In a recent decision of the Court of Appeal, a trade mark owner's appeal against a finding of misrepresentation and breach of warranty under a trade mark licence was allowed. However, the Court upheld a finding of the High Court that the trade mark owner had waived its right to terminate the licence.

The background to the case began in 2002, when Lonsdale Sports Limited (L), the trade mark owner, and The Trade Mark Licensing Co Limited (T), its exclusive licensee and sub-licensor to third parties, granted Leofelis SA, (LSA) an exclusive licence in respect of the relevant trade marks (the licence). The licence provided that it was granted subject to any existing licences or rights, written or otherwise, in respect of the trade marks. L and T declared that they were not aware of any other licences or rights having been granted.

In 2005, LSA and its sub-licensee, Leeside SRL, raised an action claiming misrepresentation and breach of warranty against L, T and another party, Sports World International Limited (SWI)(the defendants) on the grounds that they had failed to disclose earlier continuing rights granted to a third party, A, under which A was entitled to acquire products from T at a favourable price. LSA claimed that at a meeting in 2002, a director of T had represented that whilst the exclusive licence granted to LSA was subject to the rights held by A, the agreement with A was to be terminated. However, it transpired that the rights granted to A were continuing, and could not be terminated.

T attempted to terminate the rights granted to A, by a letter which contained the following paragraphs:

"We hereby exercise our right to terminate the Agreement for material breach …with immediate effect.

"However, we confirm that we will continue to allow you to operate the Agreement and fulfil our obligations under the Agreement pending the Court determining at the trial of this matter, whether the termination was valid. The ongoing adherence to the terms of the Agreement is made without prejudice to the existence of our right of termination and our assertion that the Agreement is validly terminated by this written notice."

In other words, we terminate the Agreement, but are happy to continue it until such times as a Court decides whether our attempt to terminate in this manner is valid.

The High Court upheld the claim for breach of contract and misrepresentation. However, the defendants appealed this decision, and the questions for the Court of Appeal to answer were (1) whether the defendants had waived their right to terminate the rights granted to A, (a fact which the defendants believed had not occurred), and (2) whether their failure to disclose the rights of A amounted to a misrepresentation and breach of warranty under the licence granted to LSA and its sub-licensee. The defendants believed there was no misrepresentation or breach.

The Court of Appeal held that the defendants had waived their rights of termination and therefore dismissed the defendants' appeal of the waiver issue. The Court explained that where a notice of termination was clear and unequivocal, the position was crystallised at that moment and could not be altered by later inconsistent conduct. Once such a notice had been validly served, the parties were entitled to rely on it, and should not thereafter be exposed to uncertainty based on later questions as to the status of the notice. However, in this case, the letter giving notice was not unequivocal, given that the second of the paragraphs quoted above sought to achieve a legal impossibility, which was inconsistent with the notice of termination. It was attempting to terminate the licence, and keep it alive, within the same notice.

The defendants' appeals on the misrepresentation and breach of warranty issues were allowed because, first, it was held that the director's statement that they were entitled to terminate the rights of A, was a statement of belief which was not false, and secondly, the rights granted to A merely gave A rights to distribute the goods bearing the trade marks, and did not give any rights in respect of the trade marks themselves.

The case highlights two principal points:

  • In issuing a notice of termination, the notice itself must be in clear and unambiguous terms. Where subsequent and inconsistent references to extraneous matter are made, this can lead to uncertainty, and may affect the validity of any purported notice.
  • As regards the granting of any licences or agreements, which purport to grant rights to a third party, clarity is paramount as to exactly what rights are being granted. In this case, the rights granted to A amounted only to a right to distribute goods bearing the relevant trade marks, and did not grant any rights as regards the trade marks themselves. In particular, if you are taking an exclusive licence of trade marks it is imperative to undertake thorough due diligence in order to understand if there are any third party rights which may compromise the exclusivity of the licence.