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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Electro Hydraulic Technology Ltd v Husco International Inc & Anor [1997] EWCA Civ 2409 (3rd October, 1997) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1997/2409.html Cite as: [1997] EWCA Civ 2409, [1998] 1 All ER 403

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ELECTRO HYDRAULIC TECHNOLOGY LIMITED v. HUSCO INTERNATIONAL INC and HUSCO INTERNATIONAL LIMITED [1997] EWCA Civ 2409 (3rd October, 1997)

Case No: QBENF 1999/0255/A2

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(HIS HONOUR JUDGE MADDOCKS)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 28^th July 2000

8. The structure of the Services Agreement was as follows. By Clause 15 it was stated to be the Entire Agreement between the parties and to incorporate by reference the Confidentiality Agreement contained in Exhibit A, which superseded that of January, 1993. It stated that no modification of the Agreement or waiver of any of its terms should be binding unless in writing and signed by Husco and by Mr Jennins for EHT
"Except that, in the event that the option is exercised by Husco for the Exclusive License, the terms and conditions of the Exclusive License shall control and take precedence over any inconsistent terms and conditions of this Services Agreement."
9. In addition to Exhibit A, the following Exhibits were attached. Exhibit B, which listed two Patent Applications, the second of which (No. GB9218610.5) was entitled "Linear Motor Valve"; Exhibit C, entitled Technical Details of Suspension Control Valve and Proportional Control Valve - 4 Port; Exhibit D, the Exclusive License Agreement.
10. The recitals to the Services Agreement read as follows:
"WHEREAS, WILLIAM STUART JENNINS (hereafter "MR JENNINS"), the director of EHT has contacted Husco in regard to development of technology applicable to electrically controlled hydraulic valves and more particularly described herein as Linear Motor Valve Technology;
WHEREAS MR JENNINS has applied for patent grants relating to Linear Motor Valve Technology on behalf of EHT, as more particularly identified in Exhibit B;
WHEREAS, EHT is sole owner of the patent applications and Linear Motor Valve Technology free and clear of all liens and encumbrances;
WHEREAS, HUSCO offers financial supports specified herein for development of manufacturable products from the Linear Motor Valve Technology;
WHEREAS, HUSCO is desirous of acquiring an option to an exclusive worldwide licence for manufacturing, sale and use of such Products within HUSCO's markets;
WHEREAS, HUSCO and EHT have made a letter Confidentiality Agreement on January 14, 1993, covering the disclosure of information related to the Linear Motor Valve technology;"
11. Clause 1 defined the following terms for the purposes of the agreement and Licence referred to in exhibit B as follows:

"a) The "Linear Motor Valve Technology" of MR JENNINS and EHT shall mean all drawings, written descriptions, documents and written and oral know-how communicated by MR JENNINS and EHT for manufacturing and using a hydraulic valve in which a spool is directly driven by a linear motor .. to control either flow or pressure or both. The "Linear Motor Valve Technology" also includes an associated electronic amplifier card.
b) "Product" shall mean any and all components and hydraulic valve assemblies designed by MR JENNINS and or EHT that incorporate the "Linear Motor Valve Technology", however, "Product" shall not extend to larger hydraulic systems and equipment in which such components and assemblies are used."
12. The following Clauses of the Services Agreement are relevant to its operation and termination for the purposes of this appeal.
"2. Patent Disclosure. Prior to signing this Agreement, EHT shall have disclosed to HUSCO, any and all patent applications of EHT relating to the "Linear Motor Valve Technology", including the Patent Applications listed in Exhibit B
3. Product Disclosure
a) within sixty (60) days of the signing of this Agreement, EHT shall transmit to HUSCO, such drawing, estimates and other information (including a list of all materials) as shall reasonably be required by HUSCO for determining reasonably accurate estimates of the cost of manufacture of a product incorporating "the Linear Motor Valve Technology" for an application selected by HUSCO ...
b) Nothing contained in this Agreement shall operate in any way to grant to HUSCO any form of License to manufacture any Product. Such License shall only be granted by virtue of Clause 5 hereof.
4. Payments for Services and Expenses. HUSCO retains EHT as independent contractor to perform consultancy and engineering services and product development related to the "Linear Motor Valve Technology. HUSCO shall compensate EHT for the services and non-travel expenses of MR JENNINS and other EHT employees in support of this effort in the amount of £2,000 ... per month, for the first six months of this Agreement, and in the amount of £3,000 .. per month thereafter for the term of this Agreement. Payments shall be made within ten (10) days after the end of each respective month. HUSCO shall also reimburse EHT for the travel expenses of MR JENNINS and other EHT employees ... incurred on travel away from their place of business in Frodsham .. to visit customers, when requested or required by HUSCO, such reimbursement to be made promptly upon submission of expense reports.
5. Option for Exclusive License. At any time during the life of this Agreement, HUSCO may exercise an option for an Exclusive License (Exhibit D to this Agreement), extending worldwide, within HUSCO's Field of Use for any and all Products incorporating the "Linear Motor Valve Technology" of MR JENNINS and EHT by delivering written notice of the same to EHT and EHT shall acknowledge, in writing, receipt of such notice within fourteen (14) days thereof.
6. EHT Duties. MR JENNINS agrees that he shall perform individually such services as are reasonably required by HUSCO. If for any reason MR JENNINS cannot perform such services, he undertakes to nominate a substitute and shall provide HUSCO relevant qualifications of the substitute.
7. Termination
a) This Agreement shall be effective for a term of six (6) months from the date of this Agreement at the end of such term either party .. may terminate by giving written notice, such termination to be effective one (1) month from the effective date of the written notice, the Agreement expiring not earlier than 30 June 1994. Upon exercise of the license option, HUSCO's right to terminate this Services Agreement shall be suspended until such time as royalties on sales for any consecutive twelve months reach or exceed £36,000 for the twelve months period.
b) This Agreement may otherwise be terminated:
i) Automatically upon expiration of the term or upon insolvency of either party;
ii) by either party in the event of material breach by the other which (if remediable) shall not have been rectified within thirty (30) days or such other longer period as the other party shall have required by prior notice in writing:
iii) Upon one (1) month's notice i f following a written request by EHT, HUSCO fails to make any payments as provided for under this Agreement.
......
9. Ownership of Technology. MR JENNINS represents that 1) he is authorised to make this Agreement on behalf of EHT, 2) that EHT is the owner of the "Linear Motor Valve Technology" ...
10. Good Faith (a) during the term of this Agreement, EHT agrees not to perform for a third party any services which are in HUSCO's Field of Use under this Agreement without first advising HUSCO in writing of the nature of the services contemplated and the party for whom they are to be performed.
(b) HUSCO warrants that, neither it nor any of its affiliates excluding Kayaba Industry Co ... shall not (sic) engage in the development, manufacture or marketing of Linear Motor Valves for a period of forty-eight (48) months from the Date of any termination or expiration of the Services Agreement.
[It is common ground that the double negative employed in sub-clause (b) was a mistake and that the word "not" should be deleted]
...
11. Termination for Non-Payment. If HUSCO fails to make any payment to EHT under this Agreement, EHT shall notify HUSCO in writing, and upon continuing failure of HUSCO to make the payment within one (1) month from written notice, EHT may terminate this Agreement on written notice.
...
16. Notices. Notices under this Agreement shall be in writing. Notices sent by registered mail or certified mail shall be effective when mailed. All other notices shall be effective when received by the party to whom notice is directed. Notices shall be addressed to parties at the following addresses ..."
13. So far as relevant, the structure and terms of the Exclusive License in Exhibit D (which under Clause 15 of the Services Agreement took precedence over the terms of the Services Agreement) were as follows.

Clause 1 of the License repeated the relevant definitions in the Services Agreement and added a definition as follows:

"d) "Licensed Intellectual Property" means such patents and patent applications of EHT and MR JENNINS which describe the Linear Motor Valve Technology, such patents and patent applications being identified in Exhibit L-1 hereto [which was in the form of Exhibit D to the Services Agreement] and including any subsequent patent applications or patents resulting therefrom.
e) "Licensed Products" means all products and methods for making such products which are covered by a patent claim in any of the Licensed Intellectual Property ...
..........
f) "Improvements and Extensions" in relation to the Licensed Products, shall mean all inventions and technology which would have an effect in increasing or decreasing sales of the Licensed Products."

The grant was contained in Clause 2 and Clause 3 as follows:

"2. License Grant. EHT hereby grants to HUSCO the exclusive right world-wide, to make, use and sell the Licensed Products in HUSCO's Field of Use, the grant extending to and including all Licensed Intellectual Property, and Improvements and Extensions of the said Licensed Products. Such Exclusive License Grant to HUSCO includes a right of HUSCO to sublicense within its Field of Use.
3. Term. The term License shall extend until expiration date of the last to expire of the parents and patent applications included in the Licensed Intellectual Property or if no patents issue for a term of fifteen (15) years from the Date of this License. Upon expiration of the terms of this Agreement HUSCO shall have a paid-up royalty-free, perpetual, exclusive license within its Field of Use and Territory for all Licensed Products and under all Licensed Intellectual Property and Improvements and Extensions of the said Licensed Products."

14. Clause 4 of the license provided for termination for breach by either party of any obligation which remains unremedied within 90 days of a written notice. Clause 6 provided for the payment of the royalties on Licensed Sales as set out in Schedule 1, the royalty being 5% on the selling price for annual net sales up to 500,000 and 3% thereafter, with provision for a non-refundable advance of £20,000. Clause 11 dealt with improvements. Each party was to provide from notice to the other of any improvements or extensions of the linear motor valve technology which it made during the life of the License. EHT granted to Husco the same exclusive license in respect of such improvements in extensions as originally granted, and EHT was, in turn, to be entitled to a non-exclusive licence outside Husco's Field of Use at a royalty rate to be agreed between EHT and Husco. By Clause 14 Husco was to use its best efforts to promote the sale and distribution of the Licensed Products within the territory in which it was present or represented. Clause 15 gave either party the right to terminate for non-performance of any of the provisions of the License following service of, and non-compliance with, a sixty-day notice to cure the non-performance.

THE BACKGROUND TO THE PURPORTED TERMINATION
15. Following the signing of the Service Agreement, both sides co-operated in the expenditure of considerable time and effort to obtain a customer in the motor manufacturing industry. Mr Jennins initiated the interest of Mercedes in March 1994 and, by April 1995 the work on development was being directed specifically to Mercedes' new S Class car. Between June 1995 and July 1996 some ten prototypes were built and the stage was reached by which Mercedes sought quotations for the EHT valve. On 8^th August 1996 Husco received a Letter of Intent in relation to a purchase order for the development and later delivery of a Valve Unit at (US)$199.80 per unit for 36,000 units per year over three years of which (US)$53.75 was the price for the EHT valve, the remainder being for Husco parts. Accordingly, on 22^nd August 1996 Husco exercised its option and granted Mr Jennins an additional £50,000 advance on royalties, incorporated into a `Memorandum of Understanding' dated August 31^st 1998 by which Husco agreed to pay EHT a commission of 0.5% for five years on non-EHT components on the Mercedes orders and the same on Rover orders using non-EHT technology.
16. Unfortunately, problems developed. In particular the spider spring used within the EHT valve had far too short a working life to satisfy the requirements of Mercedes. In addition, the valve was required to work off 1 amp of current rather than 3 amps. In the event, Mr Van Weeldon of Husco sketched out a new and simpler design dispensing with the deflector valve which was characteristic of the EHT prototype and incorporating two helical springs in addition to the spider springs present in the EHT valve. The whole arrangement was different; whereas the permanent magnets the presence of which was essential to the functioning of a linear motor valve were, in the EHT prototype, situated in the moving armature within the valve, they were, in Mr Van Weeldon's design rendered part of the fixed assembly. The result was that, as thereafter developed, the Husco valve had fewer component parts and was simpler, more reliable in operation and less expensive to manufacture then the EHT valve. However, at the time it was apparently treated by all concerned as a development from the EHT valve, it having been developed as a continuation of the project to meet the Mercedes order. From August 1996, work effectively ceased on the EHT valve and was concentrated on the Husco valve, Mr Jennins playing a decreasing part and being called on less and less in relation to the development work.
17. Mr Jennins' relations with Husco became soured in the course of negotiations which he initiated for a more formal agreement in relation to sales commission on non-EHT products in expansion of the Memorandum of 31^st October 1996. He was concerned that the Husco valve now being developed did not have the advanced technology and performance of the EHT valve which it was his objective to promote; yet the lack of development work on the EHT valve inhibited progress with his finding other customers for it. Between 24^th June 1997 and 7^th July 1997 Mr Jennins wrote to Husco reporting on four potential customers for the EHT valve whom he did not identify, referring to their interest as projects A, B, C and D. He received no reply save in relation to A, responding promptly thereto.
18. On 22^nd July 1997 Mr Ramirez wrote to Mr Jennins terminating the commission agreement for sale of Husco products other than to Mercedes and Rover. Despite negotiations re-opening, discussions were finally terminated by Husco on 3rd October 1997. On 13^th November 1997, prompted (as the judge found) by a concern that royalties might not be payable on the Husco valve as now developed, Mr Jennins wrote to Mr Gannon, Husco's finance officer, asking for an account of royalties. No reply was received and, on16th November, Mr Jennins wrote to Mr Wilke seeking to resolve differences over the performance of the valve being supplied to Mercedes and taking the point that sale of the `Product' was a Husco activity, EHT having no obligation to be involved in such sales. Having again received no reply, on 18<sup>th</sup> November 1997 Mr Jennins wrote to Mr Ramirez, giving `formal notice' under Clause 15 of the Exclusive License of breach by Husco of its obligation under Clause 14 to use its best efforts to promote the sale of the Licensed Product. On 19^th November 1997 Mr Wilke riposted by quoting Clause 4 of the Services Agreement as defining Mr Jennins' obligations and saying:
"In the past, I asked you to find the who, what, when and how many for the linear market. I have not seen anything for some time and according to what Jim [i.e. Mr Gannon] is telling me, there should be no reason for you not to proceed in doing that for me."
The judge held that the only occasion on which Mr Wilke had ever made a request on those lines was in April 1995, to which Mr Jennins had promptly replied and that Mr Wilke had overlooked his receipt of the letters for projects A, B, C and D in relation to which his only request for information had met with an immediate response from Mr Jennins. On 21^st November 1997 Mr Jennins passed on a further enquiry and, on 24^th November, wrote giving a report summarising the various projects and explaining his reasons for not naming the customers, which reasons he said (and the judge held) had in any event already been explained to Mr Wilke on a previous occasion which the latter could not remember.
19. On 9^th December 1997, Mr Jennins wrote a further letter to Mr Ramirez complaining that Husco was in breach of the best efforts clause in the License (Clause 14) and giving a 60-day notice to cure pursuant to clause 15. The letter was stated to be a formal notice under clause 19 of the Exclusive License Agreement. The immediate response of Husco was, without notice, to direct that the monthly payment of £3,000 due under the Services Agreement on 10^th December 1997 (in respect of the month of November) be stopped and on 11^th December Mr Wilke wrote stating that Mr Jennins had not supplied all the customer information Mr Wilke was looking for. On 17^th December 1997 Mr Jennins replied to Mr Wilke and sent a letter to Mr Gannon noting that the payment had not been received and asking to be advised when payment was to be made. However, because the letter was not marked "Attention A.A. Ramirez, President", it did not constitute formal notice of such non-payment to Husco (Clause 16 of the Services Agreement).
20. On 22^nd December 1997, Husco's lawyers wrote to EHT. The letter asserted a failure by EHT to comply with Clauses 4 and 6 of the Services Agreement. It stated:
"The purpose of this letter is to notify you formally that you have failed to provide services as required by the Services Agreement, and that no further payments will be made by HUSCO to EHT under the Services Agreement until those services are provided on an ongoing basis. You have provided no services under the Services Agreement for the last seven months. HUSCO has asked you repeatedly for assistance in development of the linear motor valve business, including requests that you provide leads for product application based on that technology. HUSCO has the right to request these services under Section 6 of the Services Agreement. Despite these repeated requests, you have failed to provide these or any other services.
This letter is not notice terminating the Services Agreement. In order for payments to resume under the Services Agreement, however, you must commence and continue the performance of the requested services and provide a weekly report to HUSCO of your activities in that regard .... .
Our client regrets that this action has become necessary, but your failure to perform services and comply with the Services Agreement has left HUSCO with no other choice."
21. On 31st December 1997, Mr Jennins replied expressing his astonishment at the contents of the letter, asserting that he had never refused to assist Husco in any way he could, observing that Husco's refusal to continue the contract payments appeared to be a curious and inappropriate response to his own notice served in relation to the best efforts clause under the Exclusive License and ending:
"Finally, if your clients are seriously intent on maintaining their position that I have "repeatedly" been asked for assistance "in development of the linear motor valve business, including requests that you provide leads for product applications based upon that technology", perhaps you will be good enough to let me know, who it is said made such requests, when and in what manner. As the correspondence will reveal, I have been meticulous in dealing with any and all queries which have been directed to me by your clients. Your client's continued refusal to pay monies due to this company represents a breach of the Services Agreement in relation to which I reserve the Company's rights and indeed my rights."
22. On 30^th January 1998 EHT wrote to Husco giving formal notice under Clause 16 of the Services Agreement as follows:
"By this letter we hereby give you one month's notice under Clause 7(b)(iii) of the termination of the above agreement by reason of your Company's failure to make payment of monies due under the said agreement.
Our written request that the monies due be paid was directed to you by our letter (by fax) dated 17^th December 1997. Despite our request as to your payment intentions, no response has been received to that fax."
Upon the same day, Husco which had plainly decided at that stage to retreat from its decision to withhold payment faxed to EHT a letter in the following terms:
"This letter is to notify you that HUSCO International has informed its bank to wire transfer 6,000 GBP to your account. These payments are made for the period of December 1997 and January 1998 pursuant to paragraph 4 of the Services Agreement between HUSCO and EHT. You are also notified that HUSCO reserves the right to reclaim these payments, any prior payments and any future payments made pursuant to the Services Agreement for which EHT has failed to or fails to perform the services as requested by HUSCO."
The Husco fax was transmitted after the mailing of EHT's notice which, under Clause 16 of the Services Agreement was effective when mailed. However, Husco's payment of the £6,000 had in fact been made as between the parties' bankers by electronic transfer prior to the mailing of the EHT notice and, if EHT had checked the position before it sent its notice, it would no doubt so have ascertained. It is to be observed that the payment made by Husco was in fact in respect of monies due to EHT for the month of November and December 1997 and not, as stated, for the months of December 1997 and January 1998: but, nothing turns upon that point, the sums paid being all that was payable at the time of payment (the next payment in respect of January 1998 not being due until 10^th February 1998).
23. On 5^th February 1998 Husco wrote setting out its position. It continued to maintain that it had repeatedly asked that EHT and Mr Jennins identify and communicate to Husco market opportunities for product applications and provide monthly reports regarding customers visited, market opportunities and the status of projects which customer specifications had identified, and that EHT had failed to do so thereby hampering Husco's efforts to sell licensed products. Husco emphasised that the information was important and that they were willing to continue the payments under the Services Agreement in order to obtain the services. The letter stated that Husco had performed all its obligations under the Exclusive License Agreement and the Services Agreement and expected EHT to perform its obligations under both agreements. It requested that EHT provide Husco with a summary of the services performed for Husco during the last four months and that Husco would make no additional payments until it received such summary of services and verification in writing that EHT had complied with Section 10(a) of the Services Agreement. It reserved the right to reclaim payments made to EHT under the Services Agreement to the extent that EHT had been in breach of that agreement.
24. On 18^th February 1998 EHT replied setting out its position. In particular it stated as follows:
"The reality is that the Services Agreement has already been lawfully terminated in accordance with its terms by reason of your companys' failure to pay monies when due. Your last minute attempt to recover the situation does nothing to affect this. I think you know very well that the notice would not have been served under this agreement if the payment had been slightly late for some more straightforward reason such as, for example, banking delays. In fact, you chose to adopt the position that EHT was in breach of the agreement and that is why you stopped paying. In these circumstances, it can hardly come as a surprise to you that EHT served the notice it did. (emphasis added)
25. By that time, the sixty-day period under the notice terminating the Exclusive License had expired on 7^th February 1998. In addition, Husco had, as it indicated it would, withheld the payment of £3.000 due on 10^th February 1998. On 28^th February 1998 the period of one month specified in EHT's notice under Clause 7(b)(iii) of the Services Agreement expired. On 3^rd March 1998 EHT wrote a further letter asking whether it would receive a response to its letter of 18^th February, but it did not do so and the matter did not progress further on either side until issue of the writ on 1^st May 1998.
THE PLEADINGS
26. EHT issued a writ on 1^st May 1998 specially endorsed with a statement of claim. It relied simply upon the letter dated 30^th January 1998 as one month's notice of termination validly given under Clause 7(b)(iii) in respect of non-payment of the monthly fee of £3,000 due on 10^th December 1997 and 10^th January 1998. On 4^th August 1998 the claim was amended to rely also upon the letter of 17^th November 1997 as notice of the defendants failure to make the payment due for November by 10^th December 1997. It was also pleaded that by the terms of the Services Agreement the time for making payment was of the essence, alternatively became of the essence after the service of the notice on 17^th December. It further relied upon Husco's lawyers' letter of 22^nd December 1997 as making clear the intention of Husco not to be bound by its obligations under contract, thereby entitling EHT to regard the contract as having been repudiated by Husco and stating that EHT `was thereby entitled to terminate the agreement'. It also pleaded that by reason of the failure to make the November payment EHT `thereby became entitled to terminate the Services Agreement by virtue of its express terms including paragraphs 7(b)(iii) and 11. Finally it pleaded that by failing to make the payment for November required by the notice of 17^th December and the payment for December due on 10^th January 1998 Husco evinced an intention not to be bound by the terms of the agreement, EHT being entitled to regard it as repudiated. However, the only `termination' relied on was the letter of 30^th January 1998 which was expressly pleaded as one month's notice of termination of the Services Agreement under clauses 7(b)(iii) and 11. There was no averment or other reference in the pleading to the effect that EHT had accepted Husco's repudiatory contract either by that letter or thereafter, in particular by issue of the writ.
27. In its amended defence and counter-claim dated 11^th August 1998, Husco pleaded as follows:
"8A . The allegation in paragraph 16 of the Amended Statement of Claim that the Plaintiff was entitled to terminate the Services Agreement for repudiatory breaches is denied. Even if, (contrary to the defendants' primary case), the First Defendant was in breach of that Agreement, and further (which is also denied) was thereby evincing an intention no longer to be bound by its terms:
(a) by the time of the Plaintiff's alleged termination (namely its letter 30 January 1998), the First Defendant had in fact paid £6,000 to the plaintiff being the amount of the allegedly outstanding payments. Accordingly, the First Defendant was not by then in repudiatory breach;
(b) in any event, the Plaintiff did not accept the alleged repudiatory breach and purport to terminate with immediate effect but instead elected to give one month's notice of termination, thereby continuing the contract;
(c) further or alternatively, the Plaintiff, having stated its reliance on Clause 7(b)(iii) of the Services Agreement as a ground for purportedly terminating that Agreement, cannot now rely on a different ground."
28. By way of reply, EHT, having referred to Husco's lawyers letter of 22^nd December 1997 pleaded as follows:
"7. ... the First Defendant had by the 30^th January 1998 given the plaintiff no indication of any intention to resile from this position. In the circumstances the plaintiff was entitled to and did in fact accept the First Defendant's repudiation by its letter to the First Defendant of 30^th January 1998
Furthermore, and in the event, the said payment [i.e. £6,000] and the accompanying letter by their lateness and context were not sufficient to dispel the First Defendant's clear intention not to meet its contractual obligations and the plaintiff would have been entitled to accept the First Defendant's repudiation of the said Agreement after their receipt.
4. As to paragraph 8A(b) of the Amended Defence and Counter-Claim the Plaintiff says that its letter of 30^th January 1998 did not continue the Agreement but rather accepted the First Defendant's repudiation and terminated the Agreement on one month's notice."
29. Thus, at the time of trial, while EHT had expanded its case from that of a straightforward contractual termination for non-payment pursuant to the notice of 30^th January so as to rely also upon Husco's stance as set out in the lawyer's letter of 22^nd January, the only acceptance of such repudiation pleaded was EHT's service of the notice of 30^th January and it is again noteworthy that no reliance was placed on anything which happened after that date.
AT THE TIME OF ITS PURPORTED TERMINATION, WAS EHT ITSELF IN BREACH?
30. This question caused the judge no difficulty. By Clause 4 of the Services Agreement, Husco retained EHT `as an independent contractor to perform consulting and engineering services and product development relating to the "Liner Motor Valve Technology". The judge held that, on the natural meaning of the words construed in their context, they were not apt to refer to the selling or marketing of the valve. As he put it:
"The words are directed to the use of the technical expertise of EHT through Mr Jennins, not to their selling or marketing skills."
Husco had relied, as they have relied in this court, upon the later words in Clause 4 which impose an obligation on Husco to reimburse EHT for the travel expenses of Mr Jennins and other EHT employees `incurred on travel away from their place of business .. to visit customers, when requested or required by Husco'. The judge took the view that those words were not intended to expand the nature of the services required of EHT, but were directed to reimbursement of expenses in respect of EHT's visits to customers which were necessary or desirable in connection with technical visits to customers in relation to products which were being developed or tailor-made to meet their requirements. Equally, in relation to the argument that Clause 6 was designed further to define or expand the duties of EHT, the judge held that it was clear from its wording that it was simply aimed at ensuring that the services which EHT were bound to supply should, so far as reasonably required by Husco, be performed by Mr Jennins personally.
31. The judge stated that, in reaching his conclusion, he did not ignore the wider background or the evidence that Mr Jennins had many connections in the industry and had in fact made many visits to manufacturers to generate interest in the EHT valve. The judge observed that such visits were referable to Mr Jennins' own interests in promoting the valve, in the first place to create a sale which would induce Husco to take up the Licence, and thereafter to generate royalties under it. However, as the judge stated,
"The benefit of Mr Jennins' marketing skills is obtained by means of that incentive. His technical skills were the subject of the fixed remuneration under Clause 4."
32. In my view those findings are unassailable. I share the judge's view as to the ordinary meaning of the words used in the context of the agreement itself and bear in mind that the judge had heard evidence at some length as to the background and circumstances surrounding the agreement, as well as the activities of the parties once it was in force. The Services Agreement was a carefully drafted agreement designed to cover the obligations of the parties pending the anticipated grant of an exclusive licence, the terms and conditions of which would control and take precedence over any inconsistent terms and conditions in the Services Agreement. Under the licence, EHT were to grant Husco the exclusive right to make, use and sell the Licensed Products and Husco was to use its best efforts to promote their sale and distribution. If it had been intended meanwhile to impose obligations on EHT in relation to the introduction and acquisition of customers, rather than proceeding on the assumption that EHT would regard it as in its own interests to do so, then it would have been easy so to provide.
33. Mr Field QC for Husco has argued that, on the basis of modern principles of construction, in first approaching the words of Clause 4 on the basis of their ordinary meaning, the judge really put the cart before the horse. Mr Field has submitted that he should have begun with an assessment of the commercial reasonableness of excluding a selling or marketing obligation from the ambit of EHT's services. He submits that each of the phrases `consulting services' or `product development' was wide enough to impose such an obligation, in particular because, without the obligation to investigate the market, to contact potential customers and to ascertain their requirements, the development of what was a new and unexploited product could not proceed. He further submitted that, EHT having brought what, at that stage, it considered a fully designed product to Husco, any further engineering and development work would only arise in the context of developing the valve to meet the specific requirements of a particular customer. Thus, the distinction drawn by the judge between technical and sales work was one which, on the evidence and as a matter of common sense, did not exist. Mr Field has also pointed out that, as the judge found, when EHT approached Husco in 1992 it brought not only its valve technology but also its contacts in the automotive industry. In that context, Mr Field submits that the services provided for in Clause 4 should be construed as extending to both aspects of EHT's range of experience.
34. Like the judge, I am unconvinced by those arguments. It is plain that the words "consulting and engineering services and product development" are all related to the Linear Motor Valve Technology which, by reference back to the definition in Clause 1A refers entirely to technical data and know-how and does not comprehend or refer to questions of sales or marketing. It may be, and was no doubt the case, that development of the `product' (also defined in Clause 1B in technical terms) would take place in the context of the demands of a particular customer interested in making use of the EHT valve; however, there is nothing in the wording of Clause 4 to indicate any obligation upon EHT in relation to the obtaining of such custom or the performance of marketing work. The Clause is silent in that regard and I see no compelling reason to suppose a common intention or understanding that such obligation should be imposed. Whereas EHT brought to Husco, and was happy to supply, its contacts in the automotive industry at the time the agreement was entered into, there is no reason to suppose that it was prepared to enter into any continuing obligation in that respect, having handed over the technology to Husco which possessed a world-wide sales force. In my view, if there was an intention to impose such an obligation (as opposed to assuming that the parties would co-operate generally in their common interest), there is every reason to suppose that it would have been specifically referred to in the agreement.
35. We heard argument in the course of this appeal on the question whether, if Clause 4 obliged EHT to supply Husco with customer information, EHT was in breach of its obligation and, if so, whether such breach entitled Husco to withhold or threaten to withhold payment as it did. In the light of the view I have expressed as to the restricted nature of the obligation under Clause 4, it becomes unnecessary to consider those matters. I would merely observe that the judge made clear his view that the arguments first raised by Mr Wilke in his letter of 19^th November 1997, and persisted in by Husco's lawyers letter of 22^nd January, were unjustified in the sense that they represented no more than a bargaining posture assumed by Husco, once the issue had been forced by EHT in the letters to which I have already referred.
36. Finally under this head, Mr Field relied in his written Skeleton Argument upon a further point, scarcely touched upon in oral argument, namely that EHT was in breach of Clause 4 by refusing to perform technical development work on the EHT valve unless Husco provided it with a new design computer. That was an argument which had been addressed to the judge but to which he did not refer in his judgment. Suffice it to say, it was matter never relied upon by Husco prior to the issue of the writ, either as repudiatory conduct or as justifying Husco in withholding any of the monthly fees due to EHT. EHT's position, as stated at the time, depended entirely upon its lack of funds to undertake certain further design equipment and, in my view, even if Husco could have established a breach of contract in this respect, it was neither repudiatory nor did it justify withholding of the monthly fee.
WAS EHT ENTITLED TO. AND DID IT, TERMINATE FOR A REPUDIATORY BREACH BY HUSCO?
37. At the trial, EHT was in considerable difficulty in relation to this question. First of all, it is quite apparent, and it was the primary case of EHT on the pleadings, that EHT relied upon the letter of 30^th January 1998 as a notice of termination given pursuant to the terms of the contract. As such, it did not have immediate effect but provided for termination in one month's time, i.e. on 28^th February. Furthermore it was stated to be notice of termination on grounds of Husco's failure to make payment of monies due under Clause 7(b)(iii). If the notice was to constitute a valid termination, it was necessary first to establish that EHT had earlier served a preliminary written request in respect of the payment(s) due (see Clause 7(b)(iii)), which request was itself required by Clause 11 to be by written notice in accordance with Clause 16. Such preliminary request/notice was identified in the 30^th January notice (and indeed in the pleadings) as EHT's letter of 17^th December 1997. However, it is conceded by EHT that the request of 17^th December 1997 did not amount to a valid contractual notice because it was not sent by registered or certified mail and it was not addressed "Attention A.A. Ramirez, President". The judge also held that it was not on its face clearly intended as a warning notice under Clause 11. That being the position, the notice of 30^th January was premature and was itself invalid for the purpose of determining the Services Agreement under the contractual machinery provided.
38. The judge endeavoured to solve this deficiency in favour of EHT in the following manner. He said:
"However, the matter does not rest there. Husco, despite having second thoughts and making payment, then reverted to its original position that Mr Jennins was bound to perform selling services and bound to account to Husco for what he had been doing.
In my judgment, by refusing to pay for these reasons, which in the context were no more than a pretext for non-payment, it was adopting a stand which can only be viewed as a repudiation of the Services Agreement.
Mr Béar [for Husco] submitted that if there was repudiation, it was never accepted by EHT (Howard -v- Pickford Tool [1951] 1 KB 417). That submission I find wholly unreal in the face of the continued assertions by EHT that the contract was at an end.
By coupling its earlier refusal and non-payment with a repeated refusal to make any further payments, Husco gave the validity to the termination by EHT which took effect on 28^th February 1998 on the expiration of the notice."
39. It should be noted that the judge did not, indeed he could not, point to any letter or circumstance apart from the service of the 30^th January notice itself which amounted to or purported to be, acceptance by EHT of a repudiation at common law by Husco. He rather relied on Husco's letter of 5^th February 1998 in which it reverted to its original position that it was entitled to withhold payment (for reasons which the judge found to be `no more than a pretext') as somehow giving retrospective validation to EHT's notice, not as a notice under the contract, but as an acceptance of Husco's common law repudiation of it. The judge did not identify EHT's `continued assertions' that the contract was at end. It seems clear that only EHT's letter of 18^th February amounted to such an assertion prior to issue of the writ.
40. Mr Field has attacked the approach and finding of the judge on a number of bases. First, he challenged the judge's finding that, following payment by Husco on 30^th January of the amount outstanding under the Services Agreement, Husco's reversion to its earlier position that Mr Jennins was bound to perform selling services for Husco and that Husco would withhold further payments unless he supplied them with sales information, was conduct which amounted to a repudiation of the contract.
41. Second, Mr Field submitted that, on a proper construction of the agreement, the ordinary entitlement of the parties to terminate for a breach of a payment obligation or other material breach of contract was intended to be displaced by the express termination provisions of the agreement which included provisions directed at non-payment. So far as non-payment was concerned, the scheme was that under Clauses 11 and 7(b)(iii) EHT was entitled to give written notice of any failure to make a payment and, upon continuing failure to make such payment within one month of a valid warning notice, a further notice could be served to effect termination. Clause 7(b)(iii) required such termination to be on one month's notice. As to material breaches other than those arising from non-payment, Clause 7(b)(ii) entitled either party by notice to require rectification of any such breach within a stated period of not less than thirty days before the right to terminate arose. Mr Field submitted that the contractual protection provided to Husco by the notice provisions, which comprehended a minimum two month period for the termination process, following formal communication with the President of Husco, would be set at nought if common law principles of repudiation were held to be applicable in respect of non-payment or other breach, given that (a) such principles require no period of notice to be given and (b) that an acceptance by one party of the other party's repudiation takes effect immediately, rather than upon expiry of some further period of time.
42. Third, Mr Field submitted that, even if EHT could in principle treat the contract as terminated by acceptance of a repudiatory breach, it did not do so in that, at all times, it purported to act under and in accordance with terms of the contract in respect of non-payment and at no stage indicated that it regarded the contract as terminated on any other basis. That being so, the 30^th January notice was not in a form appropriate or intended to operate as acceptance of a repudiation; it was rather an invocation and assertion of the binding terms of the contract for the purposes of operating the termination machinery contained within it. Nor was the position altered by EHT's further letter of 18^th February 1998. Despite the fact that, by that time, the payment due on 10^th February had not been made, the letter of 18^th February neither referred to it nor sought to rely on it. It simply re-asserted the validity of the 30^th January notice as a termination of the agreement in accordance with its terms. Thus, Mr Field submitted, the judge was in error when he treated EHT's purported termination under the contractual notice scheme as constituting also a termination by repudiation and acceptance at common law. Quite apart from the fact that, at the time of the notice, the breach/non-payment complained of had been rectified by Husco's payment of the two outstanding payments, the notice of 30^th January could not itself be treated as acceptance of a repudiation because it expressly contemplated a continuance of the contract until 28^th February. Equally, the mere expiry of the period of notice on 28^th February could not, without more, constitute an acceptance in respect of conduct subsequent to 30^th January. Not only was the notice not so expressed, but (as Mr Field put it), the idea of a floating acceptance, awaiting a breach to give it a validity it would otherwise lack, is a concept unknown to English law.
43. Fourth, Mr Field submitted that, even if EHT had a right to treat and accept Husco's conduct as a common law repudiation, it elected not to do so. If and insofar as EHT had any right to treat Husco's stance as repudiatory prior to service of the 30^th January notice, it did not do so; it elected to affirm the Services Agreement for the purpose of adopting its termination machinery in order to bring it to an end on 28^th February, during which period the parties' mutual obligations would continue (c.f. Johnstone -v- Milling [1886] 16 QBD 460 per Lord Esher at 467-8 and Norwest Holst Group Administration Limited -v- Harrison [1985] ICR 668 per Sir Denys Buckley at 683). Later, when faced with Husco's reassertion of its position on 5^th February, EHT (by its letter of 18^th February) merely reasserted the 30^th January notice and did not suggest that Husco's stance afforded grounds to accept it as a common law repudiation. Thus, until issue of the writ, the position remained that EHT asserted termination under the Notice, whereas Husco asserted that the contract remained in being. Following issue of the writ, although a plea was raised that EHT were entitled to accept Husco's conduct as repudiatory, the only acceptance relied on was the contractual notice itself which preceded the letter of 5^th February setting out Husco's revised stance.
44. I shall consider Mr Field's individual submissions in turn. As to this first submission, it seems to me that it was open to the judge to form the view, which he plainly did, that Husco's reasserted stance was insincere and constituted a mere pretext under which to withhold further payments while the parties considered their position. As such it was an anticipatory breach of contract in respect of future payments, confirmed by non-payment on 10^th February, which arguably entitled EHT, had it chosen to do so, to treat it as a common law repudiation on writing a suitable letter after the 10^th February. However, it is clear that no such letter was ever written. Nor do I consider that the judge's finding that the 30^th January Notice could constitute such a letter can be justified either by principle or authority.
45. Mr Smith QC for EHT has sought to support that finding by submitting, that the language of the Notice should not be narrowly confined to the function which it was (as he accepts) designed to perform, namely an invocation of the terms of the contract, but should be read as equally appropriate to the task of constituting a notice to accept Husco's repudiation as from 28th February. I cannot regard it as so apt. While I do not accept Mr Field's second submission that the machinery of the contract is such that it should be read as excluding the right of either party to accept a clearly expressed intention by the other party to break the contract as an anticipatory (repudiatory) breach, it does seem to me that, in the light of the contractual machinery provided, the onus is clearly on the party purporting to rely on that right to make clear that it is doing so. In this respect, it seems to me that EHT made clear at every relevant stage that it was relying on the contractual machinery rather than treating the contract as discharged at common law and, in this respect, I accept the analysis and argument of Mr Field under his third submission as set out paragraph 42 above.
46. I also accept Mr Field's fourth submission (see paragraph 43 above). It is plain that, as at 30^th January, EHT was content, and purported, to invoke the contractual machinery of termination; further, because of their ignorance that payment had been received from Husco prior to that notice being sent, EHT apparently continued so content. Thereafter, EHT never purported to identify, let alone accept, any additional conduct of Husco as amounting to repudiation. This was a deficiency not broached by EHT till the pleading of the claim endorsed on the writ. However, that pleading was not in a form appropriate to effect a cure, in that the only acceptance identified in the pleading was the notice of 30^th January, the terms and effect of which were reasserted.
47. Mr Smith's Skeleton Argument on this appeal stated that EHT relied on the judge's findings and did not seek to cross-appeal. However, at the very end of his argument, in the face of the difficulties I have described, he sought the leave of the court to make a belated re-amendment to the Reply and Defence Counterclaim. The proposed amendment sought to plead that, by its resumed stance in relation to EHT's services and the non-payment of the sum due on 10^th February, Husco was in repudiatory breach `which breach the Plaintiff accepted by its letters of 18<sup>th</sup> February 1998 and 3<sup>rd</sup> March 1998 or by the issue of these proceedings and the claims formulated therein'. This amendment was vigorously opposed by Mr Field. As to the letters relied on, he correctly pointed out their inadequacy for the purpose pleaded. The first only reasserted the 30<sup>th</sup> January notice, and the second merely pressed for a reply. As to the purported acceptance by issue of the writ, as Mr Field pointed out, EHT had been afforded ample opportunity to plead such acceptance prior to judgment below: indeed Mr Field suggested that it was EHT's failure to do so which drew the judge into adopting the impermissible line of reasoning by which he treated the contract as legally at an end. Mr Field expressly accepted and asserted that the effect of holding the 30<sup>th</sup> January notice invalid, both as a contractual notice and as acceptance of Husco's repudiation, meant that the Services Agreement remained in existence, despite the fact that the parties had since 1998 mutually failed to carry out its terms. He pointed out that Husco had clearly and expressly stood upon its assertion since 5<sup>th</sup> February that the Services Agreement remained binding on the parties and had, since that time, conducted its affairs, including lengthy litigation, on the basis that the 30<sup>th</sup> January notice was invalid to terminate the Services Agreement. I accept Mr Field's submission that it would not be right to permit further amendment at this stage. Even now, I note that Mr Smith's application is not, as one might have expected, an application to amend the writ to plead in terms the acceptance of the repudiation therein, but simply to assert in the Reply that the writ achieved that effect, whereas it did no more than rely upon the 30<sup>th</sup> January notice as constituting such acceptance. I would refuse leave to amend.
THE MEANING OF `LINEAR MOTOR VALVES'
48. Since I would hold that the Services Agreement has still not been terminated, Clause 10(b), which warrants that neither Husco nor its affiliates will engage in the development, manufacture or marketing of linear motor valves for a period of forty-eight months from the date of termination, has not become operative. However, in the light of the importance of the issue to the parties and for the purpose of assisting them to resolve any future litigation or negotiations, it is appropriate nonetheless to deal with the finding of the judge that, in Clause 10(b), the phrase Linear Motor Valves is used in a broad generic sense and is not restricted to linear motor valves incorporating or produced or developed from the `Linear Motor Valve Technology' referred to in Clause 1a) or b) of the Services Agreement. The question is one of importance to the parties because the distinction is vital as to whether or not EHT were, or (following any future termination of the Services Agreement) will be, entitled to damages from Husco in respect of its continued manufacture of the Husco valve, which the parties are agreed is not itself a development from EHT's technology but is the product of Husco's own invention.
49. The judge rested his conclusion upon three short passages of reasoning. First he referred to the expert evidence. He said:
"The first question is one of construction: the meaning of the expression "linear motor valve". From the evidence of Mr Bowler [for EHT] and Professor Labus [for HUSCO], it is not difficult to attach a meaning to that expression: it is a valve driven by a linear motor. For the meaning of the word "motor", I can adopt the definition in the Report of Professor Labus and for the basic assembly, the evidence of Mr Bowler.
While Professor Labus had not encountered a linear motor valve, it being new technology, he did not, on further questioning, dissent from the evidence of Mr Bowler. His point really was that it had not become an expression in general use in relation to hydraulic control valves.
It was, however, the type of valve with which this agreement was concerned and with which both parties had themselves become familiar over the preceding twelve months."
50. Second, he referred to the text of the agreement in the following terms:
"Turning to the Agreement itself, although there is no definition of "linear motor valves", as such, the definition of Mr Jennins' "Linear Motor Valve Technology" does refer to a "hydraulic valve in which a spool is directly driven by a linear motor" clearly recognising that there is such a thing as a linear motor.
The reference to "Linear Motor Valves" in Clause 10(c) is therefore to Linear Motor Valves which answer that description.
It was then suggested that it was confined to Mr Jennins' Linear Motor Valve. There are many objections to that.
First, it is a generic description. It may be contrasted with the words "the Linear Motor Valve Technology" of Mr Jennins" which are specific."
51. Thereafter, the judge made no further textual analysis, but moved to the surrounding circumstances and, in particular, the commercial considerations which, in the judge's view, must have governed the meaning intended by the parties. He observed:
"Secondly, the only sensible purpose of the Clause would be to exclude Husco from competing by developing or marketing other linear motor valves. In relation to the EHT valve, either Husco was excluded by not taking up the License or it was free to act by the terms of the License. The danger to EHT was that its own technology and know-how, which had been divulged to Husco, might be used against it by Husco to support a rival product at the same time.
It may well be, and indeed it appears from the evidence, that the parties were unaware of a rival product being available, but that factor serves only to strengthen the need for protection.
Third, if it had been intended to confine the Clause to the licensed product or to the EHT linear motor valve technology, those terms were readily available within the Agreement and the Exclusive License.
It was then suggested that a more restricted meaning could be gleaned form the context of the background, the matrix of facts. I can only say that having considered all the documentation and oral evidence, I do not find that it leads me to any different construction."
52. Mr Field's first complaint is that the judge treated the expert evidence before him both simplistically and incorrectly. For reasons of convenience, Husco's expert, Professor Labus, who had twenty-nine years' experience in hydraulic engineering including valve technology, gave evidence first. As the judge acknowledged, Professor Labus had not encountered `linear motor valve' as a term in the hydraulics field. He made the point that the terms `linear motor valve' and indeed `linear motor' were not in general use and, so far as he was aware, had not been used in any instance save in connection with EHT's valve. He concluded that such terms would not in themselves be recognised as having any clear meaning or particular characteristics by a practitioner in the field. His evidence in that respect was not challenged in the sense that any example was put in evidence, or any suggestion made to him in cross-examination that the term `linear motor valve'" had been used prior to December 1993 other than by EHT in describing its own valve. Professor Labus did not agree with the evidence of Mr Bowler in attaching a wider meaning to `linear motor valve' and the judge simply misstated the effect of the evidence when he observed that Professor Labus did not dissent from the evidence of Mr Bowler. Mr Bowler's evidence containing the proposition accepted by the judge was neither contained, nor even indicated, in his written report served prior to trial and was given by way of supplementary oral evidence in chief after Professor Labus' evidence had been completed and despite objection by Husco. Mr Field submitted that the judge should have recognised that the evidence of the two experts was in conflict and should have preferred that of Professor Labus, Mr Bowler lacking qualifications or experience in fluid mechanics, being an electrical engineer. Mr Field also submitted that, when the judge stated that a linear motor valve was the type of valve with which the agreement was concerned and which the parties had become familiar over the preceding twelve months, he simply begged the question (a) as to whether there was in fact current within the industry a recognised meaning of the term wider than that used by EHT in the contractual description of its product and in Mr Jennins' patent application (Exhibit D); (b) if so, whether the parties intended such wider meaning or the EHT description to be the meaning of the term in Clause 10(b). Since the judge expressly found elsewhere that the parties were unaware of the existence or development of any similar product at the time of the Agreement, Mr Field submits that they could scarcely have been aware of any `linear motor valve' technology other than that developed by Mr Jennins.
53. Turning to the question of the textual analysis accorded to the Agreement by the judge, Mr Field complains that the judge failed to refer, or apparently to attach any weight, to a number of specific points made for EHT upon the text of the Agreement. They were and are as follows:
(1) The restriction in Clause 10(b) relates to `Linear Motor Valves', the use of the capital letters L,M and V suggesting a term specific to and defined within the Services Agreement, as opposed to a broad genus wider than, and independent of, it. Whilst the term Linear Motor Valves is not itself the subject of express definition, the Services Agreement relates in its entirety to the development of `Linear Motor Valve Technology' which is defined in Clause 1(a) in terms of `all drawings, written descriptions, documents ... etc. communicated by Mr Jennins and EHT for manufacturing and using a hydraulic valve in which a spool is directly driven by a linear motor'. Thus it is plain that the term Linear Motor Valves is intended to be read as relating to any design of valve developed by EHT from its Linear Motor Valve Technology.
(2) The opening recital of the Agreement indicates that the technology the subject of the Services Agreement is the technology described within the definition section. In addition the following words of the recital refer to patent grants relating thereto and applied for by Mr Jennins on behalf of EHT, in respect of which the second such patent application itself describes its subject matter as a `Linear Motor Valve' (see Exhibit B).
(3) The overall structure of the Services Agreement confirms that position. The service to be provided by EHT relates to the Linear Motor Valve Technology (Clause 4), as does the option for an Exclusive License (Clause 5). That being so, consistency alone suggests that the restraint after termination imposed in Clause 10(b) should be construed and applied as referring to EHT's Linear Motor Valve.
(4) The judge's observation that the definition of Linear Motor Valve Technology recognised that there was such a thing as a `linear motor' afforded no solid basis upon which to conclude that the reference to Linear Motor Valve in Clause 10(b) was therefore a general reference to any valve driven by a linear motor. The judge simply plucked the words `linear motor' from within the overall description of the technology (which fell to be considered as a whole), in order to bestow on them a prior independent existence as a generic term when employed in conjunction with the word `Valve' in Clause 10(b). The result was contrary to the host of textual indications to the contrary.
54. In relation to the circumstances surrounding the Services Agreement, Mr Field submits as follows:
(5) The judge overlooked the fact, earlier narrated by him, that on 15^th December 1993, prior to the discussions on 16^th December at which agreement was reached, Mr Jennins had presented to Husco a specially prepared brochure describing at length the characteristics and advantages of linear motor valve technology, in which he referred to the valves he had designed as `Linear Motor Valves'. In doing so, he was simply repeating the term which he had also used when first putting to Husco the terms of their proposed collaboration in April 1993. In the December brochure, Mr Jennins described the superiority of the Linear Motor Valve over the proportional solenoid valves hitherto used in the industry and recorded that there were no known potential competitors. Mr Field submitted that this was plainly a document forming part of the matrices of the agreement (indeed it was included within the documents referred to in Clause 1a), which the parties no doubt had in mind when the agreement was drawn up and signed. As such, Mr Field submitted it was cogent evidence of a consistent intention on the part of EHT and Husco when employing the same expression in Clause 10(b).
(6) The judge was wrong to conclude that the only sensible purpose of the Clause was to exclude Husco from developing `other linear motor valves, not the product of the technology'. So to hold was to concentrate solely on EHT's interests and to leave out of account those of Husco. Assuming, contrary to Mr Field's submission, that the parties were aware of and intended to exclude Husco from producing other types of linear motor valve, it would lead to the following uncommercial consequences.
(7) Although (as the judge found) Mr Jennins did not claim a originality for the principle of the linear motor, or its particular application in relation to valves, once the Services Agreement was terminated Husco would be excluded from itself making use of any technology prior to or differing from that of EHT in order to develop and utilise its own linear motor valve, as indeed it did when inventing and developing the Husco valve. Mr Field submitted this was most unlikely to have been intended.
(8) Given that there was no restriction imposed on Husco by Clause 10(b) during the currency of the agreement, the effect of the judge's finding was to produce the curious and uncommercial result that Husco was free to develop and sell other linear motor valves (including the Husco valve), so long as the agreement continued, but not when it was over. Again this was most unlikely to have been the parties' intention. On the other hand, the intention attributed by Husco on the basis that the restriction was limited to Linear Motor Valves developed from EHT's technology, made good commercial sense. So long as the Services Agreement subsisted, then Husco was not prevented from such development. On the other hand, upon termination, EHT would be protected from Husco's using EHT's technology for the purposes of Husco's own business, in a situation where it had no continuing obligation to make monthly payments under the Services Agreement in connection with such use.
55. Mr Field made a number of further submissions as to the unreasonable effect of the judge's finding if the agreement ran to its full term in 2014 or somewhere near it, and was then followed by the operation of the restriction in Clause 10(b). However, those submissions primarily went to the question of whether or not the restriction as found was in restraint of trade. That question only arises if this court affirms the judge's decision upon the meaning of Linear Motor Valves as used in Clause 10(b). I do not propose to deal further with those submissions because I am wholly persuaded by the submissions of Mr Field set out in paragraphs 53 and 54 above.
56. As to Mr Field's criticism of the judge's treatment of the expert evidence (see paragraph 52 above), it does seem to me that the experts were essentially in conflict rather than agreement in the manner analysed by Mr Field. However, it also seems to me unnecessary to examine which of the two experts the judge should have preferred, since I do not consider that the true construction of the agreement depends upon the evidence of the experts. I am prepared to assume for the purposes of that exercise that the broad description `linear motor valve' has a free standing meaning outside the terms of the agreement and wider than Mr Jennins' application. However, the question still remains whether, upon proper principles of construction, the presumed intention of the parties was to refer to such wider meaning or to use the term Linear Motor Valves as shorthand for valves which were a product or development of Mr Jennins Linear Motor Valve Technology. I have no doubt that the latter is the case.
57. It is of course important not to treat the textual analysis of the agreement as an exercise isolated from those circumstances surrounding the agreement. However, confining myself to such analysis for a moment, I consider that the use of capital letters in Clause 10(b) in relation to the term `Linear Motor Valve' in the context of an agreement relating to the `Linear Motor Valve Technology', which is itself clearly defined in terms of Mr Jennins' drawings, written descriptions and documents, is the strongest possible indication of the parties' intentions and a clear textual pointer towards a construction harmonising with the wording and intention of the remainder of the agreement. I attach no importance to the contrast made by the judge between the generic use of the words `Linear Motor Valves' and the use of the definite article `The Linear Motor Valve Technology' of Mr Jennins in Clause 1a). It seems to me that the use of that definite article was no more than a function of the grammar used in what was avowedly a definition clause.
58. I also accept Mr Field's submissions as to the surrounding circumstances and in particular the relevance of the parties use of the term Linear Motor Valve in their negotiations, which centred upon the product and development of Mr Jennins' technology without any knowledge of any similar or competing products in the field. It also seems to me, contrary to the view of the judge, that, if it be correct that Clause 10(b) imposed a restriction only in respect of a development from EHT's design, it was commercially perfectly sensible that Husco should be free to produce motor valves which were a product of that development during the existence of the agreement, but should be subject to restriction if the agreement were terminated prior to Husco's exercise of its option under Clause 5. That protection would be necessary if, by the date of termination, Husco had not exercised its option under Clause 5 of the Services Agreement and would thus be free to compete with EHT, making use of its acquired knowledge of EHT's technology. If, on the other hand, Husco had exercised its option, EHT would then be compensated for Husco's use of its technology by its right to royalties under the License Agreement
59. In arguing to the contrary, Mr Smith for EHT has submitted that the judge was correct to conclude that the purpose of the clause was to exclude Husco from competing by developing or marketing any type of linear motor valve which might compete with that of EHT. He submits that it was intended that the clause would protect against the very situation which arose with Husco manufacturing and selling its own design of valve. He argues that the wide scope of the clause was the price which Husco was prepared to pay in order to obtain the right to EHT's technology. I do not find those arguments persuasive. First, of course, it is the position that the parties are agreed that the design of the Husco valve does not involve use of the EHT technology. The question thus becomes whether the agreement on its true construction excludes Husco from selling a product of its own or indeed of another manufacturer, developed independently of EHT's technology, after termination of the agreement, when the parties did not consider it appropriate to do so during the period of the Services Agreement. I do not think it is. In my view, Clause 10(b) primarily contemplates the situation where the Services Agreement might be terminated prior to the exercise of Husco's option. In that event, the parties no doubt intended and accepted that Husco should be prevented from making use of the EHT technology if it had not entered into the License Agreement which was contemplated as the long-term intention of the parties. On the other hand, upon entry into the License Agreement the parties would have contemplated that EHT's protection would be superseded by the terms of that agreement, which not only entitled EHT to royalties but contained a clause requiring Husco to use its best efforts to promote the sale and distribution of the Licensed Products. Despite the skilful submissions of Mr Smith in support of the judge's decision I have no doubt that Mr Field's submissions should prevail.
WAS EHT ESTOPPED FROM ASSERTING THE BROADER MEANING OF CLAUSE 10(b)?
60. Hitherto I have considered the meaning of `Linear Motor Valves' on the assumption that EHT was not estopped from asserting the broader meaning for which it contended. In the light of my conclusion, the necessity to consider the question of estoppel does not arise.
ASSUMING THE BROADER MEANING, WAS THE RESTRAINT IN CLAUSE 10(b) ENFORCEABLE?
61. This issue does not now arise. Nor has it been argued by either party that, if the meaning of `Linear Motor Valves' was (as I have concluded) restricted to the EHT technology, any issue of unreasonableness arises.
INJUNCTION/DAMAGES/EQUITABLE DEFENCES
62. In the light of my above conclusion, EHT in any event has no right to the injunction sought and the issues canvassed under this heading do not arise.
CONCLUSION
63. The result of EHT's failure to establish that the Services Agreement has been terminated either pursuant to notice under the contract or by reason of Husco's repudiation, is that the Services Agreement is still in being and the right of EHT to payment at the rate of £3,000 per month has continued to date. However, EHT's claim has not been pursued as a claim for payments falling due under the agreement but has been asserted by way of a claim for damages for loss of the monthly fee of £3,000 payable under Clause 4 of the Services Agreement until such time as the royalties payable under the Exclusive License Agreement reached or exceeded £36,000, alternatively until the expiry of the agreement in some fifteen years time. That being so, EHT has failed in its claim as pleaded and Husco is entitled to judgment in relation to the claim for damages for breach of the Services Agreement. Equally, because the agreement has not been terminated, Husco is entitled to judgment in relation to EHT's claim under Clause 10(b) of the Services Agreement for damages in lieu of an injunction. Finally, as claimed in paragraph 2 of its counterclaim, and subject to final submissions as to the appropriate form of wording, Husco is entitled to a declaration that the reference to `Linear Motor Valves' in Clause 10(b) of the Services Agreement is a reference to valves which are a product or development of EHT's `Linear Motor Valve Technology' defined in Clause 1(a) of the Services Agreement. I would allow the appeal and make an order to that effect.
Lord Justice Mance: I agree
Lord Justice Kennedy I also agree
Order: Appeal Allowed; claimant to pay £2,000 to Defendant; order for stay to be removed; £50,000 paid out of court; repayment of interim payment of £150,000 with interest at 1 per cent subject to set-off to account for 30 months at £3,000 per month; appellant to recover half of costs below and 90% of the costs in appeal; detailed assessment; permission to appeal to the House of Lords refused; time extended until 25^th of August.
(Order does not form part of approved judgment.)