The Court of Appeal considered the correct interpretation of related contracts and the business efficacy test for implying a term in the context of an alleged breach of confidentiality provisions in an intellectual property licence. The decision is a good reminder that the language of contractual provisions is not to be devalued by over-reliance on commercial common sense and background; only background knowledge known to all parties will be admissible. One contracting party’s wider business purpose is not relevant to whether a term should be implied to give business efficacy to a contract: Kason Kek-Gardner Ltd v Process Components Ltd [2017] EWCA Civ 2132

Kemutec Powder Technologies Ltd (KPTL) owned certain intellectual property rights (IP) relating to its businesses, including rights relating to the assembly and sale of certain industrial machines and the use of trade names associated with those machines.

KPTL went into administration and its administrators entered into an asset sale agreement with Process Components Ltd (PCL) (the claimant) for certain parts of KPTL’s business. Ten days later, the administrators entered into a second asset sale agreement with Kason Kek-Gardner Ltd (KGL) (the defendant) for the remaining parts of the business (including the parts of the business relating to the machines). Each asset sale agreement included the sale of IP used in the “Business”, but the agreements were unclear as to exactly what was meant by this.

No implied term in the confidentiality agreement

KGL argued that the confidentiality clause in the licence agreement was subject to an implied term that KGL was permitted to disclose the licence agreement “for reasonable business purposes”, which would include disclosure to a prospective purchaser. Lewison LJ outlined the test for implying terms in commercial contracts: the term must be necessary to give the contract business efficacy or it must be so obvious that it goes without saying.2 He went on to say that “[t]he necessity required by the test is necessity for the business efficacy of the contract; not some wider business purpose of a contracting party”.

The business purpose of the licence agreement was to enable KGL to operate its parts of the business. A sale of KGL’s shares by its shareholders was not a necessary business purpose of the licence. Lewison LJ concluded that the implied term was not necessary to give business efficacy to the licence nor was it so obvious that it went without saying.

The breach was “material”, justifying termination

KGL also argued that the termination provisions in the licence agreement provided that only a material breach of the confidentiality clause gave rise to PCL’s right to terminate immediately, not any breach.

The Court found that KGL’s interpretation required the position of the word “material” in the termination provisions to be shifted so that only a material breach of the confidentiality obligations was a non-remediable breach, whereas the clause actually read that a breach of the confidentiality clause was a non-remediable, material breach. The Court also stated that a material breach of a confidentiality clause was likely to be incapable of remedy; and that, where a contract expressly provides for rights of termination, it is irrelevant whether the events on which those rights are exercisable amount to repudiatory breaches or not. Accordingly, KGL’s breach of the confidentiality clause constituted a non-remediable, material breach and PCL had validly terminated the licence agreement.

Comment

This decision serves as an illustration (and perhaps a helpful reminder) of how the courts are applying recent case law on contractual interpretation and the approach being taken to implying terms in detailed commercial contracts. In summary, the language of the contractual provisions is not to be devalued by over-reliance on commercial common sense and background. Only background knowledge known to all parties will be admissible; and a contracting party’s wider business purpose is not relevant to a consideration of whether a term should be implied to give business efficacy to a contract.