Oxonica Energy Ltd v Neuftec Ltd

In construing a poorly drafted commercial licence, the court must ascertain the meaning conveyed to a reasonable person with the relevant background knowledge, giving proper weight to business sense and commercial purpose. Where definitions are expressly subject to context, their literal application may be displaced in a particular contractual context. A construction producing highly impractical administration or an unreasonable commercial result is less likely to reflect the parties’ intention unless clearly stated. A royalty clause in a patent and know-how licence therefore covered products within the broad claims of the original patent application, although they fell outside narrower granted patent claims. The appeal was dismissed unanimously.

Neuftec and Oxonica entered into a main agreement and a licence deed concerning fuel-additive technology, patents and know-how. The agreements were to be construed together. Oxonica developed Envirox 2, a product within the claims of the original patent application but outside the narrower claims of granted European patents.

The deputy judge held that royalties were payable on Envirox 2. Oxonica appealed, arguing that royalty liability depended on the patent position in the country and at the time of each transaction. The central issue was the proper construction of the definition of “Licensed Products” for royalty purposes.

The appeal was dismissed unanimously. Lord Justice Jacob gave the judgment, with Lady Justice Arden and the President of the Queen’s Bench Division agreeing.

1. The correct approach to contractual construction was not in dispute. The court had to ascertain the meaning conveyed by the documents to a reasonable person with the relevant background knowledge available when the agreements were made, as stated in Mannai Investment Co Ltd v Eagle Star Assurance [1997] UKHL 19; [1997] AC 749 and Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 2; [1998] 1 WLR 896. The two agreements had to be read together.
2. Poor drafting did not justify departing from the fundamental rule of construction. However, it made semantic niceties and supposed consistency of language less persuasive where the language could reasonably bear a sensible and businesslike meaning, following Mitsui Construction Co Ltd v A-G of Hong Kong (1986) 33 BLR 14.
3. The court considered three possible constructions. It rejected the construction making royalty liability depend on the patent position in each country at the time of each sale. That approach would create serious territorial and temporal difficulties, including questions about foreign counterparts and applicable patent law.
4. The licence was not merely a patent licence. It also covered a significant body of know-how and included a worldwide non-competition obligation. It would offend business sense to allow royalty-free use of that know-how wherever patent protection was absent or narrower. The practical and unreasonable consequences reinforced that conclusion under Wickman Machine Tool v L Schuler [1974] AC 235 at 251.
5. Although the words “or Licensed Patent” appeared in the definition of “Licensed Products”, the deed stated that its definitions applied unless the context otherwise required. For royalty purposes, the context required those words to be given no separate operative effect. Products within the claims of the original PCT application were therefore royalty-bearing worldwide, even if outside the claims of later granted patents. The appeal was dismissed for substantially the reasons given by the deputy judge, and not for the alternative reasons advanced in the respondent’s notice.

1. Court of Appeal (Civil Division) — Under [2009] EWCA Civ 668, the court unanimously dismissed Oxonica’s appeal and upheld the construction adopted below.
2. High Court of Justice, Chancery Division (Patents Court) — Peter Prescott QC, sitting as a Deputy Judge, rejected the construction under which royalty liability depended on the territorial and temporal patent position and held that royalties were payable on the disputed product.