Royal Courts
of Justice
Strand, London, WC2A 2LL
Date: 20 September 2001
B e f o r e :
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Claimant
- and -
Defendants
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MR J McCAUGHRAN (instructed
by White & Case for the Claimant)
MR P ACLAND (instructed by Hammond Suddards for the Defendants)
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1. The principal issue in this action is a claim for rectification of a joint venture agreement dated the 21st December 1995. The joint venture had been set up to exploit and to develop technology in the field of automated clutch and transmission systems ("ACTS"). The joint venture participants were Kongsberg Automotive AS ("Kongsberg") and the first defendant which was previously known as Automotive Products PLC ("AP"). Both AP and Kongsberg had at that stage concentrated on hydraulically actuated ACTS. The claimant was the joint venture company. It was formerly known as AP Kongsberg Holdings Ltd, then AP Kongsberg Ltd, and then Kongsberg Tecmatic UK Ltd ("KTM"). In September 1998 the claimant's name was changed following the acquisition of its parent company by LUK Lamellen und Kupplungsbau GmbH ("LUK"), a leading manufacturer of electrically actuated ACTS and a competitor of AP and Kongsberg. The second defendant ("INC") was and remains a US corporation within the same group of companies as the first defendant.
2. The focus of the dispute is whether specific patent and patent applications ("the omitted patents") should have been included in the sixth schedule of the joint venture agreement ("the Shareholder Agreement") and thus exclusively licensed to KTM.
3. In broad terms, it is possible to divided the omitted patents into two parts. First, there were some which had originated from INC but which had been registered in the name of AP. They related to the field of electrically actuated clutch mechanisms. Whilst the claimant contended that all technology relating to automated clutch mechanisms belonging to the joint venture partners were to be included in the agreement, the defendants contended that only technology relating to hydraulically actuated mechanisms was to be transferred because that was the existing focus of the relevant business of the two partners.
4. The second group of the omitted patents was owned by INC. It was the claimant's case that all intellectual property in the relevant technological field held within the entire AP group were to be transferred to the joint venture company. The defendants contended not only that no technology other than that owned by AP itself was to be transferred but in any event that these patent cases were not relevant to automated clutch mechanisms, let alone hydraulically actuated ones.
5. KTM did not flourish and in August 1997 AP and Kongsberg began discussions with a view to AP withdrawing from the joint venture. The outcome was a "New Agreement" dated the 20th October 1997 by virtue of which the Shareholder Agreement was terminated. Shortly, thereafter, the patents, which had previously been licensed on an exclusive basis, were assigned to KTM.
6. In the meantime, LUK had accused AP of infringing certain LUK patents by reason of the delivery of twin-mass flywheels to BMW (items wholly distinct from clutch technology). AP sought to forestall this complaint by offering LUK the opportunity of cross-licences of some of the omitted patents. When this tactic failed, AP counter-attacked by contending that LUK was infringing the patents licensed to KTM by virtue of a clutch control system supplied by LUK to Mercedes Benz. The stakes were raised yet further when LUK responded by claiming that AP had infringed LUK patents in regard to the clutch mechanism supplied by AP to Renault.
7. In early 1998 KTM was asked to assist AP in resolving the escalating dispute with LUK. In return for an undertaking by KTM not to pursue LUK for any infringement of the assigned patents, AP arranged a non-exclusive licence of the omitted patents in favour of KTM.
8. There matters rested until the summer of 1998 when ironically KTM was acquired by LUK. A claim for rectification was eventually made in November 1999.
9. Before turning to a more detailed chronology of events, it is convenient to describe briefly the transmission systems that are used in the automobile industry in order to put the omitted patents in their context. I have taken the description from the defendant's opening skeleton argument. (The claimant had helpfully provided a similar albeit slightly more detailed description.)
10. When changing gear with a conventional manual transmission system, the driver must first disengage the gearbox from the engine by depressing the clutch. The driver chooses the appropriate gear using a gear stick, which is itself connected by way of a mechanical linkage to the gearbox. The actuating force necessary to operate the clutch and to change gear is provided by the driver's muscles. In theory, manual transmission systems are very fuel-efficient. However, in practice, high levels of efficiently are rarely achieved since the driver does not or cannot know at what vehicle speeds and degrees of throttle opening it is most efficient to change gear.
11. Conventional automatic transmission systems do not have a clutch between the engine and the gearbox. Instead the engine and the gearbox are permanently engaged by way of a fluid coupling called a 'torque converter'. The gearbox of a conventional automatic vehicle is also very different from that of a manual gearbox. In the automatic gearbox, the driver chooses the appropriate gear state manually, for example Park, Reverse, Neutral, Drive or Low ("PRNDL"). Thereafter the gears are selected automatically under the operation of a control system, which responds to the speed of the vehicle and the position of the accelerator. Although conventional automatic transmission systems are easy to operate, they suffer significant inefficiencies due to energy losses in the torque converter.
12. Conventional automatic transmission systems have been modified in numerous ways over the years in order to achieve enhanced performance and safety. One idea that is germane to the present case has been the use of an electric motor instead of a manual linkage to select the appropriate drive state. This technology has been referred to under various acronyms including "ESAT" (Electric Selection of Automatic Transmission).
13. In more recent years, various attempts have been made to automate conventional manual transmission systems, the principal motivations being to improve fuel efficiency, to improve ease of driving and to remove the mechanical linkages between the driver and the engine. Three main types of automated clutch or gear shift systems have been developed.
Automated clutch systems ("ACS")
14. In ACS, it is the clutch which is automated. The main advantage over a conventional transmission system is that although the driver retains direct control of the gear shifting process, this can be effected without having to operate a clutch pedal. The clutch is automatically engaged and disengaged in response to operation of the gear stick. The actuation of the clutch is achieved using either a hydraulic system or an electric motor. The distinction between these alternative types of actuation system, which as already observed was at the heart of the disputes in this case, is described in further detail below.
Semi-automated transmissions ("SAS")
15. This is an extension of ACS in which both the clutch and the gear shifting are automated. In an SAS system, there is a form of gearshift but no clutch pedal. Gear changing is performed at the instigation of the driver by operating a series of switches, for example in the form of 'paddles' located on the steering wheel or by operating a lever switch. The main advantage of SAS over ACS is that there is no fixed mechanical linkage between the gearshift and the gearbox. As with ACS, the actuation of the clutch and the gear change is achieved using either a hydraulic system or an electric motor.
Fully-automated transmissions ("FAS")
16. In FAS systems, the driver can chose to operate the transmission either as an SAS system (i.e. as a conventional manual but without a clutch pedal) or can select a fully automatic mode in which gear-shifting and clutch operation is carried out wholly automatically. It is the vehicle's control system (rather than the driver) which chooses when to change gears, just like a conventional automatic but with the improved efficiency of a manual transmission. Again, the actuation of the clutch and the gear change is achieved using either a hydraulic system or an electric motor.
17. In broad terms two different systems have been developed to operate the clutch and the gearbox, namely electric motor actuation and hydraulic actuation:
(1) In an electric system the operating force is provided by an electric motor whose output (i.e. speed or rotation, direction of movement, etc.) is determined by an electronic control unit. This motor operates the clutch or the gearbox either by a direct mechanical linkage or by moving what can be thought of as a tube of incompressible hydraulic fluid (the latter is often referred to as a "hydrostatic linkage" as the fluid does not flow anywhere and is static). In each case the "source of the force" is the electric motor itself.
(2) In a hydraulic system, the "source of the force" to effect actuation is an accumulator containing pressurised hydraulic fluid. This pressurised hydraulic fluid is under the control of an electric solenoid or motor operated valve to achieve the force and position required each time a clutch and/or gear change is needed. The valve itself is under the control of an electronic control unit. An hydraulic system of this kind (often referred to as a "dynamic hydraulic" system) is different from a hydrostatic linkage" described above in that hydraulic fluid flows around the system and indeed has to be pumped back into the accumulator by a pump, which is also driven by an electric motor.
18. AP is a manufacturer of various automotive components including clutch units. In 1989, AP obtained a contract for the supply of an hydraulically actuated ACS system to the truck manufacturer IVECO. This led to the establishment, within AP's Borg & Beck division, of a sub-division called ACTS (an acronym for Automated Clutch and Transmission Systems). ACTS thereafter focused on the development of hydraulic actuation of a conventional manual gearbox . This ultimately led to the award of a contract by Renault for a hydraulically actuated ACS system for the Twingo and the Clio.
19. Kongsberg were also manufacturers of automotive components. Their major line was hydraulic clutch actuation systems for trucks. Its subsidiary Kongsberg Automotive Technology undertook research and development in this field.
20. INC's business was concentrated on the design and development of hydraulic systems for use in conventional manual transmission systems. In particular, it was a significant force in the US market for pre-filled clutch hydraulic systems ("PFCH"). With a view to broadening its product line, INC began development with a third party ("Christensen") of an ESAT system in the late 1980's. INC also investigated the use of electric motors to actuate gear shifting mechanisms and clutches with manual transmission systems (referred to within ICN as "Selec-Tec").
21. The claimant contended that there were two groups of patents that had been mistakenly left out of the agreements. The first group were six in all numbered A2245, A2335, A2461, A2257, A2351 and A2244. Each of these patents was owned by AP at the time of the Shareholder Agreement save for A2244. The latter had been owned by AP but has been assigned to INC as explained below.
22. It was common ground that these patents (with the exception of A2257) related to arrangements for using electrical control of the actuation of clutch or transmission systems. As regards A2257, there was some dispute between the experts as to whether it also related to arrangements for hydraulic actuation. Whether this is so or not, it is clear to me that its principal embodiments were in the field of electrical actuation.
23. All six patents, although having potential in electrically actuated ACS/SAS/FAS, derived from research work in the US and were part of the output from the Selec-Tec development referred to above. The inventions had been assigned to AP between 1987 and 1992. These assignments appear to have been in compliance with a somewhat inconsistently applied policy with the AP group to pool all patents. Patents in the PFCH field were similarly assigned. There was the perceived advantage that those patents that were in active use in the US were then licensed back to INC in return for a royalty which reduced INC's income for tax purposes.
24. In the event, this tax avoidance scheme fell foul of the Internal Revenue Service and the PFCH patents were assigned to INC in December 1995. A2244 was included in this assignment apparently because it had been incorrectly coded as a PFCH patent. It was a matter of controversy as to whether the rest of the first group, consistent with the IRS ruling, ought to have been assigned at the same time but were retained simply for reasons of economy.
25. The second group of patents amounted to 16 in all. They were all the outcome of research in the US and were owned by INC. It was common ground that 14 of them were related to push button gear selection in vehicles with conventional automatic gearboxes. They were developed within the ESAT project. There was some dispute between the experts as to their commercial viability in any other field. The highest it could be put was that it was possible that features of these patents could be used with electrically actuated ACS/FAS/SAS.
26. As regards two of the patents in this group, A2225 and A2236, it was accepted that these could be used as a part of an electrically actuated SAS or FAS.
27. Both sides called a remarkable number of witnesses to give oral evidence:-
a. The claimant called:-
i. Mr Olav Volldal who was at all material times the CEO of Kongsberg.
ii. Mr Stig Tronvold who, having been Managing Director of Kongsberg Automotive Technology, became Managing Director of KTM until shortly after its acquisition by LUK.
iii. Mr Nigel Gove who was Financial Controller at AP and became Finance Director of KTM.
iv. Mr John Comfort, another employee of AP who became an engineer at KTM.
b. The defendant called:-
i. Mr Graham Shirley who had been General Manager of the Borg & Beck ACTS division and became Product Director of KTM.
ii. Mr Roger Morrall, Patent Manager of the AP Group.
iii. Mr Roger Wood, Group Finance Director of the AP Group.
iv. Mr Kevin Connolly, Finance Director of AP.
v. Mr Martin Newman , a corporate officer in the AP Group.
vi. Mr Malcolm Gould, International Business Development Manager for AP Borg & Beck.
vii. Mr Keith Monstevens, Director of Engineering for INC.
viii. Mr Wade Fleming, President and Chief Executive of INC (who gave evidence from Memphis by video-link).
28. These witnesses included most of those responsible for the negotiations leading up to the establishment of the joint venture, its operation and its subsequent termination. To the extent that they had relevant and admissible evidence to give (and some of the evidence adduced was extremely marginal), I simply record for the moment that they were all seeking to assist the Court as best they could. In the event, the issues between them could readily be resolved by reference to the contemporary material.
29. AP made its initial approach to Kongsberg for the formation of a joint venture in late 1994. Siemens, a substantial manufacturer in the field of electronic control units, was initially perceived as a possible participant. But in due course Siemens dropped out of the negotiations and AP and Kongsberg were left to form a joint venture of their own. As a precursor to further discussions Kongsberg and AP executed a Memorandum of Confidentiality on February 1st, 1995.
30. There ensued an interregnum period during which AP were subject to a management buyout. This was completed on the 6th April 1995. It is material to note in passing that, in preparation for it, Mr Morrall collated schedules of patents relevant to the different businesses in the AP Group. One list was entitled "ALL LIVE ACTS CASES". This in due course formed the Sixth Schedule of the Shareholder Agreement. Another schedule, entitled "ALL LIVE USA CASES", was made up of the bulk of the omitted patents.
31. The parties executed a Letter of Intent on the 12th May 1995. It read in part as follows:-
Whereas AP and Kongsberg have separately developed systems which hydraulically actuate clutches and transmissions under electronic control (known variously as Clutch Management Systems, Shift-by-wire, Automated clutch and Transmission Systems); whereas the systems separately developed by AP and Kongsberg contain much similarity particularly within the Hydraulic Power Unit (HPU) and the sensing devices; whereas the principal difference between the systems separately developed by AP and Kongsberg lie in the solenoid valve, its electronic control and the general system software configuration; and whereas the parties recognise that there are advantages to be gained by jointly pursuing further development and manufacture of the HPU;
It is, therefore, agreed that the parties will enter into a joint development agreement:-
(i) to commonise on the existing AP design of HPU to the extent that it will be possible to assemble and test the immediate requirements of the parties using the AP at Leamington Spa England
(ii) to co-operate in the joint development of the design of, and manufacturing processes for, a new generation HPU which will incorporate the system electronic control unit within its construction and which will be of reduced size, weight and cost relative to the standard set by the present unit referred to in 1(i) above ...
(v) That the parties will ensure that all technology and know-how which is required to reach a successful conclusion to the development programme will be made available under the same terms and conditions as the Confidentiality Agreement already signed by the parties on February 1st , 1995 ...
32. As the negotiations continued, the parties entered into a non-binding Memorandum of Understanding on the 3rd July 1995. In its preamble, this memorandum recites that Kongsberg and AP: "have discussed the formation of a joint venture company which would take over all of the current activities of both parties in relation to the design, manufacture and sale of automated clutch and transmission systems for automotive use". It went on to describe the scope of the joint venture as being: "responsible for all activities relating to automated clutch and transmission systems as currently developed and to be developed by the parties."It was further contemplated by the memorandum that: "the Parties shall withdraw from the automated clutch and automated manual transmission market" to ensure that there would be "no actual or potential competition in this market between the parties or between the parties and the joint venture companies."The memorandum also proposed that AP and Kongsberg would "license all their respective IPR's which are used in the business of the JVG Companies to the JVG companies".
33. The negotiations culminated in the Shareholder Agreement dated the 21st December 1995, signed on behalf of AP by Mr Roger Wood and on behalf of Kongsberg by Mr Voldall. In like terms this recited that "AP and Kongsberg wish to participate as shareholders in the Company and intend to transfer all their technology and businesses relating to the design, manufacture and sale of automated clutch and transmission systems for automotive use to the Company and on the terms set out in this Agreement." Clause 2.1 of the Agreement read: "The primary object to the Company is to take over the existing business of both AP and Kongsberg relating to ACTS and to develop new ACTS…"
34. Clause 10 dealt with the transfer of assets (defined as including all fixed and moveable assets save for any intellectual property rights such as patents):-
10.1.1. Subject to the terms and conditions of this Agreement, AP as beneficial owners shall sell to JVS-UK and JVS-UK shall purchase as at the Transfer Date:
10.1.1.1. their existing ACTS business as a going concern and
10.1.1.2. all the assets and rights of AP used in that business ...
10.4 the sale and purchase of the Assets shall be completed on the Transfer Date and AP and Kongsberg shall deliver to the JVG ...
10.4.2. Licences in the format set out in the Seventh Schedule in respect of the patents listed in the Sixth Schedule ...
35. Clause 18 dealt with Warranties:
18 Warranties
18.1 AP warrants to the JVG and Kongsberg that:
18.1.1 save as set out in the Disclosures, the Warranties and undertakings set out in the Third Schedule in respect of the AP existing ACTS business are true in all respects;
18.1.2 the Disclosures are true and accurate in all respects and fully, clearly and accurately disclose every matter to which they relate.
36. Clause 19 contained a non-competition clause:
19 Future Activities
19.1 For the purpose of assuring to the Company the full benefit of the Business (being the business defined in Clause 2.1) AP agrees with the Company that: ...
19.1.2 it shall not, whilst the Company continues the Business without the Company's prior written consent directly or indirectly engage in any activity which is substantially the same as the Business or any material part thereof.
37. Clause 25 made provision for Assignment:
25 Assignment
25.1 Neither of the Shareholders shall assign or transfer ... any of its rights or obligations under this agreement without the prior written consent of the other Shareholder ...
38. The sixth Schedule to the Shareholder Agreement was entitled "Patents and Patent Applications" relating to the "products" owned by AP. The word product was not defined within the Sixth Schedule but was defined in the draft Licence Agreement contained in the Seventh Schedule as being "automated clutch and transmission systems for automotive use. The Sixth Schedule contained some 42 patents or patent applications all being pertinent to the existing business of the Borg & Beck division of AP.
39. The only other relevant feature of the Shareholder Agreement was Appendix 6 which was a "business plan executive summary" for the joint venture prepared by Mr Trondvold and Mr Shirley. It contained a forecast of the volume of units that the joint venture might be expected to produce in the period 1996 to 2005, all of which, it is common ground, were within the hydraulically actuated category.
40. On the same day, the Licence Agreement, in the form prescribed by the Shareholder Agreement, was executed. This recited "C. The Licensee is a joint venture holding company formed by the Licensors for the purpose of development, (further) design, manufacture, assembly and sale of automated clutch and transmission systems for automotive use." Clause 1 of the Agreement defined patent rights by reference to the patents and patent applications set out in Schedule A to the Licence Agreement which was the same as those listed in the Sixth Schedule to the Shareholder Agreement. By virtue of Clause 5 of the Agreement, the Licensors granted the Licensees an exclusive licence under the patent rights.
41. On the 27th February 1996, AP and Kongsberg filed an application for negative clearance with the European Commission. The claimant placed considerable emphasis upon the content of this application. For the moment it is simply necessary to record that the object of the joint venture agreement was stated to be: "to create a joint venture group of companies whereby the shareholders can combine their entire existing business relating to automated clutch and transmission system (ACTS)." The application also recorded that "the parties have agreed not to engage in the specific product market (i.e. ACTS) as that carried out by the joint venture group."
42. In seeking to marry the existing business of AP and Kongsberg, the joint venture necessarily focused upon hydraulic actuation. However it is clear that the possibility of introducing an electrically actuated system was not entirely excluded. In a note of a visit to Siemens in Toulouse by representatives of the joint venture in July 1996, there is reference to concern on the part of Siemens that hydraulic systems would not capture the high volume market since it was in their view inherently more expensive than the electro-mechanical approach adopted by some of the joint venture's competitors. Mr Shirley noted "The virtues and possibilities of the future were discussed at length with no conclusion, but, privately, I have to admit there may be some truth in the suggestion that, ultimately, we may exclude ourselves from high volume potential if we do not have a full electric system or reduce the cost of hydraulics to a competitive level. We should keep this option open if the mecatronic approach does not yield the savings we need to make to compete."
43. This fall back position was maintained in a proposal made to the Ford Motor Company in September 1996 for a project entitled B-CAR. Four alternative systems were proposed three of which were hydraulically actuated and the last of which (System D) was electrically actuated. However, the proposal went on to express doubts about the feasibility of System D for the proposed model and, in any event, made it plain that, whilst the other systems were already in production or at least in prototype form, proposal D was no more than a design study. Furthermore, even the project plan for the hydraulic actuated system had a lead-time of 3 years.
44. In December 1996 the European Commission furnished a ruling with regard to the joint venture to the effect that the Shareholder Agreement constituted a "concentration" under Article 3 of the Merger Regulations but lacked a community dimension because the thresholds with regard to turnover were not met. Accordingly the Commission indicated that no formal clearance was needed and that it was proposing to close the file.
45. In December 1996 Kongsberg made a public offering of its shares. The prospectus stated the motive for setting up the joint venture company was "to continue the parent company's activities in connection with automatic clutch systems." It went on to identify the principal competitors to the joint venture but pointed out that: "The existing suppliers have chosen somewhat different technology for their systems. AP Kongsberg uses a system in which the clutch is operated hydraulically, controlled by advanced electronics. So far some of the competitors have presented systems in which the clutch is activated by electro-mechanical methods. In comparative tests carried out by vehicle manufacturers in which AP Kongsberg have participated, AP Kongsberg's system has been judged to be the best."
46. In the spring of 1997, AP entered into a contract with BMW for the supply of twin mass flywheels. As already observed, this provoked LUK to contend that the delivery of twin mass flywheels by AP to BMW infringed certain LUK patents. A meeting ensued on the 21st May at Birmingham Airport the purpose of which, at least from LUK's perspective, was to see if AP could offer cross licences on any other product. Mr Morrall the patent manager of the AP group tabled a list of patents and patent applications at the meeting. The list contained almost all the omitted patents.
47. Mr Morrall's note of the meeting that took place in May 1997 reveals that LUK were not demonstrating much if any interest in the omitted patents. But it remained LUK's belief that there were a number of potential infringements of their patents with regard to the supply by AP of twin mass flywheels to BMW.
48. In September 1997 with this dispute still brewing AP decided to take the war to the enemy and wrote to Mercedes Benz on the 13th June 1997 suggesting that the auto-shift manual transmission being developed for Mercedes Benz by LUK might conflict with patents owned by AP. As examples AP referred to three of the omitted patents, two owned by INC and one owned by AP. Following a meeting with Mercedes Benz on the 23rd August Mr Morrall wrote to Mercedes Benz on the 3rd September as follows:-
I refer to the meeting at your request, on the 23rd August concerning the possible use of AP patents in the clutch control system to be made by LUK for the Mercedes "A" Class vehicle ...
As agreed, we have considered the position further, and we believe that there is a significant risk that the "A" Class vehicle may infringe at least one or more of our patent case numbers A1952, A2235, A2238, A2441, A2509 and A2511.
49. This demonstrated somewhat of a change of tack since five of these patents were in fact subject to the exclusive licence by AP in favour of the joint venture company. Not to be outdone, LUK raised the stakes again by asserting that AP was in conflict with LUK patents as regards the supply of parts to Renault for the "Twingo".
50. In the meantime the joint venture had run into financial difficulties. An agreement (the Restructuring Agreement) was entered into on the 5th September 1997 between AP and Kongsberg providing for the sale of AP's shares in the joint venture company to Kongsberg and the subsequent flotation of the joint venture company. The agreement contemplated the termination of the existing Shareholder Agreement and the execution of a replacement agreement with regard to patents.
51. A New Agreement was duty entered into on the 20th October 1997 providing for the termination of the Shareholders Agreement. The relevant provisions of the New Agreement read:
II (a) The parties agree that the Licence Agreements shall continue in full force and effect until superseded and replaced by new agreements entered into between each of KOA and AP respectively and APK which agreements will either licence or assign to APK all the Patents ...
(b) With effect from the date of the Replacement Technology Agreements become effective, the Licence Agreements shall be terminated with the effects set forth in Section III.
III Effect of termination: Assignment
(a) The termination of the Shareholders Agreement and the Licence Agreements as described under Sections I and II above will not terminate any liability under the Warranties (as defined in the Shareholders Agreement) or otherwise of KOA or AP to each other or to APKJ under either Agreement.
(b) With effect from the Closing Date, each of KOA and AP transfers and assigns to APK all of its rights, if any, to make a claim against the other under the Shareholders Agreement and under the Licence Agreements. Accordingly following the Closing Date APK shall have the right to enforce all obligations of each of KOA and AP and in Shareholder Agreement and the Licence Agreements to the extent such obligation result from a breach of the said Agreements by either AP or APK which have occurred prior to the Closing Date whether or not now known to the parties.
IV Non-Compete
For a period of four years after the Closing Date, AP shall not directly or indirectly by itself or through any affiliated company, provide products or services that compete with the present businesses of APK, provided, however, that this shall not prevent AP from pursuing its present business activities.
52. On the 24th October a patent assignment was entered into between AP and the joint venture company. It consisted of an assignment by way of gift of the patent and patent applications that had previously been the subject of the Licence Agreement. A Closing Protocol dated the same day records under the heading of "Patents":
Each of KOA and AP has assigned all of their respective patents and patent applications previously licensed by it to APK and APK has accepted such an assignment. The parties expressly agree that these assignments are in lieu of and in complete fulfilment of all the respective obligations of the parties under the New Agreement.
53. In November 1997 KTM made an application for listing on the Oslo Stock Exchange. The prospectus records under the heading of Research and Development as follows:-
The Automotive Industry is witnessing an increase in activity in patenting and it is becoming an issue of major strategic importance and value. Patents are being used not only to protect intellectual property but to frustrate competitors in their attempts to pursue specific developments and to exploit them. APK has recognised this and has a number of patents which both protect its intellectual property and potentially frustrate the competitors and has equipped itself to continue this important activity ...
In the management's opinion the present portfolio of patents provides adequate protection for many of the significant novel inventions which make Kongsberg Trans-Matic's systems perform in a more than competitive manner.
54. The rumbling dispute between AP and LUK was discussed by the Board of KTM on the 30th January 1998 and the Board concluded that it was not willing to enter into a confrontation with LUK. It was minded to take the stance that no action would be taken against LUK if LUK were to infringe any of the patents now assigned to the joint venture subject to LUK giving the same comfort.
55. The challenge by AP to the effect that LUK were infringing their own and/or KTM's patents in regard to the supply of equipment to Mercedes led to an assessment by KTM of the relevance of the omitted patents to existing business of KTM and LUK respectively. In this presentation to the Board in January 1998, Mr Trondvold concluded that, whilst the vast majority were of no significance as regards KTM, some were potentially relevant to the electrically actuated shifts produced by LUK.
56. By now AP had sought KTM's help in resolving the dispute with LUK. Discussions led eventually to a letter of agreement dated the 3rd April 1998 between AP and KTM. The effect of the agreement was that, in return for KTM waiving any rights on the patents already transferred to them in respect of the activities of LUK, AP were to arrange for INC to grant a licence to KTM, on a non-exclusive royalty-free basis, for all the omitted patents. INC duly entered into such a licence on the 3rd April 1998.
57. Over a year after the acquisition of KTM by LUK in September 1998, their solicitors wrote to AP threatening proceedings. Their letter dated the 29th November 1999 read in part as follows:-
We ... write in connection with certain matters of concern to our client that have recently come to light ...
The agreement reached between the joint venture partners in 1995 was that all patents in any way relevant to the parties' respective ACTS business and its future development, whether owned directly or by their respective subsidiaries, was to be licensed on an exclusive basis to the joint venture vehicle ... However it has since transpired that the list of ... patents in Part 1 of the Sixth Schedule was incomplete. In particular a number of patents licensed (on a non-exclusive basis) by [INC] to the joint venture on the 3rd April 1998 ... were omitted ...
In these circumstances we ask that you confirm your agreement to a rectification of Part 1 ... to include the patents the subject of the licence of 3rd April 1998 ... and indeed any other patents of [AP] or its subsidiaries in any way relevant to ACTS [emphasis added].
58. The response of the defendants' solicitors, in a letter dated 13th December 1998, was to query whether the matters complained of could be fairly described as having "recently come to light" and asserted that the parties had had no intention of transferring the omitted or any other patents as they were not pertinent to the existing or proposed ACTS businesses of the joint venture partners.
59. The broad scope of the claimant's case was maintained in their Particulars of Claim which described the common intention of the parties as being that all patents in any way relevant to the parties' respective ACTS business and its future development were to be licensed on an exclusive basis, although the actual extent of rectification sought was confined to the omitted patents.
60. There was no dispute as to the relevant legal principles applicable to a claim, as made here, for rectification on the grounds of common mistake. It is sufficient to quote from the judgment of Slade LJ in The Nai Genova [1984] 1 Lloyd's Rep 353 at p. 359:
First, there must be a common intention in regard to the particular provision of the agreement in question, together with some outward expression of accord. Secondly, this common intention must continue up to the time of execution of the instrument. Thirdly, there must be clear evidence that the instrument as executed does not accurately represent the true agreement of the parties at the time of its execution. Fourthly, it must be shown that the instrument, if rectified as claimed, would accurately represent the true agreement of the parties at that time ...
The standard of proof required in an action of rectification to establish the common intention of the parties is the civil standard of balance of probabilities. Nevertheless, parties who append their signature to a written instrument prima facie indicate, but the very fact of their signatures, their assent to all the terms contained in it. In these circumstances – ...
as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties' intention displayed by the instrument itself (see Thomas Bates v. Wyndham's (Lingerie) Ltd [1981] 1 WLR 505 at p. 521 per Brightman LJ) ...
61. The defendants take a point on the claimant's title to sue. This turns on the impact of the New Agreement. The defendants contend that Section III of the New Agreement only assigns claims to the joint venture Company if and to the extent that they are based on breaches of obligations contained in the Shareholder Agreement. This assignment, it was submitted, does not include any right to seek rectification which, even if valid, was terminated by virtue of Section 1.
62. As a matter of construction, I accept the defendants' submission. Whilst the first sentence of Section III(b) might be broad enough to encompass a claim for rectification, the second sentence makes it plain that the scope of the assignment is of narrower a compass. This is not surprising since, with the implementation of the New Agreement and the termination of the Shareholder Agreement, any dispute as to the intended scope of the latter would be rendered redundant.
63. The claimant sought to counter this threshold issue by reliance upon a Deed of Assignment dated 2nd April 2001 between the claimant and Kongsberg:-
Clause 1 Assignment without prejudice to the contention of the parties hereto that the new agreement duly transferred to APK2, the right which originally vested in Kongsberg to bring all the claims in relation to the agreements made against the defendants in the proceedings, if and to the extent that the new agreement did not do so, Kongsberg hereby transfers and assigns to Luk Leamington (previously APK2) the right to bring all such claims, including, for the avoidance of doubt, the right to claim rectification on the Agreements.
64. The difficulty with any reliance on this assignment is two-fold. First, if the right to claim rectification was extinguished by the New Agreement, there was no claim to assign. Second, even if any such claim was not thus terminated, the assignment did not comply with the requirements of Clause 25 of the Shareholder Agreement, not least the need for the prior written consent of AP.
65. It is true that KTM was a direct party to the Licence Agreement. But this was in the form prescribed by Clause 10 of the Shareholder Agreement. Absent any legitimate claim to rectify the Shareholder Agreement, it becomes difficult to see any basis for claims to rectify the Licence Agreement. If, as the claimant contends, the Patent Assignment was merely a continuation of the Shareholder Agreement, similar considerations arise.
66. The claimant describes the difficulties presented by this threshold issue as "technical". In deference to the arguments, I propose to consider the merits of the claim in any event. But the fact remains that the claimant's case on the title to sue on the Shareholder Agreement is not made out. Furthermore, the point gives support to the defendants' case that the Patent Assignment was an entirely new agreement and not a continuation of the earlier agreements.
67. As appears from the letter before action quoted above, it was the claimant's case that there was a common intention that "all patents in any way relevant to the parties respective ACTS business and its future development, whether owned directly or by their respective subsidiaries, were to be licensed on an exclusive basis to the joint venture vehicle". This in due course became the pleaded case, albeit enlarged by reference to "subsidiaries" or "affiliates".
68. It was submitted by the defendants, that there was an intrinsic difficulty in the claimant's case, which undermined its credibility. The relief sought by the claimant was rectification of the various agreements by way of inclusion of all or some of the omitted patents. The justification for this was said to be that any patent which could have a useful application for ACTS (even if it was not exclusively concerned with ACTS) was "relevant" and thus was intended for inclusion.
69. The problem that arose is that whilst it explains the assertion that the omitted patents should be included, it does not explain the exclusion of other patents (such as the PFCH patents) which can and indeed are used for the purposes of ACTS.
70. Mr Trondvold was pressed to deal with this inconsistency in cross-examination. He sought to distinguish between some patents "relevant" to ACTS which the joint venture should have access to (e.g. PFCH) and some patents "relevant" to ACTS (e.g. ESAT/Selec-Tec) which the joint venture should have exclusive access to.
71. This dividing line was, to put it at its lowest, difficult to discern. Whilst not wholly decisive, it strikes me that the very uncertainty of the suggested common intention presents a formidable obstacle to the claimant in satisfying the stringent requirements of rectification on the grounds of common mistake. Put another way, the defendants' case on the common intention (that the joint venture would acquire the patents relating to the existing business of AP and Kongsberg) is at least consistent with the list in the Sixth Schedule. In contrast, the claimant's case on the common intention does not appear to provide reliable criteria for rectifying it. It is accordingly difficult to elicit that "convincing proof" of an intention other than that expressed in the Sixth Schedule.
72. It was the evidence of Mr Gould (the lead negotiator for AP) and a Mr Wood (to whom Mr Gould reported) that the common intention was to merge the existing ACTS business of AP and Kongsberg. Neither Borg & Beck nor Kongsberg were conducting business based on electrical actuated technology. Thus it was appropriate, they asserted, to transfer to the joint venture those patents which were relevant to the existing business, i.e. those pertaining to a hydraulically actuated clutch technology.
73. The contemporary documents strongly support this position. Both the Letter of Intent of 12th May 1995 and the Memorandum of Understanding dated 3 rd July 1995 are almost unequivocal in this regard. In particular the latter provided that "AP and Kongsberg will licence all their respective IPRs which are used in the business of the JVG companies to the JVG companies." In contrast there is no apparent expression of accord reflecting the claimant's case on the common intention.
74. It may be true that it was envisaged that new or improved ACTS systems would be developed. Furthermore, there was no express limitation put on the joint venture company to confine its activities to hydraulically activated systems. But the contemporary view was that the hydraulic technology was to be preferred: see Borg and Beck's Business Review June 1995 "We have chosen the right technology but we must continue development to maintain current advantage."
75. The whole merit of the joint venture with Kongsberg was the synergy between the two similar hydraulic systems that each company had developed, in contrast to their competitors (such as LUK) who had focused on electrically actuated technology. Mr Wood puts it this way in his oral evidence (day 3, page 89):
The way I would describe it is this: we had a product, APplc. Kongsberg had a product. They had very similar technical pieces of equipment in process. The primary object of the company was to put those two existing businesses together so that jointly we could commercially exploit the opportunities, initially with our own respective customers, secondly, with new customers, but still using fundamentally the product which we had developed. There was not a stated intent nor, I recall, an objective to spend money creating yet another new product which was one of the principle objectives we were trying to achieve was to put our costs together and reduce the costs. It was clear to us and to Kongsberg that neither could compete independently on the costs front. We were ahead of Kongsberg in terms of manufacturing but we still could not get the costs down low enough. Kongsberg were ahead of us on some of the technological development. A lot of research and development was taking place. It was costing an arm and a leg and it would not have been commercially acceptable to the parent companies of either companies to have carried on spending the sort of money necessary.
76. This concentration on collaboration with regard to hydraulic technology was recognised by the Shareholder Agreement itself:
2.1 the primary object of the company is to take over the existing business of both AP and Kongsberg ...
77. Whilst the very same clause also envisaged the development of "new ACTS", it is notable that the ten year business plan only reflected hydraulic actuated systems, such plan being "the basis for expectations and valuation of the business potential as well as for the organisation and financing of the Business": see Clause 2.2.
78. As already observed, all this is entirely consistent with the defendants' case and inconsistent with the claimant's case. Furthermore, I see nothing in the application for negative clearance from the European Commission to suggest that the joint venture's business was not anticipated to be concerned exclusively with hydraulic technology. Nor in the event, (and I am grateful for an interesting exchange of correspondence on the form and content of the application which was copied to me after the closing submissions) is there anything to be derived from the distinction as a matter of European law between classification as a "concentrative" and "co-operative" joint venture.
79. The probability is that many on each side failed to focus on the omitted patents, let alone any other patents, which might have potential relevance from the perspective of ACTS. For example Mr Gould said in oral evidence at Day 4, page 19:-
Q. Does it follow from what you have just said that you yourself, gave no consideration to these patents in the period leading up to the entering of the Shareholder Agreement?
A. No, there is no reason for me to do so. What I did was ask the Patents Manager to identify those patents which were being used in the product being manufactured at Leamington which was to be transferred to the joint venture company. He produced a list and I was not qualified to say that particular number is incorrect or otherwise.
Q. I understand. Were you aware of the existence of these patents – the first I have referred to in paragraph 10.2 of the defence?
A. No.
80. There is, it seems to me, a conceptual difficulty in according a common intention to parties who have simply overlooked something: see e.g. The Ypatia Halcoussi [1985] 2 Lloyd's 364.
81. I have not forgotten the non-compete clause in the Shareholder Agreement (Clause 19) which was much emphasised by the claimant. But this was by way of express reference to the business identified in Clause 2.1. Just as no one had focused on a non-hydraulic technology, so no one had addressed their mind to the significance of competitive activity outside the existing business. To quote again from Mr Gould's evidence at Day 4 page 13:-
Q. Do you agree that because AP Plc had agreed to withdraw from the market in relation to ACTS, it had no interest in, can I put it this way, leaving patents relating to ACTS outside that exclusive licence?
A. No, I would not agree with that. There is sense in some instances of retaining a patent, just because of the value the patent gives you. So, in general principal, you may not use the patents, but you would not wish to dispense with it.
Q. In this case Mr Gould, where AP Plc was agreeing to withdraw completely from the market, why would it not wish to dispense with the patent?
A. Safety procedure. The joint venture company was a relatively high-risk venture and if you look at the annual reports of Kongsberg in Norway, they refer to it in those terms, and we too thought it was a high-risk venture. So as a safeguard, we decided it would be wise for AP to retain ownership of the intellectual property, but licence the company. It also removed a second problem from the discussions of placing a value on those patents, and trying to determine the relative shares of the two members of the joint venture.
Q. Why would it make any sense to leave some patents relating to ACTS out of the licence?
A. All of the patents, which the joint venture needed, were included.
82. There was at the heart of the claimant's case a non-sequitur. The defendants' witnesses were pressed to agree that there was no reason to leave out the omitted patents from the Shareholder Agreement. But even if that be so, it does not follow that the omitted patents should have been included, let alone that there was some intention to do so. Put another way, given the scope of the existing business of the participants and the anticipated future role of the joint venture, the expressed intention of the parties to withdraw from ACTS and not compete with the joint venture is not only consistent with an intention to transfer all potentially relevant IP assets in the joint venture.
83. The actual business of the joint venture confirmed its purpose, namely to manufacture and market hydraulically actuated ACTS. The only faint indication of interest in electrically actuated technology was contained in Mr Shirley's note of a visit to Siemens in July 1996 (see above).
84. This view of the need to reduce costs so as to maintain market share in the hydraulic field is no indication of any enthusiasm let alone proposal to change direction.
85. The proposal made to Ford in September 1996 is, if anything, even more emphatic on the continuing focus on hydraulic systems in contrast to a "design study" electrically actuated system which "may not be feasible". All this is against a background of a lack of resources let alone time to prepare a viable electrical solution. Faith in the hydraulic solution was maintained through to the prospectus for the public offering in December 1996: see para. 45 above.
86. It was accepted by Mr Trondvold that he became aware of the existence of the omitted patents as early as August 1997 when the dispute with Mercedes arose. He raised the matter with Mr Morrall at a meeting in September, questioning whether the omitted patents should have been included in the joint venture. It was Mr Morrall's evidence that his explanation (that the patents were not part of ACTS business and indeed had originated with INC) appeared to be accepted by Mr Trondvold. Mr Trondvold was not able to challenge that recollection.
87. Against this background it is difficult to accept Mr Trondvold's evidence that, if AP had negotiated on the basis that the omitted patents were withheld from the joint venture, Kongsberg would not have entered into the Shareholder Agreement. Indeed, the point is if anything emphasised by the fact that, at the very time of the meeting, negotiations were under way to enter into the Restructuring Agreement whereby the joint venture would be floated and AP would withdraw from it. The identity of the patents listed in the Sixth Schedule was a crucial ingredient of both the Restructuring Agreement and the subsequent New Agreement. Mr Trondvold's contemporary silence is eloquent testimony of the lack of any common intention as alleged by the claimant.
88. Mr Volldal also asserted that Kongsberg would not have proceeded with the Shareholder Agreement if he had known that patents such as the omitted patents were not to be included. When he eventually learnt some time in September 1997 that there were or might have been some patents which "could have some influence on our future business" he claims to have been angry that they had not been included in the Shareholder Agreement. Yet despite this, and indeed the more detailed information available to Mr Trondvold, the topic does not seem to have been worthy of discussion at any board meeting (despite all the work being undertaken on the preparation of the prospectus for the flotation). Indeed no mention of the point was made to AP until March 1998 (when one draft of the April Licence Agreement made reference to AP having "overlooked certain relevant patents"). This is not material which affords convincing proof of any intention contrary to the written agreement.
89. The lack of response on the part of Mr Trondvold and Mr Volldal is made all the more remarkable (bearing in mind that Mr Volldal had signed the Shareholder Agreement and the Re-structuring Agreement and Mr Trondvold had signed the Licence Agreement and the New Agreement) by the fact that they both signed the Assignment and the Closing Protocol of 24th October 1997, the former setting out the very same patents as contained in the Sixth Schedule and the latter stating in terms:
Patents each of KOA and AP has assigned all of their respective patents and patent applications previously licensed by it to APK and APK has accepted such an assignment. The parties expressly agree that these assignments are in lieu of and in complete fulfilment of all the respective obligations of the parties under the New Agreement.
90. Not a word of reservation, let alone complaint, was made. The only reasonable inference is that there was, was in the view of both, nothing to complain about. In any event as Mr Voldall accepted early in his cross-examination:-
Q. There was no question [at] the date of the New Agreement that the obligation on AP and Kongsberg in respect of patents was simply patents as listed originally under the Shareholder Agreement.
A. That was my understanding, yes.
91. This conclusion was fortified by the analysis, at Mr Trondvold's request, made by Mr Harries in January 1998 regarding the bulk of the omitted patents. His conclusion, ratified by Mr Trondvold himself in his report to the board, was that they were not relevant to KTM. No suggestion was made that, whether relevant to the existing business of KTM or not, the Sixth Schedule was defective by reason of not including the omitted patents.
92. The subsequent negotiations leading to the non-exclusive licence of the omitted patents whereby KTM, in return, waived the right to use the assigned patents against LUK (unless LUK initiated action), is also revealing. If Messrs Volldal and Trondvold believed that KTM were already the owner (or at least the exclusive licensee) of the omitted patents, then the negotiations let alone their culmination make no sense.
93. I am quite unable to accept that there is any, let alone convincing, proof of a common intention (let alone one flagged up by an outward expression of accord), that the omitted patents (or any of them) were to be included in the Sixth Schedule of the Shareholder Agreement.
94. I would add that any rectification of the Shareholder Agreement or the Licence Agreement would have been no practical purpose (thus as a matter of discretion to be declined). Those Agreements were terminated and, insofar as material, replaced by the Patent Assignment. This was an entirely new agreement, not a continuation of the earlier agreement. By the time of the Patent Assignment, both Mr Trondvold and Mr Volldal were fully aware of the existence of the omitted patents. At that stage it is not arguable that there was a discrepancy between the understanding between the parties and the language of the instrument, cf. The Mata Hari [1983] 2 Lloyd's 449.
95. It is striking in my judgment that the claim advanced was only made after the acquisition of the joint venture by LUK in July 1998. With electrically actuated systems being within the particular interest and expertise of LUK, the claim has the appearance of being somewhat opportunistic, fuelled perhaps by memories of the clash in the autumn of 1997.
96. My conclusion on the issue of rectification makes it unnecessary to consider other issues relating to the existence and exercise of any authority on the part of Mr Gould or Mr Wood to contract on behalf of INC, issues relating to Section 33 of the Patents Act 1997 and Section 261 of the US Patents Act 35 USCA and issues relating to the impact of delay on the exercise of the discretionary remedy of rectification. Accordingly I turn to the allegations of breach of contract.
97. The claimant alleges that failure by AP to grant an exclusive licence to KTM in respect of the omitted patents constitute a breach of Clause 10.1.1. This can be taken shortly:
(a) the omitted patents were not part of the existing business of AP, Borg & Beck Division
(b) in any event patents were excluded from the definition of Assets.
98. Clause 10.4 governs the extent to which patents were to be licensed. If (having regard to my earlier findings) the exclusive licence was confined to those patents set out in the Sixth Schedule, it is not arguable that a failure to licence additional patents constituted a breach of Clause 10.1.1.
99. This clause provides:-
8.1 material information
8.1.1 all information given by AP, AP's solicitors or AP's accountants to the Company, relating to the business of Assets was when given and is true, accurate and comprehensive in all respects.
8.1.2 to the best of AP's knowledge, information and belief, there are no material facts or circumstances in relation to the business or assets which had not been fully and fairly disclosed in writing to the company.
100. The claimant contended that, in failing to disclose the omitted patents, AP was in breach of these warranties. Again this can be dealt with very shortly, since, as the claimant accepted, in the course of argument, the claim in effect stands or falls with the argument relating to the relevance to the business of the joint venture company of the omitted patents:-
(a) business is defined for the purposes of the Third Schedule as "AP's" existing ACTS business (as confirmed by Clause 18.1 of the Shareholder Agreement). The omitted patents were not part of the existing business nor material to it.
(b) patents were expressly excluded from the definition of Assets.
In the circumstances, the allegation is not arguable.
101. This reads:
2.1 ownership of assets
...
2.1.2 AP has not disposed of or agreed to dispose of or granted or agreed to grant any security or other encumbrance in respect of any of the Assets.
The claimant alleged that AP were in breach of this warranty in that by a Deed of Accession dated 22nd April 1995, AP charged inter alia all patents owned by AP to Morgan Grenfell including some of the omitted patents. In fact Mr Volldal was aware that AP's bank held "pledges" over AP's assets. But in any event, since the definition of Assets in the Schedule in is by reference to the assets detailed in Appendix 1 and Appendix II not being IPR, no breach is made out.
102. It follows the claim fails and must be dismissed.