Cambridge Display Technology Ltd. v EI Dupont De Nemours & Company [2005] EWCA Civ 224

Case No A3/2004/1391[2005] EWCA Civ 224
IN THE COURT OF APPEAL
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Claim No HC04 00159
Court No 66
Venue The Royal Courts of JusticeDate Monday, 17th January 2005
The Strand
London WC2 A2U
Before
LORD JUSTICE BROOKEVice President of the Court of AppealLADY JUSTICE ARDENLORD JUSTICE LONGMORE
Between
CAMBRIDGE DISPLAY TECHNOLOGY LIMITEDClaimant-v-
Between
E.I. DUPONT DE NEMOURS AND COMPANYDefendant(A company incorporated in Delaware)Defendant
Computerised Transcript of the Stenograph Notes ofSmith Bernal WordWave Limited190 Fleet Street, London EC4A 2AGTel: 020 7404 1400 Fax: 020 7404 1424(Official Shorthand Writers to the Court)
MR R ENGLEHART QC (instructed by Osborne Clarke) appeared for claimant.MISS G ANDREWS QC (instructed by Eversheds) appeared for defendant.
JUDGMENTMonday, 17th January 2005.

LADY JUSTICE ARDEN:

[1]This is an appeal against the order of Patten J making a declaration and dismissing this action. The declaration which the judge made was that, upon the true construction of clause 3.5 of an agreement entitled “Patent licence for displays and display illuminations”, dated “16th October 2001”, (which I will call “the agreement”) between the claimant and the defendant, the shortfall therein defined, if any, falls to be paid by 15th December 2004, and on 15th December in each succeeding year.[2]The appellant is the claimant in this action, and I will call it CDT. The respondent (which I shall call “DuPont”) is the defendant in the action. As will be apparent, the issue on this appeal is as to the true interpretation of clause 3.5 of the agreement. As will appear, it is a relatively short point.[3]The agreement is governed by English law. It is a licence to manufacture and sell display equipment incorporating CDT’s electroluminescence polymer technology, which can be used to create flat-panel displays. We are not concerned with the technical specification or capabilities of CDT’s technology.[4]I can take the factual background against which the agreement was executed from paragraph 2 of the judge’s judgment.

The judge said:

“The commercial background to the Agreement is that in March 2000 DuPont acquired a small Californian research and development company called Uniax Corporation, which then changed its name to DuPont Displays Inc. The business of Uniax consisted of the development of what is described as organic light-emitting display technology, which can be used to produce plastic and glass displays for a variety of purposes, including cellular telephones and portable computers. The development of these products required the use of CDT’s invention, although it was said by the defendants that this was to be combined with Uniax’s own technology in order to create a commercially exploitable end product. The incorporation of the patented polymer materials necessitated, however, a licence from CDT as patentee.”
[5]In his judgment, the judge then notes that the agreement was based upon CDT’s standard form licence agreement. There was evidence before the judge as to the negotiations between the parties, but the judge held that that material was inadmissible on the authority of Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 913B.[6]Under the agreement, in consideration of the licence DuPont agreed to pay a lump sum of $17.5 million on the signing of the agreement and, in addition, “royalties in respect of the Net Sales Values (as defined below) of all covered LEP devices manufactured ... and sold ... in each Quarter for so long as the patent covering any LEP devices remains valid and enforceable ...” (Clause 3.1(b)).[7]I am not concerned with the definition of Net Sales Value. “Quarter” is defined in clause 1.1 thus:
“‘A Quarter’ means the three months commencing on the effective date and each successive period of three months thereafter during the continuance of this agreement, and any shorter period ending on its termination ‘quarterly’ shall be construed accordingly.”
[8]“Effective Date” is defined in the same clause. It means “the date of the last signature to this agreement”, which the judge held was 16th October 2001.[9]I now go to the operative clauses of the agreement. Clause 3.4 states that:
“A sale will be deemed to have been made and payments due hereunder for such sales shall accrue: (a) when invoiced to a Third Party ...”
[10]Clause 3.5 is the critical clause. This provides:
“Within sixty (60) of the days of the end of (a) the first two Years under this Agreement, and (b) each Year thereafter, the Licensee shall, in the manner provided in clause 3.6 below, pay to CDT the shortfall if any between the royalties payable in accordance with clause 3.1 above and the Minimum Royalty payable with respect to the period in question.”
[11]Clause 3.5 is subject to clause 3.6, which provides:
“The royalties payable under clause 3.1(b) and any shortfalls under clause 3.5 above shall be paid within sixty (60) days after each quarter during the period of this agreement.”
[12]So it would appear that although clause 3.5 provides for payments within 60 days of the end of the first two years, that payment date may not be until a later date, following the quarterly payment direction in clause 3.6.[13]The expression “year” is subject to its own definition in clause 3.1, and this is important. It means:
“The period of 12 months from the Effective Date and each succeeding period of 12 months during the period of this agreement.”
[14]So “year” is not defined by reference to calendar years but by reference to years of this agreement. So the first year of the agreement as defined will terminate on the first anniversary of the agreement.[15]The next important provision is the definition to which I must refer; it is a definition of “minimum royalty”. Clause 1.1 provides that:
“‘Minimum Royalty’ means in relation to each Year after January 1st 2003, US$1 million.”
There is, I think, nothing else in the agreement to which I need specifically to refer.[16]There appears to be a conflict between clause 3.5 and the definition of “Minimum Royalty”. Clause 3.5 appears to suggest that Minimum Royalty is payable within 60 days after the second anniversary of the agreement, that is 16th October 2003, whereas in the definition of “Minimum Royalty”, taking “Year” to be a complete year of this agreement, it is first payable in relation to the year commencing 16th October 2003 and ending 15th October 2004. And the judge so held.[17]The claimant’s case is that in the definition of Minimum Royalty, the expression “in relation to the Year after 1st January 2003” must mean in relation to each year ending after that date, and if that is done, there is no conflict between Minimum Royalty and clause 3.5.[18]Mr Robert Englehart QC, for the appellant, has made some detailed submissions to which I will refer in a moment.[19]The judge, in his judgment, notes that it was clear that there was to be a “royalty-free period”. Those are my words. But there is no evidence as to the length of that period, ie as to what period the parties agreed for that purpose, or what in fact it should entail.[20]The judge rejected DuPont’s argument that clause 3.5 should be construed in favour of the licensee -- that is DuPont -- in my judgment rightly so, and that argument has not been pursued on this appeal.[21]The judge, however, rejected the argument of CDT, summarised above. He held that the clause worked perfectly well without writing any words in. It would simply result in a minimum shortfall calculation for the first year for which the calculation had to be done, but that, in his judgment, is consistent with the use of the words “if any”, qualifying the word “shortfall” in clause 3.5.[22]He concluded that he could not treat the reference to 1st January 2003 in the definition of “Minimum Royalty” as “a mere imitation of clause 3.5”.[23]I now turn to the submissions of Mr Englehart. The appellant’s case is that the Minimum Royalty for the first period was an amount of US$1 million, and that period related to the two years ending on the second anniversary of the agreement. He submits that the royalties would then be calculated for the same period, and any shortfall would be payable under clause 3.5.[24]Mr Englehart submits that the benefit to the licensee is that for the first two years there is only one minimum royalty period. That, he says, is the benefit of clause 3.5 and the definition of “Minimum Royalty” for the licensee.[25]Mr Englehart further submits that the judge’s interpretation has the effect of ignoring clause 3.5(a) altogether, or alternatively treats the reference to “two years” as in fact a reference to three years. Alternatively, he submits that the judge’s judgment attributes an intention to the parties to do a calculation for the first period, which produces a nil result, and which he submits in effect would be absurd.[26]Mr Englehart fairly accepts that the expression “Year” means, naturally, a whole year for the purposes of this agreement. But he submits that if the reference to “1st January 2003” were not in the definition of “Minimum Royalty”, the Minimum Royalty for the first period of two years would in fact be US$2 million. So he submits that is the purpose of the reference to the date of 1st January 2003. By implication, he submits that that is the whole reason for the reference to the date, and the only function which it should be treated as serving.[27]Mr Englehart criticises the judgment of the judge. He refers to paragraphs 10, 11, 12 and 13 of the judge’s judgment. He submits that the judge was mistaken in saying that if the definition of “Minimum Royalty” did not include the date of 1st January 2003, the Minimum Royalty payable under clause 3.5 as at 16th December 2003 in respect of the first two years of the agreement would only be £1 million. He seeks to demonstrate that if the date is taken out of the definition of “Minimum Royalty”, then a minimum royalty of US$1 million is payable with respect to each year, and when one applies that to clause 3.5, there is a two-year period and therefore, on the face of it, without the date of January 2003, a sum of US$2 million is the basis of the calculation for the shortfall.[28]So, as I have said, he submits strongly and persuasively that the function of the date in the definition of “Minimum Royalty” is to cut the Minimum Royalty for the first two years down to US$1 million.[29]Mr Englehart also submits that the judge, in this construction, effectively means that the judge interpreted the words “if any” as if they qualified the words “Minimum Royalty”, because, of course, the first time this calculation is done, there is no minimum royalty if the “year” means a whole year, and Minimum Royalty only begins for years commencing 15th October 2003.[30]The judge, however, did make a point by reference to the words “if any”, and drew some support from them, and this is a submission which I will have to deal with in due course.[31]Finally, Mr Englehart submits that when interpreting the agreement with respect to the issue before us, something in the agreement has to give. Something has to give in the definition of “Minimum Royalty”. There are a number of ways the court can produce a result which renders the clauses consistent with his interpretation. The court could either insert the word “ending” after the word “year” in the definition of “Minimum Royalty” so that it would read:[32]“‘Minimum Royalty’ means in relation to each year ending after 1st January 2003, US$1 million”, which means that a royalty would be payable for the year ending 15th October 2003.[33]Alternatively, he submits that the clause can be read by introducing pauses around the expression “in relation to each year”, so that it would be as if “Minimum Royalty” was defined as follows:
“Means in relation to each year, after 1st January 2003, US$1 million.”
[34]On that interpretation, he submits that the date qualifies the amount, namely $1 million.[35]Miss Geraldine Andrews QC, appears for DuPont. She has made a number of submissions, and I hope it will not be discourteous if I say that the essence of her case is that she seeks to uphold the judge’s judgment for the reasons that he gives.[36]I now, therefore, come to my conclusions on the submissions that have been made. In my judgment, the judge’s approach was right in principle. The court must give effect to the words that the parties have used, and which appear in the agreement. In this case, the words do have a meaning. When one comes to clause 3.5, it works, giving the words their natural meaning.[37]The opening words of the clause, down to the expression “shortfall”, do not cause difficulty. It is clear that the end of the two years from the date of the agreement is 16th October 2003 -- and the ascertainment of each year thereafter is self-evident -- and then the licensee has, in the manner provided in clause 3.6 (to which I referred above) to pay to CDT the shortfall, if any. There is no difficulty so far.[38]Then, on the calculation of the shortfall, the parties take the royalties paid in accordance with clause 3.1, which is a quarterly exercise, and the Minimum Royalty payable with respect to the period in question.[39]Then the parties have directed themselves to the definition of “Minimum Royalty”. That, as I have said, means, in relation to each year after 1st January 2003, US$1 million. If one gives the expression “each year” the meaning which the parties have given to it in the agreement, it definitely means a whole year, and the first whole year after 1st January 2003 is the year commencing 16th October 2003.[40]So it is possible to work the clause with the definitions and words that the parties have given.[41]It means that a royalty cannot be calculated within 60 days of the end of the first two-year period and produce a positive result, because the royalty is only in respect (on that interpretation) of a whole year commencing after 1st January 2003.[42]Now, in principle, the court can only depart from the words that the parties have used, according to their natural meaning, if it is clear that some other interpretation was intended by the parties, and that indication must either come from some other provision of the agreement itself or admissible evidence as to the factual matrix.[43]The only candidate in this case, in the agreement, is the point that the first calculation which the parties do must produce a nil shortfall. But there is nothing to show that the parties intended something else. The appellant’s case seeks to produce the result that the parties intended a particular solution, which the appellant put forwards.[44]The appellant’s argument can only be right if, on the first way of putting it, on the way put below, words are read into the definition of “Minimum Royalty”, particularly the word “ending”, and this was the way the primary case was put below. It is not the primary case put on appeal. I deal with it first because it nonetheless forms part of the appellant’s argument, but, as I see it, there is no mandate for writing that particular word into the definition of “Minimum Royalty”.[45]The alternative way of putting the case is to say that there is a pause to be inserted after the word “year” in the definition of “Minimum Royalty”, so that the word “after” qualifies the figure of £1 million.[46]As I see it, it is unnatural to read the word “after” as qualifying an amount. There is no indication that the parties intended to adopt that unnatural interpretation on their words.[47]Mr Englehart makes careful and well-crafted submissions. He has persuasively argued that the purpose of interpolating a date into the definition of “Minimum Royalty” is so that it is clear that the first Minimum Royalty with respect to the first two-year period from the date of the agreement is only one sum of US$1 million.[48]It may be that that is what the parties had in mind, but this court cannot assume that that was the party’s purpose, still less that it was their only purpose including the date in “minimum royalty”. As I see it, the appellant’s argument can only succeed if that was the only purpose for including that reference to 1st January 2003.[49]If I may take a homely analogy, a patch to cover a hole may be added which is greater than the hole which is intended to cover. In other words, the parties may have spotted that they needed to make a provision which meant that the royalty for the first two-year period was only one sum of US$1 million, but if the words which they had adopted and agreed upon do more than that, then they are bound by those words which they have ultimately used, not by the purpose which they may -- it is not clear -- have had in mind.[50]If the appellant is right, and the Minimum Royalty arises in relation to each year -- and that would be the effect of putting in the commas and reading the definition of “Minimum Royalty” as it suggests -- it is the case that US$1 million is payable after 1st January 2003, and just US$1 million. Then, taking that to clause 3.5, the effect is that the Minimum Royalty for the period in question would be for a two-year period, and the royalties would be for the like period of two years. The benefit of doing that would be first, that the obligation to make a payment in respect of the shortfall would be deferred from the end of the first year, and second, the minimum royalty would only be 50 per cent of what it would be payable for each succeeding year.[51]But as I see it -- and this perhaps only putting the point another way -- the words which the parties have used in the agreement are not the natural way of expressing that result. The effect of the definition, on its natural meaning, is to exclude “years” -- “years” as defined by the parties -- before 1st January 2003. There is nothing in the agreement to show that the parties intended to produce the benefits for which Mr Englehart contends.[52]The parties were clearly not ad idem as to the benefits to be obtained by clause 3.5. If they had been ad idem, there would have been evidence to which we could properly have been taken.[53]I now move to Mr Englehart’s argument on the words “if any”. As I mentioned, Mr Englehart submits that the judge wrongly construed these words as qualifying Minimum Royalty, rather than shortfall, but of course there could be years in which there is no shortfall because the royalties were of a sufficient amount.[54]In my judgment, the judge was entitled to make the point which he made. The words “if any”, qualifying the shortfall, do in my judgment feed through and cover a situation where the Minimum Royalty is in fact nil for a particular period, and therefore do lend some, if only minor, support to the judge’s conclusion.[55]Next, I would add that much of the argument put by Mr Englehart has turned on the force of the opening words:
“... within 60 days of the end of (a) the first two years under this agreement.”
But the significance of those words must, to some extent, be reduced by the further words in clause 3.5: “... in the manner provided in clause 3.6 below”, which seemed to indicate that a different timetable may have to be applied.[56]Clause 3.6 states that shortfalls are to be paid within 60 days after each quarter during the period of this agreement, and the words used are apt to the shortfalls in clause 3.5. That subclause begins:
“The shortfall, if any, between the royalties and the minimum royalties.”
[57]If that is so, then there is some internal inconsistency in clause 3.5, and in my judgment the words “in the manner provided in clause 3.6 below” would have to have priority over the opening words of the clause, since they are of a more specific and detailed nature, and constitute directions to the manner in which the shortfall is to be paid.[58]As I see it, this particular point diminishes the significance which the court can attach to the opening words on which Mr Englehart has based part of his argument.[59]I should say, it is common ground that clause 3.5 does not incept before 16th October 2003.[60]Finally, with respect to the argument based on inserting the word “ending”, as I have said, this was not Mr Englehart’s primary argument, but it has to be recognised that that would involve writing a word in which is contrary to the court’s well-established and normal approach on interpretation of documents.[61]Mr Englehart put the argument very attractively, by saying it was only going to produce the same result as could be produced by inserting a comma. Either way, whether one looks at the interpretation for which the appellant contends as requiring the insertion of a comma or the insertion of a new word, “ending”, it does involve a major departure from the written terms of the agreement, and in my judgment the court would have to find justification within the admissible evidence or the terms of the agreement for such a radical departure from the agreement.[62]So, to recapitulate, in my judgment the judge adopted the right approach in principle. The court must construe the words of the agreement as they appear in the written document. They can only depart from those words and add a more purposive approach if they are satisfied from the agreement itself, or from some admissible evidence, that the parties must have made a mistake in the way in which they have put their agreement in writing.[63]In my judgment, it is not possible to reach the conclusion that the parties had some aim in mind other than that which is expressed in clause 3.5.[64]For those reasons, I would dismiss the appeal.

LORD JUSTICE LONGMORE: I agree.

LORD JUSTICE BROOKE: I also agree. The appeal is therefore dismissed.