Process Components Ltd v Kason Kek-Gardner Ltd

JurisdictionEngland & Wales
CourtChancery Division
JudgeMrs Justice Proudman
Judgment Date05 Sep 2016
Neutral Citation[2016] EWHC 2198 (Ch)
Docket NumberCase No: HC-2016-000164

[2016] EWHC 2198 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Rolls Building

Fetter Lane

London, EC4A 1NL

Before:

Mrs Justice Proudman

Case No: HC-2016-000164

Between:
Process Components Limited
Claimant
and
Kason Kek-Gardner Limited
Defendant

Geoffrey Pritchard and Georgina Messenger (instructed by Squire Patton Boggs (UK) LLP) for the Claimant

Ian Mill QC and Tom Cleaver (instructed by Paul Hastings (Europe) LLP) for the Defendant

Hearing dates: 16th, 17th, 20th, 21st, and 23rd June 2016

Judgment Approved

Mrs Justice Proudman
1

This case is a dispute about who has the rights to sell certain industrial scale powder processing machines ("the Unit Machines") and to use the trade names associated with them. The principal issues relate to whether the claimant or the defendant owns the intellectual property rights ("the IP") relating to the Unit Machines, and whether the Licence Agreement between Process Components Limited ("PCL") and Kason Kek-Gardner Limited under its former names Frame Exchange Limited and Kek-Gardner Limited ("KGL") is valid or void and whether it has been terminated and, if so, when. As the written closing skeleton argument on behalf of the defendant pithily puts it, the Court must resolve,

a. First, who acquired what assets from Kemutec Powder Technologies Limited ("KPTL") in 2009?

b. Secondly, has the 10 July 2009 Licence been validly terminated by PCL?

Background

2

I have had the advantage of representation by Mr Pritchard and Miss Messenger for PCL and Mr Mill QC and Mr Cleaver for KGL.

3

There is no dispute that KPTL originally owned the IP. The trade marks "Kek" and "Gardner" were used in relation to the Unit Machines and each of the marks has a long history and is associated with valuable goodwill.

4

The principal shareholder of KPTL was a private equity organisation called EPIC Private Equity LLP which together with associated bodies I will call "EPIC". EPIC had lent KPTL some £1.5m, secured by a debenture. KPTL got into financial difficulties and went into administration on 30 June 2009 and subsequently went into a creditors' voluntary liquidation on 18 January 2011. The joint administrators and joint liquidators were Mr Jeremy Woodside and Mr Christopher Ratten.

5

EPIC wanted to protect its position as far as possible and created PCL (of which it was the 100% owner), PCL entering into a pre-pack agreement with KPTL, also on 30 June 2009. I shall refer to this agreement as "the PCL Sale Agreement". The object of the PCL Sale Agreement, says PCL, was to sell to PCL KPTL's lucrative spares and valve businesses ("Mucon and Spares", often jokingly referred to as "M&S", Mucon being the name of the valves) and, again says PCL, all the IP, leaving out of account those assets which had been thought by EPIC to be dragging down KPTL and causing its financial problems. PCL says this included the St Blazey manufacturing facility in Cornwall and the English brand name "Kemutec", which in this country (but not the United States where there was a separate company — a subsidiary of PCL—called Kemutec Group Inc) was associated in customers' minds with KPTL's financial problems.

6

On 10 July 2009 KGL (recently created without demur from EPIC and PCL) entered into a sale agreement with KPTL, which I will call "the KGL Sale Agreement". There is a dispute as to what IP the PCL Sale Agreement and the KGL Sale Agreement respectively transferred. Mr Pritchard says that it is plain as a matter of construction that the PCL Sale Agreement conveyed all the IP belonging to KPTL so that, whatever the KGL Sale Agreement said, it could not convey what had already been transferred. In other words, although on one view the KGL Sale Agreement purports to include the sale of necessary IP rights, KPTL had already sold its IP rights to PCL so that KGL would need PCL's permission to use those rights in the assembly and sale of the Unit Machines. One of the administrators, Mr Woodside, gave evidence for PCL that it was indeed the intention to transfer all the IP to PCL. Mr Mill QC says to the contrary that the only way sensibly to construe the PCL Sale Agreement and the KGL Sale Agreement giving each its full meaning is to split the IP.

7

Mr Pritchard says that if, contrary to his submissions, I find for KGL as a matter of construction, he can rely on rectification and/or estoppel as he says it was always the intention to convey all the IP to PCL and KGL acted on that basis. Mr Mill QC however says that neither rectification nor estoppel is open to PCL for various reasons.

8

Also in 2009 (the agreement bears the date 10 July 2009 but I find that the actual execution of the document was on or about 20 July 2009 although it operated as from 10 July 2009), KGL entered into a licence agreement ("the Licence Agreement") with PCL, under which KGL expressly acknowledged that PCL owned all the IP rights and PCL granted KGL an exclusive licence to assemble and sell the Unit Machines. There is a clause in the Licence Agreement by which the terms of the Licence Agreement have to be kept confidential to PCL and KGL. Mr George Tunnicliffe, who I assume was from the outset the Chief Executive Officer of KGL, says that he only entered into the Licence Agreement because PCL seemed so sure that it owned the IP (he was not shown the PCL Sale Agreement) and he and his fellow board members only wanted to start their business and did not want to rock the boat. He says that KGL acquired from KPTL all the rights it needed to assemble and sell the Unit Machines so that it never in fact needed any licence from PCL and now seeks return of the royalties paid by KGL.

9

On or about 28 August 2015 Kason Industries Inc ("Kason") bought all the shares in KGL. As part of its due diligence processes Kason asked KGL for a copy of the Licence Agreement and KGL provided it. The agreement whereby Kason purchased KGL's shares is not in evidence as KGL has not produced it, on the grounds that it is "of no relevance", producing only an earlier Letter of Intent dated 29 March 2015 from Kason. Mr Jonathan Weiner the Chief Executive Officer of Kason said in oral evidence for KGL that the final agreement was very different but did not say in what way. I can only therefore work on the basis of the earlier offer contained in the Letter of Intent.

10

By 2015, Kemutec Group Inc was carrying on a successful business selling the Unit Machines supplied and assembled by KGL. However, when Kason bought KGL, Kason's holding company gave formal notice to PCL in September 2015 (and also gave notice to Kemutec Group Inc) that the arrangement whereby Kemutec Group Inc received a discount was to come to an end, that after 60 days KGL would cease supplying Kemutec Group Inc and that KGL would thereafter be supplying the US market through Kason.

11

PCL riposted by offering the Unit Machines for supply to Kemutec Group Inc after 2 October 2015, the date when it gave notice that the Licence Agreement was terminated with immediate effect, subject to completion of outstanding orders for Kemutec Group Inc.

12

There is a difference of opinion between Mr Pritchard and Mr Mill QC as to what evidence can be taken into account in construing the PCL Sale Agreement. Mr Pritchard says that there is a common assumption as to the background and general object of the contract. He relies on the summary in Lewison's The Interpretation of Contracts (6 th Edition), at 9 under the heading "Pre-Contractual Negotiations", as follows,

"Evidence of pre-contractual negotiations is not generally admissible to interpret the concluded written agreement. But evidence of pre-contractual negotiations is admissible to establish that a fact was known to both parties; to decide (in a consumer contract) whether a term has been individually negotiated; to determine which party put forward a particular term; and to elucidate the general object of the contract. Evidence that parties negotiated on the basis of an agreed meaning is only admissible in support of a claim of estoppel or rectification."

13

It was, he says, the plain intention of everybody, including KGL, that all the IP rights should be transferred to PCL and this was the general object of the contract. He relied on the offer made by email by Declan McKelvey (the only director of PCL at the relevant time) on behalf of PCL on 29 June 2009 by email timed at 15.44.27 (after a flurry of emails between Mr McKelvey and Roland Houchin who was advising EPIC),

"Process Components Limited wishes to make an indicative offer for certain assets of Kemutec Powder Technologies Limited as follows:

All intellectual property, brands, licences, trademarks, customer contacts £1,350,000

Plant and machinery (per schedule supplied) £25,000

Stocks (per schedule supplied) £100,000

Work in progress (per schedule) £20,000

Investment in Kem Inc £20,000

Payment terms

On completion £1,350,000

The balance of the consideration to be payable in 12 equal monthly instalments commencing 30 days from completion."

14

Also on 29 June 2009 Mr Tunnicliffe wrote to Mr Woodside at 9.09 am by email, saying,

"I am pleased to confirm that a management team consisting of Martin Jones, Martin Thomson, Steve Bayley and myself wish to enter a bid for the Unit Machine and Systems activities of Kemutec Powder Technologies, i.e. excluding Mucon and spares….

The structure of our offer is as follows:-

1. Goodwill of the Business £100,000

2. Plant and equipment £ 25,000 Note this would only be the Test Plant/Lab equipment and one or two associated items, not the factory equipment

3. Stock Not included

4. WIP/Order Book £100,000

We have not included an offer for the Intellectual Property as in this scenario it would be owned by another entity (PCL?) and we would agree a licensing arrangement with them."

15

PCL's offer was accepted by email from Mr Woodside to Mr...

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