Cambridge Display Technology Ltd. v EI Dupont De Nemours & Company

In construing a commercial agreement, the court must give the parties’ words their natural meaning. It may depart from the written text or add words only where the agreement or admissible evidence shows that the parties must have made a mistake in recording their bargain. An apparent commercial purpose or a more advantageous allocation of benefits is insufficient. Defined terms must be applied according to their contractual meaning. A specific payment timetable may prevail over inconsistent general wording. Accordingly, a minimum royalty applying to each complete contractual year after the specified date did not create a positive shortfall at the end of the initial two-year period.

Cambridge Display Technology Limited appealed against a declaration and dismissal of its action by Patten J in the Chancery Division. The dispute concerned the construction of clause 3.5 of a patent licence agreement dated 16 October 2001.

The agreement required quarterly royalties and provided for payment of any shortfall against a minimum royalty. Clause 3.5 referred to the first two years of the agreement, while the definition of Minimum Royalty applied to each Year after 1 January 2003. The central issue was whether the minimum royalty for the initial two-year period was US$1 million, or whether no positive shortfall arose until the first complete contractual year commencing after that date.

1. Appeal dismissed. The Court of Appeal unanimously upheld the declaration made by Patten J.
2. The agreement defined Year as a period of 12 months from the effective date and each succeeding 12-month period. The definition had to be applied according to its natural meaning. The first complete contractual year after 1 January 2003 therefore commenced on 16 October 2003.
3. Clause 3.5 operated by comparing royalties payable under clause 3.1 with the Minimum Royalty payable for the period in question. On the natural meaning of the definitions, no positive minimum royalty arose for the initial two-year period ending on 16 October 2003, so the calculation produced no positive shortfall.
4. The reference in clause 3.5 to payment in the manner provided by clause 3.6 gave priority to clause 3.6’s more specific quarterly payment directions over the opening wording of clause 3.5, to the extent of any inconsistency. The words if any also accommodated a period in which the minimum royalty was nil, although this provided only limited support for the conclusion.
5. The court could not insert the word ending, add punctuation, or otherwise rewrite the definition merely because the claimant’s construction better reflected an inferred commercial purpose. Departure from the written words required the agreement or admissible evidence to show that the parties must have made a mistake in recording their agreement. No such justification was established.

1. Court of Appeal (Civil Division): Appeal dismissed. The court upheld the declaration made below.
2. High Court of Justice, Chancery Division: Patten J declared that any shortfall under clause 3.5 was payable by 15 December 2004 and on 15 December in each succeeding year, and dismissed the action.