IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Friday, 9th March 2001
Before:
MR JUSTICE PUMFREY
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MR JASBIR DHILLON (instructed by Messrs Baker
McKenzie, London EC4) appeared on behalf of the Claimants.
MS HEATHER LAWRENCE (instructed by Messrs Pinsent Curtis, Leeds) appeared on
behalf of the Defendants.
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This is an application for summary judgment under CPR 24.2 in an action for unpaid royalties and damages said to arise under a licence agreement dated the 10th December 1996.
The technology which is the subject matter of the licence is concerned with filtration of fluids to remove suspended solids. The licensor is an English company, Kalsep Limited, to whom I shall refer as "Kalsep", which started life, as I understand, as a management buy-out from BP in the late 1980s or early 1990s. The defendant, X-Flow BV, is a Netherlands company. Both companies are in the same line of business and are of broadly comparable size.
In 1995, Kalsep and X-Flow entered into an agreement which was called a Technology Evaluation Agreement, to which I shall refer as the "TEA", in respect of certain membranes for use in water filters. The membranes are referred to in this agreement and elsewhere as Low Fouling Membranes.
The TEA was, as its name suggests, an agreement which was entered into with a view to the defendant, X-Flow, evaluating and developing certain material which was provided to it by Kalsep. The nature of the agreement was to confer upon X-Flow a non-exclusive non-transferrable licence to use what was called KSP Information in the area of hollow fibre and capillary membranes for use in reverse osmosis, nano-filtration and micro-filtration applications for the purpose of carrying out development work. Development work was defined as " ;any programme of work by X-Flow which develops the procedure for the fabrication of low fouling membranes and/or evaluates the performance of low fouling membranes as agreed in writing between Kalsep and X-Flow", and the definition of KSP Information was "any knowledge, information and technical data or know-how relating to low fouling membranes supplied by Kalsep to X-Flow either prior to the TEA or under the TEA, together with all knowledge, information, technical data and know-how relating to low fouling membranes derived by X-Flow as a consequence of its performance under the agreement".
At the time this agreement was entered into, Kalsep had already made a patent application in relation to certain low fouling membranes, and this fact is recited in the TEA. As one would expect, the TEA explicitly contemplates a further agreement between Kalsep and X-Flow. None the less, X-Flow paid what is sometimes called key money for the agreement and I think the sum paid out for the rights under the TEA were some 50,000 Dutch Guilders.
Clause 2.4 of the TEA provided that at the end of the period of evaluation discussions would be held concerning the commercial exploitation of low fouling membrane and gave X-Flow a right of first refusal to production of membranes according to the LFM Technology, and various aspects of the agreement, the contemplated agreement, are referred to. The agreement is concerned both to safeguard the information which was provided by X-Flow to Kalsep but also to deal with the ownership of any work carried out under the TEA, and so by clause 3 of the TEA, all copyrights and other proprietary or ownership rights and the results of any development work vest in Kalsep. Kalsep is given a right to apply for patent protection in relation to work done by X-Flow during the life of the TEA, and X-Flow is given a royalty free right to exploit the results of any invention conceived by X-Flow arising from the development work, provided that X-Flow has previously entered into a licence agreement with Kalsep for the exploitation of low fouling membrane technology. The TEA contains in clause 7, first of all, a choice of law clause and, secondly, an arbitration clause, to which I shall need to return briefly in this judgment.
Both during the term of the TEA and afterwards, there were discussions between the parties relating to a further agreement of the sort that is contemplated by the TEA. The evidence before me is exiguous as to the work that was done by X-Flow during the currency of the TEA. It is far from clear to what extent the technology was seriously evaluated, but there is no suggestion on the evidence that no work of any description was done. The discussions matured ultimately into a draft agreement which was provided by Kalsep for the consideration of X-Flow. X-Flow conducted the negotiations with Kalsep in relation to this draft agreement without the assistance of lawyers. Indeed, most of the negotiation on the evidence appears to have been conducted by the then managing director of X-Flow, Mr Coehnen, or his wife. Kalsep were at all times advised by their solicitors who prepared the drafts of the agreement for submission to X-Flow. The negotiations between the parties were not negligible, and I was shown at least one letter from X-Flow to Kalsep for the purpose of persuading me that the negotiations had been real negotiations.
On 10th December 1996 the agreement with which I am concerned was signed. It is in some respects a remarkable document. It is convenient if I set the relevant terms for the purposes of the discussion which will follow out here. The agreement is described as at Technology Licence Agreement. It is divided into 15 clauses and three schedules.
The recitals to the agreement are as follows. The first is that the licensor -- that is to say Kalsep -- owns the patents, the know-how and the trade marks. I am not concerned with the trade marks since it seems to me that there is at least a strongly arguable case that the agreement never became effective so far as any trade marks are concerned. However, the patents are defined as follows. Patents means "patents from patent applications, short particulars of which are set forth in Schedule A, and any applications for patents made by and any patents granted to the licensor with respect to the licensed product and the know-how or any improvement thereto". Without chasing the definitions, it is only necessary to note at present that the only patent, or patent application listed in Schedule A is a single patent cooperation treaty application GB9502500 with the publication number W096/27429.
The know-how is defined as the "unpatented secret substantial and identified know-how, technical and other information developed or acquired by the licensor which is not in the public domain, relating to the development, manufacturing and marketing of the licensed product, including without limitation all related ideas, concepts, inventions, discoveries, data, formulae and specifications". This definition manages to be both wide and diffuse, but for present purposes it is only necessary to draw attention to the words "and identified" since the definition of know-how appears to contemplate that any item of know-how should have been identified as such.
The rights that are granted by the agreement are set out in clause 2.1.1, by which Kalsep agrees to grant to X-Flow a non-exclusive licence to exploit the patents and grants to X-Flow a non-exclusive licence to use and develop the know-how in each in the manufacture and marketing of the licensed product in the territory, provided that in so far as the patents and/or the know-how are used to manufacture and/or market capillaries, such licence shall be sold and for the avoidance of doubt the licensor and its associated companies shall retain the right to exploit the patents and/or the know-how in the manufacture and/or marketing of capillaries in the territory. Both licensed product and capillaries are defined terms. "Licensed product" means low fouling capillary membranes, manufactured and marketed pursuant to the licences granted under the agreement, and "capillary" means a hollow fibre membrane with an internal diameter of 0.5 to 5 millimetres.
It is difficult to see what the effect of the proviso to clause 2.1.1 is, since it would appear from the definitions which I have just quoted that licenced product consists only of capillaries. Be that as it may, the effect of 2.1.1 is obviously to grant a sole licence to X-Flow -- that is, a licence exclusive of the whole world expect the licensor -- to work the patent and to use the know-how.
By clause 3.1 of the licence agreement its provisions effectively supplant those of the TEA, to which I have referred. It provides, after dealing with disclosure according to the licence agreement, that the licensee "hereby acknowledges that any know-how already supplies or shown to its employees, agents or contractors by the licensor prior to or at the commencement date shall be deemed to have been furnished under this agreement". This has the effect that information passing under the TEA will fall to be dealt with as information provided under the licence agreement and that the use of that information will be royalty bearing in accordance with the provisions of the licence agreement.
Notwithstanding the fact that the licence is a sole licence, it none the less contains in clause 4.1 a best endeavours clause, which obliges X-Flow to use its best endeavours to maximise the manufacture and marketing of the licensed product throughout the territory.
The royalties clause, with which I am principally concerned, is comparatively straightforward. By clause 5.1, as consideration for the rights granted by Kalsep to X-Flow under the agreement, that X-Flow shall pay to Kalsep royalties as specified in Schedule B. Schedule B defines various royalty rates by reference to the square metreage of product but also provides for minimum royalty. Minimum royalties are stated to be year two through expiry or termination with a minimum annual royalty of £80,000. The reference to year two might perhaps be misunderstood. The definitions clause contains a definition for the word "year", which means that year one lasted for 21 days, with the result that year two began to run on 1st January 1997, year one having lasted only from 10th December 1996 to 31st December 1996.
There is an improvements clause, to which I should pay some attention. Clause 6.1 provides that if the licensor -- that is to say Kalsep -- shall devise any improvement it shall disclose to licensee X-Flow the nature and means of making use of the improvement and shall grant to the licensee without requiring payment of any increased royalty a personal non-transferrable non-exclusive right to us the improvement in the territory whilst this agreement remains in force and on the terms already agreed in respect of the know-how. By clause 6.2, if the licensee shall devise any improvement it shall disclose to the licensor the nature and means of making use of the improvements and shall grant to the licensor in so far as the improvement is not severable from the licensor's technology licensed hereunder an exclusive perpetual royalty free licence to use and sub-license the use of the improvement in the territory, providing that in so far as such exclusive licence continues beyond the expiry or termination of this agreement the parties shall discuss and agree between them the consideration, if any, which may be payable by the licensor to the licensee for such continuing licence.
This is an improvements clause affecting both parties which while not mutual certainly provided a continuing obligation upon the licensor (Kalsep) to communicate improvements during the subsistence of the agreement to X-Flow. It is to be observed that any work done by X-Flow by virtue of clause 6.2 which amounts to an improvement, itself a defined term, such improvement essentially becomes the property of Kalsep. An improvement is widely defined. It means any augmentation, modification or improvement of the know-how or any development with respect to the licensed product whether patentable or not. It therefore is probably apt to cover pretty well all work which X-Flow might carry on under the agreement.
The term of the agreement is dealt with by clause 11. The principal provision which is to be found in clause 11.1 is that the agreement shall commence on the commencement date, defined to be 10th December 1996, and subject to the remaining provisions of the clause to continue in full force and effect for the longer of the life of the patents or 15 years from the commencement date, which is defined to be the initial period, and thereafter without limit of period, unless and until terminated by either party on not less than six months' notice, such notice to expire at the end of the initial period or at any time thereafter.
This clause provides that unless the agreement is terminated that the licence granted lasts for a minimum period of 15 years. The provisions for termination contain, first, a provision for termination by either party, by virtue of clause 11.2.1, for a material breach of the agreement by the other. So far as the licensee (X-Flow) is concerned, material breach is defined as including any breach of the payment obligations under the agreement. There is a provision for termination in the event of insolvency of either party in substantially standard form. Further rights of termination are given to the licensor (Kalsep) to determine as follows. By clause 11.3.1, if the licensee (X-Flow) fails in any year to achieve the minimum royalty as set out in Schedule B. Secondly, by clause 11.3.2, if the licensee (X-Flow) challenges or disputes the validity or ownership of any of the patents, the know-how or the trade marks, including by contesting the secrecy of the know-how or by taking any action to oppose the renewal of or to cancel any registration of the patents or the trade marks, or, finally, by clause 11.3.3, the licensee (X-Flow) undergoes any change of legal or beneficial ownership or control, it being obliged to notify the licensor in writing within 30 days of such change.
The final clause to which I have referred is a curiosity, since it appears to require X-Flow to notify Kalsep of every change in its shareholding, whether the parcel of shares which is sold is small or large, since the words "any change of legal ownership" appear to me to encompass any sale of shares. Clause 11.3.2 is, however, important. It seems to me to exclude the possibility of what is often called the licensee's estoppel. This clause (11.3.2) seems explicitly to contemplate that if the licensee should challenge validity then the licensor has the right to determine the agreement if it sees fit. This is inconsistent with the normal licensee's estoppel, which prevents any challenge to validity by the licensee and, in particular, means that the licensee cannot allege in defence to an action for royalties that the subject matter of the licence is invalid. For other reasons, as will become apparent, this is more a comment than a material finding, since it seems to me that the effect of such a challenge is dealt with by other provisions of the agreement.
Since the only interests which are licensed under this agreement are, first of all, a patent application, which has not matured into a granted patent in any jurisdiction, and know-how, which may or may not at some subsequent date fall into the public domain, it becomes clear that the licence is effectively a guaranteed payment to the claimant (Kalsep) of £80,000 per year regardless of whether a patent is ever granted on the application and regardless of whether any of the know-how is properly describable as such or is, as has been suggested in the course of these proceedings, available on the street.
I turn now to the warranties to the provisions of the agreement as they relate to validity. Clause 9.1 of the agreement is of central importance to the case before me. It provides as follows,
Nothing in this agreement shall be construed as a representation, warranty or promise by the licensor as to the utility or validity of the patents, the know-how or the trade mark, or the quality, safety or marketability of the licensed product, and all terms, conditions, warranties and representations which would otherwise be implied in this regard, whether by statute or otherwise, are hereby excluded.
By clause 9.2, there is a warranty by the licensor (Kalsep) that the exercise by the licensee of the licences granted under this agreement, in accordance with the terms and conditions hereof, does not infringe the intellectual property rights of any third party in the territory, and the licensor agrees to indemnify the licensee against any claims and expenses whatsoever arising out of or by reason of any third party claim of infringement.
Finally, I should refer briefly to the entire agreement clause (15.7). This agreement contains all the terms agreed between the parties regarding its subject matter and supercedes any prior agreement, understanding or arrangement between the parties, whether oral or in writing. No representation, undertaking or promise shall be taken to have been given, or be implied, from anything said or written in negotiations between the parties prior to this agreement except as expressly stated in this agreement. Neither party shall have any remedy in respect of any untrue statement made by the other upon which that party relied in entering into this agreement unless such untrue statement was made fraudulently, and that party's only remedy shall be for breach of contract as provided in this agreement.
I have described this agreement as remarkable. My reasons, really, are as follows. First of all, the best endeavours clause is coupled with the sole licence but not an exclusive licence. It is difficult to see how a licensee can be obliged to use his best endeavours to exploit and agreement in competition with his licensor.
Secondly, the right to a minimum royalty appears to be substantially indefeasible while the agreement remains on foot. Validity and utility of the patent and the know-how are not warranted. There is no right to reduce royalty or to terminate the agreement if the know-how is useless or if the patent is invalid or if no patents are granted upon the application. Equally, there is no royalty adjustment if patents are granted in some countries but not in all, and no provision for royalty adjustment if the patent is granted in no relevant manufacturing company.
Thirdly, the right to improvements does not depend on the information used or modified having belonged to the licensor at all, and thus, for example, if a public document is supplied as identified know-how to the licensee, the work done on it, none the less, belongs to the licensor.
It is strongly arguable, in my view, that if the defendants had been advised by English advisers, who had failed to draw the defendant's attention at least to these features of the agreement, those advisers would have been negligent. No reasons have really been suggested why a properly advised licensee should wish to enter into an agreement in this form. It cannot, I think, be seriously contended that the defendant in entering into this agreement was at least grossly improvident.
Mr Coehnen, who in fact negotiated the agreement, gives evidence in this case, surprisingly for the licensor (Kalsep). He advances no justification for his agreement to these features of the licence, and indeed it seems that after his departure from X-Flow an attempt was made over a substantial period of time to re-negotiate the agreement. This effort was manifestly fruitless. But during the subsistence of the negotiations no royalties, whether minimum royalties or any other, were paid.
On 29th November 1999, at the end of the negotiations, X-Flow's Dutch lawyers wrote to Kalsep as follows, so far as material,
It will have become apparent to you during the course of the negotiations with X-Flow regarding the TLA [that is to say the Technology Licence Agreement, the agreement with which I am concerned] that there is no consideration for this agreement. As you are well aware, X-Flow has in fact never used the low fouling technology on which the TLA is based and does not foresee that it shall do so in the future. The low fouling technology has no marketable value for X-Flow. Furthermore, Kalsep's patent application in respect of the low fouling technology will more than likely not be granted since the technology is based on know-how that was already in the public domain or, alternatively, is based on technology which was already patented by X-Flow or known to X-Flow. It is therefore neither confidential nor new. Not only the patent but also the validity of the know-how licence is open to question. Information which is effectively in the public domain in one country cannot very well be regarded as confidential in another. In order for Kalsep to show that the know-how licence has any value it would have to prove exactly what the confidential information in question is. This is impossible for Kalsep to show seeing as the licence technology was developed jointly by Kalsep and X-Flow in X-Flow's laboratory and with the use of existing patented technology and know-how belonging to X-Flow. Also the know-how is therefore neither confidential nor new. As a result of lack of consideration, the TLR is either void ab initio or voidable. There is therefore no basis on which Kalsep can now claim payment of royalties past or future. The statement in your letter of June 28th regarding the set off of the debt owing by Kalsep in the amount of Netherlands Guilders 295,562.74, against the royalties as aforementioned, is accordingly equally invalid. In the event, the TLR is not void ab initio or voidable, the TLR can and will be terminated by X-Flor despite the fact that there is not an explicit term in the TLA for the termination thereof by way of an implied term and on reasonable notice. In the event the TLR is not not void ab initio or voidable, X-Flow hereby terminates the TLA taking into account an implied reasonable notice period of three months -- that is, by per February 29th, 2000.
I do not think I need to read any of the rest of the letter.
In response to this, on 7th January 2000, Kalsep terminated. The material part of the letter is as follows,
We have come to the conclusion that the relationship with X-Flow cannot be sustained any longer and that X-Flow is unlikely to agree any further negotiations. Since you have failed to achieve the minimum royalty in the years 1997 to 1999, and since by your lawyers' letter of 3rd December you are disputing the validity or ownership of the patents and know-how, we hereby give you notice that the agreement is terminated as of this date in accordance with clause 11.3.1 and/or 11.3.2. This is without prejudice to the rights which have accrued to us under the agreement and which we reserve, and we refer you to clause 11.6 in this regard.
Then in a series of numbered paragraphs they set out the matters which they contend X-Flow are obliged to deal with having regard to the provisions for termination in the agreement.
A number of points need to be made in relation to this notice. The first is that it is not termination for breach. There are only two grounds stated for termination. The first one is a failure to achieve minimum royalty under clause 11.3.1, and, secondly, a dispute as to the validity of, or ownership of, the patents and know-how under clause 11.3.2, to both of which I have referred above. It follows that there never was, so far as this notice is concerned, any termination for breach of the agreement. This is relevant when I come to consider the further claim for damages in this case. One can summarise the claim advanced as follows. First of all, there is a claim for £241,534.24, together with interest, in relation to unpaid minimum royalties. Secondly, there is a claim for the return of property delivered by Kalsep to X-Flow, and, finally, there is a claim for damages in relation to future royalties. The claimant makes this application before summary judgment only in respect of the pecuniary remedies.
As Mr Dhillon said in his skeleton argument, and repeated in submissions before me, this is, so far as the claimant is concerned, a very straightforward claim, and where one is dealing with an agreement as improvident as this one, he rightly warned me to be on my guard against feeling sympathy for those who enter into improvident agreements at arms length. He says that the strength of the defences can really be ascertained on inspection. They are as follows. The fundamental contention is, first, that the patent application will never mature into a grant of patent in any jurisdiction and is an application made in relation to hopelessly unpatentable subject matter. It is either, to use the jargon terms, anticipated or obvious. Secondly, it is said that all the know-how is either published in the patent, which is now itself being published, or published elsewhere and is, to use the phrase which I have already quoted, available on the street.
The defendant then contends, either by way of its pleaded case and the defence which has already been served, or by way of a proposed amendment, or, finally, by way of argument addressed by Ms Lawrence at the hearing, as follows. First, the agreement was entered into under a mistake as to the existence of any relevant rights in relation to know-how and as to the validity of the patent application, or the patentability of its subject matter. The case on mistake is put two ways. Either there is a mutual mistake between the parties, going to the root of the contract so that the agreement is void, or, alternatively, the agreement is voidable, or the defendants are entitled to rescission on the footing of a unilateral mistake in circumstances in which the remedy of rescission would be available. Secondly, she says, there is no consideration for the agreement. Thirdly, she says there is a collateral or implied warranty that some information in the way of know-how at least is not in the public domain. Fourthly, she says there is collateral or implied warranty that a patent would be grant ed on the application, or at least that the application contains some patentable subject matter. Fifthly, she says that there is an implied term that the agreement would terminate if all the knowledge comprised within the know-how falls into the public domain and no patent rights result from the patent application.
She further argued that in so far as there was any relevant know-how, or patentable subject matter, it belonged not to Kalsep at all but to BP, since it was not comprised within the management buy-out to which I have referred. Taking this lack of title, together with the valueless nature of the patent and the know-in, meant, as she put it, that the first recital to the agreement, which recorded the common understanding of the parties, was simply untrue and there was nothing to contract about.
Finally, she contended, I think it is right to say for the first time at the hearing before me, that this agreement was so manifestly disadvantageous to X-Flow that it is not proper merely to describe it as improvident but that it should be described as oppressive and that it was liable to be set aside as an unconscionable agreement, a contention for which she relied upon the modern law in relation to unconscionable agreements as summarised by Millett LJ in Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144.
The last contention she elaborated in the following way. She pointed out, first of all, that X-Flow was represented by a Dutch speaker, albeit having some command of English, from, what she described as, a civil law jurisdiction. This is correct. She argued that the agreement's unconscionability could be demonstrated by a further development of an observation which I have already made. Suppose, she says, that information identified as know-how was provided by Kalsep to X-Flow in the form of a published thesis. Then she said, suppose X-Flow uses the information in the thesis to make a technical advance. Then she says, suppose that that transaction took place under TEA. The TLA provides, she says, that it is too late now for X-Flow to complain. Because of clause 3.1 of the TLA, to which I have referred, the technical advance already belongs to Kalsep and cannot therefore be used unless X-Flow enter into the TLA, as clause 3.5 provides, which I have quoted. This, she says, effectively leaves Kalsep free to impose any terms on X-Flow provided X-Flow wish to use their own development on the basis of public information. Furthermore, she observes that thereafter the licensed information which would be derived entirely from X-Flow's own work on the basis of published information would become know-how within the TLA by virtue of clause 3.1 of the TLA, to which I have referred, and would effectively be bootstrapped into the agreement. She also refers to many of the anomalous features of the agreement, to which I have already referred, in submitting that taken as a whole the agreement is oppressive.
I think it is convenient if I deal with these points in what seems to be a logical order, having first referred to the basic principles which determine the manner in which an application of this sort is to be dealt with. In Swain v Hillman [2001] 1 All ER 91, Lord Woolf, the Master of the Rolls, sets out the policy considerations which underlie CPR 24.2. CPR 24.2 provides that,
The court may give summary judgment against a claimant or defendant on the whole of a claim or on a particular issue if
(a) it considers that
(i) that claimant has no real prospect of succeeding on the claim or issue, or
(ii) that defendant has no real prospect of successfully defending the claim or issue, and
(b) there is no other compelling reason why the case for issue should be disposed of at trial.
The Practice Direction under Part 24 enlarges somewhat upon these provisions. In paragraph 4 it says that where it appears to the court possible that a claim or defence may succeed but improbable that it will do so, the court may make a conditional order, as described below. Then paragraph 5 outlines the orders the court may make. Paragraph 5 is obviously merely illustrative and does not in any way restrict the discretion of the court to make an appropriate order in all the circumstances, but the orders which the court may make on an application under Part 24 are said to include, (1) judgment on the claim, (2) the striking out or dismissal of the claim, (3) this dismissal of the application or, (4) a conditional order, and conditional orders are explained as being orders which either requirement the payment of a sum of money into court or orders requiring a party to take a specified step in relation to the claim or defence, as the case may be, and providing that the party's claim is dismissed or the statement of case will be struck out if he does not comply.
Lord Woolf in Swain v Hillman points out that the words "no real prospect of succeeding" do not need any amplification; they speak for themselves. The word "real" distinguishes fanciful prospects of success or they direct the court to the need to see whether there is a realistic as opposed to a fanciful prospect of success.
Lord Woolf says this at the end of his judgment, "Useful though the power is under Part 24, it is important that it is kept to its proper role; it is not meant to dispense with the need for a trial, although there are issues which should be investigated at the trial; as counsel put it in his submissions, the proper disposal of an issue under Part 24 does not involve the judge conducting a mini trial; that is not the object of the provisions; it is to enable cases where there is no real prospect of success either way to be disposed of summarily". I think the words "no real prospect of success either way" mean no real prospect of success either for the claimant or, alternatively, for the defendant.
The claimant's answer to the defendant's contention is as follows. First of all, it is not open to the defendant to say that the patent is invalid or that the know-how is valueless in answer to a claim for royalties under the agreement. In advancing this contention, the claimant relies upon the many cases which set out the licensee's estoppel. It seems to me that clause 11.3.2, to which I have already referred, makes this a difficult argument to maintain. It seems to me that the clause 11.3.2 does, for the reasons I have given, contemplate challenges to the validity or ownership of the know-how and the patent. Secondly, it is said that it is unarguable that there is no consideration. The defendant, it is said, had the comfort of a licence so that if there were some know-how, it would not be sued and, more importantly, if there were patentable subject matter, the defendant is protected by its licence against the subsequent claim. In other words, at its lowest the defendant had the comfort of the licence. In my view, that contention is correct. The defendant did indeed have at least the comfort of the licence during the period, which I may say is still continuing, when it is unclear whether a patent is to be granted on this application or not, and unclear as to what the scope of any ultimate granted patent is. Thirdly, it is said that any question of implied or collateral warranties either in relation to the patentability of the subject matter of the patent application or, alternatively, the usefulness, utility and unpublished nature of the know-how, is excluded by clause 9.1 of the agreement. With this I agree. It seems to me to be absolutely plain that the function of clause 9.1 is to, as Mr Dhillon put it, allocate the risk of invalidity, or lack of patentable subject matter, and lack of utility of the know-how on to the defendant licensee.
It seems to me that in truth the case on implied warranties is hopeless, having regard to the provisions of clause 9.1. There is no scope in this agreement for the implication of any warranty relating either to patentability of the subject matter of the application or the utility of the know-how.
So far as the question of collateral warranties are concerned, which are also alleged in the alternative to implied warranties, it seems to me that the contention is equally clearly to be disposed of in the light of clause 15.7 of the agreement, the entire agreement clause to which I have already referred. This entire agreement clause seems to me to me effective to exclude any collateral matter relating to the subject matter of the agreement as a whole. Any contention therefore as to the existence of a collateral warranty seems to me in the light of clause 15.7 to be doomed to failure.
So far as the implied right to determine is concerned, I have more difficulty. It is not necessarily excluded by clause 9.1, since it is a clause which is sought to be implied with a view to dealing with the position where the agreement becomes devoid of substance in the future. But there is no suggested breach of this term so far as the patent application is concerned. Since the application is still on foot, any implied term as to termination, if no valid patent results, cannot yet have arisen. The patent applications are still on foot and have not been finally disposed of, as I understand it, from any jurisdiction. Accordingly, if such a term is to be implied it is in any event incapable of operation on the facts as they now appear.
This question can be examined in a little more detail. If one considers the question of what was in fact provided to the defendant by way of know-how, itself essentially a question of fact, one observes that the know-how which is to be considered is the know-how which is called, in the definition to which I have referred, identified. But until the patent is refused everywhere I cannot see why any right to determine could arise, even if no identified know-how was ever communicated by Kalsep to X-Flow, even as a matter of implication.
I turn to the question of mistake. The contention advanced by Mr Dhillon is two-fold. First of all, it has two aspects. He says that whether I come to consider the question of common mistake or unilateral mistake giving rise to a right to rescission, there is a threshold question which has first to be considered. This question may conveniently be taken from the judgment of Rimer J in Clarion Ltd v National Provident Institution [2000] 1 WLR 1888 at page 1899, where Rimer J quotes from the judgment of Steyn J (as he then was) in Associated Japanese Bank (International) Ltd v Crédit du Nord SA [1989] 1 WLR 255. The quotation is:
It might be useful if I now summarised what appears to me to be a satisfactory way of approaching this subject. Logically, before one can turn to the rules as to mistake, whether at common law or in equity, one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many pleas of mistake will either fail or prove to have been unnecessary. Only if the contract is silent on the point is there scope for invoking mistake. That brings me to the relationship between common law mistake and mistake in equity. Where common law mistake has been pleaded, the court must first consider this plea. If the contract is held to be void, no question of mistake in equity arises. But, if the contract is held to be valid, a plea of mistake in equity may still have to be considered.
Mr Dhillon says that the contract in the present case itself by express provision in clause 9.1 provides who bears the risk of the relevant mistake. He says that the words "nothing in this agreement shall be construed as a representation, warranty or promise by the licensor as to the utility or validity of the patents, the know-how or the trade marks, and all terms, conditions, warranties and representations which would otherwise be implied in this regard, whether by statute or otherwise, are hereby excluded" are more than sufficient to indicate that this agreement contemplates in its terms that the agreement that the know-how is valueless and the patent application contains no patentable subject matter.
I have examined this contention with care, and I hope with a critical eye, and I cannot see the defect in it. It seems to me that the agreement does indeed exclude the operation of the doctrine of common mistake or, indeed, a mistake in equity in the manner indicated by Steyn J in the extract which I have just read.
There is a subsidiary contention by X-Flow that there was a mistake in relation to the TEA. It seems to me that that agreement is now, so far as both the patent application and the know-how are concerned, plainly displaced by the provisions of the TLA itself, having regard to clause 3.1 of the latter, which I have already referred to.
I can now turn to the final question, which is whether the defendant ought to be given relief against this agreement as an unconscionable bargain. I have already set out the factual contentions upon which Ms Lawrence relies. The unconscionability can be summarised in this way. If one assumes, as one must for this purpose, that the know-how available is available on the street, and that accordingly any relevant patent application is itself devoid of patentable subject matter, those facts were, or ought to have been, known to the defendant, as were their consequences. The applicable legal principle can be taken in a short statement from the judgment of Millett J (as he then was) in the Credit Lyonnais case [1997] 1 All ER 144, as follows, at page 152 below letter J:
Miss Burch did not seek to have the transaction set aside as a harsh and unconscionable bargain. To do so she would have had to show not only that the terms of the transaction were harsh or oppressive, but that one of the parties to it has imposed the objectionable terms in a morally reprehensible manner; that is to say, in a way which affects his conscience (see Multi Service Bookbinding Limited v Marden [1978] 2 All ER 489 to 502, [1979] Ch 84 at 110 per Browne Wilkinson J, and Alec Lobb (Garages) Ltd v Total Oil GB Limited [1983] 1 All ER 944 at 961, [1983] 1 WLR 87 at 95), where I pointed out there must be some impropriety both in the conduct of the stronger party and in the terms of the transaction itself that added that the former may often be inferred from the latter in the absence of an innocent explanation.
The difficulties of proof presented by that statement which confront the defendants are great indeed. It is necessary for the defendants to show impropriety, and that is to say not merely harshness but impropriety, both in the terms of the agreement and in the manner in which the agreement was arrived at.
Ms Lawrence argues that her clients are confronted with a grave difficulty since Mr Kronen is not only no longer employed by them but is on the contrary a witness appearing for the claimants. She says that it is possible to infer from the transaction itself not only that the agreement, for the reasons which I have outlined, is to be considered to be harsh and unconscionable, but also that undue pressure or improper means were used in obtaining Mr Kronen's agreement to it. Whether or not the agreement is not merely to be characterised as grossly improvident, it seems to me unarguable that improper means in the correct sense of the word "improper" were used in obtaining Mr Kronen's agreement. It seems that Mr Kronen's agreement was in point of fact truly given. It may well have been foolishly or ignorantly given but it was freely given, and there is no evidence at all which suggests any form of coercion or other improper pressure placed upon Mr Kronen or upon X-Flow as a company.
In those circumstances, it seems to me that it will be impossible for the defendants successfully to obtain relief from this contract as an unconscionable bargain. I must say that Ms Lawrence argued this point highly persuasively but in the end I was unconvinced by it. In my view, this is a genuine case of an exceptionally improvident agreement, ignorantly and foolishly entered into, that is not sufficient.
I turn finally to the question of future damages. For the reasons which I have given, this agreement was never terminated for breach. It was terminated according to its terms. Accordingly, the only rights of action which survived under clause 11.6 were those which had accrued in relation to pre-existing breaches of the agreement. Under the general law, non-payment of a sum of money due under an agreement is never a breach entitling the receiving party to put the agreement at an end unless time is of the essence, which it was not in this case. There was no right to terminate this agreement on the date on which it was terminated independent of the rights conferred by it, and I conclude, therefore, that there is no right to recover future damages in relation to lost future royalties under it. This claim, it seems to me, must fail. No relevant common law rights exist to be preserved by clause 11.6.
Mr Dhillon relied on the decision in the Stocznia Gdanska SA v Latvian Shipping Company [1998] 1 WLR 574, and in the speech of Lord Goff of Chieveley at page 585, where Lord Goff referred to the familiar principle of construction that clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law. In the present case, the only remedy arising by operation of law is an action for the debt; that is to say, the existing debt. For the reasons I have given, there is no right of action in relation to unaccrued minimum royalties.
I finally turn to the last limb of CPR 24.2. Notwithstanding the conclusions which I have come to, there is, I think, preserved by CPR 24.2 a discretion which may be exercised in circumstances which the rule requires to be compelling, none the less, to require a trial of the claimants' allegations. The editors of the White Book observe that in their view this makes little difference to the pre-existing law. They refer to Miles v Bull, a case in which the claimant's case appeared to be devious and crafty and not plain and straightforward, and they refer also to an old case, in which the claimant's case tended to show that he had acted harshly and unconscionably and it was thought desirable that if he were to get judgment at all it should be in the full light of publicity. I am in some doubt as to whether in the modern era it would be a proper exercise of a discretion if one were satisfied that there were no triable defence, none the less, to make a claimant who was being harsh or conceivably unconscionable to go through the burden of a trial merely to be held up to public opprotrium for recovering that to which he was entitled.
What I think the rules may require me to do is to stand back and to look at this transaction as a whole. It seems to me that, taken as a whole, the licence was in respect of a patent application which might or might not result in a grant of patent. When entered into, the know-how might or might not have been valuable. We still do not know whether the patent application will result in a grant of patent, and we do not know the extent of the value of that patent. We therefore do not know what the scope of the protection which will be conferred upon the claimant licensor is and on the scope of permission which the defendant will need to carry on its manufacturing processes as it wishes. In those circumstances, although I may well form the view that the defendant has paid through the nose for the consent which it has obtained, I cannot say that it is not liable to pay. I do not think there is any compelling reason to have a trial in this case, and I will grant judgment for the unpaid royalties only as asked. At present I am minded to strike out the claim for future loss, but I will hear counsel.