Entire Agreement clause in clause 19.” However, the existence of an entire agreement clause does not necessarily preclude the implication of a term: AXA Sun Life Services plc v Campbell Martin Ltd [2011] EWCA Civ 133, [2012] Bus LR 203 at [41]. The judge was referred to this authority (which Mr Mill quoted in his written closing argument) but she did not refer to it in her judgment. In so far as she relied on the existence of the entire agreement clause as precluding any implication (and it is by no means clear that she did) she was wrong to do so.

The traditional tests for the implication of terms have been reinstated by the well-known decision of the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742. The implication of terms in appropriate circumstances is a basic principle of contract law. It is thus surprising that the judge commented at [94] that she had not had explained to her “with the benefit of authority, the basis for implying such a term”.

A term will not be implied into a detailed commercial contract unless it is necessary to give the contract business efficacy or it is so obvious that it goes without saying. It is not enough that it would have been a sensible thing to agree; or that, with hindsight, the terms actually agreed operate to the disadvantage of one of the parties to the contract. If the implied term passes either of these tests, the entire agreement clause will not defeat it. Since the judge said that she had not had explained to her the basis on which the term could be implied, she did not apply either of these tests.

Mr Mill argues that without the implied term the licence agreement imposes “an absurdly onerous” obligation, precluding disclosure even to a party’s own lawyers or accountants. Accordingly, some term must be implied, and therefore the only question is how wide permitted disclosure should be. However, as Mr Bloch points out, the term that KGL seeks to imply is not a term permitting it to disclose the licence to a regulator or to its own advisers, but to a potential competitor. The judge herself commented at [94] that the suggested term “could be used to undermine PCL’s business”. I do not consider that a term of the breadth proposed by KGL meets either of the twin tests. The reformulated term hinges on the necessity of the business purpose. This is too broad a test. The necessity required by the test is necessity for the business efficacy of the contract; not some wider business purpose of a contracting party. The business purpose of the licence was to enable KGL to operate the Unit Machine and Package businesses; not to sell it, let alone to sell the shares in KGL. In short, a sale of the business was not a necessary business purpose of the contract. Indeed, a sale by the shareholders in KGL of their own shares was not a business purpose of KGL at all. Nor is such a term so obvious that it goes without saying. It is by no means obvious that PCL would have consented to disclosure of the terms of the Licence Agreement to a competitor. Even if PCL had consented to disclosure of the licence to a competitor, the precise limits of permission to disclose would have had to have been carefully negotiated. It follows, in my judgment, that disclosure of the licence agreement to Kason was a breach of clause 10.1.

That leads on to the next question, namely whether any breach of clause 10.1 justified termination of the licence. As the judge pointed out at [90] the licence stated in terms that breach of the confidentiality obligations under clause 10 constituted a non-remediable material breach. Commission of a non-remediable material breach triggered the right of termination under clause 11.2. At [97] the judge said:

“It therefore seems to me that clause 10, which meant that the terms of the Licence Agreement could not be shown to third parties, is either a condition of the contract or an innominate term entitling the innocent party to immediate termination.”

Mr Mill criticises this part of the judgment because there cannot be an innominate term breach of which automatically entitled the injured party to terminate the contract. It all depends on the seriousness of the breach. I agree that this part of the judge’s analysis is muddled, but that is beside the point. The distinction between conditions and innominate terms is most pertinent when the contract in question does not contain express provisions for its termination, and the court has to decide whether a breach of contract justifies termination by the injured party. In such a case a breach of an innominate terms will only give the injured party the right to terminate the contract if it deprives him of substantially the whole benefit he was intended to receive under the contract. But where, as here, the parties have themselves agreed the circumstances in which the contract may be terminated that analysis does not matter. What matters is what the parties have agreed about the circumstances in which the contract may be terminated.

KGL’s argument under this head is that the only effect of the deeming provision in clause 11.2 is that a breach of clause 10.1 which was otherwise material would be deemed to be non-remediable; not that any breach of clause 10.1 would be deemed to be material. I cannot accept this argument. In the first place, it is not what clause 11.2 says. That clause says that breach of clause 10.1 is (a) a non-remediable (b) material breach. Both limbs are part of the deeming provision. As Floyd LJ pointed out in the course of argument, the effect of Mr Mill’s argument is to shift the adjective “material” from its position in the clause (“breach of the confidentiality obligations under clause 10 constitutes a non-remediable material breach”) to the beginning of the phrase (“material breach of the confidentiality obligations under clause 10 constitutes a non-remediable breach”). But that entirely changes the natural meaning of the phrase. Second, the parenthesis deals with both clause 5 and clause 10. Breach of clause 5 (non-payment) is by its nature a remediable breach. Breach of an obligation to pay money can be remedied by late payment (together with interest). So this part of the parenthesis must be dealing at least both with materiality and remediability otherwise it would have very little purpose. On the other hand, a material breach of confidentiality is likely by its very nature to be non-remediable, because, as Mr Mill put it, a breach of confidentiality lets the cat out of the bag; so a deeming provision limited to that would also serve little useful purpose. Third, this is not a blanket provision entitling the injured party to terminate on “any” breach of contract. In such a case the court may well read down the apparent width of the termination clause so as to confine it to repudiatory breaches (e.g. Rice v Great Yarmouth BC 30 June 2000, (2001) 3 LGLR 4 and Dominion Corporate Trustees Ltd v Debenhams Properties Ltd [2010] EWHC 1193 (Ch)). In our case, however, clauses 10 and 5 are singled out for special treatment. Fourth, recent cases emphasise that where a contract provides expressly for rights of termination, it does not matter whether the events on which those rights are exercisable do or do not amount to repudiatory breaches (see, e.g. Firodi Shipping Ltd v Griffin Shipping LLC [2013] EWCA Civ 1567, [2014] 1 Lloyd’s Rep 471; Newland Shipping and Forwarding Ltd v Toba Trading FZC [2014] EWHC 661 (Comm)). For similar reasons I do not consider that we can derive any help from other cases which considered whether particular breaches were or were not “material” where the contract itself did not contain any similar deeming provision; and the question whether a breach was “material” was left at large.

It follows, in my judgment, that on breach of clause 10 PCL was entitled to terminate the licence.

PCL had additional arguments based on repudiation and acceptance at common law but it is not necessary to deal with them.

Because the licence has, in my judgment, been validly terminated, the fourth issue relating to its scope does not arise.

Mr Mill was, I regret to say, justified in many of his criticisms of the judge’s reasoning process. However, despite Mr Mill’s forceful submissions to the contrary, on the points that matter I consider that she reached the correct answers, even if my route to those answers is not the same as hers. In short, she was entitled to make the order that she did; and appeals are against orders, not against reasons. I would dismiss the appeal.

I agree.

I also agree.