The Codemasters Software Co Ltd v Automobile Club De L'Ouest

An indemnity in an intellectual property licence agreement may protect a licensee against third-party claims that exploitation of the licensed rights infringes intellectual property rights. The words used must be construed in their commercial context. An indemnity for claims arising from breach or alleged breach of warranties may include such third-party infringement claims, even where the wording is imperfect. A settlement is recoverable only if the claim was sufficiently strong to justify settlement and the amount paid was reasonable. The word “defend” does not, without contractual machinery dealing with notification, conduct of proceedings and settlement, impose a mandatory obligation to transfer control of the defence to the indemnifier.

Codemasters obtained rights from the Automobile Club de l’Ouest to use material connected with the Le Mans races in a computer game. Third-party manufacturers asserted intellectual property rights in cars represented in the game. Codemasters claimed that the resulting claims fell within an indemnity in clause 10.3 of the parties’ agreement.

The application was formally to strike out parts of the defence and counterclaim, but was treated as an application for summary determination of the construction of clause 10.3. The central issue was whether the clause covered third-party claims arising from exploitation of the licensed rights, or only claims under separate agreements.

1. Construction principles. The agreement was to be interpreted according to the principles stated in Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 28, including the relevance of commercial purpose and unreasonable consequences. The wording “pursuant to” was linguistically capable of more than one meaning, so the clause had to be considered in context.
2. Scope of clause 10.3. The commercial purpose of the clause was to indemnify Codemasters against third-party claims arising from its exploitation of the rights granted under the agreement. That construction was consistent with the commercial allocation of risk commonly found in intellectual property licences. “Any agreement or warranty” included allegations that ACO lacked the rights it purported to grant or that authorised use infringed third-party rights. The reference to claims, causes of action, suits, damages and demands was properly understood as referring to third-party claims, not a mere allegation of breach by the contracting party.
3. Settlements. Following the principles in Biggin & Co Ltd v Permanite Ltd [1951] 2 KB 314, Comyn Ching & Co (London) Ltd v Oriental Tube Co Ltd (1979) 17 BLR 56 and General Feeds Inc (Panama) v Slobodna Plovidba (Yugoslavia) [1999] 1 Lloyd’s Rep 688, Codemasters could not recover an unreasonable settlement. It had to establish that the claim had sufficient strength reasonably to justify settlement and that the amount paid was reasonable.
4. Defence of claims. “Defend” meant protect from, or at most gave Codemasters a right to request that ACO take over the defence. It did not require Codemasters to surrender conduct of the proceedings. A mandatory transfer of control would have required detailed contractual machinery, which the agreement lacked.
5. ACO remained entitled to argue at a later stage that Codemasters’ own breaches contributed to the third-party claims, including on causation, remoteness or mitigation. Summary judgment was therefore confined to construction of clause 10.3. Summary judgment was given for Codemasters on that issue. ACO was ordered to pay 50 per cent of Codemasters’ application costs, summarily assessed at £70,000, with the balance costs in the case.