Summary:

A trade mark owner was held to have waived its right to terminate a long term commercial agreement following the licensee's change of control, because it continued to accept payment of royalties long after it became aware of the change. The case provides an important practical lesson in how to use change of control clauses.

Background:

Change of control clauses are very commonplace in commercial agreements. Parties are eager to address the possibility of a change of ownership of the other party during the course of their commercial relationship. In particular what if the new owners are competitors of the other contracting party or there are reasons why the new relationship is not attractive, for example reputational issues? Under a typical clause, the non-changing party may terminate if the other undergoes a change of control as defined (usually by reference to a particular statutory definition of 'control').

These issues arose in the High Court case of Leofelis v Lonsdale. The case was decided in March 2007. It didn't make the headlines on 'change of control' issues, partly because they were just part of a wide-ranging commercial dispute with several facets to it. In this Report we focus just on the change of control question.

Key facts:

Lonsdale exclusively licensed various trademarks for sports goods and clothing to Leofelis in 2002, for use in EEA countries (except the UK and Eire), plus Switzerland. A fixed annual royalty was agreed.

A complex commercial dispute arose between the parties. One issue was change of control. Lonsdale was entitled to terminate the agreement for change of control of Leofelis, as defined. In February 2006, Lonsdale served notice to terminate the agreement for Leofelis' previous change of control, but the question was: could Lonsdale do so or had it waived its rights, which had actually arisen by virtue of the change two and a half years previously?

Decision:

The High Court held that Lonsdale had no right to terminate, even though its termination right for change of control wasn't subject to any time limit. Firstly, on the facts Lonsdale was shown to have known of the change of control on or around 30 July 2004 at the latest. After becoming aware of the change, Lonsdale demanded and accepted royalties from Leofelis. That fact was crucial. This was held to constitute a waiver of Lonsdale's rights. Furthermore, Lonsdale's attempt to reserve its rights to terminate the agreement while accepting royalties was held to have been ineffective, because Lonsdale couldn't show that Leofelis had 'agreed' to that arrangement.

Comments and Implications:

Several practical lessons can be drawn from the 'change of control' aspect of the case:

  • If a party wishes to terminate for the other's change of control, avoid taking steps whose effect is to affirm the continuance of the contract, after that party becomes aware of the change.
  • Consider including a specific time period in the change of control clause during which the non-changing party must exercise its right to terminate following change of control by the other. Without that time limit, change of control clauses are inherently uncertain. Although they may be stated to be of indefinite duration, as we see in the Leofelis case, the doctrine of waiver will apply. It is worth remembering that even with a time limit, if the other party clearly affirms the contract within the specified time limit, it may still be held to have waived its rights. With a time limit, there's at least some certainty. The prospect of a 'change of control' termination is lifted after the contractual time limit has passed, without the relevant party having to invoke the common law doctrine of waiver.
  • If a time limit is included, then this makes contract management all the more important. The expiry of the time to terminate needs to be prominently recorded somewhere, so that contract managers don't fall outside the time without even realising it.

Case Name & Citation:

(1) Leofelis SA (2) Leeside SRL v (1) Lonsdale Sports Ltd (2) Trade Mark Licensing Co Ltd (3) Sports World International Ltd [2007] EWHC 451 (Ch), Ch D (Evans-Lombe J)

Judgement Date: 08.03.2007