Pixdene Ltd v Paddington and Company Ltd
| Jurisdiction | England & Wales |
| Judge | Melissa Clarke |
| Judgment Date | 02 November 2022 |
| Neutral Citation | [2022] EWHC 2765 (IPEC) |
| Docket Number | Case No: IP-2021-000073 |
| Court | Intellectual Property Enterprise Court |
[2022] EWHC 2765 (IPEC)
HER HONOUR JUDGE Melissa Clarke
sitting as a Judge of the High Court
Case No: IP-2021-000073
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INTELLECTUAL PROPERTY LIST (ChD)
INTELLECTUAL PROPERTY ENTERPRISE COURT
Rolls Building
New Fetter Lane
London
Mr Philip Roberts KC and Mr Daniel Fletcher (instructed by Suttons) for the Claimant
Mr Nicholas Caddick KC (instructed by Reed Smith LLP) for the Defendant
Hearing date: 29 June 2022
A. INTRODUCTION
Paddington Bear surely needs no introduction, being such a well-loved character that Her Late Majesty the Queen was filmed taking tea with him during her recent Platinum Jubilee celebrations. However, anyone opening this judgment hoping to read an interesting, perhaps illustrated, intellectual property case about the rights in Paddington Bear will be disappointed. It concerns the proper contractual interpretation of an audit clause in a royalty distribution agreement entered into on 12 March 2013 between Paddington and Company Limited (“ Paddington”), which then, as now, owned the intellectual property rights in and arising out of Paddington Bear, and Pixdene Limited (“ Pixdene”) which had an existing right to a share of the net merchandising income from the worldwide exploitation of the Paddington Bear merchandising rights (the “ RDA”). The RDA is a short four page document consisting of three recitals and nine clauses. Paddington and Pixdene are the only parties to it.
The third recital to the RDA states that Paddington had licensed the worldwide merchandising rights in Paddington Bear to a company called The Copyrights Group Limited (“ Copyrights”), and that under the terms of that licence, Copyrights accounted to Paddington's agent (Harvey Unna and Stephen Durbridge (1975) Limited) (the “ Agent”) on a quarterly basis for net merchandising revenue.
Clause 1 of the RDA provides that Pixdene is entitled to 10% of the final share of the net Paddington Bear worldwide merchandising income paid by the Agent to Paddington, after payment by the Agent of all prior participations in Paddington Bear worldwide merchandising revenue and all other deductions.
The dispute which is before me relates to the true construction of clause 5 of the RDA. That provides:
“ 5. AUDIT
During the term of this Agreement a third party auditor may, upon prior written notice to Paddington and not more than once per every two year period, inspect the agreements and any other business records of Paddington with respect to the relevant records or associated matters during normal working hours to verify Paddington's compliance with this Agreement.”
Pixdene appointed a third party auditor, a firm called Haysmacintyre, to carry out audits pursuant to clause 5 in February 2014 and September 2017. No issues arise for my consideration from those audits. In 2019 Pixdene appointed Mr David Lawler, who now operates through Lawler Consulting Limited, to carry out a third audit pursuant to clause 5 (the “ Third Audit”), but the parties disagreed about the extent of the rights granted by clause 5, and so the Third Audit has not yet been carried out.
Pixdene brings a claim seeking remedies of specific performance (requiring Paddington to perform its obligations under clause 5 RDA) and seeking declarations of the meaning of clause 5; Paddington defends and brings a counterclaim for declarations of its own, which Pixdene defends. The Amended Particulars of Claim, Defence and Counterclaim and Defence to Counterclaim are signed by the parties with a statement of truth, and stand as evidence in these proceedings. There has been no live evidence before me, merely written and oral submissions. None of the pleadings address the factual or commercial context of the entry by the parties into the RDA or plead any facts and circumstances known or assumed by the parties at the time that the RDA was executed. Accordingly the only context for the entry by the parties into the RDA available to the Court is that which can be gleaned from the RDA itself.
It is convenient to note here that Pixdene's skeleton argument sought to provide “factual background” about, inter alia: the purpose of the RDA and intention of the parties in entering into the RDA; the history of ownership of intellectual property rights in Paddington; the value of transactions in which such IP rights were transferred; the ownership of Pixdene and personal details about its current and previous sole shareholder; the commercial success of Paddington in particular arising out of the recent Paddington movies; and allegations about difficulties in accessing Paddington's offices. None of this is found in the pleadings (which stand as evidence) and it should not need saying that a skeleton argument should not be used to seek to introduce evidence by the back door. It is not admissible, and I do not take it into account.
Pixdene is represented by Mr Philip Roberts KC and Mr Daniel Fletcher and Paddington is represented by Mr Nicholas Caddick KC. I am grateful to them all for the clarity of their submissions and their candour with the Court.
B. THE ISSUES
The issues for determination at trial were identified by His Honour Judge Hacon at a case management conference on 28 January 2022 (“ the CMC”) and are found in a Schedule to the CMC order.
The CMC order also contains a recital noting that the Defendant accepts that the documents set out in Part A of Appendix 1 to the Amended Particulars of Claim fall within the ambit of clause 5 of the RDA. However, there remains a dispute about whether the ‘Requested Documents’ set out in Part B of Appendix 1 to the Amended Particulars of Claim (as that Part B was amended by the Claimant after a hearing before HHJ Hacon on 28 January 2022) (“ Part B Requested Documents”) fall within the scope of clause 5 of the RDA.
The identified issues are as follows:
1. Whether the Defendant must permit Lawler Consulting Limited to conduct the Third Audit, even if Lawler Consulting Limited does not enter into the draft non-disclosure agreement that the Defendant provided on 7 July 2021.
2. Whether the Defendant must provide (a) the Claimant and/or (b) the auditor appointed to conduct an audit inspection under Clause 5 with copies, including electronic copies, of all documents inspected as part of such an audit, and whether the Defendant's refusal to provide such copies is a breach of Clause 5.
3. Whether the Part B Requested Documents are agreements or other records which may be the subject of an audit inspection under Clause 5.
4. Whether an audit inspection under Clause 5 is limited to a physical on-site inspection of documents in the Defendant's offices during normal working hours.
5. Does Clause 5 allow the third party auditor to carry out an audit inspection as regards a period that has already been inspected and, if so, on what basis?
6. Does Clause 5 entitle the third party auditor to provide the Claimant with information derived from the audit inspection (including confidential information belonging to (a) the Defendant and/or (b) third parties) other than the third party auditor's conclusions as to whether or not the Defendant has complied with its obligations under the Agreement and the basis of that conclusion (including the amount of any over- or underpayment but without otherwise disclosing any confidential information)?
7. To what extent is the Defendant entitled to redact documents seen by (a) the third party auditor, (b) Suttons Solicitors and any other professional advisors of the Claimant, and (c) the Claimant?
8. Should the Court order specific performance of the Defendant's obligations under Clause 5?
9. Should the Court make the declarations set out in paragraphs 43(3) to (5) and (7) of the Particulars of Claim? The Defendant has admitted paragraphs 43(1), (2), (6) and part of paragraph 43(7).
10. Should the Court make the declarations set out in paragraphs 35(6) to (11) of the Defence and Counterclaim? The Claimant has admitted paragraphs 35(1) to (5).
This is a surprisingly large number of issues to come out of one short and simple audit clause. The reason for that is that the parties do not trust each other. As Mr Roberts KC put it in his oral submissions for Pixdene, “the milk of human kindness has long since evaporated between them”. Both he and Mr Caddick KC for Paddington ask the Court, in resolving these disputes, to give as much guidance as possible about what clause 5 obliges or entitles them to do and what it does not, without leaving anything to the common-sense of the parties to sort out between them, since, they believe, they will not.
Issue 1 is no longer in dispute. Paddington accepted in its Defence that it cannot require a third party auditor to enter into a non-disclosure agreement, and that Pixdene's rights provided by clause 5 are not dependent on it doing so. It does not object to the declaration sought by Pixdene to this effect.
C. THE RELEVANT LAW
Contractual construction
The leading authority on the issue of contractual construction remains Arnold v Britton & Ors [2015] UKSC 36. Lord Neuberger approved and expanded on the guidance given in the earlier Supreme Court case Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, at [14] – [23] of his judgment, with which Lord Sumption, Lord Hughes and Lord Hodge agreed. Lord Carnwath produced a dissenting judgment, but did not take issue with Lord Neuberger's discussion of the law. Lord Neuberger said at [15] to [22]:
“[15] When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have...
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