Legal Updates
Bad drafting: the case of Oxonica v Neuftec
Key issues
- ‘appallingly drafted’ patent and know-how licence agreement interpreted by the Court of Appeal
- how are courts to interpret the wording of licence agreements?
- the dangers of cutting and pasting template wording into agreements
When a clause in an agreement, or the definition of a defined term, has been badly drafted, how much latitude can be allowed in its interpretation? The Court of Appeal addressed this question in the recent case of Oxonica Energy Ltd v Neuftec Ltd [2009] EWCA Civ 668. This case shows that, where defined terms have been used carelessly, a clause may need to be interpreted in what may seem a surprising way in order to give effect to the agreement’s underlying purpose.
The agreement
The case concerned a licence granted to Oxonica by Neuftec. Neuftec sought to develop fuel additives that would increase the efficiency of vehicle engines. It had filed an application under the Patent Co-operation Treaty (PCT) for a fuel additive including ‘at least one particulate lanthanide oxide’. Wanting to exploit this idea, Neuftec granted an exclusive patent and knowhow licence to Oxonica, an Oxford University spin-out with expertise in nanomaterials. According to the licence deed, Oxonica would pay Neuftec royalties on the sale of Licensed Products, defined as any product ‘falling within the scope of claims in the Licensed Application or Licensed Patent’. ‘Licensed Application’ referred to the PCT application, and ‘Licensed Patent’ to any patent issuing from that application.
After signing the agreement, Neuftec made applications for national and regional patents. In some cases, because of prior art in the countries concerned, the claims of the granted patents were narrower than stated on the PCT application. For example, the European Patent Office granted a patent for a fuel additive including ‘at least one particulate lanthanide oxide . . . wherein the lanthanide oxide is coated with an alkyl carboxylic anhydride’.
After selling and paying royalties on a fuel additive called Envirox, which fell within the claim of the European Patent, Oxonica developed a second product, called Envirox 2. The coating in Envirox 2 was not an alkyl carboxylic anhydride, and Oxonica refused to pay any royalties because the product fell outside the European patent claim. Neuftec objected to this interpretation of the agreement, and sued Oxonica for the royalties it claimed were due. Neuftec was successful in the High Court; Oxonica appealed, and the Court of Appeal’s judgment has recently been handed down.
The drafting issue
The question for the Court of Appeal was the meaning of the phrase ‘claims in the Licensed Application or Licensed Patent’. Did it mean (1) any product covered by the claim of the PCT application (currently the widest claim), or (2) any product covered by the claims of either the PCT application or any later patent, even where the later patent’s claim might be wider, or (3) any product covered by the claims of either the PCT application or a national application as the case might be?
Oxonica argued for meaning (3), contending that if in a particular territory the PCT was superseded by a national patent with a narrower claim, royalties should be payable only on a product which fell within that narrower claim. If meaning (1) or (2) were correct, it would have to pay royalties on products which did not have patent protection where they were sold, and this made no business sense. Furthermore, if meaning (1) were correct, then the words ‘or Licensed Patent’ in the agreement would have no meaning, and this would not be a legitimate construction.
Arguing for meaning (2), Neuftec pointed out that Oxonica was getting not only a patent licence but also a worldwide licence to use Neuftec’s knowhow, as well as a worldwide non-competition clause. Hence it was reasonable that Oxonica should pay royalties even if it could find a way round a narrowed patent claim. Adopting meaning (3) would cause great practical difficulties, since for every sale it would be necessary to consider the patent situation then current in the country concerned, ‘a potentially enormous exercise’.
The Court of Appeal upheld the High Court’s decision in favour of meaning (1). Lord Justice Jacob (with whom Lady Justice Arden and the President of the Queen’s Bench Division agreed) said it did not make sense for Oxonica to have free use of Neuftec’s knowhow in countries where there was a more restricted patent. Although Oxonica might have to compete against third parties in such countries, the third parties would have to develop their own knowhow, and the parties clearly considered the knowhow to have value. Furthermore, it was unlikely that the parties had intended the patent situation to be determined for each sale, as this ‘would be in a constant state of flux’.
Oxonica’s argument that meaning (1) would deprive the words ‘or Licensed Patents’ of any meaning was at first sight persuasive. However, the definitions clause in the agreement stated that the defined terms would have the meanings given ‘except where the context otherwise requires’. There was a difference between the context of licensing—where it was important to license everything in both the PCT application and all ensuing patents—and the context of royalty payments. In relation to royalty payments, the words ‘or Licensed Patents’ should not be read as applicable because ‘they made no sense or an unreasonable sense in that context’. This was the only way to make rational sense of what Lord Justice Jacob referred to as an ‘appallingly drafted document’.
The lesson to be learned
This case confirms the principle, already established, that an agreement should be construed as a whole in such a way as to make business sense. Especially in the case of a badly drafted document, a word or phrase may need to be given a meaning different from what at first seems appropriate. It will be necessary to do this if the provision in question would otherwise have a meaning that the parties are unlikely to have intended.
More generally, the Court of Appeal’s judgment serves as a warning to those drafting agreements to be sure that the meaning of a defined term is appropriate in each context in which that term is used. Unthinking copying of definitions and other boilerplate from precedents can result in inconsistencies which a party may seek to exploit, and which may be settled only by litigation.
Article posted: 2009-08-10
