Kason Kek-Gardner Ltd v Process Components Ltd

Contractual interpretation begins with the language used and the admissible factual background. That background comprises facts known or reasonably available to all contracting parties. Commercial common sense cannot displace clear language.

Separate contracts made in the same insolvency process are not to be read as one transaction unless they are contemporaneous contracts between the same parties forming a composite transaction. A term will be implied into a detailed commercial contract only where necessary for business efficacy or so obvious that it goes without saying; an entire-agreement clause does not itself preclude implication.

Where parties expressly stipulate termination events, their agreement governs. A clause deeming breach of confidentiality a non-remediable material breach may entitle termination for any such breach, irrespective of common-law rules concerning repudiatory breach.

Kemutec Powder Technologies Ltd entered administration after operating businesses in powder-processing machinery, systems, specialist valves and spares. Its assets were sold under separate agreements to Process Components Ltd (PCL) and Kason Kek-Gardner Ltd (KGL). PCL subsequently licensed KGL to use intellectual property rights formerly owned by Kemutec.

Proudman J made an order determining the intellectual-property rights transferred to PCL and KGL, and holding that PCL had validly terminated the licence after KGL disclosed it during the sale of KGL’s shares to Kason Industries Inc.

KGL appealed. The central issues were the proper construction of the asset-sale agreements, the effect of an erroneous trade-mark description, whether a disclosure term should be implied into the licence, and whether any breach of its confidentiality obligation entitled PCL to terminate.

Appeal dismissed. Lewison LJ, with whom Kitchin and Floyd LJJ agreed, held that Proudman J’s order was correct, although parts of her reasoning required correction.

1. The two asset-sale agreements could not be read together. They were made at different times and were not contemporaneous agreements between the same parties forming a composite transaction. The PCL agreement transferred the intellectual-property rights used in the Mucon and Spares businesses at completion. It did not divide rights by their intended purpose in separate businesses.

2. Extrinsic evidence was admissible to identify the uncertain subject matter of the Spares business. The judge’s factual conclusion that the business used the materials identified in her order was sustainable. Her decision not to draw an adverse inference from PCL’s failure to call particular witnesses was a discretionary evaluative judgment, supported by ample contemporaneous documents.

3. The erroneous reference to a registered KEK trade mark bearing an expired number was corrected by construction. It was clear that the live registered KEK mark was intended. This applied the constructional correction recognised in [2009] UKHL 38, rather than equitable rectification.

4. No term permitting disclosure of the licence to a prospective purchaser could be implied. Such a term was neither necessary to make the licence effective nor so obvious that it went without saying. The entire-agreement clause did not itself bar implication, but the proposed term failed the applicable tests.

5. Disclosure of the licence to Kason breached the confidentiality obligation. The parties had expressly agreed that breach of that obligation constituted a non-remediable material breach. PCL was therefore entitled to terminate immediately. Common-law distinctions between conditions and innominate terms, and the seriousness required for repudiation, did not control the agreed contractual termination right.

KGL consequently acquired none of the rights it claimed, so estoppel did not arise. The valid termination also made the remaining issue concerning the licence’s scope academic.

• Court of Appeal (Civil Division) — in [2017] EWCA Civ 2132, dismissed KGL’s appeal and upheld the order below.
• High Court of Justice, Chancery Division — Proudman J made the order determining the transferred intellectual-property rights and the validity of termination of the licence; KGL appealed from that order.