Oxonica Energy Ltd v Neuftec Ltd

The meaning of a formal commercial agreement is determined objectively, by asking what it would convey to a reasonable person with the relevant background knowledge. That includes relevant legal and commercial knowledge, but excludes subjective intentions and previous negotiations. Where poor drafting creates a serious ambiguity, the court should select the construction that best accords with business common sense, without rewriting the language.

A defined expression may bear different meanings in different contractual contexts where the document requires that result. In a mixed patent and knowhow licence, claims in an international patent application may operate as a convenient yardstick for royalty-bearing products, even after national patents have been granted. The wording must be construed in its commercial context.

Neuftec granted Oxonica an exclusive licence of patent rights and knowhow relating to fuel additives. The Licence Deed defined “Licensed Products” as products, processes or uses falling within the scope of claims in the “Licensed Application or Licensed Patent”.

Oxonica developed and sold Envirox 2. It fell within the broad claim of the international patent application but outside the narrower claims of granted patents in some important countries. Oxonica sought a declaration that sales of Envirox 2 did not attract royalties. Neuftec counterclaimed for an audit and payment. The central issue was whether the contractual reference to the Licensed Application ceased to matter once a national patent had been granted.

1. Construction of commercial agreements. The court applied the modern objective approach explained in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 2 and Mannai Investment Co Ltd v Eagle Star Assurance [1997] UKHL 19. The relevant inquiry was what the Licence Deed would convey to a reasonable person possessing the background knowledge reasonably available to the parties. Subjective intentions and prior negotiations were excluded.
2. Poor drafting did not justify rewriting the agreement. However, where the words admitted more than one plausible construction, the court was entitled to prefer the construction which best served business common sense. The draftsman’s unfamiliarity with patent terminology was relevant context.
3. The words “Licensed Application or Licensed Patent” were ambiguous. The alternatives were not necessarily mutually exclusive, and “application” could mean either the legal request for a patent or the content of the filed document. The definitions therefore had to be read with the qualification “as the context may require”.
4. Clause 2.1 concerned the scope of the exclusive intellectual-property licence. Clause 4 concerned the separate question of which products attracted royalties. It was permissible for “Licensed Products” to operate differently in those contexts.
5. For royalty purposes, the PCT application as filed was the agreed yardstick. Royalties were payable on any product, process or use falling within the scope of any claim of that application, and not merely on products within the claims of subsequently granted national patents. That construction avoided uncertainty concerning country-by-country patent status, divisional and continuing applications, accounting, and exploitation of knowhow outside granted patent claims.
6. Envirox 2 was therefore a Licensed Product and attracted royalties. Oxonica’s claim failed and Neuftec’s counterclaim succeeded. The parties were directed to address the form of relief and costs.