This article examines the recent appeal decision in the case of Rocep-Lusol Holdings Limited v Lindal Dispenser GmbH where the Pursuer was successful in enforcing the payment of royalties under a contract which licensed patents.
This case serves as a useful reminder of the court's approach to interpretation of commercial contracts. MFMac acted for the Pursuer in this case.
Background
Rocep-Lusol Holdings Limited ("the Pursuer") granted Lindal Dispenser GmbH ("the Defender") a contract for the exclusive license of patents for a dispenser valve system within aerosol cans in exchange for royalties. Last year the Court of Session heard arguments relating to both the contractual interpretation and competition law. The question for the court was whether the Defender was legally required to make royalty payments to the Pursuer after the patents had expired (which was before the end of the contract).
In relation to the contractual interpretation argument, the key point was the meaning of the definition of "Products". Under the agreement Products were defined as cans or actuators "falling under the scope of the protection of one or more Licensed Products". The Defender argued the correct meaning of this definition only covered products manufactured or sold during the period in which the patent remained in force. The court rejected the arguments made by the Defender and found in favour of the Pursuer.
Please see our previous article examining the initial decision in the Outer House here.
The Defender's grounds of appeal
The Defender did not challenge aspects of the initial decision in respect of competition law. The Defender relied on two grounds of appeal concerning contractual interpretation. Firstly, the judge had erred in his interpretation of the contract in finding that the Defender was not obliged to pay royalties to the Pursuer after the expiry of the patents. Secondly, as the contract granted an "exclusive licence", the judge was incorrect to reject the Defender's argument that the Pursuer was in breach of contract once the patents had expired - i.e. the licence could no longer be exclusive as anyone could make use of the inventions.
What approach will the court take to interpreting a contract?
In this case, there was no dispute between the parties about the general principles of contractual construction.
In its decision, the Inner House set out the approach to contractual interpretation as summarised in Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173. In this case the court held the court will look at the contract as a whole and adopt an iterative process when considering the meaning of a clause. A textual or contextual approach aren't mutually exclusive. The court will consider the circumstances surrounding the agreement, for example whether the contract was particularly complex and professional advisors were involved in negotiating and drafting it. However, even if that is the case, the court may still require to look at the factual background and consider clauses in similar contracts.
In light of this, the court took a primarily textual analysis of the contract in this case but also considered the contextual factors as well.
Decision
The Inner House rejected the grounds of appeal and found in favour of the Pursuer.
The court found that the parties could not have intended the wording in the definition of Products ("falling under one or more of the Licensed Patents") to mean that the technology used in the products involved the exploitation of an unexpired patent, as the parties knew when the patents were due to expire. The Defender's interpretation of the agreement would have resulted in both parties agreeing to a provision they knew would never be triggered, rendering the clause meaningless.
The court also disagreed with the Defender's interpretation of the clause granting the exclusive license to exploit the Licensed Patents. The Defender's interpretation was not the ordinary and natural meaning of the words used. It would also mean that the Pursuer had to adhere to an obligation (to maintain the registration of the Licensed Patents until they expired) which the Pursuer knew it would breach. The Defender's interpretation of the agreement was described by the court as "absurd".
It was held that the reasonable reader would have understood from the contract that there were some circumstances where royalties would be paid after the expiry of the Licensed Patents. It could not have been the parties' intention, and nor would it have made any sense, to include a clause allowing for payment (at a reduced rate) after the expiry of the Licensed Patents if on expiry there was no longer a requirement for the Defender to pay royalties.
Looking at the interpretation of the clause in the context of the contract
The court preferred the interpretation which fitted with the terms of the rest of the agreement. The Defender's position was that products sold after the expiry of the patent licence date were not 'Products' as defined in the contract and so royalty payments were not due. However, the court agreed with the previous ruling that the expression is open to interpretation. A reasonable reader considering the whole terms of the contract, as well as the background to it, would conclude that the parties intended the meaning to apply whether or not the patent relevant to the product had expired. Again, the court found this interpretation allowed for consistency between other aspects of the contract and enabled the contract to operate for the intended seven years.
The court stated it was perfectly sensible for the cost of royalty payments to be spread over a longer period than the life of the patents. In addition, the Pursuer had undertaken obligations which also existed beyond the expiry of the patents and these obligations were of significant value to the Defender.
The court did not agree with the Defender's position under the second ground of appeal. In order for the Defender's argument to be successful, it would mean that the Pursuer would have had to grant an exclusive licence to the Defender beyond the expiry of the Licensed Patents. The court described this line of argument as 'ill-founded'.
For these reasons both grounds of appeal were refused.
Business Common Sense
Although the court wasn't asked to consider business common sense as an interpretive aid, it did add that it wouldn't have helped the Defender's argument. The court particularly referenced that there was nothing unusual in having a longer period for payment of royalties than the duration of the Licensed Patents.
Comment
This case highlights the approach the courts will take when considering disputed contractual terms. Both a textual and contextual analysis can be applied and the extent to which one is preferred over the other will depend on the background factual circumstances. Ultimately, the court will look at how a particular interpretation sits within the contract as a whole.
Contractual interpretation can be a complex issue and any dispute is likely to depend on the specific facts in each case. For this reason, it is advisable to seek legal advice at an early stage.
