Leofelis SA & Anor v Lonsdale Sports Ltd & Ors

The First Claimant (“Leofelis”) is a company incorporated in Switzerland which licenses others to distribute and sell casual clothing, sports gear, and other associated products which carry the well known Lonsdale trademark (“the Products”). The Second Claimant (“Leeside”) is a company incorporated in Italy, a subsidiary of Leofelis, which carries on the business of the distribution and sale of the Products. Leofelis is owned and controlled by Signor Massimo Buscaini (“Mr Buscaini”).

The First Defendant (“Lonsdale Sports”) which changed its name from Miklat Ltd on the 27^th July 2002, is a company incorporated in England and the worldwide proprietor of a number of trademarks relating to the well known Lonsdale brand. The second defendant (“TMLC”) which changed its name from Lonsdale Licensing Ltd on the 28^th July 2003, is the worldwide licensee from Lonsdale Sports of the Lonsdale Marks and carries on the business of sub-licensing trademarks, including the Lonsdale Marks, to be exploited by others. The Third Defendant (“SWIL”) until the 30^th September 2003 called Sports Soccer Ltd, is a company incorporated in England engaged, inter alia, in the distribution and sale of the Products. It is the leading sports goods retailer in the United Kingdom operating approximately 350 retail shops, including the Lillywhites stores. Lonsdale Sports and SWIL share the same registered office and are both under the management and control of a Mr Michael Ashley (“Mr Ashley”). Mr Ashley also owns and controls Brands Holdings Ltd, (“BHL”) which changed its name from Brands Inc Ltd on the 21^st July 2004, a company incorporated in England with the same registered office and sharing common directors and officers with Lonsdale Sports and SWIL. Lonsdale Sports is a wholly owned subsidiary of BHL. Mr Ashley is the controlling shareholder of SWIL.

Cavden Group Ltd (“Cavden”) is a company incorporated in England engaged, amongst other things, in the manufacture, distribution and sale of the Products. Until June 2005 TMLC and Cavden shared the same registered office and were both under the management and control of Howard Moher (“Mr Moher”) and Mr Moher was a director of both. In June 2005 Lonsdale Sports acquired all the shares of TMLC which since then has formed part of the Sports World Group of companies. Mr Moher was and remains, either directly or through a nominee, the controlling shareholder of Cavden and a director of that company.

The central issue in this case arises from an agreement dated the 22^nd November 2002 (“The November 2002 Agreement”) by which TMLC (then known as Lonsdale Licensing Ltd) and Lonsdale Sports granted to Leofelis an exclusive licence to use the Lonsdale Marks (“the Lonsdale Marks”) throughout what now constitutes the European Economic Area including Switzerland but excluding the United Kingdom and Ireland (“The Territory”) for a period of six years commencing on the 1^st January 2002 at a fixed annual royalty in accordance with schedule 3 aggregating over the whole of the six year period to €16M. By clause 2.1 of that agreement the licensors granted to Leofelis “the exclusive licence in the Territory to use the Trade Marks [the Lonsdale Marks] in relation to the Goods [the Products] subject to the provisions of certain “the Distribution Agreements” set out in part 5 of the first schedule.” By clause 2.2.1 of The November 2002 Agreement:-

“2.2.1

The licence granted pursuant to this agreement is subject to any existing licences or rights, whether written or not, which may have been granted in respect of the Trade Marks. The Proprietor [Lonsdale Sports] and the Licensor [TMLC] are not aware of any other licences or rights having been granted in respect of any of the Trade Marks.”

In their opening written submissions counsel for Leofelis summarised Leofelis’ claims against the Defendants under five heads as follows:-

“(1)

damages for misrepresentation/breach of Clause 2.2 of the November 2002 Licence by reason of the failure of Lonsdale Sports and TMLC to disclose Mr Alavi’s continuing rights in the Lonsdale marks (“the Undisclosed Rights Claim”);

(2)

damages for breach of the exclusive licence by licensing Sports World companies to sell Lonsdale-branded goods in Belgium (“the Belgian Sales Claim”);

(3)

a declaration that Leofelis has validly appointed Leeside as its licensee throughout the territory of the November 2002 Licence (“the Sub-Licence Claim”);

(4)

recovery of the costs of bringing legal proceedings in Italy on behalf of TMLC (“the Legal Fees Claim”); and

(5)

damages for breach of Clause 7.3 of the November 2002 Licence (“the Montse Claim”).”

In their counterclaim the Defendants plead a number of breaches of the November 2002 Agreement entitling them to damages but, more importantly, to terminate the sub-licence granted to Leofelis pursuant to it as follows:-

In addition to these alleged breaches of the provisions of the November 2002 Agreement the Defendants counterclaim in respect of a failure by Leofelis to account for royalties due under an oral sub-licence by TMLC to Leofelis to sell Lonsdale branded footwear in Italy and Switzerland.

Finally the Defendants claim to terminate Leofelis’ licence pursuant to clause 11.2 and 11.2.2 of the November 2002 Agreement because Leofelis has undergone a change of control since the making of that Agreement.

The Lonsdale Trade mark was created in 1960 when the 7^th Earl of Lonsdale granted permission to a Mr Bernard Hart (“Mr Hart”) to use the name Lonsdale as a trademark for sports clothes and equipment. For reasons which are immaterial to this judgment the rights in the word Lonsdale as a trademark became split into two ownerships. The position shortly before the events which concern this case was as follows: the right to the trademark Lonsdale displayed in a hologram in what has been, throughout the hearing, described as the “cinemascope” form was vested in a company, Lonsdale Sports Equipment Ltd (“LSE”) incorporated in England and owned and controlled by Mr Hart. It is common ground that this form of the Lonsdale trademark is the most valuable. The right to exploit the trademark Lonsdale displayed in a hologram having a diamond shaped form was vested in a company, Lord John (UK) Ltd (“Lord John”) which was owned and controlled by a Mr Javid Alavi (“Mr Alavi”). Both groups sought to exploit the word mark “Lonsdale” and this gave rise to much litigation in different countries both between these two groups and also against others seeking to sell the Products under the Lonsdale mark.

On the 22^nd February 2001 Lord John and Mr Alavi entered into an agreement (“The Alavi Licence”) whereby Lord John, as proprietor of the registered trade marks listed in attachment A to the agreement, licensed the use of those trademarks to Mr Alavi. The licence was a “non-exclusive royalty free licence to use the Trade Marks throughout the world…”. Clauses 9 to 11 and 13 of the agreement provided as follows:-

“9.

This Agreement shall remain in force for a period of three years from the date hereof and shall thereafter be renewable automatically without need for notification for additional three year periods unless sooner terminated.

10.

Notwithstanding the provisions of Clause 9, the Licensee may terminate this Agreement by giving one months written notice of termination to the Licensor.

11.

Notwithstanding the provisions of Clause 9, the Licensor may terminate this Agreement immediately by written notice to the Licensee if the Licensee commits a breach of any of the conditions of this Agreement and fails to rectify the breach within thirty days of receiving notification of the breach from the Licensor…

13.

The Licensee may assign or sub-licence its rights and obligations under this Agreement subject to the prior written consent of the Licensor; such consent not to be unreasonably withheld.”

On the 4^th April 2001 Mattia Ghielmini (“Mr Ghielmini”) a business associate of Mr Buscaini wrote to LSE expressing an interest in becoming an official licensed distributor of Lonsdale Products in Italy. When this approach was favourably received Leofelis was incorporated as the vehicle to carry into effect this intended commercial operation. For that purpose and for the purpose of “tax efficiency” the following structure was put in place. Leeside was incorporated as a subsidiary of Leofelis to be the trading company of the group which would carry out the distribution and sale of the Products in Italy. The whole of the issued shares of Leofelis were held by a company, Regent Finance Ltd (“Regent”) incorporated in England. Regent was a company offering nominee services having other clients besides Leofelis and those interested in Leofelis. On the 16^th May 2001 Alianza Investment Corp (“Alianza”) a company incorporated in Panama, as lender, entered into a loan agreement with Regent, as borrower, lending Swiss F200,000. Recital (A) to this agreement provides:-

“(a)

The Borrower wishes to invest in 100% of the share capital, consisting of 200 bearer shares of CHF 1000.00, in Leofelis S.A… and wishes to obtain a loan or other financial facility to do so;… ”

Clause 2.3 of this agreement provided that the loan could only be used for the purpose of acquiring the issued share capital of Leofelis, and by clause 4, that if so used it would be interest free. The shares of Alianza were held equally between Mr. Buscaini and a Signor Danilo Melli (“Mr Melli”). Mr Busciani describes himself in his first witness statement as “the de-facto managing director of” Leeside and is the driving force behind the Claimants in these proceedings. Mr Melli was a designer of clothes and widely experienced in the clothing industry in Italy who, before his association with Mr Busciani, had acted as a distributor of the Products in Italy. By an agreement dated the 30^th May 2001, between Regent and Alianza, Regent, in consideration of the payment of £5,000, granted to Alianza a call option to purchase the Leofelis shares held by it. The option period was to be one year from the date of the agreement renewable by Alianza on notice and payment of a further sum of £5,000, eight times. In June 2003 Signor Natale Oteri (“Mr Oteri”) invested in 6.5% of the shares of Alianza. It appears that simultaneously with acquiring his shareholding (from each of Mr Buscaini and Mr Melli equally) Mr Oteri entered into a power of attorney irrevocably conferring on Mr Buscaini the right to vote his shares. This was done without informing Mr Melli. When Mr Melli discovered that this had happened unavailing attempts were made in Panama by Mr Melli assisted by Mr Oteri to undo this arrangement thus restoring equal control of Alianza to Mr Buscaini and Mr Melli. In July 2004, in the course of severing his business connections with Mr Busciani, Mr Melli sold his shares, in Alianza, to him.

There is an issue between the parties as to whether the events of July 2004 constituted a change of control of Leofelis for the purposes of Clause 11.2 of the November 2002 Agreement. Materially for the purposes of this judgment that clause provides:-

“The Licensor may terminate this Agreement by immediate written notice in the event that;

11.2.1

…

11.2.2

The Licensee undergoes a change of control within the meaning of the term as set out in SECTION 840 of the Income and Corporation Taxes Act 1988….”

It is the Claimants’ contention that the control of Leofelis and so of Leeside vested in Regent. In agreement with the submissions of Mr Gruder for the Defendants it seems to me clear that control of Leofelis depended on control of Alianza as “Control… by means of the holding of shares or the possession of voting power in … any other body corporate” see 840 (a) of the Income and Corporation Act 1988 as applied by clause 11.2.2 of the November 2002 Agreement. Control of Alianza allowed the controller at his option to call for a transfer of all the Leofelis shares held by Regent to Alianza and so give control of Leofelis to Alianza. See per Laddie J in Sanofi-Sythelabo SpA v. 3M Health Care Ltd [2002] EWHC 707 (Ch) and the authorities cited by him. Furthermore it is apparent from their actions that each of Mr Buscaini, Mr Melli and Mr Oteri considered that voting control of Alianza carried with it control of Leofelis. It follows that control of Leofelis passed from joint control by Mr Buscaini and Mr Melli, to Mr Buscaini, on Mr Oteri acquiring his shares in June 2003 and assigning their voting rights to Mr Buscaini.

By an agreement dated the 11^th June 2001 LSE granted to Leofelis an exclusive royalty bearing licence to use the registered trademarks contained in Part 1 of Schedule 1 to the agreement in the cinemascope form as set out in Part 2 of Schedule 1, in Switzerland and Italy, for “a royalty of 3% of the Nett Selling Price of each unit of the Product sold by the licensee.” By clause 8.1 of the agreement Leofelis undertook “to act at its own expenses [sic] to protect legally the Trademark of this agreement, ….” It is accepted that LSE and Mr Hart were at a low ebb at the making of this agreement as a result of the cost of litigation, mainly against Lord John, undertaken to defend its right to the Lonsdale marks. On the 19^th June 2001 Leofelis granted Leeside a sub-licence to use the same marks in Italy. By an agreement of 19^th October 2001 between LSE and Leofelis the Territory of the licence granted by the 11^th June 2001 agreement was extended to all the then countries of the European Union except the UK and Ireland but also including Andorra, Gibraltar, Liechtenstein, Monaco and Poland. The period of the licence was extended to the 31^st December 2007 thereafter renewable “automatically on a three years basis unless a contrary notice is sent from one party to the other observing at least 12 months period of notice from the end of the agreement…”. Otherwise the provisions of the 11^th June 2001 agreement were to remain in force including, in particular, the provisions as to the payment of royalties.

On the 13^th September 2001 Lord John granted an exclusive licence for the production and sale of clothing bearing the Lonsdale marks to Maurizio Badii & C. srl (“Badii”) for a term of three years terminable on 12 months written notice. On the 22^nd January 2002 Lord John granted a similar licence to Punch GmbH (“Punch”) again terminable on 12 months written notice. The territory of the licence to Punch covered all states then in the European Union, excluding the UK, but with in addition Hungary, Poland the Czech Republic and Switzerland. Before these agreements Punch and Badii had been acting as distributors for Lonsdale Products in Europe, Badii obtaining its products from Punch. Badii had had a long term relationship with Lord John and Mr Alavi prior to September 2001. The marks licensed by these two agreements were either the word marks “Lonsdale” or “Lonsdale London” or the diamond shaped hologram Lonsdale mark.

In the spring of 2002, as a result of the intervention of Mr Moher, Mr Ashley became interested in acquiring the Lonsdale marks. Negotiations started between Mr Ashley and LSE and Mr Hart, and, at the same time, with Lord John and Mr Alavi. It is not necessary to trace the history of these negotiations. As a vehicle for the acquisition of the Lonsdale marks Mr Ashley caused to be incorporated Lonsdale Sports, the first Defendant, then having the name Miklat Ltd

In the result, upon terms set out in three documents each dated the 11^th June 2002, (1) an agreement between Lord John, Brands Inc Ltd [now BHL], Sports Soccer Ltd [now SWIL], and Javid Alavi, (2) a deed of release between LSE, Lord John and Brands Inc Ltd and (3) an assignment between LSE and Miklat Ltd [now Lonsdale Sports] and a settlement agreement dated the 12^th June 2002 between LSE and Lord John, all litigation between LSE and Lord John was settled and LSE and Lord John sold to Miklat Ltd the right to exploit the Lonsdale marks which they each claimed to be entitled to. It is only necessary to refer in detail to the provisions of the agreement (No (1) above) of the 11^th June 2002 between Lord John, Brands Inc Ltd, Sports Soccer Ltd [SWIL] and Mr Alavi (who is shown in the agreement as trading under the name Merc). I will refer to this agreement as the “Lord John SPA”.

By clause 2.1 of that agreement, subject to conditions precedent including the execution of an agreement whereby LSE sold its Lonsdale Marks to Miklat Ltd [Lonsdale Sports, the first Defendant], Lord John sold its Lonsdale marks to Miklat Ltd and assigned to Miklat Ltd the benefit of the distribution agreements with Punch and Badii which I have set out above [para 16] and the non-exclusive worldwide licence with Merc of the 22^nd February 2001 which I have also set out above [para 10]. By clauses 5.2 and 5.3 the consideration payable to Lord John for the transfer of the Lord John Lonsdale marks was to be £3M payable by annual instalments of £300,000 over ten years and 25% of any excess of the nett profits of Miklat Ltd after tax exceeding £1.2M in each of those ten year periods. Additional consideration would become payable in the event that Brands Inc Ltd sold any of its shares in Lonsdale Sports or Lonsdale Sports sought to realise the value of its interests in the Lonsdale marks being transferred, in an amount equal to the higher of £3m or 25% of the nett consideration received by Brands Inc Ltd, after the deduction of reasonable costs and expenses, exceeding £12M.

For the purposes of this judgment the important provision of this agreement was that at clause 5 A.1as follows:-

“For the period commencing on the date of Completion and ending upon the completion of any sale by Newco [Lonsdale Sports] of all of its interests in the Marks, [including both cinemascope and diamond holograms] Newco shall supply, or procure the supply, to Merc within a reasonable time (being no longer than the shortest delivery period given to any other wholesale purchaser of Goods for delivery in the United Kingdom) such of the Goods for resale as Merc may order (without restriction or limit) at a price to be fixed by Newco provided that such price (excluding VAT and delivery or other charges) shall not be higher than 15 % below the lowest price (determined on the same basis) charged by Newco (or such other supplier) of the Goods to any other customer (whether wholesale or retail) in the United Kingdom.”

The word “Goods” is defined in the agreement as “any goods which are sold “advertised” marketed for sale or offered for sale on a wholesale or retail basis worldwide by reference to any of the Marks including but without limitation by way of a sign, advertisement, label, swing tag or catalogue bearing a mark or sign identical or similar to any of the Marks;” It is accepted that the provisions of this clause would entitle Mr Alavi to acquire Products from SWIL on extremely favourable terms as to price.

In the course of discussions between Leofelis and representatives of the Ashley companies it had been suggested that Leofelis might purchase the Lonsdale Marks from Lord John and LSE. When this prospect failed to emerge Mr Ghielmini wrote to Mr Hart and Mr Bernstein on the 21^st May 2002 indicating that they were not interested in acquiring a partial interest in the Lonsdale Marks and were content to remain licensees of those marks under the agreement of 11^th June 2001. However, after the purchase of the Lonsdale marks by Lonsdale Sports, as a result of the transactions of the 11^th June 2002, it was suggested to Leofelis that a new licence on revised terms might be available. Accordingly a meeting took place on the 22^nd July 2002 at the Heathrow Forte Crest Hotel at which were present Messrs Buscaini, Ghielmini and Melli, for Leofelis, and Mr Moher and Mr Bernstein representing Lonsdale Sports the new owner of the Lonsdale Marks. Mr Ashley was not present being on holiday. There are issues as to precisely what was said in the course of this meeting. However it is broadly accepted that in the course of it a proposed new structure for the exploitation of the Lonsdale Marks was set out. Lonsdale Sports would own the newly acquired Lonsdale Marks the exploitation of which would be administered by Mr Moher through TMLC, which would be the worldwide licensee of the marks. Leofelis would be the exclusive sub-licensee for Europe excluding the United Kingdom and Ireland. That exclusive licence for Europe would be subject to the three licences set out in part 4 of schedule 1 of the November 2002 Agreement under the heading “Distribution Agreements”, with, in addition, a fourth non-exclusive licence in favour of a company called Mr President. The Leofelis side were informed that notices terminating the licences of Punch, Badii and Mr Alavi/Merc would be delivered by Lonsdale Sports. It was suggested that Leofelis, which was engaged in litigation with Punch and Badii, might settle that litigation and reach an arrangement with those companies involving them playing a part as distributors of Products so taking advantage of their existing networks of agents. Leofelis would surrender its existing licence under the 11^th June 2001 Agreement and would transfer to Lonsdale Sports the rights to certain trademarks including Lonsdale Marks of which it was the proprietor. These arrangements were broadly acceptable to the Leofelis side.

On the 5^th August 2002 Mr Bernstein for Lonsdale Licensing Ltd [TMLC] gave 12 months notice to Badii to terminate their licence. On the 6^th August a similar notice was given to Punch. No notice terminating the Alavi licence has been produced. It was Mr Moher’s evidence that he thought this had been done but it was Mr Alavi’s evidence that no such notice was served on him.

On the 17^th October 2002 it appears that an Italian retailer Gino Zerbini placed an order through the agency of Badii with Mr Alavi for 100,000 pieces of Lonsdale Trademark clothing. Mr Alavi placed part of the order for the manufacture of these clothes with Sports Soccer Ltd [now SWIL] pursuant to clause 5 A.1 of the agreement of the 11^th June 2002. There is an issue as to whether this was a bona fide order and not a cover for Mr Alavi to threaten to flood the Italian market with Product. It was plainly the latter. Whether it was also the former does not matter very much.

The next event of significance was the November 2002 Agreement some provisions of which I have already set out at paragraph 4 above. Under the heading “Grant of Licence and Termination of the 2001 Licence” clause 2 of the agreement provided in full as follows:-

“2.1

Subject to Clause 2.2 the Licensor hereby grants to the Licensee the exclusive licence in the Territory to use the Trade Marks in relation to the Goods from the date of this Agreement and for the Term (unless terminated earlier in accordance with the provisions of this Agreement) and on the other terms and conditions set out in this Agreement and (in respect only of those of the Trade Marks referred to in and licensed by the Distribution Agreements), subject to the terms and provisions of the Distribution Agreements and to all rights claimed in the Montse Proceedings to the extent that they are currently claimed or in due course adjudged or found to subsist by any Court of competent jurisdiction or Trade Mark Registry.

2.2.1

The licence granted pursuant to this Agreement is subject to any existing licences or rights, whether written or not, which may have been granted in respect of the Trade Marks. The Proprietor and the Licensor are not aware of any other licences or rights having been granted in respect of any of the Trade Marks.

2.2.2

In the event that during the term of this Licence any of the Parties becomes aware of any other licences or rights having been granted, the Parties shall use all reasonable endeavours to terminate such licences or rights in accordance with the terms of any such licences or rights. The Licensor shall be liable for, indemnify and hold harmless the Licensee against any liability incurred arising out of any such licences or rights that there may be.

2.3

The Licensee shall use its best endeavours at all times during the Term to create, promote and retain goodwill in the business utilising the Goods under the Trade Marks.

2.4

It is hereby agreed that the 2001 Licence be hereby terminated by the mutual consent of the Parties and the Proprietor and the Licensee each acknowledge that it has no outstanding claims against the other under or pursuant to the said Licence or otherwise howsoever arising and that save for the provisions of clauses 11 .2.3; 11.2.4; and 11.2.7 shall be of no further effect.”

“The 2001 Licence” referred to in paragraph 2.4 is comprised in the 11^th June 2001 Agreement described at paragraph 15 above, and to which reference is made in clause (B) of the recitals. Under the heading “Financial Provisions” and materially to this judgment clause 3 provides as follows:-

“3.3

Royalties payable under this Agreement shall be paid in advance in four equal instalments in sterling on 1^st January, 1^st April, 1^st July and 1^st October in each year commencing on 1^st January 2003.

3.4

At the same time as payment of any such royalties falls due under this Agreement the Licensee shall submit or cause to be submitted to the Licensor a statement in writing recording the main terms of all sub-Licences entered into by the Licensee and insofar as available to the Licensee the turnover in the Goods pursuant to Clause 10 in the Territory under the Trade Marks.

3.5

The licensee shall keep proper records and books of account showing all income received by it from any sub-Licences entered into and of the turnover in the Goods in the Territory and such records and books shall be kept separate from any records and books not relating solely to the Goods in the Territory and shall be open at all times to inspection and audit by the Licensor or its duly authorised agent or representative on giving 10 working days notice in writing who shall be entitled to take copies of or extracts from the same.”

Under the heading “Quality Control” and materially to this judgment clause 4 provides as follows:-

“4.1

The Licensee shall ensure that the Goods manufactured, distributed, supplied or marketed by it or any permitted Sub-Licensee under the Trade Marks conform to and comply in all respects with any standards, regulations and all other requirements in respect of the Goods which may be specified in writing from time to time by the Licensor.

4.2

Prior to the launch of each collection, the Licensee shall, upon demand, deliver to the Licensor free of charge samples of each unit of the Products including their wrappings and packaging and, if so requested, shall not commence or continue distribution of the Products until it has received written approval from the Proprietor of their design, standard of workmanship, quality or presentation and intrinsic merit. The Licensor shall be deemed to have given its approval of any such samples if it does not give to the Licensee notice to the contrary within 10 working days after the receipt of the same, and the Licensor shall not be entitled unreasonably to withhold such approval.

4.3

The Licensee shall ensure that all other units of the Products including their wrappings and packaging of the same description as the samples correspond to the samples approved by the Licensor in accordance with clause 4.2.

4.4

The Licensee shall supply to the Licensor free of charge such further samples of the products as the Licensor may reasonably require from time to time…

4.7

The Licensee shall also, upon demand, submit samples of all packaging, advertising, promotional and other documentary material including invoices and office stationery to be used in relation to the Goods after the date of this Agreement to the Licensor for approval prior to any such material being used. The Licensor shall be deemed to have given its approval of any such material if it does not give to the Licensee notice to the contrary within 10 working days after the receipt of the same, and the Licensor shall not be entitled unreasonably to withhold such approval.”

Under the heading “Infringement of Trademarks” clause 7 provides as follows:-

“7.1

If the Licensee learns of any infringement or threatened infringement of the Trade Marks or of any action detrimental to the Trade Marks or of any third party allegation that the Trade Marks are liable to cause deception or confusion to the public the Licensee shall forthwith and without delay notify the Licensor giving full particulars of such circumstances and the Licensee shall make no comment or admission to any third party in respect of such circumstances.

7.2

The licensee shall, subject to clause 7.3 below, after consultation with the Licensor in its own name and at its own cost take such action and do all such things (including litigation, arbitration or compromise) as the Licensor may deem necessary in respect of any infringement or alleged infringement of the Trade Marks or passing off or any other claim or counterclaim brought or threatened (“Disputes”) in respect of the use of the Trade Marks, save only in respect of any claims made by third parties relating to the Licensor's ownership of or title to the Trade Marks,. In resolving any Disputes the Licensee shall keep the Licensor fully informed of the actions taken in respect of such Disputes.

7.3

The Montse Proceedings and all steps and actions in relation thereto shall be and remain in the name, control and at the cost of the Licensor. The Licensor shall keep the Licensee informed of the actions taken in respect of the Montse Proceedings insofar as they have or are likely to have a material effect on the rights granted to the Licensee in this Licence.

7.4

In any action brought by the Licensee for infringement under section 30 of the Trade Marks Act 1994 the Licensee shall have the conduct of all proceedings relating to the Trade Marks.

7.5

If the Licensor brings or is involved in any Disputes the Licensee will at the request of the Licensor and at its own cost give full co-operation to the Licensor (including the provision of documentation and making relevant people available) in any Disputes in respect of the Trade Marks.

7.6

In any infringement proceedings which are brought by the Licensor, the Licensor shall be entitled to claim in respect of any loss suffered or likely to be suffered by the Licensee.

7.7

The Licensor shall be liable and responsible for all losses, claims, costs and expenses including legal costs incurred or arising out of any proceedings necessary to protect the Licensor's ownership of, any of the Trade Marks.”

Under the heading “Sub-Licensing” and materially to this judgment clause 10 provides as follows:-

“10.1

The Licensee shall be entitled to grant Sub-Licences of the Trade Marks on the conditions set out below:

10.1.1

such Sub-Licence shall be subject to the prior written consent of the Licensor, such consent not to be unreasonably (withheld or delayed it being recognised by the Parties that the Licensor may withhold consent to any sub-licence to any competitor of the Licensor). The Licensor shall be deemed to have given its consent if it does not give notice to the contrary to the Licensee within 10 working days after the receipt of Licensee's written request for consent;”

Under the heading “Termination and Renewal” and materially to this judgment clause 11 provides as follows:-

“11.2

The Licensor may terminate this. Agreement by immediate written notice in the event that:

11.2.1

the Licensee commits a breach of this Agreement; PROVIDED THAT if the breach is capable of remedy termination shall only occur if the breach shall not have been remedied within 30 days of the Licensee having been given notice in writing specifying the breach and requiring it to be remedied;

11.2.2

the licensee undergoes a change of control within the meaning of the term as set out in section 840 of the Income and Corporation Taxes Act 1988.”

On the same day Leofelis entered into an assignment in favour of Lonsdale Sports of the benefit of the trademarks which were its property to which I have already made reference in my description of the meeting of the 22^nd July 2002 [paragraph 22 above] at the Crest Hotel, and received back a licence to use those trademarks.

On the 21^st November 2002 Lonsdale Sports and Lonsdale Licensing Ltd entered into a Master Trade Mark Certificate agreement whereby Lonsdale Sports as proprietor licensed Lonsdale Licensing Ltd to use all its trade marks worldwide for a period of ten years. As already described Lonsdale Licensing its changed its name on the 28^th July 2003 to become TMLC the second Defendant.

In early 2003 there took place a telephone conversation between Mr Buscaini and Mr Moher in the course of which Mr Buscaini alleges that he was alerted by Mr Moher to the likelihood that, contrary to the impression that Mr Buscaini had been given that the licences to use the Lonsdale Marks held by Mr Alavi, Punch and Badii were either terminable or would expire by early 2004, Mr Alavi’s rights to exploit the Lonsdale trade marks were not terminable and would enable Punch and Badii as sub-licensees from him to continue to operate as before within Leofelis exclusive territory. Mr Moher admits that the conversation took place but denies he told Mr Buscaini that Mr Alavi’s rights were not terminable.

In March 2003 as a result of a conversation between Mr Moher and Mr Buscaini, Leofelis received an oral licence, never confirmed in writing, to market Lonsdale branded footwear in Italy and Switzerland from April 2003. It is from the grant of this oral licence that one of the Defendants’ counterclaims for unpaid licence fees results.

On the 17^th June 2003 there took place a meeting at the Dunstable offices of the Sports World Group between Mr Buscaini, Mr Ghielmini and Mrs Scacciavillani, (Mr Buscaini’s wife and legal advisor of Leofelis), for Leofelis, Mr Alavi and his lawyer Miss Frances Whitehead, Mr Badii and Mr Schotsman for Merc, Badii and Punch, and Mr Ashley, Mr Mellors, Mr Moher, Mr Bernstein and Miss Sara Ludlum, their in house lawyer, for Brands Inc Ltd [later BHL]. In the course of this meeting the following agreements all dated 17^th June 2003 were entered into:-

It is Leofelis’ case that it entered into the transactions set out at i) and ii) as a result of commercial necessity in order to obtain and preserve, as far as possible, its exclusive licence to exploit the Lonsdale trademarks within the territory provided for in the November 2002 Agreement. Leofelis contends that it was placed in this position as a result of breaches of that agreement and misrepresentations, for which the Defendants are responsible, of the extent of the rights enjoyed by Mr Alavi, Punch and Badii under the licences held by them, subject to which Leofelis was granted its exclusive sub-licence by the November 2002 Agreement.

On the 5^th November 2003 Leofelis Asia (HK) Ltd was incorporated in Hong Kong. It appears that this company was formed with a view to marketing products with the Lonsdale Mark in the Far East and in particular in South Korea. It is the Defendants’ contention in their counterclaim that the operations of this company, in alleged association with Leofelis, constituted breaches of the November 2002 Agreement by Leofelis selling Products outside the Territory prescribed by its sub-licence.

On the 6^th April 2004 Mr Schotsman wrote to Mr Buscaini and Mr Moher drawing attention to the sale of Products in Disport stores in Belgium (“the Belgian Sales”). The Disport chain of shops belonged to Sports World Belgium SA (“SWB”) together with other retail outlets in Belgium. It is Leofelis’ case that the Defendants have been infringing its rights as exclusive sub-licensee under the November 2002 Agreement by the sale of Products through its Belgian outlets.

On the 30^th July 2004, in an e-mail from Mr Moher to Mr Buscaini, Mr Moher requested that Leofelis sign a licence agreement licensing the marketing of Products in the Middle East, in particular, the UAE. It appears that pending such a licence Leofelis had sold Products for distribution through a distributor in the UAE. This is the basis for another of the counterclaims made by the Defendants. It is the Defendants’ contention that Leofelis have not accounted for royalties becoming due under this licence, alternatively, if no licence agreement was arrived at, Leofelis have breached the November 2002 Agreement by selling Products outside the area prescribed by their sub-licence under that agreement.

On the 30^th July 2004 Sara Ludlum wrote to Mr Buscaini saying that TMLC had been advised that there had been a change of control in Leofelis. The final paragraph of that letter reads:-

“Further to clauses 11.2.2 [of the November 2002 Agreement] in each of the above mentioned Licence Agreements TMLC hereby reserves its right to terminate the above mentioned Licence Agreements whilst discussions between Massimo Buscaini and Lonsdale Sports Ltd/TMLC are ongoing.”

This letter was not an election on behalf of Lonsdale Sports and TMLC to terminate the November 2002 Agreement on a change of control of Leofelis of which they had recently become aware (if such was the case). It was notice that Sports World and TMLC reserved the right to terminate for a limited period (the period of the discussions between them and Mr Buscaini). There has been no evidence of what these discussions were about or when they ended but I must assume that they had ended by the time the present proceedings had been started. It was not until the 28^th February 2006 that TMLC, by letter of that date, gave unequivocal notice to terminate the November 2002 Agreement for the various breaches of it pleaded in the Defence and Counterclaim dated the 16^th December 2005 and after that document had been served.

Earlier in this judgment I described how Mr Melli, at about this time, severed his business relationship with Mr Buscaini and sold his shareholding in Alianza to him. It is the Defendants’ contention in their counterclaim that the events leading up to this sale operated as a change of control, thereby, pursuant to clause 11.2 of the November 2002 Agreement, entitling TMLC to terminate that Agreement. I have already found that there was such a change of control. See paragraph 14 above.

On the 23^rd December 2004 Mr Ghielmini wrote to Mr Moher drawing his attention to the fact that articles from the Spring/Summer 2005 collection of Leeside disclosed to TMLC on the 6^th July 2004 had been copied and put on sale without authorisation from either Leeside or Leofelis. Under clause 4.2 Leofelis was bound to produce to TMLC, upon request, samples of goods it proposed to sell within its territory. By clause 4.7 similar terms applied to packaging of goods proposed to be sold. Leofelis objected to producing its samples at TMLC’s premises because of the alleged copying. In the course of 2005 it was attempted to meet this problem by Leeside making such samples available for inspection in Milan and meeting the cost of inspection there. It seems that this system was never properly brought into operation. Failure by Leofelis to provide samples of the Products for sale is the subject of another of the Defendants’ counterclaims.

These proceedings were commenced on the 14^th October 2005. From the making of the November 2002 Agreement down to the commencement of proceedings and thereafter TMLC has demanded and Leofelis has paid the fixed royalties becoming due under that Agreement. The last such payment was made on the 31^st October 2006 and covers a period which expired at the end of December 2006.

Since the Defendants’ counterclaim claims to terminate the November 2002 Agreement, and thus Leofelis’ sub-licence pursuant to it, by reason of breaches of that Agreement it is convenient to deal first with the counterclaim.

Change of control

Sale of footwear by the Claimants

Failure of Leofelis to promote and maintain the brand

Failure of Leofelis to provide samples

Clause 8.3 of the November 2002 Agreement provides:-

“8.3

The Licensee shall obtain and maintain (notwithstanding the termination of this Agreement) liability insurance in an amount and on such terms and conditions as shall be acceptable to the Licensor for the claims identified in clause 8.2. Such policy of liability insurance shall contain an endorsement of the interest of the Licensor or otherwise require the insurance company to give the Licensor not less than 30 days, notice of cancellation or non-renewal of such insurance. The Licensee shall supply the Licensor with a copy of its policy, if so requested.”

Clause 8.2 of the Agreement contains an indemnity by Leofelis to TMLC against any liability to which TMLC is put as a result of Leofelis’ breaches of the Agreement, including against Product liability in respect of Products supplied by Leofelis in the Territory.

It follows that Clauses 8.2 and 8.3 read together and the definition of “Goods” contained in Clause 1.1, imposed upon Leofelis the obligation to take out a Product Liability Insurance policy in respect of the Goods (described in Schedule 2 as “Licensed Goods”) which Leofelis delivers to third parties within its territory. It is accepted that this has never been done. Such failure has continued after the last demand for and acceptance of royalties by TMLC. It follows that Leofelis is currently in breach of the provisions of the November 2002 Agreement but there has been no fresh notice to terminate that Agreement since the last demand and acceptance of royalties on the 31^st October 2006.

It was at one stage contended by Leofelis that it was not possible to obtain an insurance policy which complied with the provisions of Clauses 8.2 and 8.3. It was never fully explained how this could be so given that Product Liability Insurance policies are a matter of common currency. That submission can only be made on the basis that these Clauses required the taking out of one policy covering the totality of claims which could be made in respect of all the matters for which Leofelis, by Clause 8.2, was to hold TMLC harmless. It seems to me that the Clauses are not to be construed in that way and that a failure to take out a policy covering Product Liability but not dealing with the other potential claims described in Clause 8.2 nonetheless constitutes a breach.

However it seems to me that the present position under this head of counterclaim, following the most recent demand and acceptance of royalties, is that the Defendants must be treated, notwithstanding their pleading, as not currently wishing to terminate the November 2002 Agreement. The Claimants must be given a reasonable time to comply with their obligation after delivery of this judgment.

There was no evidence of any damage suffered by the Defendants consequent on Leofelis breach. It follows that the counterclaim under this head fails.

Grant of unapproved Sub-Licences

Unlicensed sale in the Middle East

Unlicensed sales in Korea

It is Leofelis’ contention that Lonsdale Sports (“the Proprietor” under the Agreement) and TMLC previously (Lonsdale Licensing Ltd “The Licensor” under the Agreement) are in breach of the provisions of Clause 2 of the November 2002 Agreement by failing, as provided in Clause 2(1), to grant to Leofelis a licence to market the Product in the territory provided for in the Agreement which was exclusive apart from the rights created by the “distribution agreements” as described in part 5 of Schedule 1 to the Agreement and certain rights claimed in the “Montse Proceedings” which are not relevant to the present issue. Leofelis further contends that in breach of Clause 2.2.1 of the Agreement (see paragraph 25 above) TMLC and Lonsdale Sports failed to disclose the rights of Mr Alavi under Clause 5A1 of the Lord John SPA and the full extent of his rights as licensee under the Alavi Licence. Leofelis further contends that Lonsdale Sports and TMLC failed to give notice terminating the Alavi Licence as represented as having been done in paragraph 3 of Part 5 of the first Schedule. It is Leofelis’ contention that, on a true construction of the Alavi Licence, TMLC and Lonsdale Sports were not in fact entitled to give such a notice in the circumstances prevailing at the material time.

The material Clauses of the Alavi Licence are Clauses 9, 10 and 11 set out at paragraph 10 above. There is an issue as to their true construction.

It is the contention of Leofelis that the result of the three Clauses was to confer on Mr Alavi a licence which he could keep alive indefinitely provided he did not commit a breach of the terms of the agreement conferring the licence which he did not rectify within 30 days of the licensor receiving notification of such a breach pursuant to Clause 11. This is because the automatic renewal of the licence for a further period of three years, after the first such period, and, thereafter, after each succeeding three year period provided for in Clause 9, could only be interrupted by the Licensor “unless [the licence be] sooner terminated”. The only power to terminate the licence available to the Licensor is that provided for in Clause 11 resulting from breach by the Licensee of the provisions of the licence agreement.

The rival contention of the Defendants is that such a construction does not give effect to the words “notwithstanding the provisions of Clause 9” with which Clauses 10 and 11 start. It is submitted that these words imply that the termination provisions of Clause 10 and 11, which succeed these words, are inconsistent with termination provisions which are to be found in, or are to be implied into, Clause 9. It is submitted that it must be implied into Clause 9 that the termination there spoken of must be a termination capable of being brought about by the Licensor on reasonable notice to the Licensee, a period of notice to be contrasted with the fixed period provided for in Clause 10 and the summary termination for breach provided for in Clause 11. The way Clause 9 would work is by construing the Clause as giving the Licensor a right to terminate at the expiry of each successive three year period by notice given a reasonable time before such expiry. It is submitted that without such a construction there is no purpose in providing for renewable three year periods of the licence.

The difficulty of this construction is that it does not give effect to the words “unless sooner terminated” with which Clause 9 concludes. To achieve the desired result it is necessary to substitute for those words “unless reasonable notice to terminate this agreement has been given by the Licensor before the expiry of the initial or each successive period of renewal.”

These Clauses of the Alavi Licence are plainly very badly drafted. It is submitted by the Defendants that their construction of them is to be preferred because it leads to greater commercial commonsense and they quote an extract from the judgment of Lord Diplock in Antaios Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 where he says:-

“If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”

It is not in issue that at all material times Lord John (UK) Ltd was a company owned and controlled by Mr Alavi. Therefore the agreement constituting the Alavi Licence was, in substance, Mr Alavi licensing himself. There is no evidence as to what Mr Alavi had in mind when he did so but it may have been with a view to selling or otherwise disposing of the licensor or the licensor selling or disposing of the underlying trademarks leaving Mr Alavi as worldwide licensee. It makes commercial sense that Mr Alavi should, in these circumstances, wish to receive a licence which he was in a position to keep alive indefinitely at his own discretion. Seeking to achieve this by prescribing automatically renewable three year terms might well be muddled thinking by the draughtsman or the use of an inappropriate precedent. The Defendants’ construction produces a licence whose terms are much less favourable to the Licensee. In my judgment the one background fact which is known as to the circumstances of the creation of the licence agreement leads me to the conclusion that Clauses 9, 10 and 11 are to be construed in the way contended for by Leofelis. In any event, it is at least strongly arguable that their construction is correct with the consequence that Leofelis, in entering into the November 2002 Agreement might in the future be faced with unlooked for competition within their territory from Mr Alavi and consequent litigation with him as to his surviving rights to exploit the diamond version of the Lonsdale trademark within the Territory which it was well possible that they could lose.

It was submitted that the Defendants and Mr Moher genuinely believed that the Alavi Licence was terminable on notice from the Licensor which, by November 2002 was TMLC, and that notice to terminate it in February 2004 on the expiry of the relevant three year period had been given. Such was the evidence of Mr Moher. No copy of such notice to terminate has been produced and Mr Alavi, giving evidence for Leofelis, said that no such notice was received by him. I find that no notice to terminate was given as suggested in paragraph 3 of Part 5 of the first Schedule and that in consequence, even if the Defendants’ construction of Clause 9 of the Alavi Licence is to be preferred, it is altogether possible that reasonable notice to terminate it by February 2004 would have been missed and in consequence it could only be terminated by subsequent notice in February 2007.

It was Mr Moher’s evidence under cross-examination that he believed that he had given a copy of the Alavi Licence to Leofelis before the November 2002 Agreement was entered into. There is documentary evidence in particular an e-mail dated the 19^th November 2002 from Mr Osborn, the solicitor acting for the Defendants, to Silvana Scacciavaillani, Mr Buscaini’s wife, who acted as Leofelis’ Italian solicitor, which shows that she was engaged in finalising the terms of the November 2002 Agreement and in particular considering Schedule 1 Part 5. It was Mr Buscaini’s evidence that he regretted that they did not obtain the advice of an English lawyer before entering into the November 2002 Agreement.

It was submitted on behalf of the Defendants that it was unthinkable that any lawyer should have been prepared to allow a client to enter into the November 2002 Agreement without seeing copies of the licences mentioned in Part 5 of Schedule 1 and, in particular, the Alavi Licence. I accept the force of this submission. It follows, it is submitted that the terms of the Alavi Licence must have been known to Leofelis through its lawyer before they entered into the November 2002 Agreement. In my view, without more, that does not much advance the Defendants’ case. It is equally unlikely that, had the terms of the Alavi Licence been competently examined by lawyers on either side, the confused drafting of Clauses 9, 10 and 11 would not have been appreciated and the possibility of Leofelis’ suggested construction have emerged. There is no evidence that anything like this happened. I can see no reason why those acting for Leofelis were not entitled to rely on the description of the Alavi Licence contained in paragraph 3 of Part 5 of the first Schedule which clearly indicated that its terms enabled the Licensor to terminate it on notice.

In my judgment the fact that such was not the case, or even only arguably not the case, meant that Sports World and TMLC, by failing to disclose the full possible ambit of the Alavi licence, were in breach of the provisions of Clause 2.2.1 of the November 2002 Agreement.

I have set out the provisions of Clause 5A1 of the Lord John SPA at paragraph 20 above. It is Leofelis’ contention that the rights conferred on Mr Alavi under this Clause constituted “a licence or rights…granted in respect of any of the trademarks” for the purposes of Clause 2.2.1 of the November 2002 Agreement of which, it is not suggested, Sports World and TMLC were unaware when that agreement was entered into. It follows, it is contended by Leofelis, that the failure to disclose these rights constituted a breach of Clause 2.2.1. I accept Leofelis’ contentions.

The provisions of Clause 5A1 conferred on Mr Alavi trading as Merc, as additional consideration for the transfer by Lord John of its trade mark rights to Lonsdale Sports, valuable rights to purchase Products from Lonsdale Sports, including, for the first time, goods branded with the more valuable cinemascope mark. The effect of the Clause was to give Mr Alavi, for the first time, a right to acquire and trade in Lonsdale cinemascope branded goods including, in particular, a right to purchase goods bearing a community trademark that Lonsdale Sports had acquired from LSE. Clause 1 of the Lord John SPA defines “marks” as “including without limitation those particulars set out in parts 1 and 2 of Schedule 1”. Among the trademarks listed in Part 1 of Schedule 1 is CTM 000627505 which is the community trademark in question (“the LSECTM”). The same trademark is shown by Part 1 of Schedule 1 of the November 2002 Agreement as being one of the marks licensed to Leofelis.

Clause 5A1 imposes on Lonsdale Sports an obligation to supply Mr Alavi with such goods when ordered and “without restriction or limit” as was accepted by Mr Moher. That obligation is imposed for a period defined in the Clause as “commencing on the date of Completion and ending upon the completion of any sale by Newco [Miklat/Lonsdale Sports] of all its interests in the marks”. That was a period the length of which was controlled by Lonsdale Sports and over the length of which Leofelis had no control. The Clause imposes no obligation on Mr Alavi to purchase a minimum quantity of goods in any given period. Consequently, he was free to make as much, or as little use, of his rights under Clause 5A1 as he saw fit.

As Mr Moher accepted in cross-examination, the Clause entitled Mr Alavi to dispose of any goods supplied under it as he pleased and was not restricted, as Mr Moher initially suggested, to selling them retail from Mr Alavi’s Carnaby Street shop. He was entitled to sell such goods anywhere, including in the Territory, at a very preferential price which gave Mr Alavi a significant competitive advantage over Lonsdale Sports’ other customers for the same goods. I accept Mr McLean’s submission that Clause 5A1, although strictly not a licence to manufacture cinemascope branded Products, by having the effect of enabling Mr Alavi to acquire unlimited quantities of such goods for sale anywhere, had an affect so similar to a licence as to constitute it a licence within Clause 2.2 of the November 2002 Agreement. In any event if that be wrong in my judgment the Clause clearly constituted a right “granted in respect of any of the trademarks” within Clause 2.2.1.

It was submitted by the Defendants that Clause 5A1 was simply a supply agreement in respect of Products entered into in favour of a UK retailer which provided for delivery of goods in the United Kingdom. I cannot accept this submission. As I have already found, and as Mr Moher accepted, Mr Alavi was at liberty to sell or dispose of goods acquired under the Clause in anyway which he pleased either wholesale or retail. It is not in issue that part of Mr Alavi’s business was a substantial wholesale business including for export. It follows that Lonsdale Sports, in supplying goods under the Clause, must have contemplated that those goods might be exported for sale within the Territory, in particular, through the network of agents associated with Badii and Punch.

It was further submitted that Leofelis as the intended Licensees of Lonsdale products for the European Economic area, excluding the United Kingdom and Ireland, must have appreciated that it was open to Lonsdale Sports to supply goods through their United Kingdom Licensees for sale in the United Kingdom to third parties who could then export those goods to compete with Leofelis’ sales in the Territory. It is accepted that the ability to do this flows from the doctrine of “exhaustion of rights” under European trademark law. By that doctrine the rights of an owner of a trademark right are “exhausted” when his right to control the sale of branded goods is lost when those goods are put on the market for sale and sold within a country comprised in the EEA. I deal with the European directive of the exhaustion of trademark and copyright rights at para 194 and following below. Cavden was, at all material times, Lonsdale Sports’ Licensee for the United Kingdom and Product supplied to them or manufactured by them pursuant to their licence could have been exported in that way. It was submitted that Clause 5A1 placed Mr Alavi in exactly the same position as Cavden. It was pointed out that Leofelis took no steps to seek to restrict “parallel imports” of this kind into the Territory. They did not seek to obtain from Lonsdale Sports or TMLC limits on sales of Products to Mr Alavi or Mr President in the United Kingdom so as to prevent this occurring. I do not accept that this is of significance. Leofelis had been told that the Mr President licence was moribund and that notice had been given to terminate Mr Alavi’s licence with effect from February 2004. Their attitude might well have been different had Leofelis known of the ability of Mr Alavi, under Clause 5A1, directly to supply Badii and Punch with Products in the Territory for a period over which Leofelis had no control.

It was submitted that Clause 5A1, being only a right to obtain the supply of Products in the United Kingdom, did not constitute a “licence or rights having been granted in respect of the trademarks” within Clause 2.2.1. It was submitted that this was so because “the trademarks” must be read as being confined to so much of the ability to exploit those marks as that for which Leofelis was licensed. Thus the inclusion of the LSECTM in Part 1 of Schedule 1 of the November 2002 Agreement must be read as confined to the use of that trademark in the Territory. It follows, so the argument proceeds, that Lonsdale Sports and TMLC were under no obligation to disclose the rights conferred on Mr Alavi by Clause 5A1 “in respect of” the LSECTM because they were only concerned with the use of that trademark in the UK and Ireland. I cannot accept that submission. I can see no reason why the November 2002 Agreement is not to be construed in accordance with its plain words so that a statement in Clause 2.2.1 that “the proprietor and the licensor are not aware of any other licences or rights having been granted in respect of any of the Trade Marks” should not include licences or rights having been granted in respect of those marks for use in the UK. In my view the availability of the LSECTM to be used by Cavden in the United Kingdom should have been disclosed just as Mr Alavi’s rights under Clause 5A1 should have been disclosed. I cannot accept that Leofelis were only concerned with licences to sell Lonsdale goods in the EEA outside the UK and Ireland. As I have already said they might well have been very concerned with an arrangement which allowed Mr Alavi to export Lonsdale branded goods directly to Badii and Punch who had established agent networks in a significant part of the Territory. The presence of the LSECTM in Schedule1 Part1 of the November 2002 Agreement was not, as submitted by the Defendants, irrelevant.

In my judgment the failure by Lonsdale Sports and TMLC to disclose the rights conferred by Mr Alavi under Clause 5A1 constituted a breach of Clause 2.2.1 of the November 2002 Agreement.

It is Leofelis’ alternative claim that the Defendants are liable to it for damages flowing from misrepresentation to Leofelis by Mr Moher in the course of the meeting at the Forte Crest Hotel, Heathrow on the 22^nd July 2002 [see paragraph 22 above]. It will be remembered that present at that meeting were Messrs Buscaini, Ghielmini and Melli for Leofelis and Mr Moher and Mr Bernstein representing Lonsdale Sports the new owner of the Lonsdale marks. Mr Moher was also a director of TMLC. Mr Bernstein was an employee of TMLC at the relevant time. TMLC, then called Lonsdale Licensing Ltd was the worldwide licensee of the Lonsdale brands from Lonsdale Sports.

It was Mr Moher’s evidence that he and Mr Bernstein spent some considerable time preparing for the meeting of the 22^nd July. There were produced in evidence handwritten notes and a diagram which Mr Moher accepted were created in the course of those preparations. Mr Moher accepted that the notes record the planned tactics, to be pursued both before and at the meeting, to persuade Leofelis to surrender its existing sublicence from LSE under the 11^th June 2001 agreement accepting in place a new sublicence from TMLC.

It appears that Mr Hart was a party to these preparatory discussions although he did not attend the meeting of the 22^nd July. On the 20^th June 2002 Mr Hart had written to Mr Ghielmini at Leofelis. In that letter he had suggested that Leofelis sublicence was only an exclusive sublicence in Switzerland and that Brands Inc (an Ashley company) “are worried about the possible illegality of the extension to your licence made while LSE were subject to an undertaking not to deal with its brands.” This refers to the suggestion that LSE was not in a position to grant a sublicence to Leofelis on the 11^th June 2001 because at that time it was bound by an undertaking not to dispose of its assets given in the course of litigation of which, it is accepted, Leofelis was, at all material times, entirely unaware.

In the course of his cross-examination Mr Moher described the tactical moves being planned for the meeting of the 22^nd July as including repeating the suggestion that by reason of the circumstances surrounding its granting Leofelis’ licence was invalid, by suggesting that its extension to a much larger territory on the 19^th June 2001 was invalid, by undermining its exclusivity by registering new cinemascope trade marks to compete with those licensed to Leofelis, by granting third parties a licence to produce Lonsdale branded goods to “sell them to us and for us to sell it back to them … so they could sell them in [Leofelis] Territory,” by “creating difficulties for Leofelis to operate the licence” and by searching for breaches of the provisions of the licence by Leofelis enabling the licensor to bring it to an end. When it was put to Mr Moher that his actions were designed to undermine Leofelis’ licence from LSE his answer was that he “was more concerned with whether I was maximising the value to me of the brands we had bought.” When it was suggested that his attitude was that:-

“If they did not play ball, it would be pain for Leofelis…”

His answer was “ yes I would say so yes.”

In the course of his questioning about what happened at the 22^nd July meeting Mr Moher admitted that he had said that in his view the validity of the agreement to enlarge the Territory of the LSE licence on the 19^th October 2001 was questionable. It was then put to him that subject to four licences and the Montse claims, Leofelis were being offered an exclusive licence in the Territory. He agreed. He also agreed that those four licences were the non-exclusive licences to Punch, Badii, Mr Alavi trading as Merc and Mr President which latter licence had not been operated for many years. When it was put to him that he had said that those four licences could be brought to an end within a relatively short period of time he agreed but subject to the caveat that the licensees might cause trouble in the process and were not likely simply to walk away. He accepted that he told the meeting that he could and would serve notices to terminate those licences.

Following these exchanges I intervened to ask Mr Moher whether he expected that the notices would succeed and gave that impression to the meeting to which he answered:-

“I said that, under the terms of the licences, I believe we can serve effective notice but went on to explain that it was unlikely that people would go quietly into the night…I did believe that it would be effective, the notice legally. I did believe that yes.”

In agreement with the submissions of Mr McLean I accept that these exchanges were clear evidence that at the meeting on the 22^nd July Mr Moher on behalf of Lonsdale Sports and TMLC had represented to Leofelis that Leofelis was being offered an exclusive sublicence in the Territory subject to the rights being exercised in respect of Products within that Territory by Punch, Badii and Mr Alavi and that those rights would be terminated as soon as possible by notices given under the agreements which created them which would have the effect of bringing those rights to an end. Nothing happened between the meeting on the 22^nd July and the signing of the November 2002 Agreement so as to qualify those representations.

Those representations are substantially repeated in the text of the November 2002 Agreement at Schedule 1 Part 5 in respect of Punch, Badii and Mr Alavi where it is said in respect of the rights of Punch and Badii that “the licensor has given notice of termination due to expire in August 2003” and in respect of Mr Alavi that “the licensor has given notice of termination due to expire in February 2004”. In my judgment those words amount to a representation that the drafter of the agreement was representing not only that those notices to terminate had been given but also that the notices were expected to succeed in their intention to terminate the rights on those dates. It follows that I accept Mr Buscaini’s description of the 22^nd July 2002 meeting at paragraphs 53 and 54 of his first witness statement which is consistent with these findings.

I have already found that these representations were false in that the Alavi Licence was not terminable at February 2004 but could continue for an indefinite period and his rights under Clause 5A1 were not within the control of Leofelis to determine but would only come to an end when Lonsdale Sports sold all its interest in the Lonsdale marks. These representations were also false in relation to the rights of Punch and Badii, with whom Mr Alavi had a trading connection, in that, by reason of his continuing rights under Clause 5 A1 of the Lord John SPA, Mr Alavi would have been in a position to supply Badii and Punch with Products, thereby, in effect, sublicensing them to market those goods anywhere in the Territory so long as his rights under Clause 5A1 remained available to him. It was not suggested that the Defendants were unaware of the provisions of the Alavi Licence or Clause 5A1.

It was submitted by the Defendants that liability for these representations was excluded by the effect of an “entire agreement” clause at Clause 13.3.2 of the November 2002 Agreement. That Clause provides as follows:-

“13.3.2

Each party acknowledges and agrees that in entering into this Agreement and such licence it does not rely on, and shall have no remedy in respect of, any statement, representation, warranty or understanding (whether negligently or innocently made) of any person (whether party to this Agreement or not) other than as expressly set out in this Agreement and such licence as a warranty or representation. [sic] The only remedy available to it for breach of such warranties or representations shall be for breach of contract under the terms of this Agreement. Nothing in this clause shall, however, operate to limit or exclude any liability for fraud or fraudulent misrepresentation.”

I was referred to the judgment of Lightman J in Inntrepeneur v East Crown [2000] 2 Lloyds 611 at 614 where the judge sets out the purpose and effect of such clauses. It is submitted, therefore, that the only remedy available to Leofelis in respect of these representations is one for breach of contract under the terms of the November 2002 Agreement which does not mention these representations specifically.

It seems to me that this argument substantially fails on the facts given the representations that I find contained in Part 5 of Schedule 1 to the Agreement and the express representation contained in Clause 2.2.1 that TMLC and Lonsdale Sports “are not aware of any other licences or rights having been granted in respect of any of the trade marks.” It follows that Leofelis’ claim for damages for misrepresentation is largely not covered by Clause 13.3.2 because the relevant misrepresentations are made in the November 2002 Agreement itself.

Be that as it may I accept Mr McLean’s submission based on section 3 of the Misrepresentation Act 1967 that Clause 13.3.2 of the November 2002 Agreement cannot apply because the Defendants have not discharged the requirement placed on them by Section 3 to prove that that Clause was a fair and reasonable one to be included in that contract. Section 3 of the 1967 Act provides:-

“3:- If a contract contains a term which would exclude or restrict-(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or (b) any remedy available to another party to the contract by reason of such a misrepresentation, that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.”

Section 11.1 of the 1977 Act prescribes “that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.” In the judgment of Lord Justice Chadwick in Watford Electronics v Sanderson [2001] BLR 143 at 155 he said this:-

“It is true that an acknowledgement of non-reliance does not purport to prevent a party from proving that a representation was made, nor that it was false. What the acknowledgement seeks to do is to prevent the person to whom the representation was made from asserting that he had relied upon it. If it is to have that effect it will be necessary …for the party who seeks to set up the acknowledgment as an evidential estoppel to plead and prove that the three requirements identified by this court in Lowe v Lombank Ltd [1960] 1 WLR 196 are satisfied. That may present insuperable difficulties; not least because it may be impossible for a party who has made representations which he intended should be relied upon to satisfy the court that he entered into the contract in the belief that a statement by the other party that he had not relied upon those representations was true.”

As transposed for the facts of this case the requirements in Lowe v Lombank Ltd are:-

Section 2(1) of the 1967 Act provides as follows:-

“Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the representation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true ”

It is clear that if Mr Moher’s representations and the representations made in the November 2002 Agreement had been made fraudulently Lonsdale Sports and TMLC would have been liable in damages to Leofelis. It follows from section 2(1) that unless they can prove that they had reasonable grounds to believe the representations and that they did so believe them at all material times prior to the 21^st November 2002, they are liable under that section.

In Howard Marine v Ogden and Sons [1978] 1 QB 574 at 596 Lord Justice Bridge said:-

“If the representee proves a misrepresentation which, if fraudulent, would have sounded in damages, the onus passes immediately to the representor to prove that he had reasonable grounds to believe the facts represented. In other words the liability of the representor does not depend upon his being under a duty of care the extent of which may vary according to the circumstances in which the representation was made. In the course of negotiations leading to a contract the statute imposes an absolute obligation not to state facts that the representor

cannot prove he had reasonable grounds to believe.”

No attempts have been made by either Lonsdale Sports or TMLC to show that they genuinely believed in the truth of the representations I have found that they made. In the result therefore I conclude that Leofelis has established that Lonsdale Sports and TMLC are liable to it in damages for misrepresentation in the alternative to their liability for damages for breach of contract.

The proceedings before me were limited to deal with issues of liability only. Assessments of damage were postponed. It is necessary, however, that I set the parameters within which any assessments of damage are conducted.

As set out at paragraph 34 above on the 17^th June 2003 a meeting took place at the headquarters of the Sports World companies at Dunstable attended on behalf of the parties to these proceedings, and of Merc/Alavi, Badii and Punch. From that meeting there emerged three agreements all dated the 17^th June 2003. The agreements described at sub-paragraphs (i) and (ii) of paragraph 35 are relevant to the issue of damages.

It is Leofelis’s case that it was compelled to agree the terms upon which Badii and Punch were to surrender their rights to market Product in the Territory by the knowledge that, if it did not meet their terms, Mr Alavi, their trading associate, could continue to supply them as distributors notwithstanding that TMLC might have terminated their sub-licences. Any settlement with them had to form part of a package which included the release by Mr Alavi of his rights. It is the Defendants’ case that the settlement arrived at in June 2003 was one which would have had to have been made on the basis that the rights of Mr Alavi, Badii and Punch were terminable as indicated in Part 5 of Schedule 1 to the November 2002 Agreement. They were jointly in a position to inflict great damage on the brand by flooding the market with Lonsdale branded goods during the unexpired notice periods. Leofelis and Mr Buscaini were unaware of the extent of Mr Alavi’s rights at any time before the meeting at Dunstable on the 17^th June 2003. It follows, it is submitted, that the loss occasioned to Leofelis by having to buy out Badii and Punch by entering into the agreements of the 17^th June is not referable to any breach of the Defendants of the November 2002 Agreement or any misrepresentations by them.

It was Mr Buscaini’s evidence that he first realised that Mr Alavi had continuing rights to use the Lonsdale trade marks as a result of a telephone conversation with Mr Moher in early February 2003. At paragraph 80 of his first witness statement he said that he was then told that Mr Alavi had retained rights to market Lonsdale branded goods “effectively indefinitely on a worldwide basis.” This was not technically correct in respect of Mr Alavi’s Clause 5A1 rights which were limited in the manner which I have described but were capable of extending for an indefinite period after the expiry of any notice to terminate them in February 2004 over the length of which Leofelis had no control. Mr Moher admitted the conversation but denied that he said anything about Mr Alavi’s rights being of indefinite duration.

Mr Buscaini then describes a telephone conversation with Mr Alavi when he asked for confirmation from him of the extent of those rights. In his witness statement Mr Alavi confirms this conversation and that during it he gave confirmation that his rights were incapable of being terminated by notice. Both he and Mr Buscaini go on to describe a meeting in Milan attended by Mr Badii, Mr Schotsman of Punch, Mr Buscaini and Mr Alavi in the course of which the extent of Mr Alavi’s rights were discussed and during which Mr Alavi showed Mr Buscaini some of the relevant documentation.

There then followed, according to Mr Buscaini and Mr Alavi, telephone conversations with Mr Moher in the course of which terms for dealing with the continuing rights of Mr Alavi, Badii and Punch were agreed. Those discussions led to the meeting of the 17^th June 2003 at the Dunstable offices at which the three agreements were entered into which I have set out at paragraph 34 above. Mr Alavi gives a detailed description of what took place at this meeting between paragraphs 56 and 59 of his witness statement.

In his closing submissions Mr Gruder attacked Mr Buscaini’s account of these events on the ground of their “improbability”. He drew attention to Mr Buscaini’s acceptance that, notwithstanding the “shock” of Mr Moher’s disclosures in the course of their early February 2003 telephone conversation, he never made any complaint either orally or in writing to anyone on the Defendants’ side about their apparent failure to disclose to him the extent of Mr Alavi’s rights before he entered into the November 2002 Agreement. Mr Buscaini accepted in the course of cross-examination that he did not demand that the Defendants show him the documents on which Mr Alavi’s rights were based nor did he seek to obtain any legal advice as to their effect. Mr Gruder drew my attention to various documents which, I accept, indicate that at an early stage Leofelis and the Defendants contemplated that it would be necessary to do deals with Badii and Punch in order to avoid damage to the Lonsdale brand which they might have been able to inflict in what appeared to be the final months of their licences.

Notwithstanding these submissions, however, I am not prepared to reject Mr Buscaini’s evidence that before entering into the 17^th June 2003 agreement he knew of the threat posed to Leofelis’ exclusive licence by the possible continuation of Mr Alavi’s rights after February 2004 for a substantial period, and that this affected the terms he was prepared to offer. His account of how he acquired knowledge of those rights, and when, is consistent with that given by Mr Alavi. I can see no reason why it might serve Mr Alavi’s interests to support Mr Buscaini’s account. I find Mr Buscaini’s explanation for his inaction, that he did not wish to challenge the Sports World companies so soon after the making of the November 2002 Agreement, having regard to the disparity of size and resources available to them when compared with Leofelis. This involves my rejecting Mr Moher’s account of his telephone conversation with Mr Buscaini in early February 2003 and acceptance of Mr Buscaini’s account. I do so. Mr Buscaini’s evidence on this point is consistent with that of Mr Alavi’s. In his closing submissions Mr Gruder urged me to approach Mr Buscaini’s evidence with caution pointing out occasions when he was compelled to accept that what he had said in the past was inaccurate or untrue. I accept that his evidence was not without blemish but there are occasions, of which some are recounted in this judgment, where he gave evidence which was demonstrably against his interest when there was no obvious reason why he was compelled to do so.

In addition to the agreements of the 17^th June, on the 19^th June 2003 an agreement was made described as a “supplemental” agreement between Lord John, Brands Inc Ltd [BHL], Sports Soccer Ltd [SWIL] and Mr Alavi. By that agreement the provisions of the Lord John SPA were substantially amended so as to remove Clauses 5.2, 5.3 and 5.4 containing the provisions as to the consideration payable in respect of the assignment by Lord John of its Lonsdale marks to Lonsdale Sports and substituting two new sub-clauses 5.2 and 5.3 of which the material sub-clauses for the present purposes are 5.2, 5.2.1 and 5.2.2 as follows:-

“5.2

The consideration for (i) the Marks [the Lonsdale trade marks being transferred by Lord John] (ii) the termination of the Merc rights to acquire branded goods in Clause 5A of the original agreement [the Lord John SPA and see paragraph 20 above] and (iii) the termination of the Merc Distribution Agreement (as defined in Clause 17 below) shall be as follows:

5.2.1

Payment in an amount of £2M due to Merc in respect of the items referred to in sub-clauses (ii) and (iii) above on the Business Day next following the satisfaction of the Condition Precedent; and

5.2.2

Payment in an amount of £400,000 to the Vendor [Lord John] on the Business Day next following the satisfaction of the Condition Precedent and each of the succeeding following seven anniversaries thereof making a total further maximum amount of £5,200,000 which when aggregated with the amount of £300,000 paid on Completion results in an aggregate maximum amount of £5,500,000.”

It will be seen, therefore, that Brands Inc as purchaser was binding itself to pay immediately the sum of £2M to procure the release by Mr Alavi of his rights under Clause 5A of the Lord John SPA and the Alavi Licence.

This is underlined by a provision at paragraph 3.1 under the sub-heading B as follows:-

“Clause “5A Merc” shall be deleted in its entirety and shall be replaced by the following. For the avoidance of doubt LJ [Lord John] and Merc hereby unconditionally and irrevocably confirm and undertake that neither they (nor any of their Associates) have or shall have any right or entitlement to enter into any agreement licence or arrangement to acquire any product or merchandise which is sold under either of the Marks.”

The agreement then inserts a new paragraph 17 as follows:-

“17

Termination of Merc Distribution Agreement, in return for a payment of £2M paid by the purchaser to Merc, as referred to in clause 5.2.1 above the non-exclusive worldwide licence with Merc set out in Part 4 Distribution Agreements (Merc Distribution Agreement) shall be terminated and Merc shall provide to the Purchaser a letter in the form of Schedule 3 to this Supplemental Agreement forthwith.”

The draft letter appearing at Schedule 3 confirms that the “Merc Distribution Agreement” referred to in the new paragraph 5.2 is the agreement of the 22^nd February 2001 creating the Alavi Licence described at paragraph 11 above.

It was Mr Moher’s evidence under cross-examination that the express appropriation of £2M to the release of Mr Alavi’s rights under clause 5A1 and the Alavi licence was in some way a mistake or a convenient way to make drafting the agreement easier and that the intention of the parties to that agreement was always that the £2M was to be paid with the remainder of the £5.5M to release the obligations to pay the original consideration for the transfer by Lord John of its Lonsdale trade marks provided for in the Lord John SPA in its original clauses 5.2 to 5.4. I reject that evidence. It would have been much simpler for the drafter of the 19^th June 2003 agreement to make the totality of the payments provided for in the new clauses 5.2 to 5.2.2 payable in substitution for amounts becoming due under the original clauses 5.2 to 5.4. The drafter has gone out of his way to apportion the £2M to the release of the Alavi licence and Mr Alavi’s rights under the Lord John SPA.

I can see no reason why the Sports World companies should have been prepared to make such a payment unless they accepted that Mr Alavi’s rights amounted to a serious invasion of Leofelis’ exclusive licence within the Territory greater than that which Mr Alavi could inflict during the eight months between the date of the supplemental agreement and the expiry of their notice to terminate Mr Alavi’s Licence in February 2004. Why should they pay £2M to release rights which the parties to the November 2002 Agreement expressly had in contemplation when they entered into it? The payment seems to me to be telling evidence against the Defendants’ proposition that Leeside and Mr Buscaini were prepared to pay Badii €3.8M, and to give Punch an extended sub-licence, to release their rights, at a time when they were unaware that the effect of Clause 5A1 and the Alavi Licence could extend beyond the expiry of the notices to terminate the Alavi, Punch and Badii licences set out in Schedule 1 Part 5 of the November 2002 Agreement. Whereas it may be submitted that they had not appreciated the potential longevity of the Alavi licence they must have appreciated that Mr Alavi’s rights under clause 5A1 were capable of extending long beyond the period of the notice to terminate the Alavi licence in February 2004.

It seems to me that Leofelis is entitled to recover damages for breach of contract under the following heads:-

As Mr Moher admitted, the settlements made by Leofelis with Punch and Badii on the 17^th June 2003 and the “supplemental” agreement of the 19^th June were linked and were designed to clear the Lonsdale mark so as to enable Leofelis to have truly an exclusive sub-licence within the Territory. The settlements with Badii and Punch effected by Leofelis mitigated the loss which Leofelis suffered as a result of the breach of contract of Lonsdale Sports and TMLC for which Leofelis could have looked to them for compensation. It follows that Leofelis is entitled to recover as damage the cost and loss to which it has been put in reaching its agreements with Badii and Punch.

I turn to consider Leofelis’ entitlement for damages for misrepresentation. It is well established that damages recoverable under section 2(1) of the 1967 Act fall to be calculated on the same basis as if they were damages for fraudulent misrepresentation. In the present case the question of damage is complicated by the fact that Leofelis wishes to continue to exploit the sub-licence granted to it under the November 2002 Agreement. That sub-licence is wider in extent and different in duration from the licence granted to Leofelis by LSE on the 11^th June 2001. It does not seem to me, therefore, that Leofelis can recover any part of the royalty payments that have become due under the November 2002 Agreement and which they have paid, as contended for by Mr MacLean. It seems to me, however, that under this head it is clear that they can recover the same damage as those recoverable for breach of contract by Leofelis which I have described above.

It is common ground that since about April 2004 and still continuing, Products have been sold in a number of retail shops in Belgium operated by Sports World Belgium SA (“SWB”). This company was, at the material time, known as Disport SA. The directors of SWB are Mr Ashley, Mr John Ashley and Mr Dave Forsey. SWB is the wholly owned subsidiary of CDS Holdings SA which has an issued capital of 2,500 shares of which the registered holders of all but 1, held by Mr Mellors, was Mr Ashley. There are 7 directors of CDS Holdings SA two of which are Mr Forsey and Mr Mellors.

It is also now common ground that SWB obtained those goods for sale from SWIL the third Defendant. SWIL is a private company limited by shares all of which are held by Mr Ashley. He is a director together with 5 other directors including Mr Forsey and Mr Mellors. It was Mr Moher’s evidence that the day to day management of SWB and SWIL was not the same and that SWB operated as an independent company.

It is Leofelis’ claim that the supply of Product by SWIL for sale in shops in Belgium, and therefore within the Territory, controlled by SWB with the consent of LSL and TMLC, constituted a derogation by Lonsdale Sports and TMLC from the exclusive licence granted to Leofelis and amounts to an unlawful interference by SWIL with Leofelis’ exclusive rights, in respect of which Leofelis is entitled to relief.

It is the Defendants’ case that the Products sold in SWB’s Belgian outlets were first sold by SWIL to SWB in the United Kingdom, and therefore not in the Territory, and then exported by SWB to Belgium for sale in SWB’s outlets. It follows from the European law principle of “exhaustion of trademark rights”, that any rights that Leofelis might have had, in respect of the Products so sold, were exhausted as a result of the goods being put on the market in the United Kingdom in the course of their purchase by SWB from SWIL. In the result, therefore, it is submitted, no breach of Leofelis’ exclusive licence resulted from the sales by SWB in the Territory. A number of invoices appearing to record sales of Lonsdale branded goods by SWIL to SWB were produced in evidence appearing to record sales between March 2005 and October 2006. There are no indications from these documents as to where the place of sale of each of the transactions recorded took place.

In deciding this issue it is therefore important for the court to know exactly how and in what circumstances the relevant sales of Product were made by SWIL to SWB during that period. Save for information capable of being gleaned from documents, the only source of evidence, as to what occurred, are officers and employees of Sports World companies and, in particular, SWIL and SWB. The only such witness to produce a witness statement covering these facts was Mr Mellors who was a director and company secretary of Lonsdale Sports, finance director of SWIL, and a director of SWB’s parent company. He was not, however, called. The only evidence in chief about the circumstances of the Belgian sales emanating from the Defendants, by a witness who was called and who was cross-examined, was given by Mr Moher who, as his evidence makes plain had no direct knowledge of the relevant facts. This evidence is contained between paragraphs 145 and 151 of his first witness statement dated the 11^th October 2006 and in paragraph 68 of his second witness statement dated the 10^th November 2006. So far as material those paragraphs read as follows:-

“146

I must point out that Cavden never supplied direct to any retail stores in Belgium. All we did was to supply Sports World in the UK, which is a separate legal entity to that of BHL (although they are in common ownership). I did not know that the goods would be sold on in to the Belgian market if that is what happened. This was first drawn to my attention by an email dated 5 April 2004 from Mr Guert Schotsman at Punch, regarding garments with Sports Soccer hangers. I refer to Exhibit 72 which attaches a copy of his email and response dated 15 April 2004 (copied to Mr Buscaini and Ms Scacciavillani) advising Mr Schotsman that as far as I was concerned the goods were on the Belgian market legally as I had sold them to a separate entity in the UK, who had then sold them on to Disport International SA (now SA Sports World Belgium NV), in Belgium. I am not aware of sales from Lillywhites or other Sports World stores in Brussels. I understand that the retailer was able to request stock from Sports World at their warehouse and so it would not have been invoiced in their name, or allocated to them until it was requested. The email also contains Mr Schotsman's response alerting me to the fact that the real problem was that the goods in Disport were selling at about half the price to the price of his products, which was disrupting the market. He also observed that “it is the same as what happened in our case when goods turned up in Italy, also legally”, and that it was perceived that the ultimate owner had more control to be able to do something about it.

147

Punch remained concerned, as did their Belgian distributor, Mr Ramon Van Gennip, a Director of Originals Belgium whom it affected most directly. I refer to Exhibit 73 which attaches a copy of an email dated 13 May 2004 from Mr Van Gennip to Mr. Buscaini, which Punch forwarded to me, Mr Buscaini and Mr Ghielmini. Mr Buscaini was therefore aware of the problem from at least this time. Mr Van Gennip also refers to the problems of “very bad deliveries from Leeside”. The issue was raised again in June 2004 with Mr Van Gennip finding LONSDALE polos being retailed in Belgium that had a label on the inside saying “Produtto e Distribuito da Leeside s.r.l.”, apparently bought from Belgian branches of Lillywhites according to Mr Schotsman. Mr Buscaini commented that “I really can't understand how my old stuff could be possible to reach Lillywhites in Bruxelles;”

148

I reassured Mr Van Gennip in an e-mail dated 22 July-2004 (copied to. Mr Buscaini and Ms Scacciavillani), that I believed the goods with which he was concerned were not counterfeit and were legally on the Belgian market. However, I said that I would discuss the matter with Sports World, the owner of Disport in Belgium. I advised that Sports World would increase the retail selling price points to ensure any disruption they were causing to the market was limited. This had been agreed at a meeting between Mr Buscaini and Mr Ashley on or around 6 July 2004. 1 refer to Exhibit 74, which attaches a string of emails between me, Mr Van Gennip and Mr Buscaini, copied to various other interested parties, covering the period 16 June 2004 to 22 July 2004.

149

My understanding from this was that the matter had been resolved and I was led to believe by Mr Buscaini that he did not have a problem with it. In other words, there was an understanding that whilst the situation was not ideal, in the context of our overall relationship and given the help SWIL had given in guaranteeing the Badii Settlement, the parties would live with it. I did not, therefore, implement the same tools to prevent this reoccurring as I had done in relation to Enkay in Italy as mentioned above, as I thought this was unnecessary, considering this understanding.

150

I was, therefore, extremely surprised to receive a letter out of the blue from Mr Buscaini dated 7 January 2005 complaining about LONSDALE LONDON goods being sold in “Disport, Sports World and Lilly White Shops” in Belgium. I refer to Exhibit 75, which attaches this letter. It made no reference to the previous arrangement, other than the enclosed e-mails. We responded stating, rightly in my view that the goods were legally in Belgium under the exhaustion of rights principle…

151

Mr Buscaini had been involved in the discussions as regards these sales from the very beginning in April 2004, as mentioned above, yet expressed no real concern until 7 January 2005 when preparations had no doubt started to prepare for this court case. The reason Mr Buscaini did nothing was presumably because we had an understanding as concerns this particular territory.

68.

Mr Buscaini, at no stage, requested that any sales by SWIL in Belgium cease (either under the informal licence for SWIL to manufacture LONSDALE goods granted verbally by me from Cavden to Mike Ashley at SWIL, or under the sale of goods contract between Cavden and SWL). I should point out that it is most unlikely that any goods sold by Cavden to SWL under the sale of goods contract would have been sold to Sports World Belgium as the stock concerned was end of line stock sold to SWL simply for the purposes of clearing it.”

It will be seen that Mr Moher gives hearsay evidence of an “understanding” arrived at as a result of a discussion between Mr Buscaini and Mr Ashley which, it is said, amounted to an agreement that Mr Buscaini would not object to the Belgian sales. In the final sentence of paragraph 68 of his second witness statement Mr Moher says that Mr Buscaini “himself states” that there was such an agreement. Mr Moher does not give evidence as to the circumstances in which it is said Mr Buscaini said this and, in particular, that he overheard him do so. Nowhere in the evidence, documentary or oral, is Mr Buscaini shown to have admitted to the existence of such an agreement. Mr Ashley could have given evidence as to what occurred in the course of the alleged discussion between him and Mr Buscaini. He was not called to give evidence.

Mr Moher’s understanding of how the supply of Lonsdale branded goods by SWIL to SWB worked emerges most clearly from his answers to certain questions which I put in the course of his cross-examination as follows:-

“MR JUSTICE EVANS-LOMBE: Can you just help me. Are you saying that the sales that Mr Ashley was effectively making in Belgium were direct sales, or were they sales that he made in the UK, and the product was then got out to Belgium somehow?

A. The latter. What would happen, I believe, was that the buying office in Dunstable would order goods, and I cannot tell you for definite, but my understanding, is that they would then -- the buyers in Disport in Belgium have access to Sports World system, and could call off from Sports World stock which would then be delivered and invoiced to them. And that would be the same for all brands, not specifically this.

Q: But would that then be a sale in Belgium?

A. Yes, the goods were invoiced to Belgium, correct.

Q: Yes. So that would be a direct infringement, would it not, of Leofelis’ sub licence, would it?

A. If the goods had been -- it depends on how the goods were bought by Sports World International. Disport is a separate entity legally, so legally, it may not have been --

Q: This would be a sale by SWIL--

A. To Disport.

Q: To Disport in Belgium?

A. That is correct.

Q: If Disport had a means of calling the stock directly from SWIL.

A. But it would have to be invoiced to them and paid for by them, and they are a separate legal entity, from what I understand.

Q: What difference does that make?

A. That once -- it depends on how the goods arrived in Sports World's warehouse, whether there is an exhaustion of rights, or not...

Q: Anyway, you accept that it would be a breach of Leofelis’ sublicence.

A. I think it may well have been, yes. I think it may well have been, yes. I am sorry, but I cannot tell you from a legal point of view exactly whether that is the case, but --

Q: Anyway, your opinion is that --

A.

It may well have been, yes.”

As to documentary evidence Mr MacLean, in his submissions, drew my attention to correspondence in May and June 2004 between Mr Moher and a Mr Van Gennip by e-mail. Mr Van Gennip was a distributor of Lonsdale branded goods in Northern Europe and was complaining at the competition he was suffering from such goods imported into Belgium by SWB and then either sold in Belgium or exported for sale in other neighbouring countries at highly competitive prices. In reply to an e-mail from Mr Van Gennip suggesting such goods were to be treated as counterfeit, Mr Moher replied by an e-mail of the 24^th May 2004 as follows:-

“The goods in Disport are not counterfeit and are authorised under the terms of licences currently in place. Cavden do not earn any money on these goods. The money is earnt by the brand owner which is not Cavden.”

The “brand owner” here referred to can only have been Lonsdale Sports or Mr Ashley. On the 2^nd June Mr Moher again sent an e-mail to Mr Van Gennip the first paragraph of which reads as follows:-

“I will take this issue [the competition complained of] up with Sports World who own Disport [SWB - we now know that Sports World is in a different company group to SWB see paragraph 167 above] of course, I can see your issue, but in the end all goods are being supplied directly by the brand owners (not Cavden) to Sports World. Also none of the goods are designated or manufactured specifically for Disport, they are just called off by Disport from Sports World stock as with all other brands (e.g. Nike/Adidas) which are also heavily discounted….”

In a further e-mail to Mr Van Gennip dated the 15^th July 2004 Mr Moher said:-

“I am aware of this discussion but Mike Ashley did not agree to remove Lonsdale product from his Belgium stores. He has simply agreed to review and increase prices in order to try to avoid the disruption to the marketplace that you have described.”

Paragraph 39 of the amended defence and counterclaim as it stood at the commencement of the hearing read as follows:-

“39

It is admitted that Sports World has sold clothing in Belgium bearing the Lonsdale mark. Such goods are goods put into circulation in the United Kingdom and Ireland by Cavden pursuant to its licence from TMLC and Lonsdale Sports. Accordingly they are goods put on the market in the EEA with the trademark owners consent.”

The statement of truth for this pleading was signed by Mr Mellors.

It is now accepted that the clothing sold in Belgium was not “put into circulation in the United Kingdom and Ireland by Cavden”. Application was made in the course of the hearing to amend paragraph 39 to reflect the Defendants’ current case as to the supply of Product by SWIL to SWB. That such an application was to be made was first mentioned by the Defendants in an answer by the Defendants in a Part 18 response dated the 15^th June 2006.

Mr MacLean drew my attention to the fact that the Defendants’ case as to how the sales of Lonsdale branded goods in Belgium had been and were being brought about, has changed on a number of occasions. In the Defendants’ then solicitors’ letter in answer to the Claimants solicitors’ letter before action dated the 7^th June 2005, the Defendants’ case as to the Belgian sales is put as follows:-

“When your client wrote to TMLC on 7 January 2005 TMLC made enquiries and confirmed that all LONSDALE LONDON sales by Cavden, the UK licensee, to third parties, were and are to UK companies and invoiced accordingly. Your client was advised by TMLC that once Cavden has sold goods to a third party within its licensed territory there is no restriction on those goods being resold elsewhere in Europe. Despite the declaration in your letter to the contrary these sales were to and are to a third party acquirer. Sports World is a customer of Cavden and sales by Cavden in the UK to Sports World are within the terms of Cavden’s licence agreement. Once sold to Sports World or any other customer in the UK the LONSDALE goods are in free circulation.”

In summary therefore it was being suggested that the goods sold in SWB’s shops in Belgium were previously sold by Cavden to SWIL in the United Kingdom and were thus in free circulation in the market, all these trade mark rights having been exhausted. Under cross-examination Mr Moher accepted that this letter gave a highly misleading impression. In his second witness statement Mr Moher said that it “is most unlikely” that any goods sold by Cavden to SWIL would have been sold in SWB’s shops. Under further cross-examination Mr Moher said that the volumes of Lonsdale branded goods sold by Cavden to SWIL were “too small for them to end up through the Sports World distribution or anywhere other than a few shops”. As I have already stated, it is now accepted that Cavden had nothing to do with the supply of Lonsdale branded goods ultimately sold by SWB in Belgium.

The second way in which the Defendants put their case is contained in paragraph 39 of the defence served on the 16^th December 2005 and which I have set above. It is now accepted, as Mr Moher accepted in answers to the questions put by me which I have also set out above, that the sale of Lonsdale branded goods by SWIL to SWB in Belgium during the currency of the November 2002 Agreement would have constituted a breach of the terms of that agreement and a wrongful interference in Leofelis’ exclusive licence thereby granted. I have already dealt with the suggestion that Cavden was the ultimate supplier of the goods to SWIL. Mr Mellors who had vouched for the truth of the allegations contained in paragraph 39 was not available to be cross-examined as to how it came about that a mistake had been made in the drafting of the first sentence and that that mistake had passed unnoticed for such a substantial period.

The third way in which the Defendants’ case has been put is contained in their response dated the 15^th June 2006 to a Part 18 question asking when SWIL first sold Lonsdale branded clothing in Belgium. That response was as follows:-

“[SWIL] has not sold clothing in Belgium bearing the Lonsdale mark. Any retail sales made in Belgium by any of the Sports World group of companies would have been undertaken by the wholly owned subsidiary of Sports World registered under the name S.A. Sports World Belgium N.V. (previously registered as Disport International S.A. prior to 16 September 2004). Leave will be sought to amend paragraph 39 of the Defence and Counterclaim accordingly).”

The admission in this answer that SWB was a wholly owned subsidiary of SWIL was very damaging to the Defendants’ case on exhaustion of trade mark rights, as I will later describe, and was sought to be put right in the Defendants’ answer of the 27^th October 2006 to a further Part 18 request. The truth of the answer of the 15^th June 2006 was vouched for by a Mr Piasentin the Defendants’ corporate counsel, who, although present throughout the trial was not called to explain his mistake.

The fourth way in which the Defendants’ case is put is contained in the Part 18 response of the 27^th October 2006. In this response the Defendants allege for the first time that the goods in question were manufactured by SWIL pursuant to an oral, royalty free sublicence that Mr Moher on behalf of Cavden had allegedly granted to a “representative” of SWIL in around November 2002. In cross-examination Mr Moher identified this “representative” as Mr Ashley. The case made out at this stage was that the goods allegedly sold by SWB in Belgium had previously been sold to SWB in the UK by SWIL pursuant to an oral agreement made between Mr Forsey of SWIL and Mr Gysel of SWB. The sale price is alleged to have been cost plus 10% to cover the costs of sorting, loading and delivery. No witness has been called or document produced in evidence to support this version of the events.

The fifth way in which the defendant’s case is put is in the draft amendment to paragraph 39 put forward by the Defendants. It reads as follows:-

“It is admitted that S.A. Sports World Belgium N.V. (previously known prior to 16 September 2004 as Disport International S.A. and herein referred to as “Sports World Belgium”)has sold clothing in Belgium bearing the LONSDALE mark. Sports World Belgium purchases the goods from Sports World in the United Kingdom. Sports World Belgium is in a different group of companies and under separate management from Sports World. Such goods are goods put on the market in the United Kingdom by Sports World and with the consent of Cavden, such consent given pursuant to Cavden’s licence from TMLC dated 22 November 2002. Accordingly, they are goods first marketed in the United Kingdom and put on the market in the EEA with the trade mark owner’s consent.”

This amendment, for the first time, withdraws the admission contained in the Part 18 answer of the 15^th June 2006, that SWB was a wholly owned subsidiary of SWIL. As I will later explain, this admission was highly damaging to the Defendants’ case as to the exhaustion of Leofelis’ trade mark rights in respect of Lonsdale branded goods sold by SWB in the territory. However, again, the account of the facts contained in this proposed amended paragraph 39 was unsupported by any oral or documentary evidence.

Finally a further variation of the Defendants’ account of the facts allegedly leading up to the Belgian sales of Product is contained in the final paragraph of the Defendants’ solicitors’ letter of the 10^th November 2006 where they say this:-

“There is an additional aspect of this part of the case which we want to draw your attention to. We are instructed that sometimes the goods ordered by Sports World Belgium are already in the warehouse and are available for despatch. However, sometimes (from 2005/2006) Sports World International, where commercially expedient, has ordered some or all of the goods from Texline, a sourcing agent who uses an overseas manufacturer. On occasion, particularly if the size of the order was large, some of these goods have been shipped direct from Texline to Sports World Belgium. Texline has then invoiced Sports World Belgium directly in respect of the goods that are shipped straight to them. Our clients do not have any documents in their power, custody or control on this particular source of product to Sports World Belgium. Furthermore, our clients are advised by Sports World Belgium that it is not possible to work out which stock has come into Sports World Belgium via Texline and which has come in from Sports World International’s warehouse.”

It seems to me that this account, certainly in respect of large orders which were shipped directly by Texline to SWB, and in default of any explanatory evidence of which there was none, describes a sale by SWIL to SWB of Lonsdale branded goods in Belgium notwithstanding that Texline may have invoiced SWB in respect of the goods shipped to them. As described, SWIL would make an order for a substantial quantity of goods some of which were required by SWB but which they, SWIL, did not have in stock in their warehouse. In those circumstances they would direct Texline to deliver the goods, ordered from them by SWB, directly to SWB in Belgium. In respect of those goods Texline would invoice SWB directly. It is by no means clear to me, as submitted by counsel for the Defendants in their written closing submissions, that SWIL was not a party to the contract of purchase and sale from Texline. It appears that Texline was an established supplier of outsourced goods to SWIL. All this is substantially speculation. The final paragraph of the Defendants’ solicitors’ letter quoted above is not evidence. No evidence was called from any witness who had direct knowledge of the contractual basis upon which Lonsdale branded goods were ordered from Texline and delivered to SWB. The paragraph states that the Defendants have no documents in their power recording or even relating to the apparently substantial transactions there described. I find that statement very hard to accept.

It seems to me that the clear admission in paragraph 39 of the amended defence that SWIL sold Lonsdale branded goods to SWB in Belgium which, if correct, would constitute SWIL in breach of Leofelis’ exclusive licence within the Territory, places upon the Defendants the burden of proving facts which support their current case that the circumstances of the Belgian sales were such that the trademark rights granted to Leofelis in respect of the goods sold, had been exhausted, because SWB had purchased them from SWIL in the United Kingdom before they were exported to Belgium. In my judgment the Defendants have failed to discharge that burden. It was open to them to do so by calling evidence from those responsible for the relevant transactions in SWIL and SWB, in particular, Mr Ashley and Mr Mellors. As I have said, it was apparent that Mr Moher had little if any direct evidence to give on this issue. This is well illustrated by the Defendants’ counsel’s written submission at paragraph 137 of their closing submissions that Mr Moher “confirmed that the goods were invoiced and delivered to Sports World Belgium.” What he actually said in answer to the question directed to who invoiced the goods was “I understood Sports World had invoiced them to Disport.” It seems to me that the absence of any witness able to give direct evidence as to the way in which Lonsdale branded goods were supplied by SWIL to SWB for the purpose of marketing those goods in Belgium entitles me to draw the inference that there was no relevant officer or employee of either company able truthfully to give evidence supporting the Defendants’ case, see per Brooke LJ in Wisniewski v Central Manchester Health Authority [1998] Lloyds’ Law reports p 223 at page 240.

In the result I refuse permission to amend paragraph 39 of the amended defence.

But even if the Defendants had called the necessary evidence to substantiate the case pleaded in their amended paragraph 39 it seems to me that their case fails as a matter of law.

Article 7 of the 1st Council Directive 89/104 to Approximate the Laws of Member States Relating To Trade Marks (“the Directive”) provides as follows:-

“Exhaustion of the rights conferred by a trade mark

The trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent.

Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialization of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market.”

The Defendants submit and I accept that it is not possible to avoid the rule of exhaustion by contract or otherwise.

The Territory covered by Leofelis’ exclusive licence did not extend to the whole of Europe but excluded the United Kingdom and Ireland where the licensee was Cavden. I am willing for the purposes of this part of the case to assume, as the Defendants allege, that Cavden had, at all material times, given SWIL a nonexclusive oral sub-licence to manufacture and sell Product in the United Kingdom. I am also prepared to proceed on the basis that, contrary to the finding which I have made, the Defendants have established that SWIL supplied SWB by selling to it its requirement of Product in the United Kingdom which goods were then exported to Belgium by SWB for marketing there.

The Defendants’ case depends on the contention that a sale by SWIL to SWB, a related company, having common directors but, more importantly, both being owned and controlled by Mr Ashley, constituted the putting on the market in the Community of the goods in question for the purposes of subparagraph (i) of the Directive. This contention appears to turn on whether, as a matter of fact, SWIL was, at all material times, in a position “to oppose further commercialisation of the goods” at any time up to their onward sale by SWB to third parties.

The only authority on the point appears to be the decision of the European Court of Justice in Peak Holding AB v Axolin-Elinor AB [2005] Ch 261. Peak Holdings and associated companies imported into Denmark clothing bearing its trade mark Peak Performance. The garments were offered for sale to the public in a shop operated by a sister company of the claimant. The stocks remaining unsold were sold to a third party on condition that they should not be resold in Europe. The defendant obtained some of the unsold stock and offered it for sale at half price in Sweden. Peak Holdings brought proceedings for trade mark infringement and the defendant claimed that those rights had already been exhausted. The Swedish court held that the trade mark rights had been exhausted when the goods were offered for sale in the shop in Denmark. On appeal, the court made a preliminary reference to the ECJ seeking guidance as to when goods are “put on the market” for the purposes of article 7(1). The Opinion of the Advocate General was given by Mrs Advocate General Stix-Hackl. In her Opinion she expresses the view that the proper approach to the application of the Directive was “economic”. Thus the trade mark proprietor puts the relevant goods on the market in the Community when he takes steps to realise the value to him of his trade mark rights in the goods by disposing of those goods for value. At paragraph 41 of her Opinion the Advocate General continues:-

“41

It should be pointed out in that regard that change of ownership does not affect the question whether the trade mark proprietor can obtain an economic benefit from the mark. In other words, the change of ownership of the marked goods must not be taken to account if the necessary economic approach is to be followed….

42

If a change of ownership is relevant, it becomes necessary to treat the transfer of the actual right of disposal of the goods as the determinant. Goods are accordingly put on the market when a third party whose decisions in relation to the sale of the goods cannot be ascribed to the trade mark proprietor, for example because the third party is objectively independent (which does not as a rule apply to transactions between related companies or to transactions within a distribution system) has acquired the actual right of disposal of the goods.

43

…goods bearing a trade mark are not put on the market merely by reason of their importation into the EEA and customs clearance, or by reason of their being offered for sale in shops belonging to the trade mark proprietor or undertakings associated with him. Goods are instead put on the market in the EEA within the meaning of Article 7(i) of Directive 89/104, with the effect that the rights are exhausted, when an independent third party has acquired the right of disposal of the goods bearing the mark.”

The decision of the Court is encapsulated in paragraph 44 of the judgment as follows:-

“The answer to the first question must therefore be that Article 7(1) of the Directive, must be interpreted as meaning that goods bearing a trade mark cannot be regarded as having been put on the market in the EEA where the proprietor of the trade mark has imported then into the EEA with a view to selling them there or where he has offered them for sale to consumers in the EEA, in his own shops or those of an associated company, without actually selling them.”

The judgment of the Court does not deal with the question of whether a transfer of ownership between related companies for value constitutes a putting of the goods transferred on the market notwithstanding that it was submitted to the court that “a transfer between companies within the same group should be regarded as an internal measure within the group which does not bring about an exhaustion of the rights.” See paragraph 29.

The judgment does, however, adopt the “economic” approach of the Advocate General. The following appears at paragraph 39 and onwards of the judgment:-

“39.

In the present case, it is not disputed that, where he sells goods bearing his trade mark to a third party in the EEA, the proprietor puts those goods on the market within the meaning of Article 7(1) of the Directive.

40.

A sale which allows the proprietor to realise the economic value of his trade mark exhausts the exclusive rights conferred by the Directive, more particularly the right to prohibit the acquiring third party from reselling the goods…

42.

Such acts [merely offering the goods for sale] do not transfer to third parties the right to dispose of the goods bearing the trade mark. They do not allow the proprietor to realise the economic value of the trade mark. Even after such acts, the proprietor retains his interest in maintaining complete control over the goods bearing his trade mark, in order in particular to ensure their quality.”

In agreement with the submissions of Mr MacLean it seems to me to follow that for the rights of a trade mark proprietor to have become exhausted within the meaning of the Directive he must have realised the economic value of the mark and put the goods beyond his control by a sale to an objectively independent third party. In the 14^th edition of Kerly on Trade Marks and Trade Names at paragraph 16/095 the authors say:-

“Until the right of disposal is transferred, the trade mark proprietor retains his interest in controlling the quality of the goods. It seems that realising the economic value of a trade mark means a sale to an objectively independent third party who acquires the actual right of disposal of the goods.”

The question therefore becomes one of fact, namely, were the sales by SWIL to SWB sales to an objectively independent third party whose effect was to realise the economic value of the trade mark in the goods in question. In my judgment they were not. The transfers were transfers at cost with an additional 10% on top to cover the costs of packaging etc incurred by SWIL. They were not transfers for a consideration which represented the market value of the goods transferred. It seems clear from the evidence of Mr Moher that, when objection was taken to the “parallel” importation and subsequent sale at competitive prices by SWB of Products, that that objection was first made to Mr Moher and then transmitted by him to Mr Ashley for his decision as to whether the trade should be halted or whether the undermining of the market which resulted from it should be checked by raising the prices at which SWB sold through its outlets in Belgium. It seems clear from this that, not only was Mr Ashley in a position through his control of SWB to halt onward sales of the goods once delivered to SWB, his subordinates actually referred to the decision whether to do so to him. In my judgment, even if SWIL supplied SWB with Products in the manner I have assumed in paragraph 193 above, the relevant Products were not put on the market in the Community for the purpose of Article 7. of the 1^st Council Directive 89/104 so as to exhaust Leofelis trade mark rights.

Finally on this part of the case I turn to the Defendants’ defence of consent or waiver by Leofelis in respect of the Belgian sales of Lonsdale branded goods through SWB’s outlets in Belgium. The Defendants’ case is pleaded at paragraph 43B of the amended defence as follows:-

“Further or alternatively, the Defendants rely on the fact that at all material times, the Claimants were aware of the acts of sale to Sports World Belgium and consented thereto and/or thereby waived any rights to insist upon compliance with the alleged implied terms aforesaid which are denied.”

Leofelis is no longer pressing a claim based on an implied term in the November 2002 Agreement but I am ready to proceed on the basis that the plea of waiver applies to breaches of that contract and procuring and consenting to such breach.

The first question, therefore, is whether there was an agreement made orally between Mr Buscaini and Mr Ashley in which Mr Buscaini agreed that Leofelis would not object to the Belgian sales continuing.

Mr Moher deals with this issue in the passage from his first witness statement which I have set out above at paragraph 170. Mr Buscaini’s account of the relevant events appears from paragraph 121 to 123 of his first witness statement as follows:-

“121

On 16 June 2004, I was informed by Ramon van Gennip, who worked for Punch Gmbh in Belgium, that Mr Ashley was selling LONSDALE goods through his own outlets, Lillywhites, Disport and Sports World, in Belgium. We requested that they stop these sales and they responded by saying that they intended to continue to do so. See pages 444 to 449 of MB1. I met with Mr Ashley in Dunstable on 6 July to discuss this problem.

122

Although we were very unhappy with this development, I was reassured by Mr Ashley that the sales were limited to only a few stores and that he did not want to affect LONSDALE’s positioning on the continent as a prestige brand rather than a discount brand. The correspondence, however, continued as the sales in Belgium also continued.

123

We subsequently found out that a number of the stores were selling these goods and that these large volumes of cheap, low quality goods were significantly damaging our market in Belgium. This would also, of course, have a knock-on effect in other neighbouring countries. I was horrified. We had been told that we would have an exclusive licence and that we would be protected so far as possible from grey imports and yet here was a company from the very same group as the company who had given us our licence selling in a country within our Territory as defined in the November 2002 Agreement. This was particularly damaging where the markets and brand profiles are (or at least were) so different in the UK and continental Europe. Cheap low quality imports will quickly destroy our high quality brand in continental Europe and our turnover in Italy has already reduced massively over the last two years. This goes against everything that was said to me prior to our signing the November 2002 Agreement and what I understood the November 2002 Agreement to mean with regard to exclusivity. This prompted the formal letter from Mr Ghielmini dated 7 January 2005 (a copy of which is attached at page 450 of MB1).”

It is common ground that a meeting took place between Mr Ashley and Mr Buscaini at the Sports World offices in Dunstable on 6^th July 2004 to discuss the problem of the Belgian sales and that this was precipitated by complaints from Mr Schotsman of Punch and Mr Van Gennip his distributor in Belgium. Mr Moher was first alerted to the problem in April 2004 Mr Buscaini was alerted by a letter to him from Mr Van Gennip of the 17^th May 2004. In evidence were a series of e-mails mainly passing between Mr van Gennip and Mr Moher in June and July 2004 but which were copied to Mr Buscaini and Mr Mellors. On one of those dated the 22^nd July Mr Moher writes to Mr Van Gennip saying:-

“My understanding is that Sports World Group will continue to buy and retail both Lonsdale and No Fear and sell through all their retail facias including those in Belgium. The ranges they buy will be distinct from the ranges you will sell. They will increase their retail selling price points to try to ensure minimal disruption to the market and this should make your achieving your 35% margin perfectly feasible. I see no reason in telling you anything other than this, hard as it may be for you as I am sure you would rather deal with the facts than live in hope of dreams that don’t come true. I point out that I wasn’t at the meeting that Massimo referred to and am basing my comments on assumptions from previous conversations with Sports World and the fact that they have indicated to me any further policy changes on this issue.”

These e-mails were put to Mr Buscaini in cross-examination but he steadfastly refused to accept that he told Mr Ashley that he was prepared to tolerate sales on the scale that he describes at paragraph 123 of his witness statement even if SWB raised the prices. In fact the sales through a number of outlets by SWB continued and there was no increase in price.

It seems to me that the burden of proof to establish that there was an oral agreement or understanding which amounted to a waiver of any infringement of Leofelis’ exclusive trade mark by the Belgian sales, rests on the Defendants. In my judgment they have not discharged it. The only direct evidence of what took place at the meeting between Mr Buscaini and Mr Ashley on the 6^th July 2004, adduced by the Defendants, is Mr Moher’s evidence of a conversation with Mr Buscaini on an occasion he does not specify in which he alleges that he understood from Mr Buscaini that there had been an agreement or understanding as the Defendants allege. Leofelis first direct complaint about the Belgian sales is contained in a letter to TMLC for the attention of Mr Moher from Leofelis signed by Mr Ghielmini. Mr Moher responds to that letter by a letter of the 19^th January 2005 which does not contain any reference to the alleged understanding. When this absence was put to Mr Moher in cross-examination his only explanation was that the letter was drafted for him by a lawyer. But more importantly the Defendants failed to call Mr Ashley to contradict Mr Buscaini’s account of the meeting of the 6^th July 2004. In those circumstances it seems to me that I am entitled to infer that Mr Ashley was not in a position to give truthful evidence which would support the Defendants’ case being advanced on this point. I find that there was no such arrangement or understanding as the Defendants allege.

It was further submitted by the Defendants that Leofelis’ failure until the 5^th January 2005 to raise any challenge to the Belgian sales of which, through Mr Buscaini, Leofelis must have been aware by the 13^th May 2004, constituted waiver of any resulting infringement of trade mark. I am unable to accept this submission. When this delay was put to Mr Buscaini his answer was words to the effect that he wished to think very hard before mounting a direct challenge to his licensor. In my view that was a wholly understandable attitude to take given the disparity of size and resources between the Sports World companies on the one hand and Leofelis on the other. This was, still, relatively early in the relationship between the Sports World companies and Leofelis.

In my judgment the supply by SWIL to SWB of Products for sale in SWB’s Belgian outlets constituted an invasion of Leofelis exclusive sub-licence in the Territory conferred by the November 2002 Agreement and I will grant the injunction sought by Leofelis restraining such conduct.. It is clear that this invasion will have caused damage to Leofelis either directly or by a diminution in royalties received from its own sub-licences and I will direct an enquiry as to the extent of such damage.

It is to be assumed that SWIL had, at least, an informal sub-licence from TMLC, worldwide master sub-licensee, to sell Product in Belgium. Such evidence, by clause 10.11 of Lonsdale Sports master sub-licence to TMLC of the 21^st November 2002, required the consent of Lonsdale Sports. It is clear that Mr Ashley, Mr Moher and Mr Mellors, at all material times, were aware of the Belgian sales and Lonsdale Sports or TMLC would also have been so aware, at least as a result of the knowledge of Mr Ashley, Mr Moher and Mr Mellors being imputed to them. It was therefore open to Lonsdale Sports or TMLC or either of them to take steps to stop the Belgian sales. In my judgment it was a plain breach of the November 2002 Agreement for either of Lonsdale Sports or TMLC to compete, or permit competition, in the marketing of Product with their exclusive sub-licence, Leofelis, in the Territory. I will therefore grant the same relief against them as I have granted against SWIL.

The Claimants seek a declaration that Leeside has validly been appointed as Leofelis’ sub-licensee in all countries in the Territory.

It is common ground that by a licence agreement of the 19^th June 2001, referred to in paragraph 15 above, Leofelis, by virtue of its licence from LSE, granted Leeside an exclusive sub-licence to use the Lonsdale trade mark in Italy. The term of the sub-licence ran until the 31^st December 2002 and was automatically renewable thereafter on a yearly basis unless sooner terminated, see Clause 3 of the agreement. The existence of Leeside’s sub-licence was disclosed to the Defendants prior to their entering into the November 2002 Agreement. Schedule 5 of the November 2002 Agreement identifies as an approved sub-licence of Leofelis a “non- exclusive licence dated 01.06.2001 and made between (1) the Licensee and (2) Leeside srl in respect of the trade mark LONSDALE registered in Italy with registration No 553468 for goods in class 25 only.” This description was inaccurate in that the date was wrong. It described the sub-licence as non-exclusive and the goods to which it extended were not confined to “class 25”. Those inaccuracies are not material to this part of the judgment.

At paragraph 27 above I have set out the provisions of Clause 10.1 and sub-clause 10.1.1 of the November 2002 Agreement forming part of the provisions relating to Leofelis’ powers under that agreement to grant sub-licences in the Territory. It is common ground that Schedule 5 paragraph 1 had the effect of giving TMLC’s approval to the 19^th June 2001 sub-licence by Leofelis to Leeside.

By a letter dated the 20^th December 2002 signed by Mr Ghielmini on behalf of Leofelis to Gabriella Perino on behalf of Leeside, Leofelis confirmed the territorial extension of Leeside’s sub-licence under the 19^th June 2001 agreement to the countries listed in annex A to that letter, that is, to all countries then included in the European Union.

On the 17^th June 2003 pursuant to the arrangements undertaken on that date which I have set out at paragraph 32 above, Leofelis granted an exclusive sub-licence to Punch in respect of Germany, Benelux, Hungary and Poland commencing on 1^st January 2003. See paragraph 32(i) above. In that agreement Leeside is described as “the exclusive sub-licensee in Italy for the sale of products bearing the Lonsdale trade mark pursuant to the agreement subscribed with the company Leofelis, exclusive licensee of Lonsdale Licensing Ltd…”. So far as material the recitals to that agreement read in translation as follows:-

“Whereas

(a)

LEOFELIS S.A. is the licensee of LONSDALE LICENSING LIMITED of the trademarks as per Schedule A belonging to LONSDALE SPORTS LIMITED concerning the Goods as per Schedule B and for the Territory;

(b)

pursuant to art. 10 of the contract as per lett. (a) above LEOFELIS S.A. has the power and authority to grant sub-licenses relating to the trademarks subject-matter of the said contract;

(c)

the parties intend to come to the execution of sub-licence agreement in force of which Punch, in its capacity as exclusive sub-licensee, starts the production, distribution and marketing within the Territory of the Goods bearing the Trademarks;

…

(e)

Punch is interested to obtain such licences to produce and sell the Goods bearing the Trademarks within the Territory in its capacity as sub-licensee of Leofelis, and Leofelis is interested in granting such rights according to the terms and conditions settled hereinafter.”

In November 2003 Miss Ludlum, TMLC’s in-house lawyer, was concerned to obtain certain documents including Leofelis’ sub-licence to Leeside to be supplied to Leofelis’ Pakistani manufacturers for the purposes of litigation in Pakistan. On the 20^th November 2003 she sent an e-mail to Mr Buscaini requesting “confirmation that your manufacturers are authorised by Lonsdale Sports Limited.” The response came from Miss Scacciavillani by an e-mail of the same date in which she undertook to send by fax three documents, one of which was the agreement of the 19^th June 2001 of which she said “the reports between Leofelis and Leeside are regulated in the agreements signed in 19^th June 2001…”. Miss Scacciavillani fulfilled her undertaking by sending a fax of the 21^st November 2003 reading “I send you the agreement between Leofelis S.A. and Leeside Srl concerning LONSDALE Trademarks”. The accompanying document in Italian was a copy of the 19^th June 2001 agreement including Schedule A to the agreement also in Italian commencing with the words “Estensioni Territoriali” and then listing the various trade marks for the use of which Leofelis had been licensed by LSE against various countries of the European Union but not including Italy and Switzerland.

In May 2005 Punch’s sub-licence was terminated by Leofelis for non payment of royalties. On the 28^th November 2005 Mr Ghielmini for Leofelis wrote to Mr Moher for TMLC asking permission to grant to Leeside four non Lonsdale sub-licenses. The second paragraph of that letter reads:-

“Please provide your consent to this sub-licence. Leeside Srl is of course well known to you as the sub-licensee of Leofelis for the territory of our licence for all other marks under it.”

There was no response to this letter from TMLC or Mr Moher and accordingly the sub-licences sought were automatically approved under the provisions of Clause 10. On the 22^nd February 2006 in the course of a letter from Lonsdale Sports to Mr Ingrilli of Miss Scacciavillani’s law office Mr Piasentin says “Leeside Srl is the exclusive sub-licensee of Leofelis for various territories including Italy.”

The first objection taken by the Defendants to the treatment of Leeside as an approved sub-licensee of Leofelis for any of the Territory is contained in the Defendants’ solicitor’s letter dated the 22^nd May 2006 months after the commencement of these proceedings. It was clear from the cross-examination of Mr Moher that he was fully aware that by at least 2004 Leeside was acting as the general sub-licensee within the Territory of Leofelis.

The issue is whether TMLC is now to be treated as having given its approval to the extension of the territory outside Italy to Switzerland, the countries appearing on Schedule A to the 19^th June 2001 Agreement, and Poland and Hungary. It is clear that no express request was made for any of these extensions. It is equally clear, in my judgment, that at least by early 2006 the Defendants and, in particular, TMLC were fully aware that Leeside was acting as the sub-licensee of Leofelis for the whole Territory in respect of which Leofelis was licensed under the November 2002 Agreement. No objection was raised by the Defendants to this happening until after the commencement of these proceedings. TMLC demanded and accepted royalties under the November 2002 Agreement long after it had become aware that Leeside was acting as such general sub-licensee to Leofelis. In my judgment the Defendants have waived any right which they may have had under Clause 10 of the November 2002 Agreement to object to the extension of Leeside’s sub-licence to include the whole of the territory in respect of which Leofelis is licensee. In agreement with the submissions of Mr MacLean I accept that the granting by Leofelis to Punch of a sub-licence to part of its territory, which must have occurred with the knowledge and consent of Leeside and which was terminated in 2005 does not affect this conclusion. Leofelis are entitled to the declaration that they seek.

It is Leofelis’ case that since the November 2002 Agreement they have undertaken litigation, particularly in Italy, against third parties using the Lonsdale trade mark, in the course of which they have been involved in challenges to TMLC’s right to exclusive use of the mark. Leofelis claims that it is entitled to recoup the costs of those proceedings in so far as they were incurred in defending TMLC’s title to the Lonsdale trade marks pursuant to Clause 7.7 of the November 2002 Agreement.

The provisions of Clause 7 of the November 2002 Agreement are set out at paragraph 26 above. Leofelis’ claim is pleaded at paragraph 38 of the amended particulars of claim. The various proceedings undertaken are set out at annexure “J” to the particulars of claim. The claims are described in the witness statement of Enrico Ingrilli senior partner in the law firm Studio Legale Ingrilli by reference to a schedule annexed to his witness statement. There are differences between the annexure to Senior Ingrilli’s witness statement and annexure J to the amended particulars of claim. Mr Ingrilli’s evidence was substantially unchallenged as to the litigation actually undertaken by Leofelis. It seems to me therefore that the court should take the annexure to Mr Ingrilli’s statement as the correct list of the litigation with which we are concerned in preference to that exhibited to the amended particulars of claim in sofar as there is a difference.

There was in evidence before the court 14 lever arch files of records of the relevant proceedings in Italian, un-translated.

It was the Defendants’ contention that by reason of the provisions of Clause 7.2 of the November 2002 Agreement, before it could become entitled to be reimbursed costs it was necessary that Leofelis obtain the consent of TMLC to the commencement of the proceedings in question. It was alleged that no such consent was ever obtained in respect of any of the cases. It was Mr Ingrilli’s evidence under cross-examination that consent had been obtained in a number of the cases but there was little documentary confirmation of this.

In my judgment it is not necessary to embark on an analysis, case by case, of whether Mr Ingrilli’s firm obtained consent to commencing the litigation in respect of which the claims for costs are made because, in agreement with the submissions of Mr MacLean, clause 7 is not to be construed as requiring Leofelis to have obtained the consent of TMLC before the commencement of litigation where the litigation involved a challenge to TMLC’s title to the relevant trade marks in order for the costs involved in meeting that challenge to be recoverable under clause 7.7.

Clause 7 contains no provision which requires the consent of TMLC to the commencement of proceedings involving a challenge to TMLC’s title to the relevant mark in order for Leofelis to be entitled to be reimbursed the costs involved in defending that challenge. There is no provision even for consultation before this can happen.

Clause 7.2 requires there to be consultation between the Licensee and the Licensor before the Licensee, at its own cost, commences proceedings of any kind in respect of “infringement or alleged infringement of the Trade Marks or passing off or any other claim or counterclaim brought or threatened … in respect of the use of the Trade Marks, save only in respect of any claims made by third parties relating to the Licensor’s ownership of or title to the Trade Marks.” Clause 7.7 makes the Licensor “liable and responsible for all losses, claims, costs, etc. incurred in those proceedings necessary to protect the Licensor’s ownership of the Trade Marks.”

The pattern of Clause 7 is, therefore, plain and logical. The Licensee, Leofelis, in consultation with the Licensor, TMLC, must, at its expense, take such proceedings as it is directed to by the Licensor as are necessary to prevent infringement of the Trade Marks. However in sofar as those proceedings, or any separate proceedings, involve combating a challenge to the Licensor’s title to the Trade Marks the Licensor must reimburse the Licensee’s costs incurred.

It follows, in my judgment, that to the extent that Leofelis incurred costs in any of the proceedings, listed by Mr Ingrilli in the annexure to his witness statement, in the course of combating a challenge to TMLC’s title to the Trade Marks of which Leofelis was the Licensee under the November 2002 Agreement, it is entitled to be reimbursed by TMLC.

Notwithstanding that I am not concerned with the assessment of the amount of remedies, there was a discussion, in the course of submissions as to how the amount of such recoverable costs should be established. I was impressed with the very substantial costs involved in translating all the court records of the proceedings in question. It seemed to me that the appropriate course was for the court to appoint a United Kingdom based Italian lawyer, preferably an expert in Italian trade mark law, to examine the court records and give his estimate of what percentage of the total costs of all the proceedings was represented by challenges to TMLC’s title to the Trade Marks. The measure of recovery would then be that percentage of the costs paid by Leofelis to its lawyers to pursue or defend those proceedings.

As described in paragraph 18 (vi) the “Montse proceedings” were defined in the November 2002 Agreement “as those disputes and proceedings brought by or against Lonsdale Espana by Montse SA and … by Montse SL in Spain and Portugal concerning and relating to the Trade Marks and the interests in them.” This claim is brought pursuant to Clause 7.3 of that agreement which is set out at paragraph 26 above. Montse SA and Montse SL were vehicles for trading operations in Spain and Portugal which, amongst other businesses, involved trading in Products in those countries. The Montse companies contended that they had a Trade Mark right to do so and they actively pursued litigation against Sports World and its Licensees to protect that right. It is common ground that litigation was conducted on the Sports World side by TMLC and eventually resulted in a settlement agreement arrived at in or about June 2006, the terms of which are unknown, but which has resulted in the Montse companies surrendering their rights to trade in Product in Spain and Portugal. Spain and Portugal are within the Territory and, in consequence, the settlement clears the way for Leofelis to market its Product in Spain and Portugal which it was previously impossible for it to do because of the active opposition of the Montse companies.

Leofelis seeks to claim damages on the basis that there is to be implied into Clause 7.3 an implied term that the Defendants and, in particular, TMLC were under an obligation from the inception of the November 2002 Agreement to pursue the litigation against the Montse companies vigorously so clearing the way for Leofelis. Their failure to do so has meant that Leofelis has been unable to earn profits by trading in Product in Spain and Portugal. There was no evidence of Leofelis making any attempt to do so and it was Leofelis’ case that their preferred strategy was to consolidate their operations in Italy and Switzerland before branching out into other parts of the Territory not sub-licensed to Punch and Badii. I have come to the conclusion that the normal principles upon which a court may imply a term into a contract to give effect to what are its demonstrable intentions, long established by authority, do not permit me to imply into Clause 7.3 the term contended for by Leofelis. Even if such a clause could be implied Leofelis have introduced no evidence from which it could be established that it has hitherto suffered any consequential loss. I accordingly dismiss this part of Leofelis’ claim.