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Lonsdale v Leofelis: Battle of the breaches

The High Court has recently found in favour of the Lonsdale group in two related applications for summary judgement in Leofelis SA v. Lonsdale Sports Ltd [2012] EWHC 485 (Ch) concerning a claim brought by Leofelis for damages arising from Lonsdales repudiatory breach of a trade mark license agreement.

The decision has ramifications for both claims of repudiatory breach as well as for any damages which may be recovered.

Background

A party is able to terminate a contract and claim damages where the other commits a repudiatory breach. However, where the terminating party is subsequently unable to prove the repudiatory breach, it may itself be liable in a counterclaim by the non-terminating party for breach of contract.

Where a terminating party terminates for the wrong reason, or later discovers a better ground for termination, it is entitled to retrospectively validate its termination on a different ground. In Boston Deep Sea Fishing & Ice Co v. Ansell [1888] 39 Ch. D. 339, an employer was able to rely on the employees repudiatory conduct to justify dismissal even though at the time of dismissal, that conduct was unknown to the employer.

This was reiterated by Greer J in Taylor v. Oakes, Roncoroni & Co. [1922] 127 LT 267 at 269 as a long established rule of law that a contracting party, who, after he has become entitled to refuse performance of his contractual obligations, gives a wrong reason for his

refusal, does not thereby deprive himself of a justification which in fact existed, whether he was aware of it or not.

Lonesdale v. Leofelis

Lonsdale granted Leofelis an exclusive licence to use trademarks within certain European territories in return for royalties. Leofelis sublicensed these marks to manufacturers in return for royalties itself, with the written agreement of Lonsdale, as required. The agreement was due to expire in 2008, but was renewable to 2014 at the option of Leofelis.

In September 2007, Leofelis purported to terminate the agreement on the basis that Lonsdale had obtained an injunction against a German licensee of Leofelis, which it claimed repudiated the agreement. However, Lonsdale denied repudiation and demanded that Leofelis continue its payment of royalties. On appeal, it was held that Leofelis did not have valid grounds to terminate the agreement as Lonsdale was entitled to obtain the injunction in Germany.

Lonsdale subsequently brought a claim for breach of contract against Leofelis and applied for summary judgement. Through disclosure, Leofelis learned that Lonsdale had, in fact, breached the exclusive agreement by licensing the relevant marks to another party, something completely unknown to Leofelis at the time their own licence was agreed and later, terminated. Leofelis argued, in its counterclaim, that its termination was retrospectively valid on different grounds to those it relied upon at the time. While this was accepted by the court, Leofelis was only entitled to damages up to the point of termination only.

The reasoning

As a matter of logic, the court accepted that the agreement would have been terminated in any event. Notwithstanding the valid ground for termination, Leofelis had brought the agreement to an end for other reasons as well, thereby limiting any royalties it would have received.

To ignore the invalid termination would amount to awarding Leofelis a windfall which did not represent its true losses. The loss of royalties from 2007 to 2008 was not caused by Lonsdales repidiatory breach; in fact they were caused by the Leofelis termination. Ross J accepted that the court should not award damages on a false factual matrix, for the remaining term of the agreement or until 2014, knowing full well that the contract would not have lasted that long.

On this point, the court relied upon The Golden Victory [2007] UKHL 12, [2007] 2 AC 353, where the House of Lords held that damages would not simply be calculated and awarded on the date of breach without regard for subsequent events which would have resulted in the contract being shortened for other reasons.

Effect on terminating parties

The Lonsdale action highlights a number of areas for those advising parties contemplating the termination of an agreement.

Firstly, is the party able to prove the grounds it relies upon to the requisite standard? It is for the party claiming repudiatory breach to show whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the contract breaker has clearly shown an intention to abandon and altogether refuse to

perform the contact, Lord Justice Etherton in Eminence v Heaney [2010] EWCA Civ 1168, at 31.

Secondly, have all of the grounds available been expressed in the letter of termination? The innocent party ought to consider any other grounds it may have to terminate the agreement and not simply rely upon its right to raise other grounds later. While the court may validate a termination retrospectively, it is unlikely that the court will disregard any purported termination when considering causation and loss.

Finally, have damages properly been considered? Causation aside, it is clear that courts are unwilling to simply award damages for the entire contract term without regard to other facts which would have brought the contract to an end. The limiting event may result from an independent party (such as war in The Golden Victory) or an act of either party. Parties should realistically calculate loss and obtain evidence to substantiate it. On the latter point, while Lonsdale had committed a repudiatory breach by breaking the exclusive license agreement in certain territories, Leofelis was unable to satisfy the court that this had deprived it of any royalties as it did not sublicense the marks in the territories in question anyway.

IQBAL MOHAMMED