Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd

A contractual right voluntarily held in suspense may be resumed when, in all the circumstances, equity permits. Depending on the circumstances, the concession may end automatically or require clear intimation and a reasonable period for readjustment. No universal rule requires a formal notice specifying the date of resumption.

A licence condition does not contravene section 38(1) of the Patents and Designs Act 1907 merely because it creates a financial inducement to acquire the licensor’s goods. The condition must limit the licensee’s freedom of choice by requiring, prohibiting or restricting conduct in the legal sense.

A patent licensor granted the licensee rights to manufacture and deal in hard metal alloys. Clause 5 of their 1938 deed required the licensee to pay substantial “compensation” when monthly production or use exceeded a quota. During wartime the licensor voluntarily ceased demanding that compensation pending proposed new arrangements.

In earlier proceedings, the Court of Appeal held that equity suspended the licensor’s strict rights until it gave due intimation of its intention to resume them. The licensor’s counterclaim in those proceedings demanded compensation. It subsequently commenced this action to recover compensation from 1 January 1947, nine months after that counterclaim.

Pearson J upheld the claim. The Court of Appeal reversed his order because the counterclaim neither acknowledged the suspensory arrangement nor specified a future termination date. The central issues were whether that counterclaim and the ensuing interval satisfied equity, and whether clause 5 was invalid as a penalty, a restraint of trade or under section 38 of the Patents and Designs Act 1907.

1. Appeal allowed by a majority of four to one. Lord Oaksey adopted Lord Reid’s prepared opinion. Lord Tucker and Lord Cohen also allowed the appeal. Viscount Simonds dissented only on the statutory issue. The Court of Appeal’s order was reversed and Pearson J’s judgment restored.

2. Per Viscount Simonds, Lord Tucker and Lord Cohen, the equitable doctrine recognised in Hughes v Metropolitan Railway Company and Birmingham and District Land Company v London and North Western Railway Company does not impose a universal form of notice. A period of suspension may end upon an event or change of circumstances. Where intimation is required, equity may require a reasonable opportunity for readjustment without requiring the grantor to specify a fixed future date. The counterclaim plainly reversed the licensor’s former attitude and asserted its strict contractual rights. The ensuing nine months were an ample and reasonable interval before compensation was claimed.

3. The Canadian Pacific Railway decision did not establish a general requirement for dated notice. It concerned the revocation of a licence, expressly rested outside equitable doctrine and turned on exceptional circumstances, including public reliance upon the telegraph service. It therefore did not govern the present concession concerning money payments.

4. Per Lord Oaksey, adopting Lord Reid’s reasoning, with Lord Tucker and Lord Cohen agreeing, clause 5 did not offend section 38(1) of the Patents and Designs Act 1907. The words “require”, “prohibit” and “restrict” concern limitations upon the licensee’s freedom of choice. A financial advantage or inducement which may influence a choice, while leaving the licensee legally free to buy and use another supplier’s goods, is insufficient. The provision was highly penal and any ambiguity should not extend it beyond the ordinary meaning of its language. Viscount Simonds dissented, reasoning that economic compulsion could prohibit or restrict as effectively as an express obligation.

5. The penalty defence failed because clause 5 did not impose a sum upon breach of a contractual obligation. The restraint-of-trade defence also failed. The restraint was reasonable between the parties, and the licensee did not discharge the heavy burden of showing injury to the public interest. The cause was remitted to the Queen’s Bench Division for further proceedings consistent with the judgment.

1. House of Lords: By a majority of four to one, reversed the Court of Appeal’s order and restored Pearson J’s judgment.

2. Court of Appeal: Allowed the licensee’s appeal. It held that the counterclaim was insufficient notice because it did not terminate the suspensory arrangement expressly or specify a fixed future date.

3. High Court, Queen’s Bench Division: Pearson J rejected the notice, penalty, restraint-of-trade and statutory defences and awarded the licensor £84,050 4s 4d with interest.