Virgin Aviation TM Limited & Anor v Alaska Airlines Inc

Contractual interpretation is a unitary exercise in which the court reads the agreement as a whole, balancing its language, context and commercial consequences. Words giving priority to one clause operate only to the extent of an actual inconsistency with another provision.

A right to perform licensed activities without using trade marks and without usage-based royalties did not displace an express annual minimum payment. The minimum payment was consideration for retaining the licensed rights. It was payable even where no royalty based on actual use accrued. A construction allowing a licensee to retain valuable rights throughout a long term without payment was commercially incoherent.

Virgin licensed certain Virgin names and trade marks to Virgin America for use in its airline business. Alaska assumed Virgin America’s rights and obligations when the airlines merged. It later ceased using the Virgin Brand and stopped making payments.

The Commercial Court declared that Alaska remained obliged to pay the annual Minimum Royalty under the licence: [2023] EWHC 322 (Comm). Alaska appealed, contending that clause 3.7 entitled it to conduct all activities without using the marks and without paying any royalty. The central issue was whether that clause displaced the minimum annual payment required by clauses 8.1 and 8.6.

Decision

1. Appeal dismissed. Phillips LJ, with whom Andrews LJ and the Master of the Rolls agreed, upheld the declaration that Alaska must pay at least the annual Minimum Royalty during the contractual term, notwithstanding that it had ceased using the Virgin Brand.

2. Contractual interpretation was a unitary and iterative exercise. The court was required to read the professionally drafted commercial licence as a whole, testing the rival constructions against its language, factual matrix and commercial consequences. The principles in Rainy Sky SA v Kookmin Bank [2011] UKSC 50 and Wood v Capita [2017] AC 1173 supported that approach.

3. Clause 3.7 permitted Alaska to carry on some or most operations without using the Virgin Brand and without paying royalties on those operations. It therefore qualified the ordinary obligation in clause 3.6 to use and promote the brand. Its priority wording did not, however, create a conflict with the separate payment provisions sufficient to disapply them.

4. Clauses 8.1 and 8.6 required payment of the greater of usage-based royalties and the defined Minimum Royalty. The latter was in substance a fixed minimum payment for the airline rights granted under clause 3. It was not calculated by reference to actual use, and remained due even if clause 3.7 meant that no usage-based royalty was payable.

5. The factual matrix supported that construction. The minimum payment was introduced when Virgin was giving up controls and becoming exposed to a greater risk of complete de-branding. The commercial consequences were also decisive: Alaska’s construction would allow it to retain and sterilise valuable rights for up to 25 years without payment, and would convert Virgin’s option to terminate into an effective right for Alaska to end the economic bargain without penalty. The court did not need to decide Alaska’s challenges to the judge’s alternative conclusions.

• Court of Appeal (Civil Division) Dismissed Alaska’s appeal and affirmed the declaration that the annual Minimum Royalty remained payable: [2024] EWCA Civ 622.

• High Court of Justice, Commercial Court Declared that Alaska had to pay at least the Minimum Royalty in each financial year of the licence, even if it derived no gross sales from use of the marks: [2023] EWHC 322 (Comm).