In Scomadi v RA Engineering, the High Court construed a poorly drafted agreement against a licensor, meaning that the licensee could continue to manufacture the licensor’s retro scooter, even after the original agreement was terminated.

Scomadi entered an agreement with Hanwei for the design and manufacture of a retro scooter. The agreement provided that Scomadi would retain all intellectual property rights in the scooter designs, although the rights involved were not identified.

Hanwei made a number of changes to the design of the scooters as they went into production, which the court concluded were “significant”. This resulted in the parties entering a supplementary agreement (SA) which acknowledged Hanwei’s input into the designs, and indicated that Hanwei “owns some part” of the final design. The SA stated that Scomadi was not permitted to use a third party to manufacturer the scooter, and if it did, Hanwei would still be able to manufacture and sell the scooter in any market.

The scooter went into production, but over time the relationship broke down and Scomadi made overtures to a third party manufacturer. Hanwei got wind of this and the original agreement was terminated. The court had to decide whether Hanwei could continue to manufacture the scooter, and if not, whether Scomadi’s registered designs were infringed by Hanwei.

Scomadi argued that the SA should be set aside for want of consideration. However, the court disagreed finding that the continuation of the relationship amounted to a practical benefit of the type identified in Williams v Roffey.

The court then had to construe the SA – which was prepared without the benefit of legal of legal advice. The court found that the parties course of conduct leading up to the SA supported the Hanwei’s position, i.e. that it could continue to manufacture. This led to the bizarre outcome that two competing manufacturers could make and sell the same scooter, which usurps the function of intellectual property rights. The case is a stark reminder of the difficulties dealing with background and foreground intellectual property rights, and the benefit of obtaining professional advice.