Trademark Licensing Company Ltd & Anor v Leofelis SA

This is an application for summary judgment in an action concerning a trade mark licence agreement dated 21 November 2002 (“the Licence Agreement”) whereby the claimants granted to the defendant an exclusive licence to use certain trade marks relating to the Lonsdale brand on clothing and other goods in the EU as it then was (excluding the UK and Ireland) and in Hungary, Poland, the Czech Republic and Switzerland (“the Leofelis Territories”) in consideration of the payment by the defendant of a fixed royalty payable in quarterly instalments each year and amounting in all to €16,150,000. The agreement was for a period of six years commencing on 1 January 2003.

In this action the claimants seek: (1) a declaration that the Licence Agreement was validly terminated by the claimants on 2 November 2007; (2) the sum of €1,675,000 in respect of royalties which had accrued under the Licence Agreement prior to its termination; and (3) damages of €3,500,000 in respect of royalties for the remaining term of the Licence Agreement.

The claimants contend that the defendant has no real prospect of defending the claim on the issue of liability and accordingly has no defence to the first two elements of the claim. As to the third element, the claimant accepts that the quantum of damages cannot be tried summarily and will need to be the subject of an assessment.

This action follows proceedings brought by the defendant and Leeside Srl (“Leeside”) against the claimants and another Lonsdale group company (“the Lonsdale Companies”). Those proceedings (“the 2005 Proceedings”) began in October 2005 and are still ongoing (in relation to quantum). Leeside is an Italian company to which the defendant granted a sub-licence to use the Lonsdale trade marks.

The 2005 Proceedings came on for trial before Evans-Lombe J in late 2006. He gave judgment on 8 March 2007 and made various consequential orders dated 19 March and 8 May 2007, 18 July 2007 and 26 July 2007.

The 2005 Proceedings concerned four claims of relevance to the present application. The first was a claim that, in breach of the Licence Agreement, the Lonsdale Companies had sold Lonsdale branded products to a connected Belgian company called Sports World Belgium (“SWB”) in Belgium. The Lonsdale Companies contended that the relevant sales had taken place in the UK and that, under the doctrine of exhaustion of rights, the subsequent importation of the products into Belgium and the sale of the products in Belgium did not constitute an infringement of any trade mark rights and that there had therefore been no breach of the exclusivity provision of the Licence Agreement. In the course of his judgment, Evans-Lombe J related how the Lonsdale Companies’ explanation as to how the sales of Lonsdale branded goods in Belgium had been brought about had changed on a number of occasions. In the end, and on the evidence before him, he concluded that the relevant sales had taken place in Belgium and that the doctrine of exhaustion of rights did not apply. He therefore found that the Belgian sales involved breaches of the Licence Agreement and that the defendant was entitled to recover damages in respect of them.

The second claim concerned what have been described as “Italian fees” incurred by the defendant in proceedings in Italy involving challenges to the validity of the Lonsdale trade marks. Evans-Lombe J found that the defendant was entitled to be reimbursed all such fees.

The third claim arose in relation to a sub-licence granted by the defendant to Leeside. The defendant first granted to Leeside a sub-licence which was limited to Italy. This sub-licence was approved by the claimant. Some 18 months later, the defendant purported to extend Leeside’s sub-licence to cover all the Leofelis Territories. However, it never obtained the consent of the claimants to this extension. In the 2005 Proceedings, the defendant and Leeside sought a declaration that the defendant had validly appointed Leeside as its sub-licensee for the Leofelis Territories on the basis that the need for formal approval of the extension had been waived. At the trial, the defendant and Leeside were successful on this issue, and Evans-Lombe J granted the declaration which they sought. In the meantime, Leeside began to use the Lonsdale trade marks in Germany. This led the second claimant to apply for an interim injunction which was granted by the Berlin District Court on 25 July 2006. This injunction was subsequently confirmed by that court on 9 January 2007. Leeside filed an appeal against that decision, which was withdrawn in August 2008 following the judgment of the English Court of Appeal, as I shall explain later in this judgment.

The fourth claim concerned an allegation by the defendant that misrepresentations had been made to it by the second claimant concerning certain third party rights in the Lonsdale trade marks. Once again, Evans-Lombe J found in the defendant’s favour in relation to this claim. The circumstances giving rise to the claim were resolved, at least in part, by the grant by the defendant to a German company called Punch GmbH (“Punch”), run by a Mr Geurt Schotsman, of a sub-licence to use the Lonsdale trade marks in Germany, Belgium and the Netherlands. This sub-licence continued until January 2006 by which time Punch had achieved a turnover under the Lonsdale trade marks of in excess of €13,000,000 in Germany alone.

By his order dated 19 March and 8 May 2007, Evans-Lombe J granted an injunction to restrain the Lonsdale Companies from making any further sales of the relevant Lonsdale branded products in the Leofelis Territories to SWB or any third party, save where the rights under the trade marks had been exhausted.

Evans-Lombe J also ordered the Lonsdale Companies to pay to the defendant damages to be assessed and a substantial sum by way of an interim payment, but he allowed the defendant to use part of the interim payment to make the second quarter royalty payment of €837,500 which fell due on 1 April 2007. The balance of the money was ordered to be paid on or before 10 April 2007 to the defendant’s solicitors to be held by them in escrow pending an appeal by the Lonsdale Companies.

When the next royalty payment of €837,500 became due on 1 July 2007, the defendant made an application to the court for permission to make that payment too out of the money which Evans-Lombe J had ordered should be held in escrow. That application came before court on 18 July 2007 and, by order of that date, Evans-Lombe J allowed the defendant to make the payment out of the money held in escrow on the basis that its owner, Mr Massimo Buscaini, provided a personal guarantee of repayment, should the need arise.

The matter became yet further complicated because the Lonsdale Companies sought to appeal the order of 18 July 2007 which resulted in another order made by Evans-Lombe J on 26 July 2007 whereby he stayed his earlier order pending an application by the Lonsdale Companies to the Court of Appeal for permission to appeal. For their part, the Lonsdale Companies gave an undertaking that they would not rely upon the non-payment of royalties due on 1 July 2007 to seek to terminate the Licence Agreement. In the end, the Court of Appeal held that Evans-Lombe J was wrong to permit the money to be paid out of escrow, so the appeal succeeded. The upshot is that the royalty payment due on 1 July 2007 has never been paid.

By letter dated 17 August 2007, the claimants’ solicitors wrote to the defendant’s solicitors stating that the claimants were exercising their right under the Licence Agreement to conduct an audit and inspection of the defendant’s records.

No agreement had been reached by 6 September 2007 and accordingly, by letter of that date, the claimants’ solicitors gave notice of breach under the Licence Agreement and provided the defendant an opportunity to remedy that breach within 30 days.

By letter dated 12 September 2007, the defendant’s solicitors invited the claimants to conduct an audit and inspection on Friday 21 September 2007.

By a further letter dated 14 September 2007, the defendant’s solicitors drew attention to the injunction in Germany which restrained Leeside from selling Lonsdale goods in that territory. They referred to the finding of Evans-Lombe J that Leeside was a valid sub-licensee of the defendant and asserted that the maintenance of the injunction therefore represented a continuing and ongoing breach of the defendant’s rights under the Licence Agreement. The letter continued:

The claimants say, and I agree, that this letter, read fairly, made a complaint about the continuing existence of the German injunction and gave notice that if it was not discharged then it might be relied upon as a ground for terminating the Licence Agreement. It reserved the defendant’s rights to terminate, but only on the basis of the German injunction. Subject to that reservation of rights, the defendant stated it would comply with the agreement.

On 21 September 2007, the claimants’ solicitors wrote indicating that they were unable to attend to carry out an audit and inspection on that day and requested an alternative date. The defendant’s solicitors replied by letter of the same date, complaining of the claimants’ conduct but offering an alternative date:

Again, this letter made clear that the defendant was treating the Licence Agreement as being in existence and would perform its obligations under it.

Thereafter the claimants’ solicitors confirmed that they accepted the invitation to undertake the audit and inspection on 5 October 2007 in Lugano. This led to a letter from the defendant’s solicitors dated 25 September 2007 which concluded:

This position was confirmed by a letter dated 26 September 2007 in which the defendant’s solicitors made clear that the defendant did not and would not accept the validity of what they described as the claimants’ purported notice of termination reserved under cover of the letter of 6 September 2007.

Then, by a letter dated 28 September 2007, and shortly before the fourth quarter royalty fell due on 1 October 2007, the defendant purported to terminate the Licence Agreement on the basis of the continuing injunction in Germany:

Not surprisingly, the defendant did not pay the fourth quarter royalty for 2007 and accordingly, by letter dated 2 October 2007, the claimants’ solicitors gave formal notice that the defendant was in breach of the Licence Agreement and required the defendant to remedy the breach within 30 days.

The defendant’s response, by solicitor’s letter dated 3 October 2007, was to state that it had already terminated the Licence Agreement by its letter of 28 September 2007 and would therefore not be making any further royalty payments. On 2 November 2007, the 30 day period having elapsed, the claimants terminated the Licence Agreement in accordance with its terms and with immediate effect.

In April 2008 the Court of Appeal heard the substantive appeal by the Lonsdale Companies against the judgment and orders of Evans-Lombe J, with the exception of his findings and orders in respect of the sales of Lonsdale branded products in Belgium and the “Italian fees” claim.

By its judgment and order of 1 July 2008, the Court of Appeal declared that no valid or effective sub-licence had ever been granted by the defendant to Leeside for any country other than Italy. It followed that no valid sub-licence had been granted for Germany and that the claimants were therefore perfectly within their rights to obtain an injunction in Germany to restrain Leeside from using the Lonsdale trade marks there; and further, that by maintaining such an injunction it could not be said that the claimants had acted in breach of the Licence Agreement, let alone a repudiatory breach which justified its termination. That is now accepted by the defendant.

It having become clear from the judgment and order of the Court of Appeal that the ground of termination upon which the defendant had relied was unsustainable, the claimants wrote a letter before action dated 21 November 2008 relating the history and then setting out the claim for unpaid royalties of €837,500 in respect of each of the instalments payable on 1 July and 1 October 2007 and for damages in the sum of €3,500,000 in respect of the final year of the Licence Agreement to December 2008.

A response from the defendant dated 4 December 2008 disputed the claim on the basis that its termination of the Licence Agreement was based upon the continuing injunction obtained against Leeside in Germany “without prejudice to any other breaches on which our client was entitled to rely”. It then referred to proceedings which were at that time ongoing before the Italian courts and asserted that the other breaches would be addressed by that court. No such other breaches were, however, identified in the letter. Accordingly, the claimants issued the claim in this action on 10 February 2009.

The defendant’s initial response was to issue an application to stay the claim until after the conclusion of the Italian proceedings. That application was heard by Sir William Blackburne on 30 November and 1 December 2009. Plainly one of the matters which it was relevant for the judge to consider was the extent to which the issues in the two sets of proceedings might overlap. However, as the judge explained at paragraphs [16] and [17] of his judgment, none were identified:

Shortly before that hearing, the claimants issued this application for summary judgment. On 7 December 2009, directions were given, including a direction that the defendant should file and serve its evidence in answer by no later than 12 February 2010.

No substantive evidence in answer was served by the defendant by 12 February 2010 but, instead, the defendant’s solicitors wrote to the claimants’ solicitors on that day stating that the defendant had decided it would not be defending liability and would consent to judgment for damages to be assessed. An extension of time was sought for the service of evidence limited to the issue of quantum.

Then, by a letter and witness statement dated 24 February 2010, the defendant’s solicitors notified the claimants that the defendant wished to withdraw its admission of liability in the light of “evidence of further breaches” of the Licence Agreement which the defendant had drawn to their attention and in order “to investigate the facts to assess the merits of a possible defence on liability”.

On 26 February 2010, the defendant issued an application for permission to withdraw its admission. Since then, the defendant has served witness statements in response to the application upon the basis of which the defendant argues that it now has a real prospect of successfully defending the claim both as to liability and quantum. As I have said, the claimants accept that the quantum of damages cannot be decided summarily and therefore needs to be subject to an assessment but maintain that the defendant has no real prospect of defending the claim on the issue of liability.

The approach to be adopted in relation to a summary judgment application is well established. The relevant principles have been drawn together by Lewison J in Pegasus Management Holdings SCA v Ernst & Young [2008] EWHC 2720 at [42]:

The present case has a further dimension, as the claimants rightly emphasise. As I have explained, on 12 February 2010, the defendant formally admitted liability and said it would consent to judgment for damages to be assessed. In the light of the long history of this matter, including the hearing before and the judgment of Sir William Blackburne, I believe I am entitled to infer the admission was made after careful and thorough consideration by the defendant of whether there was any possible basis upon which it could seek to defend the claim on the facts of which it was aware. The relevance of this to the present application for summary judgment was explained by Potter LJ in ED&F Man Liquid Products v Patel at [11]:

And a little later, at [53]:

The application by the defendant for permission to withdraw its admission is made under CPR 14.1(5). Under the Practice Direction supplementing CPR 14, I am required to have regard to all the circumstances of the case including, so far as relevant, whether or not new evidence has come to light which was not available at the time the admission was made; the prospects of success of the defence if the admission is withdrawn; and the interests of the administration of justice.

The claimants accept that the prospects of success of the defence are an important factor to take into account in the exercise of my discretion. Accordingly, in the event I find that, notwithstanding the admission, it is not appropriate there should be summary judgment, the claimants did not submit that I should refuse permission to withdraw the admission.

In my judgment this approach was entirely proper. The critical question for me therefore is whether the claimants are entitled to summary judgment upon their claims for a declaration that the Licence Agreement was validly terminated by them on 2 November 2007; that the sum of €1,675,000 in respect of royalties accrued under the Licence Agreement prior to its termination; and for damages to be assessed in respect of royalties for the remaining term of the Licence Agreement. If they are not, then the application for permission to withdraw the admission must be allowed.

The defendant submits it has a realistic prospect of establishing that the claimants committed breaches of the Licence Agreement which would provide a justification for the purported termination on 28 September 2007. The claimants accept that, as a matter of law, it is open to a party retrospectively to justify termination of a contract by reference to a ground which it did not rely upon at the time of the termination. However, the claimants say that the matters upon which the defendant now seeks to rely cannot possibly afford any such ground.

Importantly, the defendant accepts that it cannot rely upon events which, to its knowledge, occurred before the end of July 2007 to justify a later termination of the Licence Agreement because it elected to treat the agreement as in force by making its application to make the royalty payment due on 1 July 2007 from the funds held in escrow. So also, the defendant cannot rely upon matters which occurred after 28 September 2007 to justify termination of the agreement on that date. So far as matters within its knowledge are concerned, the defendant is therefore limited to a window from the end of July to the end of September 2007.

The matters relied upon by the defendant fall into two categories. The first category concerns a number of alleged breaches by the claimants of the exclusivity granted to the defendant under the Licence Agreement by reason of the sale of garments bearing the Lonsdale trade marks in Belgium, Holland, France and Sweden.

The claimants respond that the evidence of many of these sales is flimsy at best, that the sales do not in any event amount to a fundamental breach and, moreover, the defendant affirmed the Licence Agreement in September well knowing of the matters on which it now seeks to rely.

The second category concerns the grant of a licence by the second claimant to SIA Sports and Clothing (“SIA”) on 5 January 2007. Under the SIA licence, SIA was given permission to use the Lonsdale trade marks in relation to sports clothing from 1 January 2007 to 31 December 2007 in certain territories by that time within the EU but outside the scope of the Licence Agreement, namely Latvia, Lithuania, Estonia, Slovakia, Slovenia, Romania and Bulgaria (“the SIA Territories”). In February 2007, an amendment to the SIA Licence was agreed which extended its duration to 31 March 2008. The amendment also extended the products within the scope of the licence to include footwear and gave SIA permission to grant a sub-licence in relation to footwear to Punch, footwear being outside the scope of the Licence Agreement.

The defendant contends that, upon its proper construction, the SIA Licence was not limited to the SIA Territories and so constituted a derogation from and breach of the exclusive rights granted to the defendant. It also contends that the SIA Licence was not a genuine commercial agreement but instead a device by which goods bearing the Lonsdale trade marks could be sold in the Leofelis Territories.

Again, the claimants dispute these allegations. However, they do not suggest the defendant was aware of the SIA Licence before they launched this application for summary judgment. Further, they accept that the defendant has a realistic prospect of establishing at trial that Lonsdale branded products sourced from Punch and SIA were being sold in the Leofelis Territories in the summer of 2007. But they say there is no evidence such sales took place with their agreement or consent.

Evidence in relation to the alleged sale of Lonsdale branded garments by or with the consent of the claimants in Belgium and the Netherlands is given by Mr Buscaini who, as I have mentioned, is the beneficial owner of the defendant; Mr Dirk Abbeloos, Leeside’s former distributor in Belgium and the Netherlands; and Mr Kenneth Lister, Leeside’s former distributor in France.

It will be recalled that Evans-Lombe J found that the claimants had sold Lonsdale branded garments to SWB in Belgium. It is clear from the evidence that SWB continued selling these garments until shortly before the grant of the injunction on 8 May 2007. It is also clear that the sale of Lonsdale branded garments in Belgium and other EU territories resumed following the termination of the Licence Agreement by the claimants on 2 November 2007. However, the evidence that the claimants and SWB were continuing to sell Lonsdale branded garments in Belgium or the Netherlands in the critical window between the end of July and the end of September 2007 is, in my view, very thin.

So far as Belgium is concerned, the evidence comprises an email from Mr Lister to Mr Buscaini dated 16 July 2007 stating that “the people in Belgium are restarting the sales and will start from next season to sell LONSDALE at wholesale prices in the North and East of France and to anyone that comes along I suppose”. Mr Lister confirms he sent the email because he had obtained information from his representatives working in Belgium that SWB had resumed the sale of Lonsdale branded products. Further, Mr Abbeloos states, but without any support, that to the best of his knowledge and recollection “at all times from April 2007 up to and including October 2007 Sportsworld continued to sell Lonsdale garments in Belgium”.

The position in relation to the Netherlands is much the same. Mr Buscaini says that on 21 August 2007, he was informed by Mr Abbeloos that a company called Sportsdirect (another company in the group of companies to which the claimants belong) was selling Lonsdale branded garments in Leeuwarden and Groningen in the Netherlands, where Sportsdirect had just opened two new stores. This is supported by the evidence of Mr Abbeloos who refers to his communication to Mr Buscaini on 21 August 2007 and continues that, to the best of his knowledge and recollection (he having visited the stores several times himself), at all times from April 2007 up to and including October 2007, Sportsdirect continued to sell Lonsdale branded garments in those two stores.

The claimants strongly refute the suggestion that they sold or consented to the sale of any Lonsdale branded garments by anyone other than the defendant in the period between May and November 2007. I have before me evidence from Mr Hans Gysel, a director of and head of the retail operations of SWB, Mr Mark Devereux, who is employed by a Sportsdirect company as group warehousing and processing manager, and Mr Niall Sutherland, who was at the relevant time employed by the same Sportsdirect company as group transport manager. They explain in detail the steps taken to ensure that no sales of Lonsdale branded garments were made by SWB or otherwise with the consent of the claimants in Belgium and the Netherlands between May and November 2007. On 30 April 2007, it was made clear that in no circumstances should any such products continue to be sold in any SWB store or remain anywhere else in Belgium or the Netherlands. Each store was requested to remove all relevant products from sale and lorries were dispatched to transport them back to headquarters in Shirebrook, England. By 5 May 2007, it had been confirmed that all such products had been removed and Mr Sutherland and Mr Devereux visited four randomly selected stores to carry out spot checks. No branded products remained in store. In addition, Mr Gysel has explained that the claimants have never had a store in Groningen or the surrounding area.

There is a body of email correspondence between Mr Buscaini and Mr Kenneth Lister in the period from March 2007 to October 2007 concerning a complaint by Mr Lister that a company called STC was selling Lonsdale branded products in France. Mr Lister elaborates how these matters came to light in his witness statement. He discovered that the principal of STC, a Mr Laurent Stevenard, was a former agent of Punch and was told by his customers that the products STC was selling were supplied by a German company under licence from the claimants. Mr Lister also says that these sales by STC continued through July, August and September 2007. For his part, Mr Buscaini responded to Mr Lister’s complaints by investigating Mr Stevenard. By email dated 9 June 2007, Mr Buscaini informed Mr Mark Lister, Mr Kenneth Lister’s brother, that he had contacted Mr Stevenard and been told by him that he received his products from a company called Yamuka which had the same address as Punch. This German connection was confirmed on 19 October 2007 when Mr Mark Lister sent to Mr Buscaini a copy of a catalogue showing the Lonsdale products which STC was selling and from which it was evident that at least some of those products had a German origin.

The claimants accept that this evidence raises a triable issue as to whether or not Lonsdale branded products sourced from Punch were indeed being sold in France during 2007 and, in particular, in August and September 2007. But they say there is no evidence that these products were being sold by them or with their consent.

On 9 July 2007, Mr Buscaini received an email from his former distributor in Sweden, Mr Bosse Frövén, complaining that the claimants were selling Lonsdale branded products to companies in Sweden. On 16 July 2007, Mr Frövén emailed Mr Buscaini again to say that he had confronted a Swedish company in Stockholm which had admitted that it was buying the products from Punch. Mr Buscaini enquired as to the identity of the company and was told by Mr Frövén that its name was “IDS”. In July 2009, Mr Buscaini says he attended a trade fair at which Punch appeared and held itself out as a licensee of the claimants. Further, a list of Punch’s licensed distributors available at the fair included both IDS and STC.

The claimants’ position in relation to sales of Lonsdale branded products in Sweden is much the same as it is in relation to sales of such products in France. They accept there is a triable issue as to whether such products were sold but say that no such sales were made by them or with their consent. Indeed, they maintain they had no involvement in any sales of Lonsdale branded products in the Leofelis Territories between July and September 2007. Further, they continue, it is possible that the products were sold without any licence and so in infringement of trade mark or that they were legitimate parallel imports. In any event, if the defendant had a justifiable complaint in relation to sales in Belgium, the Netherlands, France or Sweden, it had a duty under clause 7 of the Licence Agreement to notify the claimants so that steps could be taken to prevent any infringement. No such notification was given and the claimants say they did not learn about these sales in any other way.

As I have mentioned, the defendant makes two allegations. The first is that the terms of the SIA Licence authorised the sale of relevant products within the Leofelis Territories, and thus derogated from the rights granted to the defendant. This argument depends upon the proper interpretation of the SIA Licence. The second is that the SIA Licence did not reflect a genuine commercial agreement between the parties but was instead a device by which Lonsdale branded products could be sold into the Leofelis Territories and that the claimants consented to such use of the Lonsdale trade marks.

Clause 2 of the SIA Licence provides, so far as relevant:

The “Distribution Channels” are defined in Schedule 7 as those channels agreed on a case by case basis with the Licensor.

The agreement also contains an entire agreement clause:

The defendant recognises that the grant of the licence under clause 2.1 is limited to the SIA Territories but argues that clause 2.6 then extends the licence to all countries, including the Leofelis Territories, at least in respect of orders which have not been solicited by SIA.

In my judgment the construction of clause 2.6 for which the defendant contends is not correct. Clause 2.1 and 2.6 must be read together. Clause 2.1 contains a grant of a licence and is limited to the SIA Territories. Clause 2.6 falls into two parts. The first is a prohibition against the active solicitation by SIA of orders for the products the subject of the agreement outside the SIA Territories, subject to the qualification that SIA is not to be prohibited from accepting unsolicited orders for such products which it may receive from another country in the EEA. It says nothing, however, about where such sales may take place.

The second part has two aspects. First, there is a statement that the claimants give no warranty that the sale of any products outside the SIA Territories will not infringe any third party rights. Second, there is an indemnity by SIA against any liabilities which the claimants may incur arising from any such sales.

I accept that the second part of clause 2.6 does appear to contemplate that SIA may make sales of products outside the SIA Territories. But nothing in the clause constitutes the grant of a licence to use the Lonsdale trade marks in relation to any products sold in that way.

I therefore reject the submission that the SIA Licence authorised the sale of Lonsdale branded products within the Leofelis Territories and so derogated from the rights granted to the defendant.

The background to the SIA Licence is explained on behalf of the claimants by Ms. Sharon King, a senior brand licensing manager employed by International Brand Management Limited (“IBML”), a company that manages brands owned by the Sportsdirect group of companies, including the Lonsdale brand. To recap, the SIA Licence was granted in January 2007 in respect of the SIA Territories. It was then amended in February 2007 both in relation to its duration and scope. In particular, the second claimant consented to SIA granting a sub-licence for footwear products to Punch. SIA and Punch had the same parent, a company called PSF International (“PSF”). Indeed, SIA, Punch and PSF had the same single director, Mr Schotsman.

Ms. King continues that when the Licence Agreement was terminated on 2 November 2007, IBML was well aware of the need to find a suitable replacement licensee for the Lonsdale brand as soon as possible. Accordingly, IBML began negotiating with Punch and two Italian companies, known as Cartorama and 1 Idea Italia.

Negotiations with Punch began in the second half of November 2007 and continued in the first quarter of 2008. Punch was thought to be a suitable candidate because it already had a distribution network in place. However, says Ms. King, IBML was not entirely convinced that Punch had sufficient capability to handle a large pan-European operation. Accordingly, the claimants decided to “test the water” with Punch in territories where Punch was best established.

The negotiations reached fruition on 10 April 2008 when the second claimant entered into a deed of amendment with SIA and Punch which replaced the SIA Licence with an agreement (“the Punch Licence”) whereby:

SIA was released and discharged from its obligations under the SIA Licence;

Punch undertook to perform the obligations of the licensee in the SIA Licence;

Punch was licensed to make and sell clothing under the Lonsdale brand in France, Germany, Hungary, the Czech Republic and Slovakia until 31 March 2009; and

the minimum royalty payment for 2008 was set at €350,000.

Accordingly, the Punch Licence allowed Punch to make and sell Lonsdale branded products in some of the former Leofelis Territories and Punch duly paid €350,000 in royalties for 2008.

Further negotiations continued with Punch throughout 2008 and into 2009 leading to an expansion in the territorial scope of the Punch Licence to include all of the EU (as presently constituted) and Switzerland.

Against this background, the claimants submit that the contention that the SIA Licence was not genuine but instead a device is not only extremely serious but, of itself, does not take the defendant very far, as Diplock LJ explained in Garnac Grain Co. Inc. v H. M. F. Faure & Fairclough Ltd. [1966] QB 650 at 683 to 684:

The defendant recognises this difficulty and contends that the SIA Licence did not represent the entire agreement between the parties but only part of it and that, contrary to what the agreement indicates, which is that there was a grant of a licence limited to specified territories, in fact there was a grant of a licence which went beyond those territories and included territories the subject of the Licence Agreement including, specifically, Germany. This contention is based upon all of the following facts and matters.

First, it will be recalled that one of the complaints made by the defendant in the 2005 Proceedings related to the sale of garments bearing the Lonsdale trade marks in SWB shops in Belgium. The facts and matters giving rise to that complaint are set out in detail in the judgment of Evans-Lombe J at [166] to [210]. He found that the claimants did indeed sell Lonsdale branded products into Belgium in breach of the Licence Agreement. Mr Buscaini says that this shows not only that the claimants were prepared to invade the exclusive rights they had granted to the defendant but also, significantly, that the defendant’s investigation of the circumstances in which the products came to be sold was greatly hampered by the manner in which the claimants responded to the complaint. In particular, their explanations of the source of the products and the circumstances in which they were being sold in Belgium changed numerous times as they tried unsuccessfully to conceal and then justify their actions.

Second, SIA, Punch and PSF are all related companies with the same single director Mr Schotsman. Moreover, Punch had a long history of trading in Lonsdale branded products in Germany, the Benelux, Hungary and Poland over many years prior to January 2006. As a result, Mr Schotsman was well known to the claimants.

Third, SIA was incorporated in Latvia on 30 November 2006 but appears not to have traded beyond 2008 and is now in liquidation. Mr Buscaini therefore believes it likely that SIA was incorporated for the purpose of taking the SIA Licence from the claimants and was put into liquidation after that licence was brought to an end by the Punch Licence.

Fourth, the claimants accept that the facts and matters which I have related concerning the sale of Lonsdale branded products in France and Sweden in 2007 do raise a triable issue as to whether or not SIA and Punch engaged together to place those products upon the market for the first time in the Leofelis Territories and in breach of the rights exclusively granted to the defendant under the Licence Agreement.

Fifth, SIA’s revenue for 2007 is stated to be £1,237,564. This, says Mr Buscaini, plainly relates to the sales of Lonsdale branded products made by SIA in 2007 disclosed in the statements exhibited by Ms King and which total €1,585,001. Accordingly, if SIA was doing any other business, it was wholly insignificant.

Sixth, all sales made by SIA of Lonsdale branded products were items of men’s clothing and are recorded as having been made in Latvia, with no sales recorded as having been made in any of the other SIA Territories. As Mr Buscaini elaborates, the sale summaries show sales well in excess of 215,000 garments and, as an experienced distributor of Lonsdale branded products, he finds it implausible that such a volume of clothing was being sold in Latvia, particularly given that the total population of Latvia is around 2.3 million, including 920,000 men. He considers it likely that all or the bulk of the sales made by SIA were not in fact made in Latvia or any of the SIA Territories but were instead made in the Leofelis Territories through Punch.

Finally, and very importantly, the Punch Licence both brought to an end the arrangements with SIA and granted to Punch rights in a new set of territories, namely France, Germany, Hungary, the Czech Republic and Slovakia but excluding Latvia, despite the fact that Latvia was the only territory in which SIA had supposedly made sales. Mr Buscaini considers it extraordinary that Punch or SIA would not have wished to continue to have the right to sell Lonsdale branded products in Latvia if the turnover in that territory for the year 2007 was truly in the region of €1.5 million.

Faced with the evidence of Mr Buscaini, Ms. King made a second witness statement which was served on the day before the hearing. She maintains that the SIA Licence was a genuine commercial agreement which was intended to and did take effect according to its terms. She also says that the SIA Licence recorded the entire agreement between the parties and that none of the claimants or other companies in the Sportsdirect group of companies did, at any time during the period that the Licence Agreement with the defendant was in force, grant any licence to SIA or Punch to make sales of Lonsdale branded products which would infringe the defendant’s rights. She also gives an explanation for the reference to Latvia but no other territory in the sales documents, saying that it is common for licensees simply to put a single total sales figure into the first convenient place in the relevant template. Further, she says that following the allegations made by Mr Buscaini, she has made enquiries of Mr Schotsman concerning the nature of SIA’s operation and been told by Mr Schotsman that SIA did have a distributor in Latvia, a company called Latvian Deluxe. As to this, I was provided with the report of a search conducted by the defendant which suggests that Latvian Deluxe is another company controlled by Mr Schotsman.

Finally, Ms King says there is nothing extraordinary in the decision not to include Latvia in the territory subject of the Punch Licence because it was a short term agreement of limited territorial scope in order to test the water with Punch, given the concerns the claimants had as to whether Punch had the capability to handle a large pan-European operation.

Ms King’s evidence is certainly a powerful riposte to the evidence of Mr Buscaini and the inferences which the defendant submits I should draw based upon the facts and matters I have related. However, I have reached the conclusion that the defendant has shown that it is possible that the claimants licensed SIA or other related companies to make sales of Lonsdale branded products in the Leofelis Territories and therefore granted a licence which was inconsistent with the Licence Agreement. What has caused me most concern is the failure by the claimants to provide any real explanation as to why they were prepared to forego the royalties (of about €400,000) payable on sales into the SIA Territories of about €1.5 million if they truly believed and understood that SIA had an established network in those territories. The suggestion that the 2008 Punch Licence was of limited territorial scope in order to “test the water” with Punch does not, in my judgment, properly address the issue. If the SIA Licence was intended to and did take effect according to its terms, then SIA had established a substantial market in the SIA Territories for Lonsdale branded products which SIA or some other licensee could continue to exploit independently of the activities of Punch under the Punch Licence.

The defendant contends that the exclusivity provision of the Licence Agreement was a condition so that any breach, however small, could justify termination.

The exclusivity provision is not designated in the Licence Agreement as a condition; nor does the Licence Agreement provide for a right of discharge in the event of breach. Accordingly, I must consider whether the nature of the Licence Agreement or the circumstances of the case lead to the conclusion that the parties must, by necessary implication, have intended that the defendant would be discharged from further performance of its obligations in the event that the exclusivity provision was not fully and precisely complied with. If not, then the exclusivity provision must be considered an intermediate term.

The Licence Agreement is a six year trade mark licence in respect of all EU territories as of November 2002 (with the exception of the UK and Ireland) and in Hungary, Poland, the Czech Republic and Switzerland. In my judgment it is not possible to say that, by necessary implication, the parties must have intended that any breach of exclusivity, however small, would justify the immediate discharge of the entire licence for the remainder of its term; nor is this something that was ever suggested in the correspondence about termination to which I have referred.

Accordingly I must consider whether or not the alleged breaches were of such seriousness as to amount to a repudiation of the contract. As Lord Wilberforce explained in Woodar v Wimpey [1980] 1 WLR 277 at 283:

As I have said, the evidence that the claimants or SWB were selling Lonsdale branded products into Belgium and the Netherlands from the end of July to the end of September 2007 is scanty. Further, there is nothing to suggest that any isolated incidences of sales which may have taken place in breach of the Licence Agreement had the effect of depriving the defendant of substantially the whole benefit of the agreement. Nor does the conduct complained of demonstrate a refusal by the claimants in a matter going to the root of the agreement to perform their contractual obligations. Further, there is, in my judgment, considerable force in the claimants’ submission that Mr Buscaini evidently considered those matters that he knew about in September 2007 to be of such little substance and significance that he did not even think them worth bringing to the notice of the claimants, let alone relying upon them in an attempt to justify termination. Indeed, the defendant went so far as formally to admit liability on 12 February 2010.

In all these circumstances I have reached the conclusion that the defendant has no real prospect of establishing that the alleged sales by the claimants or SWB of Lonsdale branded products in Belgium and the Netherlands in the period from the end of July to the end of September 2007 can be relied upon to justify the immediate termination of the Licence Agreement on 28 September 2007.

The position in relation to France and Sweden is rather different. For the reasons I have given, I am satisfied that it is possible that the defendant may establish at trial that Lonsdale branded products sourced from Punch in Germany were being sold in these territories and that Punch and SIA placed these and other such products upon the market in the Leofelis Territories with the consent or agreement of the claimants. Now it is true to say the defendant knew about sales of Lonsdale branded products by STC in France and IDS in Sweden and had information suggesting these products had been placed upon the market by Punch in Germany, yet did not raise them with the claimants or rely upon them to justify termination. However, the defendant did not know of the involvement of SIA, the SIA Licence or the quantity of sales made by SIA and had no reason to believe that these sales were made with the consent of the claimants. In my judgment, these alleged activities are different in nature to the alleged sales in Belgium and the Netherlands and, if made good, at least arguably amount to a repudiation of the Licence Agreement sufficient to justify immediate termination.

The defendant accepts that it affirmed the Licence Agreement by clearly and unequivocally treating it as subsisting at the time of the hearings on 18 and 26 July 2007. The claimants contend that the defendant continued to affirm the Licence Agreement right up to 26 September 2007 and is no longer able to rely on facts of which it had knowledge at that time (other than the German injunction) to attempt to justify the purported termination of the Licence Agreement on 28 September 2007.

I have set out details of the relevant communications in describing the events that preceded termination at paragraphs [14] to [25] above. In my judgment the letters dated 12, 14, 21, 25 and 26 September from the defendant’s solicitors are consistent only with the defendant having chosen to have affirmed the agreement rather than determine it and constitute a communication of that election to the claimants in clear and unequivocal terms, subject only to the reservation of the alleged right to terminate the agreement if the claimants did not take steps to lift the German injunction.

I believe this affirmation is fatal to the defendant’s case based upon the alleged sales of Lonsdale branded products by SWB or the claimants in Belgium and the Netherlands. The defendant was aware of all material facts in relation to these sales by the end of September 2007 and nothing has emerged since which sheds any further light upon them.

The position in relation to the alleged sale of Lonsdale branded products in France and Sweden is, however, again different and intimately tied to the allegation that the claimants consented to the sale by SIA and Punch of Lonsdale branded products in the Leofelis Territories. It is not suggested that the defendant was aware of the involvement of SIA, the SIA Licence or the quantity of sales made by SIA. Further, the defendant had no reason to believe that these sales were made with the consent of the claimants. In relation to SIA and Punch, it cannot therefore be suggested that the defendant acted in a manner consistent only with treating the agreement as still alive and with knowledge of the facts upon which it now seeks to rely as giving rise to the repudiation.

I have found that the defendant may succeed in establishing that the claimants authorised sales by SIA and Punch of Lonsdale branded products into the Leofelis Territories and that some of these products subsequently found their way onto the market in France and Sweden. Nevertheless, it must be recognised that this case carries with it the contention that, contrary to the evidence of the claimants, the SIA Licence did not represent the whole agreement between the parties. This is an extremely serious allegation and, while I consider the defence may succeed, I consider it improbable that it will do so, particularly in the light of the evidence of Ms King.

In circumstances such as these it is appropriate for the court to consider whether to make a conditional order and, in particular, to require the defendant to pay a sum of money into court. The claimants submit that the appropriate order would be to require the defendant to make a payment into court of the royalty instalments payable on 1 July and 1 October 2007 and so show in earnest that it does want to dispute the issue of repudiation and is not using this issue to secure some tactical advantage.

The defendant resists such an order on three grounds. First, it says there is an issue in relation to mitigation, particularly in relation to the royalty instalment due on 1 October 2007. In my judgment, this is a bad point. If the defendant’s purported termination was invalid, then the royalty payment became due on 1 October 2007 and the fact that the Licence Agreement was subsequently terminated in November did not entitle the defendant to a refund. The claim is in debt and in respect of an accrued sum and that remains the case irrespective of what the claimants may have done to mitigate their loss after the termination date.

Second, the defendant points to its ongoing inquiry as to damages in the 2005 Proceedings and contends that sums may be found due and owing by the claimants to the defendant which may give rise to a set off. I believe this argument involves a misunderstanding as to the purpose of a conditional order. It is not an order for an interim payment but rather an order for a payment into court. Its purpose is to require the defendant to show that it is serious about pursuing its defence and is not seeking to secure some tactical advantage.

Finally, the defendant says it does not have the money to pay €1,675,000 into court and that the effect of the order sought will be to stifle its defence. The claimants gave notice of their intention to seek a conditional order if their application for summary judgment failed but, through no fault of their own, this notice was given at a relatively late stage. In the circumstances, and following the guidance given by the Court of Appeal in Anglo-Eastern Trust Ltd v Kermanshahchi [2002] EWCA 198, it seems to me that the defendant should be given an opportunity to place full and proper evidence before the court to the effect that the order will stifle its defence, such evidence to include evidence of the assets available to it.

Similar circumstances to those of the present case arose recently in Nasser Kazeminy and Ors v Kamal Siddiqi and Ors [2009] EWHC 3207 (Comm). In that case Teare J indicated in his judgment that he proposed to make a conditional order requiring the defendant to pay a sum into court. He further indicated that if, after seeing the judgment in draft, the defendant considered that the conditional order would stifle its defence and wished to provide evidence in support of any such contention then he would consider an application for that purpose and any evidence in support after formally handing down judgment.

All parties before me invited me to take the same course and that is what I shall do. Accordingly, I propose to make a conditional order that the defendant must pay into court the sum of €1,675,000. If, after seeing this judgment in draft, the defendant considers that the order I propose to make is one which will stifle its defence and wishes to provide evidence in support of that contention then I too will consider its application for that purpose and any evidence in support after formally handing down judgment. The conditional order I propose to make will not be made and perfected before any such application has been heard. If the application is granted and I find that it is appropriate to order payment into court of a lesser sum, then the conditional order will reflect that finding.