Tool Metal Manufactuing Company Ltd v Tungsten Electric Company Ltd [1955] UKHL 5 (16 June 1955)

Die Jovis, 16° Junii 1955

Upon Report from the Appellate Committee, to whom
was referred the Cause Tool Metal Manufacturing Com-
pany Limited against Tungsten Electric Company
Limited, that the Committee had heard Counsel, as well
on Wednesday the 20th, Thursday the 21st, Monday the
25th, Tuesday the 26th, Wednesday the 27th and Thurs-
day the 28th days of April last, as on Monday the 2d
and Tuesday the 3d, days of May last, upon the Petition
and Appeal of Tool Metal Manufacturing Company
Limited, of 3 The Sanctuary, Westminster, in the County
of London, praying, That the matter of the Order set
forth in the Schedule thereto, namely, an Order of Her
Majesty’s Court of Appeal of the 29th of March 1954,
might be reviewed before Her Majesty the Queen, in
Her Court of Parliament, and that the said Order might
be reversed, varied or altered, or that the Petitioners
might have such other relief in the premises as to Her
Majesty the Queen, in Her Court of Parliament, might
seem meet; as also upon the printed Case of Tungsten
Electric Company Limited, lodged in answer to the
said Appeal; and due consideration had this day of
what was offered on either side in this Cause:

It is Ordered and Adjudged, by the Lords Spiritual
and Temporal in the Court of Parliament of Her Majesty
the Queen assembled, That the said Order of Her
Majesty’s Court of Appeal, of the 29th day of March
1954. complained of in the said Appeal, be, and the
same is hereby. Reversed, and that the Judgment of the
Honourable Mr. Justice Pearson of the 16th day of
November 1953, be, and the same is hereby Restored:
And it is further Ordered, That the Respondents do pay,
or cause to be paid, to the said Appellants the costs
incurred by them in the Court of Appeal, and also the
costs incurred by them in respect of the said Appeal to
this House, the amount of such last mentioned costs to
be certified by the Clerk of the Parliaments: And it is
also further Ordered that the Cause be, and the same
is hereby, remitted back to the Queen’s Bench Division
of the High Court of Justice, to do therein as shall be
just and consistent with this Judgment.

Tool Metal

Manufacturing

Company

Limited v.

Tungsten Electric

Company

Limited.

HOUSE OF LORDS

Viscount Simonds
Lord Oaksey
Lord Reid
Lord Tucker
Lord Cohen

TOOL METAL MANUFACTURING COMPANY LIMITED

TUNGSTEN ELECTRIC COMPANY LIMITED

Viscount Simonds

16th June, 1955.

My Lords,

The facts in this complicated case are fully stated in the speech of my
noble and learned friend, Lord Cohen, which I have had the privilege of
reading, and I do not think it necessary to trouble your Lordships by refer-
ring, except incidentally, to the events which preceded the issue of the writ in
the action in which this appeal is brought.

It was in the circumstances stated by my noble friend that the Appellants,
by writ issued on the 11th September, 1950, claimed from the Respondents
as compensation under clause 5 of the Deed as from the 1st January, 1947,
to the 26th January, 1950, a quantified sum of £84,050, and an account of
compensation payable under the same clause from the 26th January, 1950,
to the 27th July, 1950, when the licence terminated.

To this claim the Respondents put in a number of defences. They pleaded
that the provisions of clause 5 were void on three separate grounds: (a)
because they imposed a penalty; (b) because they were an unreasonable
restraint of trade; and (c) because they contravened section 38 of the Patents
and Designs Act, 1938. They also pleaded that the delivery of the counter-
claim in the first action did not operate as notice to terminate the equit-
able arrangement which, as was held in that action, existed at any rate until
such delivery and that it was a condition of its termination that the notice
determining it (a) should be unequivocal and (b) should specify the date
of termination, and further that that date should give them a reasonable
time to adjust their business affairs to meet the altered circumstances. To
this, in effect, the Appellants replied that the delivery of the counterclaim
was a sufficient intimation of their intention to reassert their legal rights and
that, that intimation having been given, equity demanded nothing more than
that a reasonable time should be allowed before they sought to enforce
them. And they further said (nor was this denied by the Respondents)
that upon this footing a reasonable time was given since the counterclaim
was delivered in March, 1946, and compensation claimed from January,
1947.

Upon this part of the case I will be as brief as I can, for, having read
the Opinion of Lord Cohen in which the facts of the case are set out at
greater length, I am not prepared to dissent from his conclusion. It would
not, however, be right in a case in which I find myself unable to agree
with the decision of the Court of Appeal to say nothing on the far-reaching
conclusion to which they have come.

My Lords, the decision of the Court of Appeal in the first action was
based on nothing else than the principle of equity stated in this House in
Hughes v. Metropolitan Railway Company, 2 A.C. 439 and interpreted by
Lord Justice Bowen in Birmingham and District Land Company v. London
and North Western Railway Company 40 Ch.D. 268 at p. 286 in these terms:
” It seems to me to amount to this, that if persons who have contractual rights
” against others induce by their conduct those against whom they have such
” rights to believe that such rights will either not be enforced or will be kept
” in suspense or abeyance for some particular time, those persons will not
” be allowed by a Court of Equity to enforce the rights until such time has
” elapsed, without at all events placing the parties in the same position
” as they were in before.” These last words are important, for they
emphasise that the gist of the equity lies in the fact that one party has

by his conduct led the other to alter his position. I lay stress on this
because I would not have it supposed, particularly in commercial transac-
tions, that mere acts of indulgence are apt to create rights, and I do not
wish to lend the authority of this House to the statement of the principle
which is to be found in Combe v. Combe [1951] 2 K.B. 215 and may well
be far too widely stated.

The difficulty in the present case lies in the fact that in the first action,
in which it was held that between these parties the principle applies, neither
of them in any pleading or other statement between the delivery of the
counterclaim in March, 1946, and judgment in April, 1950, took their stand
upon its existence. The Respondents asserted a binding agreement for the
complete and final abrogation of any compensation: the Appellants, though
willing to make some concession in regard to the past, denied any agreement
in respect of any period at all. The position of neither of them was com-
patible with the existence of an equitable arrangement by which the right
to receive and the obligation to pay compensation were suspended for a
period which lasted at least until March, 1946, and for a debatable period
thereafter.

My Lords, I think that at this point the issue is a very narrow one.
On the one hand it is said that a plea resting on the denial of an agree-
ment cannot be a notice determining that agreement. This is the view
taken by Lord Justice Romer in which the other members of the Court of
Appeal concurred. On the other hand it is urged that, since the suspensory
period is due to the gratuitous willingness of the one party to forgo
their rights, nothing can be a clearer intimation that they propose no
longer to forgo them than a claim which, though it may ask too much, can
leave the other party in no doubt that they must not expect further indul-
gence. The problem may perhaps be stated in this way. Did equity require
that the Appellants should expressly and unequivocably refer to an equitable
arrangement which the Respondents had not pleaded and they did not
recognise? Or was it sufficient for them by a reassertion of their legal
rights to proclaim that the period of indulgence was over? In favour
of the latter view it is added that such an attitude on the part of the
Appellants could not surprise the Respondents who had not hesitated to
bring against them a serious charge of fraud.

My Lords, it is not clear to me what conclusion the Court of Appeal
would have reached but for the authority of the case of the Canadian
Pacific Railway Company v. The King [1931] AC 414, to which I must refer
later. For my part I have, after some hesitation, formed the opinion that, as
soon as the counterclaim was delivered, the Respondents must be taken to
know that the suspensory period was at an end and were bound to put their
house in order. The position is a very artificial one, but it was their
own ignorance of a suspensory period, or at least their failure to plead
it, which created the difficulty, and I do not think that they can take
advantage of their own ignorance or default and say that they were entitled
to a further period of grace until a further notice was given. Equity
demands that all the circumstances of the case should be regarded and I
think that the fair and reasonable view is that the Respondents could
not, after they had received the counterclaim, regard themselves as entitled
to further indulgence.

It was, however, urged on behalf of the Respondents that, even if the
counterclaim could otherwise be regarded as a sufficient notice that the
equitable arrangement was at an end, yet it was defective in that it did not
name a certain future date at which it was to take effect. To this the reply
was made that equity did not require a future date to be named in the notice,
but that what it did require was that a reasonable time should be allowed
to elapse before it was sought to enforce it. Here, too, the Court of Appeal
favoured the view of the Respondents, again feeling themselves constrained
by the decision in the Canadian Pacific Railway case. And here, too, I am
forced to the opposite conclusion. Equity is not held in a strait-jacket.
There is no universal rule that an equitable arrangement must always be

determined in one way. It may in some cases be right and fair that a dated
notice should be given. But in this case what was the position in January,
1947, which I take to be the critical date? Then for nine months the
Respondents must, in my opinion, be taken to have been aware that the
Appellants proposed to stand on their legal rights. It is not denied that those
nine months gave them ample time to readjust their position. I cannot
regard it as a requirement of equity that in such circumstances they should
have been expressly notified in March of 1946 that they would have nine
months and no more to take such steps as the altered circumstances required.
In coming to this conclusion I do not think I run counter to any authority
that was cited to us unless it be the Canadian Pacific Railway case to which I
must now refer.

My Lords, in his judgment in the Court of Appeal Lord Justice Romer
introduced that case with these words: ” In my opinion, although in many
” cases the equity, to which Hughes v. Metropolitan Railway Company gave
” recognition and high authority, is satisfied by merely conforming to the
” terms in which Lord Cairns (and subsequently Lord Justice Bowen) formu-
” lated it, there are other cases where justice requires that the resumption of
” legal rights which have been suspended for a period must be preceded by a
” notification to the other party concerned specifying a fixed period of grace
” during which that party can put his house in order: and that in such cases
” a notification such as that will be a condition precedent to the valid
” re-assumption of the owner’s legal rights.” ” Such a case “, the learned
Lord Justice proceeds, ” was Canadian Pacific Railway v. The King.”

My Lords, it is undoubtedly the fact that the Canadian Pacific Railway
case decided that what I have called a ” dated notice ” was required in that
case to terminate an existing licence and that the Crown, the licensor, had in
that case the duty and the risk of fixing a reasonable period of notice, but I
must observe that not only was the equitable principle, which was recognised
in Hughes’ case, not invoked, but Lord Russell of Killowen in delivering the
opinion of the Board expressly disclaimed any reference to that or any other
equitable principle. The relevant problem there was whether a licence to
occupy land by placing telegraph poles thereon had been revoked by the
institution of proceedings by the Crown, and the question was what term in
regard to revocation should be implied in the licence which the Crown was
assumed to have granted. I have no doubt that the question is analogous
to that which we have to decide in this case, for the implication of a term
as to revocation, upon which the licence is silent, must depend on what is
fair and reasonable between the parties. The Court will be guided by the
same principles in the one case and the other. The passage which I cited
from Lord Justice Bowen’s judgment in the Birmingham case ended with
these words: ” That is the principle to be applied. I will not say it is
” not a principle that was recognised by Courts of Law as well as of Equity.
” It is not necessary to consider how far it was always a principle of common
” law.” Nor, my Lords, is it necessary today, but in the House of Justice
it would be difficult to distinguish between the equitable principle recognised
in Hughes’ case and the rule well established at common law long before the
fusion of law and equity that a licensor must give reasonable notice to
determine a licence. It was this rule which was applied in the Canadian
Pacific Railway case and, in applying it, Lord Russell of Killowen said:
” Whether any and what restrictions exist on the power of a licensor to
” determine a revocable licence must, their Lordships think, depend upon the
” circumstances of each case.” And, as I read the decision, it was the
circumstances of that case and nothing else, certainly not any general rule,
which led him to say that ” it will be for the Crown to determine the licence
” by service of a notice the sufficiency of which, if called in question, will
” have to be decided, upon proper evidence, in subsequent proceedings. It
” will be for the Crown, at its risk, to fix the length of notice.” The circum-
stances of that case were very unusual, and I do not doubt that they fully
justified the rule being applied in that way. But so also in the present case
the circumstances are very unusual: it is hardly possible that they should be
repeated, and even if I apply in the amplest way to the termination of the

equitable arrangement between the parties in this case the rule applicable to
the revocation of licence, I find nothing in the Canadian Pacific Railway case
which precludes me from reaching the conclusion which I have already stated,
viz. that the Appellants gave sufficient notice that the suspensory period was
at an end and allowed enough time to elapse before seeking to enforce their
rights. For these reasons I think that this defence fails and that the judg-
ment of the Court of Appeal cannot on this ground be upheld.

The plea that the provisions of the deed are unenforceable because they
impose a penalty clearly cannot be maintained. It is perhaps enough to say
that they do not impose, or purport to impose, a penalty. No doubt the
consequences of certain actions by the Respondents may be detrimental to
them, but that does not involve that a penalty is imposed in the sense in
which that word is used in the equitable doctrine that equity relieves against
penalties. No case was cited where the doctrine was invoked otherwise
than for a penalty payable upon the breach of a contractual obligation.

The further plea that the provisions of the deed are unenforceable, because
they constitute an unreasonable restraint of trade, must also fail. It was
conceded that as between the parties the restraint was reasonable. But it
was contended that it was unreasonable in the public interest. The onus of
proof here lay with the Respondents and it is a notoriously heavy burden.
In my opinion, the Respondents did not discharge it and I concur so fully in
the reasoning and conclusion of Lord Justice Romer that I need say no more.

My Lords, having come to the conclusion that it has not been established
that clause 5 of the Deed of the 2nd April, 1938, is under the general law
void as in restraint of trade, it is necessary now to consider whether it is
avoided by section 38 of the Patents and Designs Act, 1907. The Patents Act
of 1949 has substituted a new section for that section but it is with the earlier
Act that we are here concerned. It had by 1907 become notorious that
patentees were seeking by virtue of their patents to obtain a collateral ad-
vantage by imposing conditions upon licensees such as that the patented article
should not be used save in conjunction with some other article produced by
the patentee or that the patented article alone should be used or that the user
should purchase his raw materials from the patentee: see Terrell 9th Edition
p. 262 and cases there cited. And it is, I think, clear that the object of the
Legislature was to put an end to this grave abuse of monopoly rights. How far
it has done so must depend on the true construction of section 38 of the Act
of 1907, but the background is one in which I see first the common law
rejection of a monopoly, then the statutory grant under the Statute of
Monopolies and the succeeding Patent Acts of limited monopolies hedged
about with divers safeguards in the public interest against their abuse, then
the attempt by patentees, in spite of such safeguards, to secure for themselves
collateral advantages by virtue of their monopoly, and finally the attempt to
check such attempts by prohibitory legislation with powerful sanctions. Lord
Justice Romer in Huntoon Company v. Kolynos (Incorporated) 47 R.P.C.403
accurately stated the purport of the legislation in one aspect when he said that
its language ” would seem to suggest that the object of the Legislature was
” to prevent persons who had obtained a monopoly in respect of an article or
” a process by means of a patent so using that monopoly as to obtain for
” themselves a virtual monopoly in respect of other articles and processes for
” which they have not obtained any patent “. His statement would be equally
applicable to articles which had been patented but the patents had expired.
Nothing, I suppose, could be in more direct conflict with the law relating to
patents than a contractual provision which indirectly secured for a patentee
a monopoly extending beyond the statutory period of his patent.

I now turn to section 38, and for the sake of clarity state the first subsection,
with the omission of words not relevant to the present case—

” It shall not be lawful in any contract … in relation to the
“… licence to use . . . any article . . . protected by a
” patent to insert a condition the effect of which will be

” (a) to prohibit or restrict the …licensee from using any
” article or class of articles, whether patented or not, supplied
“… by any person . . . other than the … licen-
” sor or his nominees; or

” (b) to require the … licensee to acquire from the
“… licensor, or his nominees, any article or class of articles
” not protected by the patent . . .”

I need not at the present stage refer to the provisoes to this subsection nor
to the other subsections.

Upon the meaning and effect of the words that I have cited numerous
questions have arisen, but the controversy has chiefly centred round the words
” the effect of which will be ” and the words ” prohibit or restrict “.

I think that it is clear that the words ” the effect of which will be ” have a
wider scope than the words ” which will “, and I cannot find a more accurate
way of stating the difference than by saying that the former phrase emphasises
that the result may be directly or indirectly achieved. But it is the word
” will ” which has caused the greater difficulty. It was pointed out truly
enough that the word is ” will ” not ” may “. and from this the short step was
taken of saying that it must be shown by evidence that the condition
necessarily will or, in other words, must have a certain effect. But, in my
opinion, too much stress is laid on the use of the future tense. The subsection
looks forward to the future; it opens with the words ” It shall not be lawful
” in any contract “, and in describing what could only be a future condition in
a future contract it was, I think, good grammar to use the words ” the effect
” of which will be “. The problem is precisely the same as if the present tense
had been used, or as if (leaving out the words ” the effect of which will be “)
the subsection had run ” condition prohibiting or restricting etc.”, or (giving
their proper meaning to the words I have for the moment omitted) ” condition
directly or indirectly prohibiting or restricting “. It is common ground that
the matter must be examined as at the date of the execution of the contract.
That is a date at which the surrounding circumstances are known but the
future cannot be foreseen, and nobody can predict that such and such a result
will inevitably ensue. The Court then, in my opinion, in considering whether
section 38 operates to avoid a condition, has the task of determining whether
its essential quality is (I will not repeat ” directly ” or ” indirectly “) prohibitive
or restrictive of a certain course of conduct. This cannot as a rule, I think,
be a difficult task.

Obviously, no condition will have the effect of prohibiting or restricting
me from following a certain course if I have never wanted and never shall
want to follow that course. The fundamental supposition is that, if I do want
to follow it, I shall be faced with the condition, and it is fair to assume that it
is just because I may want to follow it, that the condition is imposed. If I
find such a condition in a contract, it is, in my view, idle to speculate (as was
done at great length in this case) whether and when I shall want to do a
certain thing: the question is whether, when I want to do it, I shall find myself
prohibited or restricted.

What, then, is the meaning of ” prohibit ” and ” restrict “? It has been
urged by the Appellants and was, I think, held by Mr. Justice Pearson that
both these words cover only a direct contractual provision, e.g. ” the licensee
” will not use any hard alloys except those supplied by the licensor ” or ” the
” licensee will not use more than 25 per cent. of hard alloys supplied by any
” other supplier than the licensor “, the former taken as an example of a
prohibiting, the latter of a restricting, condition. And, if I understood the
argument, it proceeded on the footing that ” prohibit ” meant ” forbid “, that
” forbid ” connoted such a contractual provision as I have stated and that
” restrict “, being found in immediate conjunction with ” prohibit “, must be
given a similar meaning. I cannot accept this argument. In the first place,
it wholly ignores the words ” the effect of which will be “. But, secondly, I
see no reason in the context for so limiting the meaning of the word
” prohibit” or, if indeed that word has a limited meaning, for saying that
” restrict ” must be similarly limited. I put to learned Counsel the hypothesis

of a penalty which must in fact effectually deter the licensee from purchasing
in the market and he admitted candidly that his construction required him
to deny that that operated to prohibit the licensee. It appears to me that,
while one meaning of ” prohibit ” is ” forbid “, it has another meaning, which
I would by no means call a secondary meaning, and that is ” prevent “. If
a modest tourist says that the prices of a certain hotel are prohibitive, he
is not thinking in terms of contractual provision. The prices are so high
that he is prevented from entering that hotel. It is interesting to note that
he might say that the condition of his purse forbade it. I would say
then that a man may be prohibited from a course of action equally by the
express terms of his contract, by the law of the land, or by economic circum-
stance. Nor do I see any reason for giving the word in the context of
section 38 a narrower meaning than it fairly bears. True enough it is in a
sense a penal provision. But I do not detract one jot from what I said in
London, North Eastern Railway Company v. Berriman ([1946] A.C. 278) if
I insist that, it being the plain purpose of the section to prohibit (or prevent)
the licensor from using his monopoly to obtain a collateral advantage,
nothing less than its fair meaning should be given to the clause. It would
be a strange piece of legislation which disallowed a direct contractual
provision but allowed a condition which indirectly had the same effect. It
was, perhaps, in order to avoid the possibility of such a conclusion that the
words ” the effect of which will be ” were introduced.

But to ” prohibit ” must be added ” restrict “. If I am wrong in thinking
that prohibition covers prevention as well by economic circumstance as by
direct contractual provision, why should ” restrict ” be so limited? I see
no reason for saying that it follows from an application or misapplication of
the ejusdem generis rule. The argument, I think, involves that ” prohibit ”
means ” totally prohibit ” and ” restrict ” means ” partially prohibit ” and in
either case by means of an express contractual provision: for otherwise I do
not know what meaning can, upon this footing, be given to ” restrict “. But
this would be surplusage: for it could not be maintained that a condition
was not prohibitive, if it forbade the user of material supplied by outsiders
to the extent of (say) 75 per cent. In truth, however, there is no valid
reason in the context or otherwise for giving a limited meaning to this
word. A word of command, the fear of penal consequences, or barbed
wire may equally restrict my movement. I do not know why the means by
which I am restricted should affect the fact that I am restricted in a real
sense of that word. And I would say that in the sphere of commerce nothing
could more truly restrict a trader than the fact that, wishing to purchase
the goods of A rather than the goods of B, he finds that he can only do so at
the cost of paying a heavy penalty to B. That is the effect which the
penalty is intended to have and it will probably have it.

I do not find anything contained in the other subsections which throws
any light upon the meaning of the relevant words. The proviso to sub-
section (1) offers some mitigation to its stringency and subsection (4) gives
cogent evidence of the importance attached by the Legislature to subsection
(1). Some comment was made on the fact that the section does not preclude
a condition prohibiting sale by the licensee of goods supplied by outsiders,
but I do not see why this omission should lead to a narrow construction of
” prohibit ” and ” restrict ” in relation to user. There may be good reason
for thinking that a selling agent may fairly be restrained by the licensor
from selling the goods of an outsider. This seems to be the motive of
subsection (5) (a).

After this too long exposition of the section I return to the present case
and ask whether, on the 2nd April, 1938, it could fairly be said of clause 5
that it was a condition which will have the effect of prohibiting or restricting
TECO from using contract material supplied by suppliers other than
T.M.M.C. As I have already indicated, it must have been an idle and
irrelevant speculation at that date whether at any time in the next ten
years TECO would want to do so. The penal clause is inserted upon the
assumption that they may or will want to do so and to meet just that
eventuality. Assuming then, that the time comes when TECO wants to

use contract material obtained from an outsider, will this clause have a
prohibitive or restrictive effect? I do not see how it can fail to do so. The
assumption is that TECO want to obtain their material from an outsider
either because they can get it cheaper or because they think it better material
or for some other good commercial reason. If there was no clause, they
would do so. But the clause is there and at once the position is changed.
They can pursue their chosen course only at the expense of a penalty which
will not be borne by their own competitors in the market, and so they are
compelled to buy from their licensors. I repeat that the compulsion of
economic conditions is as truly prohibitive or restrictive as a direct contractual
obligation. Its intention and its effect are to confine them to purchase from
their licensor, when unhampered by the clause they would be free to purchase
from another. That is, in my opinion, a restrictive condition which section
38 (l) of the Act avoids.

On this ground, and this ground only, I would dismiss this appeal.

Lord Oaksey

My Lords,

I have had the advantage of reading the Opinion prepared by my noble
and learned friend, Lord Reid, who has not yet taken the Oath in your
Lordships’ House on account of his absence from the country, and as I
entirely agree with his Opinion I propose to read it as my own, and to
vote accordingly.

My Lords,

Krupps of Essen had been developing processes for the manufacture of
hard metal alloys and in 1931 they formed the Appellant Company, whom
I shall call ” T.M.M.C.”, to operate in Britain. T.M.M.C. owned a number
of British patents and they sought to stop what they alleged to be infringe-
ments by certain British companies including the Respondents TECO
who had been making hard tips for machine tools and other articles from
tungsten carbide powder. After much negotiation, on 2nd April, 1938,
two deeds were executed by which T.M.M.C. granted a licence to TECO
to import, make, use and sell under certain conditions hard alloys made
in accordance with the inventions the subjects of their patents (called
” contract material “) and TECO agreed to pay a royalty of 10 per cent.
and in addition ” compensation ” at the rate of 30 per cent. of the value
of contract material sold or used by them in excess of 50 kilograms per
month. This was a very heavy burden on TECO and they only agreed
to it because the alternatives were either to defend an action for infringe-
ment, which would have been disastrous for them if they were unsuccessful,
or to go out of business and perhaps also pay damages for past infringe-
ments. Before the war TECO paid about £16,000 to T.M.M.C. as
” compensation “.

Shortly before the war Krupps sold their interest in T.M.M.C. to British
buyers and early in the war TECO settled their liability for compensation
down to the date of settlement by paying a further sum of over £3,000.
Thereafter no demand for further payment of compensation was made until
after the end of hostilities.

In July, 1945, TECO sued T.M.M.C. for repayment of those sums
amounting in all to £19,521, alleging that the deeds of 1938 had been obtained
by fraudulent misrepresentation, and they also pleaded that T.M.M.C. had
agreed that no further compensation should be payable. On 26th March,
1946, T.M.M.C. lodged a defence and counterclaim denying fraud and
claiming payment of royalties and also of compensation as from 1st June,
1945. The case was finally decided by the Court of Appeal on 4th April,
1950. Fraud was not proved and the counterclaim for compensation
failed. In that action there was no plea or suggestion by TECO that their
agreement to pay compensation was void or voidable on any other ground
than fraud.

On 11th September, 1950, T.M.M.C. raised the present action claiming
compensation as from 1st January, 1947, and TECO’s defence was
delivered on 10th November, 1950. Four defences were pleaded; first,
that no notice had been given by T.M.M.C. which entitled them to demand
compensation, secondly, that the clause in the 1938 agreement imposing
liability to pay compensation was in restraint of trade and illegal, thirdly,
that this clause provided for the imposition of a penalty which was irrecover-
able at law, and fourthly, that the clause was null and void in that it
offended against section 38 (1) (a) of the Patents and Designs Act, 1907.
I agree with your Lordships that the first and third defences fail, and I
propose only to deal with the other two.

If these defences, or either of them, are valid it is somewhat remarkable
that nothing was said about them in the earlier action but it is admitted that
it is competent to raise them now for the first time. In order to deal with
them I must first consider the terms of the clause against which they are
directed. It is clause 5 of the Agreement of 1938, which is in these terms:
” If in any month during the continuance of the said Licence the
” aggregate quantity of contract material sold or used by TECO and
” Industrial (other than contract material supplied to TECO by the
” Grantors or any Licensees under the said patents) shall exceed a quota
” of 50 kilograms (50 Kg) TECO shall whether all or any of such
” material shall be subject to royalty hereunder or not pay to the
” Grantors compensation equal to thirty per cent. (30%) of the sum
” which represents the excess net value that is to say the average net
” value per kilogram of all contract material sold or used by TECO
” and Industrial in the said month multiplied by the weight in kilograms
” of all such contract material as aforesaid sold or used by TECO
” and Industrial during such month in excess of fifty kilograms (50 Kg).
” Provided that contract material sold by TECO to Industrial shall
” only be taken into account for the purposes of this clause on the
” occasion of its sale or use by Industrial.”

Before considering this clause in detail it is necessary to have in mind
something about the nature of contract material. TECO’s process begins
by taking tungsten carbide and any other desired ingredient in finely powdered
form and the object of the process is to get the grains or particles to adhere
to each other so that the finished product is an extremely hard object of the
required shape. This is done by sintering in two stages. After the first
stage the powder has been compacted into an object which can be fairly
easily worked to approximately the right size and shape. The second
stage then makes the object so hard that it is difficult to grind away any
of it. It is only when this second stage is completed that the object becomes
contract material within the meaning of the Agreement. The manufacturer
can then sell the object in this state or he can grind it after the second
stage is completed so as to sharpen its edge or bring it to the exact shape
which his customer wants. It is admitted that any such operation after
the second stage is use of contract material by the manufacturer within the
meaning of the Agreement.

It appears that there are two grades of contract material, the iron grade
and the steel grade. They are made by somewhat different processes and
both were within the scope of the patents in force in 1938. But the patents
with regard to the iron grade expired in 1941: thereafter only the patents
with regard to the steel grade remained. So the clause operated in this way.
Down to 1941 the only possible ways in which TECO could get contract
material which they could sell or use were by making it themselves or by
buying it from T.M.M.C. or their other licensees. If in any month TECO
sold or used more than 50 Kg. of contract material made by themselves
they had to pay compensation on the excess, but they would pay no
compensation in respect of selling or using any contract material which they
had acquired from T.M.M.C. or their licensees. This was not, in my view.
calculated to confer any preference on T.M.M.C. or to induce TECO
to buy from T.M.M.C. rather than make the material themselves. There
were price fixing arrangements in the deeds which, if I understand them
rightly, would give little encouragement to TECO to buy from T.M.M.C.

even though they could do so without compensation affecting material so
bought, and I can find nothing to indicate that TECO did buy from
T.M.M.C. or that it was contemplated that they would make a practice of
doing so. But the inclusion of this exemption in clause 5 and of a similar
exemption from royalty in clause 3 shows that the parties thought that
such purchases might occur and the most likely reason for the exemption
would seem to be that, if TECO bought direct from T.M.M.C., T.M.M.C.
would get their full profit on what they sold to TECO in the same way
as if they had sold to anyone else, and that, if TECO bought from another
licensee of T.M.M.C., the material sold by that licensee would be taken
into account in assessing the compensation payable by that licensee. So,
if material acquired by TECO from T.M.M.C or their licensees were
taken into account to increase the compensation payable by TECO, the
effect would be that T.M.M.C. would get a double profit from the same
material and that no doubt was thought to be unfair, and to require the
insertion of the exemption.

But after the iron grade patents had expired the situation with regard
to iron grade contract material might be different. It was then open to
anyone to make that material and, if that material was then made by some
manufacturer independent of T.M.M.C., it was open to TECO to buy it
and use it or resell it. In 1938 no one could say whether after 1941
independent manufacturers would manufacture this material or whether, if
they did, the price and quality of their product would offer any inducement
to TECO to buy from them rather than make the material themselves
or buy it from T.M.M.C. But the terms of clause 5 are certainly wide
enough to require TECO to bring into computation for the purpose of
compensation any material which they might then buy from independent
manufacturers and use or resell themselves. And it is also clear that after
the iron grade patents had expired TECO were still liable to pay com-
pensation in respect of iron grade contract material manufactured by
themselves.

TECO now say that in as much as clause 5 required payment of com-
pensation to T.M.M.C. in respect of iron grade material after T.M.M.C.’s
patents relating to that material had expired it was in restraint of trade.
I think that in the circumstances of this case it may be presumed that this
obligation would tend to have the effect of diminishing the amount of iron
grade material which TECO would be able to sell at a profit and putting
them at some disadvantage in competing with T.M.M.C. But even if that
were sufficient to show that clause 5 is objectionable it is still necessary to
consider whether any restraint which it might cause is justifiable as being
reasonable in the interests of the parties and in the public interest. As
regards the parties, counsel for TECO rightly admitted that in view of
their disadvantageous position, which I have already mentioned, it was
reasonable for them to accept the 1938 agreement. T.M.M.C. no doubt
drove a hard bargain but I cannot hold that they took an unconscionable
advantage of their position, or that clause 5 was commercially unjustifiable
or unreasonable for the protection of their trading interests. Counsel argued
that a restraint may be reasonable in the interests of the parties and yet
against the public interest, and so it may be. But I am unable to hold that
this restraint was against the public interest. There is nothing to show that
it either limited or was likely to limit the total supply of the material
available for purchase by the public or that it had or was likely to have
any substantial effect on the price which consumers would have to pay. If
TECO had refused to make the agreement it was not argued that there
was any provision in the Patents Act which could have been invoked. The
most that can be said is that T.M.M.C., instead of trying to drive TECO
out of business, which they could probably have done without in any way
offending against the law, offered to TECO an agreement which, although
it might limit their activities, allowed to them a substantial share of the
trade: and I know of no authority for holding that that is against the
public interest. To hold that that is against the public interest would only
encourage a trader in an advantageous position to act more ruthlessly
against his rival than he might be inclined to do.

TECO’s last defence is that clause 5 of the Agreement of 1938 offends
against section 38 (1) (a) of the Patents and Designs Act, 1907, and is there-
fore null and void. Section 38 (1) is in these terms:

” It shall not be lawful in any contract made after the passing of this
” Act in relation to the sale or lease of, or licence to use or work, any
” article or process protected by a patent to insert a condition the effect
” of which will be—

” (a) to prohibit or restrict the purchaser, lessee or licensee from
” using any article or class of articles, whether patented or not, or
” any patented process, supplied or owned by any person other than
” the seller, lessor or licensor or his nominees; or

” (b) to require the purchaser, lessee, or licensee to acquire from
” the seller, lessor, or licensor, or his nominees, any article or class
” of articles not protected by the patent;

” and any such condition shall be null and void, as being in restraint
” of trade and contrary to public policy.”

This is not an easy subsection to interpret. Let me therefore first take
a case to which it clearly applies. Before the section was enacted the owner
of a patented process might and sometimes did attach to a licence to use
the process a condition that the licensee must buy raw material used in the
process from him and from no one else. Such a condition was prohibited
by the section, no doubt because it was regarded as an abuse of the patentee’s
monopoly in that it imposed on the licensee a restraint beyond the scope
of the patent. The condition might be a positive obligation to buy the
raw material from the licensor—that is made unlawful by subsection (1) (b)
—or it might be a negative obligation prohibiting the licensee from buying
it from any person other than the licensor and that is prohibited by sub-
section (1) (a). In the same way the seller of a machine protected by a
patent might require the buyer to purchase raw material from him or
prohibit the buyer from purchasing it from any other person and that is also
made illegal.

Obviously, a condition restricting the right of the licensee to choose from
whom he would buy articles not protected by the licensor’s patents need
not be drafted in such direct terms. It is not difficult to imagine circum-
stances where a condition which did not expressly require the licensee to
buy from the licensor or prohibit him from buying elsewhere would in fact
operate to deprive the licensee of the right to buy in the open market and
the section is drafted in terms wide enough to nullify such a condition.
It is not limited to conditions which in terms prohibit or restrict or require:
it makes unlawful any condition the effect of which will be to prohibit or
restrict the licensee from buying from others or to require him to buy from
the licensor.

In trying to simplify my explanation I have stated the effect of sub-
section (1) (a) rather too widely. For some reason that is not apparent to
me this subsection does not nullify a condition prohibiting or restricting the
licensee from purchasing articles from any person other than the licensor:
it only affects conditions the effect of which will be to prohibit or restrict
the licensee from using such articles. No doubt the effect would generally
be the same because generally the licensee would purchase with a view
to using the articles, but it is worth noting in connection with the present
case that if the licensee desired to buy for resale and not for use a condition
might have the effect of restricting his right to buy in the open market and
yet be unobjectionable provided that its effect was not to require him
to buy from the licensor.

Before turning to the question at issue in the present case I should
perhaps deal rather more fully with the phraseology of subsection (1) (a).
I read it as affecting, first, any article or class of articles, whether patented
or not, supplied by any person other than the licensor, and, secondly, any
patented process owned by any person other than the licensor; and the
patented articles or patented processes must, I think, be articles or processes
protected by other patents than those under which the licence is granted.

I have tried to explain the subsection using only the words ” licensee ” and
” licensor “: I do not think that it is necessary to elaborate my explanation
to include all the words “purchaser, lessee or licensee” on the one hand
and ” seller, lessor, or licensor, or his nominees ” on the other. And I must
further note that it is admitted that section 38 does not apply to a condition
the effect of which is merely to restrict the volume of the licensee’s trade
or the amount of unpatented raw material which he can use in his manu-
facture while leaving him free to buy the restricted amount where he chooses.
Such a condition is left to the ordinary law of restraint of trade. The
purpose and effect of section 38 is to prevent the licensor from limiting
the right of the licensee to trade with others so as in effect to compel the
licensee to trade with him.

I now turn back to the facts of the present case. I have already said
that the terms of clause 5 show that the parties contemplated at least the
possibility that TECO would want to buy contract material as well as
make it themselves; and that after the expiry of the iron grade patents they
might be able to buy iron grade material from other manufacturers than
T.M.M.C. and their licensees. If then they wanted to buy iron grade material
and if supplies from such outside manufacturers were available, they would
not be prevented by clause 5 from buying from outsiders but there would
be an inducement to buy from T.M.M.C. and not from outsiders because
purchases from outsiders would come into the computation for paying com-
pensation, whereas purchases from T.M.M.C. would not. It is said that
the effect of this inducement would be to restrict TECO from buying
material from persons other than T.M.M.C. or their other licensees, and
if TECO were not buying to resell but were buying to use the material them-
selves then the effect of this inducement would be to restrict TECO from using
material bought from persons other than T.M.M.C. or their other licensees.
That and that alone is said to bring clause 5 within the scope of section 38
and to make it null and void.

It will be seen that a number of contingencies were involved before this
inducement could operate: TECO must want to buy iron grade material
instead of making it and they must want to buy it for use and not for
immediate resale ; some independent manufacturer must have started making
the material; and the material must be of suitable quality and must be
available at a competitive price. If then the independent manufacturer’s
price were more than 30 per cent. below T.M.M.C.’s price the 30 per cent.
compensation would not matter as it would still pay TECO to buy
from the independent manufacturer, and if that manufacturer’s price were
above T.M.M.C.’s price the compensation would not matter as TECO
would in any case buy from T.M.M.C. But if that manufacturer’s price
were below, but less than 30 per cent. below, T.M.M.C.’s price, then the
liability to pay compensation would probably induce TECO to buy
from T.M.M.C. whereas, in the absence of clause 5, they would probably
have bought from the independent manufacturer. It is the possibility of
that happening which, on the argument for TECO. makes it necessary to
hold that the effect of clause 5 ” will be ” to restrict TECO from using
iron grade material supplied by any person other than T.M.M.C. and their
licensees.

There appear to me to be four key words in the subsection—” the effect
” of which will be (a) to prohibit or restrict … or (b) to require . . .”.
To my mind, the natural meaning of the subsection is that the effect of the
condition must be to limit the right of the licensee to make a choice, and I
do not think that these words are appropriate to cover a case such as the
present where the licensee remains free to choose but the presence of the con-
dition will in some circumstances create an inducement to choose to buy from
the licensor. I take first the word ” require ” in subsection (1) (b): the effect
of a particular condition may be to offer so great an advantage to the licensee
if he buys from the licensor that it would be extremely foolish of him not
to do that, but I do not think that in the ordinary use of language it could
properly be said that the effect of such a condition will be to ” require ”
the licensee to do it. I feel bound to hold that subsection (1) (b) only
applies if the effect of the condition is that whenever certain circumstances

occur the licensee, if he wishes to buy the article, is obliged to buy it from
the licensor. Then I take the word “prohibit” in subsection (1) (a). It is
true that the adjective ” prohibitive ” is frequently used when there is no
legal prohibition, as in the phrase ” a prohibitive price “, and it may be
that the verb ” prohibit” is sometimes used in that way; but I would not
expect the word ” prohibit” to be used in this context to denote a state
of affairs where the inducement not to buy the other person’s goods is so
great that no reasonable person would choose to do so, and I see nothing
in the context pointing to such a meaning. I think that the meaning is that
the effect of the condition will be such as to oblige the licensee in certain
circumstances not to use the other person’s goods. Then I come to the
word ” restrict”. A person though not prohibited is restricted from using
something if he is permitted to use it to a certain extent or subject to
certain conditions but otherwise obliged not to use it, but I do not think
that a person is properly said to be restricted from using something by a
condition the effect of which is to offer him some inducement not to use it,
or in some other way to influence his choice. To my mind, the more
natural meaning here is restriction of the licensee’s right to use the article
and I am fortified in that opinion by two considerations.

If I am right in thinking that ” require ” and ” prohibit ” refer to legal
obligations to buy or not to use, I see nothing to suggest that ” restrict ”
is used in quite a different sense which has nothing to do with legal obligation
but which relates to financial disadvantage. And, secondly, to say that the
effect will be to restrict seems to me much more appropriate if restriction
refers to restriction of the licensee’s right to use than it would be if restriction
refers to an inducement not to use. The legality of the condition has to
be determined at the time when the licence is granted and if the terms of
the condition are such as to restrict the licensee’s right to use an article in
certain circumstances then it can properly be said that its effect will be
to restrict him from using it. But if, as in the present case, all that can
be said is that the effect of the condition in some circumstances will be
to offer a financial advantage, which may be considerable or may be small,
if the licensee uses the licensor’s goods, I do not see how it can be said
that its effect will be to restrict the licensee from using other goods. The
licensee may be influenced by this financial advantage or he may, perhaps
for good reason, choose to disregard it: it is impossible to say in advance
what the effect will be.

I recognise that to give this meaning to the section leaves room for
evasion. I do not think that the primary purpose of clause 5 was to evade
this section and the absence of any reported case in a period of 48 years
since the section was enacted would seem to show that evasion of this
kind has not been common. But undoubtedly it would often be possible
to achieve a preference for the licensor by coupling the licence with a
condition which, though not having the effect of limiting the licensee’s free-
dom of choice, imposed some burden on the licensee if he bought certain
articles in the open market. The question is whether it is legitimate to
stretch the words of section 38 to make them apply to such a case. Section
38 (1) is a highly penal provision. It not only makes the whole condition
void, although the circumstances in which it would have the effect of
restricting the licensee may be very unlikely to occur, but by subsection (4)
it also makes the existence of the condition a defence to an action for
infringement of the patent. At best the section is ambiguous, and if a penal
provision is ambiguous it ought not, in my view, to be construed in a
wider sense than the ordinary meaning of its terms requires. This section
appears to have been enacted to deal with a definite and limited abuse, and
if Parliament failed to take the opportunity to deal with the whole matter
sufficiently comprehensively, then the remedy was an amending Act of
Parliament.

I would allow this appeal and restore the order of Mr. Justice Pearson. The
respondents must pay the costs in your Lordships’ House and in the Court of
Appeal.

Lord Tucker

My Lords,,

The Court of Appeal allowed the appeal of the present Respondents (here-
inafter referred to as ” TECO “) on the ground that the Appellants (herein-
after referred to as T.M.M.C.) were not entitled to recover sums called
” compensation ” under clause 5 of a deed dated 2nd April, 1938, to which
T.M.M.C. and TECO were parties, because they had not before action
brought given a sufficient notice to terminate a period of suspension during
the currency of which payment of compensation money could not be enforced
by reason of the equitable principle enunciated in Hughes v. Metropolitan
Railway Company 2 A.C. 439. It may be convenient at this stage to quote
the language used by Lord Cairns in that case. He said: ” It was not argued
” at your Lordships’ Bar, and it could not be argued, that there was any
” right of a Court of Equity, or any practice of a Court of Equity, to give
” relief in cases of this kind, by way of mercy, or by way merely of saving
” property from forfeiture, but it is the first principle upon which all Courts
” of Equity proceed, that if parties who have entered into definite and
” distinct terms involving certain legal results—certain penalties or legal
” forfeiture—afterwards by their own act or with their own consent enter
” upon a course of negotiation which has the effect of leading one of the
” parties to suppose that the strict rights arising under the contract will not
” be enforced, or will be kept in suspense, or held in abeyance, the person
” who otherwise might have enforced those rights will not be allowed to
” enforce them where it would be inequitable having regard to the dealings
” which have thus taken place between the parties.”

The present is the second of two actions between these parties arising
out of the deed of 2nd April, 1938, which contained the terms and conditions
under which a licence under certain Letters Patent was granted by T.M.M.C.
to TECO. In the first action TECO claimed damages for fraud against
T.M.M.C. They alleged that as a result of certain fraudulent misrepresenta-
tions they had paid sums for compensation under clause 5, and in paragraph
10 of their Statement of Claim they said: “Thereafter the Plaintiffs and
” Defendants agreed that no sums should be payable in respect of com-
” pensation after 31st December, 1939, or alternatively that the Defendants
” would accept the amount of the royalties in full satisfaction of all sums
” payable under the said deeds as from 31st December, 1939.”

By their Defence T.M.M.C., in paragraph 8, denied the agreement alleged
and alternatively relied on the Statute of Frauds and lack of consideration.
In paragraph 17 of their Counterclaim T.M.M.C. said : ” In breach of their
” obligations under Clauses 3, 5, 7 and 8 of the Deed of Agreement the first
” Plaintiffs ” (i.e. TECO) ” have not since 31st March, 1942, rendered any
” accounts or paid the sums due for ‘ royalties’ or compensation. The
” Defendants do not desire to enforce payment of compensation in respect of
” deliveries made after 31st December, 1939, but before the end of hostilities
” with Germany.”

In their claim for relief they asked for delivery of accounts in the form
specified in clause 7 of the deed of all material sold or used since 31st
March, 1942, and for an enquiry into the sum due from TECO for com-
pensation since 1st June. 1945.

In their Reply TECO admitted that they had not rendered accounts or
paid any sum to the Defendants (T.M.M.C.) but otherwise did not admit
paragraph 17 of the Counterclaim.

It is perhaps relevant to refer also to paragraph 3 of the Reply in which,
inter alia, TECO relied on part performance in answer to the plea of the
Statute of Frauds. The particulars thereunder are as follows: —

” Subsequent to the date of the said oral agreement the Plaintiffs
” have not paid any compensation and have received no complaint from
” the Defendants in respect of such non-payment. Subsequent to the
” said date the Defendants have never made any demand upon the
” Plaintiffs for the payment of compensation but have confined their

” requests for payment to payments due in respect of royalty, and in
” particular the Plaintiffs will rely upon letters passing between the
” first named Plaintiffs and the Defendants ” (the dates of which are
then set out).

It will be observed that nowhere in the pleadings is there any statement
of facts relied upon as giving rise to the application of the principle in
Hughes v. Metropolitan Railway whereby T.M.M.C. would be precluded
from recovering compensation for a limited period or for a period which
would continue until terminated by notice. Nor are any facts set out
showing in what manner and to what extent TECO altered their position
in reliance on any promise or forbearance on the part of T.M.M.C.

At the trial before Devlin, J. no amendments were made to the pleadings
with respect to these matters although other amendments were made. Devlin,
J. found against TECO both on the issue of fraud and with regard to
the agreement alleged in paragraph 10 of the Statement of Claim. After
referring to the extremely vague and unsatisfactory evidence of Mr. McLeod
on behalf of TECO with regard to the alleged agreement he said:

” Accordingly the Plaintiff has been forced to rely mainly upon the
” evidence of a Mr. Bateman, a witness called for the Defendants, and
” Mr. Bateman’s evidence was in these terms on Day 5, at page 46, that
” on an occasion in 1942 he heard Mr. Wickman say to Mr. McLeod
” when this topic was being discussed words to this effect—he cannot,
” of course, remember the precise words—’ I have already told you
” ‘ that you will not be charged compensation and you will get a new
” ‘ agreement in which we hope there will not be a quota ‘. That
” evidence, taken in conjunction with the evidence of the Plaintiff,
” vague though it is, satisfies me that some agreement of some sort
” was made. When I use the word ‘ agreement ‘ I am using it now in
” a very broad sense ; I am not attempting to consider the question
” whether it is an agreement that is binding in law. But it is quite
” plain that something was said by Mr. Wickman to these licensees,
” something which resulted in their not paying compensation, at any
” rate, for the duration of the war, and I have no doubt that the sort
” of thing that was said—and indeed it is the best evidence the Plaintiff
” could produce—is the sort of thing that Mr. Bateman heard said.

” That being so, what I have to consider is whether those words
” support the Plaintiff’s contention. The Plaintiff says that an agree-
” ment was made which relieved him from the obligation of ever paying
” compensation again, and thus to that extent varied the deed into which
” he had entered in 1938, by striking out from it the compensation
” provisions. I think that that is putting far too great a weight on the
” words used by Mr. Wickman as Mr. Bateman heard them. One has
” to have regard to the circumstances in which they are used. They
” were used in relation to a plan (if I may so put it) that a new agree-
” ment was in course of preparation, and that in this new agreement
” there was going to be some sort of redrawing of quotas. It seems
” to me extremely unlikely, since the idea was then in the minds of
” the parties that a new agreement was to be drawn up, that Mr.
” Wickman should have intended or should have been understood to be
” striking something for ever out of the old agreement.”

After stating that that view is borne out by some further considerations,
to which he refers, he went on: ” He is less likely to have taken either of
” those courses if he treated it as being merely a temporary remission of
” the obligation to pay compensation, a remission that was to last only
” during certain circumstances, or only until it was recalled by the
” Defendants.”

Finally he said:

” The result is that I reject the view that there was an agreement that
” was intended to continue, which was to vary the original agreement.
” The agreement that was made was, in my view, one of two things
” I do not think there was anything in it which could be said to

” limit its operation for the duration of the war, although that may
” have been the intention of the Defendant Company. But I think it
” fairly emerges, from the language which Mr. Wickman was heard to
” use, that it was intended to be a temporary modification pending the
” new agreement. Accordingly, I think that when the new agreement
” was presented to Mr. McLeod and was rejected by him the tem-
” porary relief which he had been granted came to an end. I do not
” mean that it came at once to an end. It is obvious that it would
” be a reasonable provision that he should have some reasonable notice
” in order to make the necessary alterations. Compensation is now
” claimed from June, 1945, which is some nine months after the new
” agreement was presented to him, and I think that gives him sufficient
” time.”

I have set out these passages at some length as I consider it important to
see precisely what the learned Judge decided. He uses the word ” agree-
” ment ” more than once, but explains that he is using it in a very broad
sense, and when his findings are examined it appears that what he found as
a fact was that Mr. Wickman had made a promise not to charge compensa-
tion pending the new agreement and that he had carried out his promise
by not claiming it. That and nothing more.

On appeal the Court of Appeal held, with regard to the counterclaim,
that the findings of Devlin, J. made the principle laid down by Lord Cairns
in Hughes v. Metropolitan Railway (supra) and by Lord Justice Bowen in
Birmingham and District Land Company v. London and North Western
Railway Company 40 Ch. Div. at page 296 applicable, but they differed from
his view that the temporary period of suspension ended with the presentation
of the new draft agreement or when the negotiations broke down. Lord
Justice Somervell said: ” I think, against that background, the Plaintiffs were
” entitled to an express notice if the old terms were to be enforced again
” according to their literal provisions. If you read the correspondence, the
” Plaintiffs wrote objecting to the agreement; there was ample opportunity
” for the Defendants to say: ‘ Well, you know, if you do not like this agree-
” ‘ ment we shall withdraw our terms of not collecting the 30% and you
” ‘ will be back on the letter of the old pre-war contract’. Not having done
” that, I do not think they can rely on anything until we come to the counter-
” claim. That plainly indicates the view that they were taking.”

Lord Justice Cohen agreed and said: ” Now, as my Lord has said, the
” direct evidence that the Plaintiffs acted on that invitation may be somewhat
” scanty, but I respectfully agree with him in accepting the argument of Mr.
” Beyfus that the matter is really one of res ipsa loquitur, and I feel no doubt
” that the Plaintiffs carried on their business during the war on the basis that
” the compensation would not be demanded until due intimation of the
” intention so to do was given.”

This last sentence sums up the essence of the decision on this point so far
as the present action is concerned. The Defendants could not get the relief
they claimed in their Counterclaim because they had given no previous
intimation of their intention to demand payment. That left open for decision
in a subsequent action whether or not the Counterclaim was a sufficient
intimation.

My Lords, the parties to the present action are estopped from disputing
the correctness of the decision of the Court of Appeal in the first action to
the effect that circumstances existed which gave rise to the application of the
equitable principle in Hughes v. Metropolitan Railway and that no sufficient
intimation to terminate the period of suspension of payment had been given
prior to the Counterclaim in that action, but it would be wrong, in my
opinion, if the view were to prevail that your Lordships in the present case
are tacitly accepting the correctness of that decision. If it were permissible
to go into these matters on the present appeal I should—with all respect—
have desired to hear argument as to the application of this equitable doctrine
to a case where the party who says he has been misled and altered his
position has done so in reliance on an agreement which is found never to

have been entered into and which is essentially different from the promise
which is held to have been made and who gives no precise evidence with
regard to the manner or extent of the alteration of his positon. The sole
question, therefore, before the Courts on this issue in the present action has
been throughout: Was the Counterclaim in the first action a sufficient inti-
mation to terminate the period of suspension which has been found to exist?
Pearson. J. held that it was. He said:

” The result of these cases, in my opinion, is that, where the rule of
” equity applies, the period of suspension comes to an end when it is in
” all the circumstances equitable that it should come to an end, and that
” is, normally at any rate, according to the circumstances, either at or
” within a reasonable time after the termination of the state of affairs
” which is the cause or basis of the suspension. It is not necessary that
” the person whose legal rights have been suspended should give a notice
” purporting to terminate the suspension, although of course it would be
” fair and reasonable and advisable for him to do so.

” In this case the state of affairs which was the cause or basis of, the
” suspension would have been, according to the view taken in the Court
” of first instance in the former action, the continuance of the negotia-
” tions for new licensing arrangements, but according to the view of the
” Court of Appeal the state of affairs was, I think, the attitude of
” T.M.M.C. in not requiring payment of the compensation for the time
” being. When that attitude was reversed, a reasonable time for resump-
” tion of compensation payments began to run. The making of the
” Counterclaim in the first action clearly involved a reversal of the
” previous attitude, and therefore it started running a reasonable time
” for resumption of compensation payments.”

In the Court of Appeal it was argued on behalf of TECO that the Counter-
claim did not purport to determine any existing agreement and that in any
event it was deficient in that it specified no date for the termination. These
submissions were largely based upon a judgment of the Privy Council in the
case of Canadian Pacific Railway v. The King (1931) A.C.414, which was
cited for the first time in the Court of Appeal. It was a decision relating to
a licence to erect certain telegraph poles and wires on property belonging
to the Crown in Canada. I shall return to examine this case at a later stage.
Both these submissions prevailed and the judgment of Pearson, J. was
reversed. Hence the present appeal.

My Lords, it is difficult to keep these two submissions entirely separate as
they both involve consideration of what is necessary to terminate a period
of suspension and restore the parties to their previous position. It has been
said more than once that every case involving the application of this equitable
doctrine must depend upon its own particular circumstances. It is, of course,
clear, as Pearson, J. pointed out, that there are some cases where the period
of suspension clearly terminates on the happening of a certain event or the
cessation of a previously existing state of affairs or on the lapse of a reason-
able period thereafter. In such cases no intimation or notice of any kind
may be necessary. But in other cases where there is nothing to fix the end
of the period which may be dependent upon the will of the person who has
given or made the concession, equity will no doubt require some notice or
intimation together with a reasonable period for re-adjustment before the
grantor is allowed to enforce his strict rights. No authority has been cited
which binds your Lordships to hold that in all such cases the notice must
take any particular form or specify a date for the termination of the sus-
pensory period. This is not surprising having regard to the infinite variety
of circumstances which may give rise to this principle which was stated in
broad terms and must now be regarded as of general application. It should.
I think, be applied with great caution to purely creditor and debtor relation-
ships which involve no question of forfeiture or cancellation, and it would
be unfortunate if the law were to introduce into this field technical require-
ments with regard to notice and the like which might tend to penalise or
discourage the making of reasonable concessions.

My Lords, in the present case I can find nothing which persuades me
that equity could require anything further than that which is contained in
the Counterclaim in the first action. It is true that it does not purport
to be putting an end to an existing ” agreement ” for a temporary suspension.
No such agreement had been pleaded. It does, however, contain a clear
intimation of a reversal by T.M.M.C. of their previous attitude with regard
to the payment of compensation and of their intention to enforce compliance
with clause 5 of the agreement and for an account thereunder.

It does not, I think, lie in the mouth of TECO, who had consistently
failed to comply with their obligations to render the returns required by the
deed, now to complain that the notice should have specified a named future
date upon which the suspensory period was to come to an end.

I turn now to the case of Canadian Pacific Railway v. The King (supra)
which was so much relied upon by Romer, L.J. in the Court of Appeal. It
dealt with the withdrawal of a licence to erect telegraph poles. Licence
cases are sometimes somewhat similar to the present class of case but I do
not consider that they are safe guides to the solution of the application of
the equitable principle with which alone your Lordships are now concerned.
Even licence cases are, however, largely dependent upon their special facts,
as was pointed out by Lord Russell of Killowen in delivering the judgment of
the Board in the Canadian Pacific case (see page 432). Furthermore, in
that case it was expressly stated that it was not decided on equitable
grounds. At page 430 Lord Russell says: ” Upon the facts of the present
” case their Lordships can find no foundation for the application of any
” equitable doctrine in favour of the Appellant. There was no mistaken
” belief by the Appellant as to the ownership of or the rights over the Inter-
” colonial property, still less was there any such mistaken belief, which was
” known to the Crown. There was no conduct on the part of the Crown
” which induced the Appellant to build in the belief that rights in per-
” petuity would be acquired. There was nothing upon which to ground any
” estoppel. The facts are all the other way.” There was, moreover, one
feature in that case which is alone sufficient to explain the decision requiring
the Crown to specify a date in its notice, namely, that a letter had been
written indicating that unless the poles were removed at once it would be
necessary for the Crown to fix a date for their removal. No such date
was ever fixed or notified to the Company before the proceedings were
commenced. In similar circumstances it might well be held inequitable
to allow T.M.M.C. to enforce clause 5 of the deed by issuing a writ with-
out first giving notice specifying a date. I do not, however, think it is
profitable to examine the circumstances in which notices may have been
required in other cases or the precise form of such notices unless some
principle of general application is to be found therein. I can find no such
general principle in the Canadian Pacific case nor in any other of the cases
referred to in argument on this appeal.

I should, perhaps, add that those cases where a licence has been given
contractually, in my view, afford no assistance since in such cases the
requirements with regard to notice must necessarily be dependent upon the
construction of the contract by virtue of which the licence was obtained. I
have not therefore thought it necessary to refer to the views expressed on
that subject by the noble Lords who took part in Winter Garden Theatre
(London), Limited v. Millenium Productions Limited [1948} A.C. 173.

Where I respectfully differ from the views expressed by Romer L.J. in
the Court of Appeal in the present case is that I am unable to obtain the same
help from the Canadian Pacific case and I feel that he has laid undue
emphasis on the word ” agreement ” as constituting the basis for the applica-
tion of the equitable doctrine and consequently imposing on T.M.M.C. steps
which would normally be required from a party to a contract who desires to
determine a contractual relationship.

In my view, the Counterclaim of 26th March, 1946, followed by a period of
nine months to 1st January, 1947, from which date compensation in the
present action is claimed, is sufficient to satisfy the requirements of equity and
entitle T.M.M.C. to recover compensation under clause 5 of the deed as from

the latter date. In the somewhat peculiar circumstances of the present case
any other result would, I think, be highly inequitable.

My Lords, with regard to the other defences relied on by TECO I agree
that those of restraint of trade and penalty fail. As to the remaining
defence of section 38 of the Patents and Designs Act 1907 which involves a
question of construction which, I confess, has caused me considerable diffi-
culty, I have reached the conclusion, for the reasons which have been stated
by my noble and learned friend, Lord Oaksey, that the Courts below were
right in holding that this defence did not avail the Respondents in the present
case.

In the result, therefore, I would allow the appeal.

Lord Cohen

My Lords,

The dispute between the parties is as to the right of the Appellants to what
was called compensation and arose out of two deeds, one a deed of agreement
and the other a licence, both executed on the 2nd April, 1938, and made
between the Appellants (to whom I shall refer hereafter as ” T.M.M.C.”)
of the first part, the Respondents (to whom I shall refer hereafter as
” TECO “) of the second part, and Tungsten Industrial Products Limited
(therein defined as ” Industrial “) of the third part. Industrial were the dis-
tributors of the products of TECO and played no part in the disputes with
which your Lordships are concerned.

These deeds have given rise to two actions between the parties. The
facts leading to the first action were carefully and elaborately marshalled in
the judgment of Devlin, J. therein and the events which subsequently
occurred are stated with sufficiency and accuracy in the judgment of Pearson,
J. whose order, dated the 16th November, 1953, directing the payment by
TECO to T.M.M.C. of the sum of £84,050 4s. 4d. with interest at the rate
of 4 per cent. from the 11th September, 1950, to the date of judgment, was
reversed by the Court of Appeal. It is from that order that the appeal now
before your Lordships has been brought. Like Romer, L.J. in the Court of
Appeal, I shall confine myself to stating as briefly as I can the matters which
appear to me to be relevant to the points argued before your Lordships.

In 1931 T.M.M.C. was incorporated in England by Krupps of Essen, the
well-known German firm, for the purpose of developing as their subsidiary
certain patents which Krupps had acquired in relation to Tungsten carbide.
Under these patents T.M.M.C. manufactured articles which were, in the
main, machine tool tips, and they marketed them under the name of
” Wimet “. In or about 1934 T.M.M.C. brought proceedings against the
British Thomson-Houston Company Limited (hereinafter referred to as
” B.T.H.”) for infringement of the said patents, but those proceedings were
settled upon the terms of an agreement made on the 1st January, 1936,
under which B.T.H. acknowledged the validity of T.M.M.C.’s patents and
were granted an exclusive licence to manufacture under such patents in terri-
tory which included the United Kingdom. One result of this agreement
was that T.M.M.C. could only grant subsequent licences with the consent
of B.T.H. but they were entitled to and did continue to manufacture them-
selves under the patents.

Some time later the activities of TECO came to the notice of T.M.M.C.,
who took the view that TECO were infringing T.M.M.C.’s patents. Negotia-
tions took place and ultimately, with the consent of B.T.H., Heads of Agree-
ment were signed on the 1st June, 1937, under which TECO received a
licence under the said patents. I need not refer to the terms of the Heads
of Agreement as they were superseded by the two deeds of the 2nd April,
1938, which in substance incorporated the terms of the Heads of Agreement.

The licence was a non-exclusive licence under the patents to import,
make, use, and, subject as thereinafter mentioned, to sell contract material
as therein defined in Territory A as therein defined, and to sell contract

material in and for export to Territory B as therein defined, upon and
subject to the conditions therein and in the Deed of even date contained.
The licence was to commence from 1st June, 1937, and to continue until
the 18th September, 1947, and thereafter until determined by either T.M.M.C.
or TECO on six months’ notice in writing.

Contract material was defined as ” Hard metal alloys made in accordance
” with the inventions the subjects of the said patents or any of them whether
” made before or after expiry of such patent or patents “.

The hard metal alloys mentioned in the said definition fell into two classes,
” iron grade ” and ” steel grade “. The last of the patents relating to iron
grade expired in December, 1941.

Broadly speaking, Territory A consisted of the United Kingdom and
Territory B included the British Commonwealth and Empire but not Canada.

The agreement of even date with the licence contained a recital that
TECO had made and sold hard metal alloys of a composition and by a
process which fell within one of the said patents. Under clause 2 T.M.M.C.
waived all claims against TECO and Industrial and TECO’s customers in
respect of any infringement of the patents.

Under clause 3 TECO had to pay to T.M.M.C. a royalty of 10 per cent.
on the net value of all contract material sold or used by TECO and/or
Industrial (other than contract material supplied to TECO by the Grantors
or any Licensees under the said patents) during the continuance of the
said licence and made in accordance with one or more of the said patents
(other than or in addition to Letters Patent No. 262,723) which should be
in force at the date of sale or use thereof by TECO and/or Industrial, such
royalty being payable in the case of contract material sold by TECO to
Industrial only upon its use or sale by Industrial.

Clause 4 contained price regulation provisions which I need not set out
in detail but which were said to throw light on the question of unlawful
restraint of trade.

Clause 5 provided for the payment of what was called ” compensation ”
and so far as material is in the following terms: –

” 5. If in any month during the continuance of the said Licence the
” aggregate quantity of contract material sold or used by TECO and
” Industrial (other than contract material supplied to TECO by the
” Grantors or any licensees under the said patents) shall exceed a quota
” of fifty kilograms (50 Kg.) TECO shall whether all or any of such
” material shall be subject to royalty hereunder or not pay to the
” Grantors compensation equal to thirty per cent. (30%) of the sum
” which represents the excess net value “.

The clause then proceeded to define ” excess net value “.

Clause 7 provided for monthly returns of contract material sold or used by
TECO and Industrial in the preceding month, and clause 8 provided for
the monthly payment of royalty and compensation.

Clause 12 gave TECO certain rights in respect to improvements upon or
modifications of the inventions the subject of the said patents.

I need not refer to any other provision of the deed of agreement.

The effect of clause 5 having regard to the division into iron grades and
steel grades and to the dates of the relevant patents is accurately summarised
by Pearson, J. as follows: —

” The effect of the compensation provisions over the period of
” Licence can be worked out in this way: ‘ 1st June, 1937, to March,
” ‘ 1939: Both the iron grades and the steel grades are protected by
” ‘ patents, and bear royalty, and also bear compensation on the excess
” ‘ over the quota. For the period March, 1939, to December, 1941, the
” ‘ iron grades are still protected by the patent No. 4 in the schedule,
” ‘ they do not bear royalty, but they bear compensation on the excess
” ‘ over quota. The steel grades are still protected by patents and still
” ‘ bear royalty and compensation on the excess over the quota. In the

” ‘ third period, December, 1941 to July, 1947, the iron grades are not
” ‘ protected by any patent (unless possibly there might be some later
” ‘ patents under clause 12), they do not bear royalty, but they do bear
” ‘ compensation on the excess over the quota. The steel grades are
” ‘ protected by patents, or at least one patent, and bear royalty and
” ‘ bear compensation on the excess over the quota. Then there is the
” ‘ fourth short period, July to September, 1947, and both the iron grades
” ‘ and the steel grades are unprotected by patents (unless conceivably
” ‘ there might be some later patents under clause 12) and they do not
” ‘ bear royalty but they do bear compensation on the excess over
” ‘ quota ‘ “.

It is convenient here to observe that between the 1st June, 1937, the date
of the Heads of Agreement, and the 2nd April, 1938, the output of TECO
was in every month in excess of 50 kilograms and in March, 1938, amounted
to 168 kilograms.

At the time of the execution of the agreements Mr. McLeod, who was
the managing director of TECO, raised no objection to the compensation
provisions of the agreement, but finding that he could not pass the burden
thereof on to his customers he was, even before the outbreak of war, protest-
ing against them.

Shortly before the outbreak of war the control of T.M.M.C. had passed
from German to British hands and Mr. McLeod, who had been making his
complaints to a Dr. Louis, an agent of Krupps, renewed them to Mr.
Wickman, who was connected with the persons then in control of T.M.M.C.

TECO, however, continued to make returns and to pay royalty and com-
pensation down to the outbreak of war. TECO then defaulted, but in
May, 1940, paid a sum in satisfaction of royalty and compensation due down
to the 31st December, 1939. TECO continued to make returns and pay
royalties, but not compensation, up to the 31st March, 1942. After that
date returns were made up to some date which I am unable to specify in
1943, but nothing further was paid for royalty or compensation prior to
the commencement of the first action.

Discussions appear to have gone on between Mr. McLeod for TECO
and Mr. Wickman or other representatives of T.M.M.C. in regard to com-
pensation. It seems clear that prior to the commencement of the first action
T.M.M.C. did not make any claim for compensation in respect of any period
after the 31st December, 1939, and in the first action TECO alleged a
binding agreement for cancellation of the obligation to pay such compensa-
tion. The evidence as to what transpired is very sketchy. It is conveniently
summarised by Devlin, J. in his judgment in the first action as follows: —

” The Plaintiff has set up by way of defence to that that there was
” an agreement between him and Mr. Wickman made on behalf of their
” respective companies that compensation should be washed out
” altogether. The evidence which he has given about it is so vague that
” Mr. Beyfus has said that if the matter was left there he could hardly
” rely upon it. Mr. McLeod first stated that it was said by Mr.
” Wickman on the 19th February, 1941, but Mr. Wickman was not in
” the country, he was in America on the 19th February, 1941. Mr.
” McLeod then said that though he might have been mistaken about the
” date, at any rate it was said by Mr. Wickman on some occasion in
” 1943. All he could remember about it was that Mr. Wickman had
” said that compensation was washed out and all that was wanted was a
” flat 10 per cent. royalty. He had no recollection really of the circum-
” stances in which it was said, and he really accepted that he had no
” real recollection of the interview at all. Accordingly, the Plaintiff
” has been forced to rely mainly upon the evidence of a Mr. Bateman,
” a witness called for the defendants, and Mr. Bateman’s evidence was
” in these terms on Day 5 at page 46, that on an occasion in 1942 he
” heard Mr. Wickman say to Mr. McLeod when this topic was being
” discussed words to this effect—he cannot of course remember the
” precise words—’ I have already told you that you will not be charged

” ‘ compensation and you will get a new agreement in which we hope
” ‘ there will not be a quota ‘. That evidence, taken in conjunction
” with the evidence of the Plaintiff, vague though it is, satisfies me that
” some agreement of some sort was made. When I use the word
” ‘ agreement ‘ I am using it now in a very broad sense; I am not
” attempting to consider the question of whether it is an agreement
” that is binding in law. But it is quite plain that something was said
” by Mr. Wickman to these licensees, something which resulted in their
” not paying compensation, at any rate for the duration of the war,
” and I have no doubt that the sort of thing that was said—and indeed
” it is the best evidence the Plaintiff could produce—is the sort of thing
” that Mr. Bateman heard said “.

On the 21st September, 1944, T.M.M.C. submitted to TECO the draft
of the proposed new agreement. It did not abolish quotas but it provided
for the distribution of any compensation payable by any of the licensees
who exceeded their quotas amongst those licensees who failed to achieve
their quota.

TECO did not accept the proposed new agreement and on the 17th
January, 1945, issued the writ in the first action claiming damages for fraud
or alternatively breach of warranty and damages for breaches of the contracts
contained in the two deeds of the 2nd April, 1938. In formulating their
claim for damages in paragraph 6 of the Statement of Claim they alleged
that they had paid as compensation £19,521 12s. 7d. and that thereafter it
had been agreed that no sums should be payable in respect of compensation
after the 31st December, 1939. By paragraph 10 of their Defence T.M.M.C.
denied any such agreement and in the alternative relied on the Statute of
Frauds. In the further alternative they alleged that if (which was denied)
any such agreement was made there was no consideration for it. By their
counterclaim they alleged breaches by TECO of their obligation to pay
royalties and compensation but stated that they did not desire to enforce
payment of compensation in respect of deliveries after the 31st December.
1939, but before the termination of hostilities.

It is to be observed that neither in their Statement of Claim nor in their
Reply did TECO allege any equitable bar to the enforcement of the relief
claimed by T.M.M.C. in their counterclaim though it must have been clear
to TECO that T.M.M.C. were claiming to be entitled as from the termina-
tion of hostilities to enforce their strict legal rights under the two deeds of
the 2nd April, 1938.

On the 20th January, 1950. Devlin, J., dismissed the Plaintiffs’ claim
except in respect of a minor breach of the agreement of 2nd April, 1938,
for which he awarded nominal damages of 40s. That part of his decision
is irrelevant to the matter now before your Lordships.

As regards the counterclaim, he negatived the assistance of any agreement
binding in law for the final termination of the payment of compensation.
I have already read one passage of his judgment dealing with this point.
He concluded his judgment on this point of the case by saying :

” The result is that I reject the view that there was any agreement
” that was intended to continue, which was to vary the original agree-
” ment. The agreement that was made was, in my view, one of two
” things. I do not think there was anything in it which could be said
” to limit its operation for the duration of the war, although that may
” have been the intention of the Defendant Company. But I think it
” fairly emerges, from the language which Mr. Wickman was heard to
” use, that it was intended to be a temporary modification pending the
” new agreement. Accordingly I think that when the new agreement
” was presented to Mr. McLeod and was rejected by him the temporary
” relief which he had been granted came to an end. I do not mean that
” it came at once to an end. It is obvious that it would be a reasonable
” provision that he should have some reasonable notice in order to make
” the necessary alterations. Compensation is now claimed from June.
” 1945, which is some nine months after the new agreement was pre-
” sented to him, and I think that gives him sufficient time. If I should

” be wrong about that view then I should hold that it was a temporary
” arrangement which was made subject to the right of the Defendant
” Company to terminate by giving reasonable notice. I should regard
” the presentation of a new agreement in such circumstances as
” amounting to a reasonable notice. I do not think that in this type
” of case it is necessary that the notice should be express. The rule that
” protects a party in circumstances such as these is a broad rule of equity
” and justice. It is not thought right that a man who has indicated that
” he is not going to insist upon his strict rights as a result of which the
” other party has altered his position, should be able to turn round at
” a minute’s notice and insist upon his rights, however inconvenient
” it may be to the party who thought he was temporarily relieved. Equity
” requires that he should give reasonable notice that he is going to
” resume his strict rights. But all that is necessary to comply with that
” broad rule of equity is that the notice should be such as to put an
” ordinary person clearly in mind that the other party is going to resume
” his strict rights. I think it is plain that when one man is served with
” a draft of a new agreement which shows that the compensation pro-
” visions are going to be set in force again he should understand from
” that that he must either accept the new agreement or return to the
” strict position under the old agreement.”

No such arrangement had been pleaded and had the judge thought that
it afforded any defence to the counterclaim he would no doubt have required
TECO to amend their reply, but on the view he formed of the matter any
equitable bar to the relief claimed by T.M.M.C. in their counterclaim had
been removed before the counterclaim was delivered. In the result T.M.M.C.
succeeded on their counterclaim.

TECO appealed to the Court of Appeal, who dismissed the appeal so
far as their claim in the action was concerned but they allowed it as far
as that part of the counterclaim was concerned which dealt with compensa-
tion. The Court, which consisted of Somervell, L.J., Singleton, L.J. and
myself, took a different view from that formed by Devlin, J. as to the result
in equity of the conversation between Mr. McLeod and Mr. Wickman and
of the conduct of T.M.M.C. in not claiming compensation after the 31st
December. 1939, at any time prior to the delivery of the counterclaim.
Romer, L.J. in the present action has cited relevant passages from the
judgments of Somervell, L.J. and myself in the first action and I will
content myself with three short citations. The first from the Judgment of
Somervell, L.J.: ” I think, against that background, the Plaintiffs were entitled
” to an express notice if the old terms were to be enforced again according
” to their literal provisions. If you read the correspondence, the Plaintiffs
” wrote objecting to the agreement; there was ample opportunity for the
” Defendants to say: ‘ Well, you know, if you do not like this agreement we
” ‘ shall withdraw our terms of not collecting the 30 per cent. and you will
” ‘ be back on the letter of the old pre-war contract. ‘ They not having done
” that, I do not think they can rely on anything until we come to the Counter-
” claim. That plainly indicates the view that they were taking. I think the
” Plaintiffs would be entitled to a reasonable time after that.” At page 71
of the record I say: ” I think that there was the plainest possible indication
” by the Defendants that they did not intend for the time being to claim
” compensation, and that they conveyed that intimation in terms which
” amounted to an invitation to the Plaintiffs to continue to conduct their
” business on the basis that until something was done, until notice was
” given, no royalty would be demanded. Now, as my Lord has said, the direct
” evidence that the Plaintiffs acted on that invitation may be somewhat
” scanty, but I respectfully agree with him in accepting the argument of
” Mr. Beyfus that the matter is really one of res ipsa loquitur, and I feel no
” doubt that the Plaintiffs carried on their business during the war on the
” basis that the compensation would not be demanded until due intimation
” of the intention so to do was given.” On page 72 I say: ” I think the
” Plaintiffs were entitled … to receive notice if the Defendants were
” proposing to enforce a right to compensation which had been in suspense
” for five years or thereabouts. So far as I can see, nothing equivalent to

” such notice was given before, as I have said, the counterclaim was delivered,
” and in my opinion, therefore, compensation did not become payable until
” a reasonable time after delivery of the counterclaim.”

It is, I think, plain from these judgments that at that time the Court of
Appeal was of opinion that the counterclaim was a sufficient notice and that
after the lapse of a reasonable time to enable TECO to make the necessary
adjustments in the conduct of their business compensation would be payable
without the necessity for further action by T.M.M.C. But our observations
on that point must be regarded as obiter since once we came to the conclusion
that (1) some positive action by TECO determining the temporary arrange-
ment was required and that a reasonable time must be allowed to enable
TECO to adjust their position after that action had been taken before
T.M.M.C. could enforce their strict legal rights, and (2) as no such positive
action had been taken before the delivery of the counterclaim, the counter-
claim so far as compensation was claimed must necessarily fail.

Reaching the conclusion that we did we should, I think, have required
TECO to amend their reply so as to raise the equitable defence which they
had successfully advanced in their arguments. Unfortunately we did not
do so.

In the course of his judgment Somervell, L.J. had dropped the hint that
nine months might be a reasonable time after which compensation would be
payable and on the 11th September, 1950, T.M.M.C. issued the writ in the
present action claiming compensation from the 1st January, 1947. By para-
graph 4 of their Defence TECO pleaded as follows: —

” 4. In or about March, 1943, and on an occasion prior thereto which
” the Defendants cannot now more particularly specify, the Plaintiffs
” agreed to forgo the payment of compensation by the Defendants until
” a reasonable time should elapse after notice given by the Plaintiffs to
” the Defendants to resume such payment. No such notice has been
” given to the Defendants. Alternatively, if such notice has been given
” to the Defendants, a reasonable time thereafter had not elapsed by
” 1st January, 1947, or by any date during the currency of the 1938
” Deeds “.

They do not now allege that if the counterclaim was a sufficient notice, the
action was brought prematurely.

In paragraphs 6 and 7 of the Defence they allege in the alternative that
clause 5 of the Agreement of the 2nd April, 1938, was invalid either (a) as
being an unreasonable and unnecessary restraint of TECO’s trade, or (b) as
being a penalty not recoverable at law, or (c) as offending against section 38
(1) (a) of the Patents and Designs Act, 1907.

On the 16th November, 1953, Pearson, J. rejected all these defences and
gave the judgment for T.M.M.C., the effect of which I have already indicated.

He dealt first with the allegation of unreasonable restraint of trade and
rejected it on the ground that the compensation clause did not contain
any restraint of trade but that even if it did, the provisions of the agreement
and licence as a whole were reasonable both as between the parties and in
relation to the public interest.

He rejected the penalty argument because, as he found, no penalty was
involved.

He also held that clause 5 did not infringe section 38 of the Patents and
Designs Act, 1907. I shall return to this subject later.

On the question of the sufficiency of the notice to determine the temporary
arrangement, he summarised his conclusion as follows: —

” The result of these cases ” (Hughes v. Metropolitan Railway Com-
pany 2 A.C. 439; Birmingham and District Land Company v. London
and North Western Railway Company 40 Ch. D. p. 268 ; Central London
Property Trust Limited v. High Trees House Limited [1947] 1 K.B. 130]
” in my opinion is that, where the rule of equity applies, the period of
” suspension comes to an end when it is in all the circumstances equitable

” that it should come to an end, and that is, normally at any rate,
” according to the circumstances, either at or within a reasonable time
” after the termination of the state of affairs which is the cause or basis
” of the suspension. It is not necessary that the person whose legal
” rights have been suspended should give a notice purporting to terminate
” the suspension, although of course it would be fair and reasonable
” and advisable for him to do so.

” In this case the state of affairs which was the cause or basis of the
” suspension would have been, according to the view taken in the court
” of first instance in the former action, the continuance of the nego-
” tiations for new licensing arrangements, but according to the view of
” the Court of Appeal the state of affairs was, I think, the attitude of
” T.M.M.C. in not requiring payment of the compensation for the time
” being. When that attitude was reversed, a reasonable time for
” resumption of compensation payments began to run. The making
” of the counterclaim in the first action clearly involved a reversal of
” the previous attitude, and therefore it started running a reasonable
” time for resumption of compensation payments “.

TECO appealed to the Court of Appeal, who allowed the appeal.
Romer, L.J., in whose judgment Somervell, L.J. and Birkett, L.J. concurred,
agreed with Pearson, J. on the issues of unreasonable restraint of trade
and penalty and agreed provisionally with his conclusion on the issue arising
under section 38 of the Patents and Designs Act, 1907, but stated that he
did not necessarily agree with all the reasoning upon which that conclusion
was founded. On the question of the issue as to the sufficiency of the
notice to terminate the temporary arrangement for suspension of compensa-
tion payment the Court of Appeal differed from Pearson, J. and accordingly
reversed his order and entered judgment for TECO with costs.

My Lords, Romer, L.J. based his conclusion on the notice point mainly
on the decision of the Privy Council in Canadian Pacific Railway v. The King
[I931] A.C. 414. He said: “In my opinion, although in many cases the
” equity, to which Hughes v. Metropolitan Railway Company gave recogni-
” tion and high authority, is satisfied by merely conforming to the terms
” in which Lord Cairns (and subsequently Lord Justice Bowen) formulated
” it, there are other cases where justice requires that the resumption of legal
” rights which have been suspended for a period must be preceded by a
” notification to the other party concerned specifying a fixed period of grace
” during which that party can put his house in order; and that in such
” cases a notification such as that will be a condition precedent to the valid
” reassumption of the owner’s legal rights.

” Such a case was Canadian Pacific Railway v. The King [1931] Appeal
” Cases, page 414″.

I must, therefore, examine closely what were the facts and what was the
reason for the decision in the case last cited. The Canadian Pacific Railway
had erected poles carrying telegraph wires on the roadway of a Canadian
Government railway at various times ranging from 1888 to 1911. There
were some negotiations between the parties as to parts of the telegraph
line but at no time was any written agreement ever concluded. As to
what was called the ” main telegraph line ” there was correspondence in
the course of which a representative of the Department of Justice of Canada
wrote on the 20th March, 1924, withdrawing offers which had been made
for settling the dispute between the parties and saying that wires and poles
must be removed. The letter ended: ” No time has been fixed within which
” you must effect this removal, but unless you agree to act at once in the
” matter, a date will be fixed by the Department of Railways and Canals.”
No such date was fixed nor were the wires and poles ever removed from
any section of the telegraph line. Accordingly in 1926 the Crown com-
menced proceedings against the Canadian Pacific Railway alleging trespass
and claiming damages. The trial judge found that as to the whole line
the telegraph poles were on the Crown land by the leave and licence of
the Crown but that the licence was not irrevocable. He gave leave to

apply for further directions. On appeal to the Supreme Court of Canada
that Court found that the Canadian Pacific Railway were trespassers except
as to a small section as to which they had an irrevocable licence. The Privy
Council agreed with the trial judge that as to the whole line the Canadian
Pacific Railway had a revocable licence, and held that it had not been
determined before the commencement of the proceedings. The Board then
proceeded to consider how that revocable licence could be determined.
Upon the facts of the case their Lordships were unable to find any founda-
tion for the application of any equitable doctrine in favour of the Canadian
Pacific Railway nor were they able to see anything upon which to found
an estoppel (see p. 430). They went on to say, at p. 432: ” Whether any
” and what restrictions exist on the power of a licensor to determine a
” revocable licence must, their Lordships think, depend upon the circum-
” stances of each case. The general proposition would appear to be that
” a licensee whose licence is revocable is entitled to reasonable notice of
” revocation.” They then proceeded to examine the facts of the particular case
and came to the conclusion that it was ” peculiarly a case in which grave
” injustice might ensue if the Crown were at liberty by the mere initiation
” of legal proceedings to determine summarily the rights of the appellant,
” and turn the appellant’s occupancy into trespass. For the appellant is not
” the only one concerned; the telegraph line is part of a system in the exist-
” ence and continuance of which the public has a very considerable interest.”
They accordingly concluded that the case was one in which the licence
could only be effectively ended after notice had been served upon the
Canadian Pacific Railway to determine the licence on such a specified date
in the future, as would give the Canadian Pacific Railway an interval of
time between the service of the notice and the specified date sufficient not
only to allow the removal of the poles and wires but also to make arrange-
ments for the continuance of the telegraph line on another site.

My Lords, I have, I think, sufficiently stated the circumstances to indicate
the very considerable differences between this case and the case now before
your Lordships. In the Canadian Pacific Railway case the Crown had,
at any rate, as regards one section, expressly stated they would name a
date by which the poles and wires must be removed. Moreover, a para-
mount public interest was involved. In these circumstances I cannot see
that the facts are so analogous that the decision can be safely taken as a
sure guide in the present case.

The Canadian Pacific Railway case was considered by the Court of Appeal
in Minister of Health v. Bellotti [1944] I K.B. 298, where Lord Greene,
M.R. said that the only proposition of general application which he could
extract from the Canadian Pacific Railway case was to be found in the
paragraph I have already cited, which reads : ” Whether any and what restric-
” tions exist on the power of a licensor to determine a revocable licence
” must, their Lordships think, depend upon the circumstances of each case.”
With that observation of the then Master of the Rolls I respectfully agree.

Before I turn to the circumstances of the present case, I must observe
that the Canadian Pacific Railway case was not determined on equitable
principles. Indeed, Lord Russell of Killowen, in delivering the judgment
of the Board, expressly pointed out that no equitable doctrine was involved.
It is no doubt true, as Mr. Beyfus argued, that any condition or restriction
affecting the power to determine a revocable licence which the law would
imply would be one which equity would regard as reasonable, but before
reaching a conclusion on the matter it seems desirable to look at the two
cases relied upon by the Court of Appeal in the first action as laying down
the principles applicable to the case.

In Hughes v. Metropolitan Railway Company 2 A.C. 439 the Respondents
sought to recover possession of premises for breach of a lessee’s covenant to
repair within six months after notice calling up him to do so. That notice
had been given on the 22nd October, 1874, but in December negotiations
started between the parties for the purchase by the appellant of the
respondents’ interest. These did not break down until the 31st December.

1874. On the 28th April, 1875, the writ in the action was issued. The
repairs were completed some time in June. The question arose whether,
having regard to the negotiations, they had been completed within due time.
It was held in this House that the negotiations had the effect of suspending
the notice and that the suspension did not cease to operate until the 31st
December, 1874. In the course of his judgment Lord Cairns stated the
equitable principle involved in these words: ” It was not argued at your
” Lordships’ Bar, and it could not be argued, that there was any right
” of a Court of Equity, or any practice of a Court of Equity, to give relief
” in cases of this kind, by way of mercy, or by way merely of saving
” property from forfeiture, but it is the first principle upon which all
” Courts of Equity proceed, that if parties who have entered into definite
” and distinct terms involving certain legal results—certain penalties or
” legal forfeiture—afterwards by their own act or with their own consent
” enter upon a course of negotiation which has the effect of leading one
” of the parties to suppose that the strict rights arising under the contract
” will not be enforced, or will be kept in suspense, or held in abeyance,
” the person who otherwise might have enforced those rights will not be
” allowed to enforce them where it would be inequitable having regard to
” the dealings which have thus taken place between the parties.”

In Birmingham and District Land Company v. London and North Western
Railway Company 40 Ch. D. 268 a similar question arose and the Court of
Appeal applied the principle as laid down by Lord Cairns in the passage
I have quoted. After citing it Bowen, L.J. pointed out that it had nothing
to do with forfeiture and went on: ” It seems to me to amount to this, that
” if persons who have contractual rights against others induce by their
” conduct those against whom they have such rights to believe that such
” rights will either not be enforced or will be kept in suspense or abeyance
” for some particular time, those persons will not be allowed by a Court
” of Equity to enforce the rights until such time has elapsed, without at
” all events placing the parties in the same position as they were before.
” That is the principle to be applied. I will not say it is not a principle
” that was recognised by Courts of Law as well as of Equity. It is not
” necessary to consider how far it was always a principle of common law.”
Though he does not, in terms, say so, it is implicit in what he says that
to make the principle applicable the party setting up the doctrine must
show that he has acted on the belief induced by the other party, but this
factor is of no importance in the instant case as it has been decided in
the first action that the principle is applicable. Does this principle afford
a defence to the claim in the present action?

I have already stated the findings of the Court of Appeal in the first action
as to the circumstances which brought the equity into operation. These
findings necessarily involve that in the present case equity required T.M.M.C.
to give some form of notice to TECO before compensation would become
payable. But it has never been decided that in every case notice should
be given before a temporary concession ceases to operate. It might, for
instance, cease automatically on the occurrence of a particular event. Still
less has any case decided that where notice is necessary it must take a
particular form.

Romer, L.J. seems to have taken the view that the counterclaim could
not be a notice because you cannot terminate an agreement by repudiating
it. With all respect, the fallacy of this argument consists in treating the
arrangement found to exist by the Court of Appeal in the first action as
an agreement binding in law. It was not an agreement, it was a voluntary
concession by T.M.M.C. which, for reasons of equity, the Court held
T.M.M.C. could not cease to allow without plain intimation to TECO of
their intention so to do. The counterclaim seems to me a plain intimation
of such change of intention operating as from the 1st June, 1945, and for
the future. None the less, the intimation would fall short of what was
required if it was the duty of T.M.M.C. to specify in the intimation the
reasonable time which they would allow after receipt of the intimation to
enable TECO to readjust their business to the altered conditions. I see

no reason why equity should impose this burden on T.M.M.C. Having
regard to the nature of the concession—a mere cessation of money payments
—and to the fact that TECO were the only persons in a position to judge
what time would reasonably be required to make such adjustments as were
necessary, I think that TECO were sufficiently protected by the fact that
if T.M.M.C. commenced proceedings before what the Court should determine
to be a reasonable time, the action would fail. I agree, therefore, in sub-
stance with Pearson, J. on this part of the case.

On the questions of unreasonable restraint of trade and penalty I find
myself in complete agreement with Romer, L.J. and I do not desire to add
anything to the reasons given by him and by your Lordships for rejecting
these defences.

I turn therefore to the question whether clause 5 of the agreement offends
against section 38 of the Patents and Designs Act, 1907. I had written
some lengthy observations on this question, but since doing so I have had
the opportunity of reading in print the observations of my noble and learned
friend, Lord Oaksey. I find myself so completely in agreement with him
that I will add no reasons of my own for rejecting this defence.

For the reasons I have given, I would allow the appeal and restore the
order of Pearson J.

Source: https://www.bailii.org/

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