CL-2022-000507 - [2025] EWHC 2505 (Comm)

“The doctrine of “severability” in the context of total failure of basis ‘allows courts to split up the total payment made and allocate it to particular parts of the benefit expected in return. Where only part of the expected benefit has been conferred, it can be said that there has been a total failure of basis in respect of that part of the payment relating to the benefit still outstanding’ (Goff & Jones, §12-26).”

“It is not a requirement that ‘the contract must expressly distribute the consideration between different elements of counter-performance: all that is needed is that the court be able to identify distinct elements of payment in respect of which there has been a failure of basis’ (Goff & Jones, §12-27 citing Giedo Van der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB) at §§302– 304 and 323).”

“The test in each case as to whether a contract is severable is ‘whether as a matter of practical common sense the court considers that it is able to apportion on objective analysis of the nature of the contract and the consideration’ Dargamo Holdings v Avonwick Holdings [2021] EWCA Civ 1149 [2021] 2 CLC 583 (per Carr LJ at §104, quoting §297 of Giedo).”

Clause 3 grants the compendious “Airline Rights” in consideration for “Airline Royalties.” Clause 8.1 provides for a payment obligation (with a floor) “in consideration of the Airline Rights”. The “Airline Rights” comprise rights to use and sub-license (clause 3.1) (and through clause 9 the right to transfer those rights in specified circumstances) and rights of exclusivity (clauses 3.2 to 3.4).

On the natural reading of the introductory words to both clauses 3.1 and 8.1, and given the definition of “Airline Royalties”, the “Airline Royalties” are granted in consideration of the full package of Airline Rights. The definition of “Airline Royalties” does not distinguish between the MR payment provision in clause 8.6, and the amounts calculated by reference to clause 8.1(a) to (c), to the extent these lead to a figure exceeding the MR. While clause 3.1 provides that the Airline Royalties are paid in consideration of the use rights alone, Mr Toledano KC accepted that, read as a whole, the TMLA provided that the Airline Royalties were paid in return for the full bundle of Airline Rights.

I do not accept the submission that this construction requires the words “each and every” to be read into the words “in consideration of the Airline Rights”. “Airline Rights” is a defined term, and the natural meaning of a provision that a sum is paid “in consideration of the Airline Rights” is that it is paid in respect of all the rights falling within that definition, not some unspecified sub-set of them.

That conclusion is also strongly supported by the history of the TMLA, which, prior to November 2014, contained the same use and exclusivity rights, and a version of clause 8.1, but no MR. At that stage there could be no suggestion that the Exclusivity Obligation was the subject of a separate payment obligation from the use rights. The November 2014 TMLA introduced the MR in the form of the floor to ensure payment was received even if there was no use. However, there is nothing to suggest the amendments were intended to create separate payment obligations where previously there had been one.

It is also consistent with the conclusions of the Court of Appeal, who observed that the TMLA gives Alaska the right to use the Marks to the extent it wishes to do so, whether it chooses to avail itself of that right or not. That right to use forms part of the consideration for which the MR was payable, as the Court of Appeal noted.

On Alaska’s construction, as confirmed in oral submissions, if Alaska used the Marks during a financial year in which there was a breach of the Exclusivity Obligation, Virgin would remain entitled to “Gross Sales”-assessed royalty payments under clause 8.1. If these equalled or exceeded the amount of the MR, the MR would be of no relevance and Alaska could point to no amount referable to the Exclusivity Obligation which ceased to be payable or became recoverable on total failure of consideration grounds.

Where royalties calculated under clauses 8.1(a) to (c) fell below the MR, the severable payment solely referable to the Exclusivity Obligation would be the amount of the shortfall, and thus inherently variable.

The suggestion that the TMLA provides for a severable payment solely referable to the Exclusivity Obligation which would vary in amount, and in some cases involve no payment at all, is a commercially very surprising outcome.

These difficulties arise because what Alaska is trying to treat as a separable and severable payment is not a payment at all, but a floor forming part of the definition of the single payment obligation created by clause 8.1.

Reliance was placed on reference to “Gross Sales” in clause 8.1 and the associated definitions which it was suggested showed that payments under clause 8.1(a) to (c) were solely in consideration of actual use. “Gross Sales” is defined as amounts received “in connection with the carrying on of the Licensed Activities”, which are in turn defined as “the activities … in connection with which [Alaska] and its subsidiaries are permitted to use the Marks”. Clause 8.1 does not, therefore support the conclusion that clause 8.1 is intended to calculate a payment made solely in return for actual use (such that the consideration referable to exclusivity must be found elsewhere). (emphasis added)

The fact that the MR is a fixed amount does not support the conclusion that it is paid solely for the Exclusivity Obligation. The MR is (necessarily) a fixed amount because it represents the floor of the amount payable for the Airline Rights.

The structure of clause 8.6, with Alaska being obliged to pay the higher of the two alternatives in (a) and (b), does not assist Alaska. Indeed the fact that where the clause 8.1 calculation (i.e. the amount Alaska says is payable for actual use) is higher than the MR, nothing additional is paid (and therefore on Alaska’s case nothing solely referable to the Exclusivity) tells against Alaska’s construction.

The mechanism for payment (quarterly accounting and an annual adjustment at the end of Alaska’s financial year by reference to the MR where appropriate) does not assist Alaska. That inevitably follows from the MR being an annual floor for royalty payments.

Finally, Alaska made the point on a number of occasions that Virgin had accepted for the purposes of this hearing that there was an arguable repudiatory breach, i.e. one which deprived Alaska of “substantially the whole benefit of” the TMLA (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, 66). However, it is very far from the case that a breach sufficient to satisfy the Hong Kong Fir test and permit prospective discharge of a contract for breach of an innominate term means that there has been a total failure of consideration in respect of any contractual performance by the party in repudiatory breach prior to termination.

That analysis affords no commercial value to Alaska’s right to use the Marks (and the passages in Virgin’s pleadings in the previous action relied upon as adopting Alaska’s submission define the benefits in terms of Alaska being “permitted” to use the Marks rather than simply actual use). One benefit of the continuing right to use is that it remained open to Alaska to change its mind and use the Marks if it wished.

Further, it was also open to Alaska to sell the licence along with a substantial part of its business (clause 9.1.2) to a purchaser who might well attach value to the right to use the Marks and to exclude others from doing so, and to use the licence as security (clauses 9.1.3 and 9.2).

Alaska suggested that Virgin had already conceded that the only commercial benefits which arose from the licence were actual use and exclusivity, relying on submissions made in the prior proceedings. I was not assisted by the references to the submissions made in the prior proceedings, which did not always clearly distinguish between issues of the right to use and exclusivity, and had no reason to do so. However, Virgin’s submissions clearly identified one of the benefits to Alaska as “the right to use the Virgin brand again in future should it wish to do so” (paragraph 47(1) of its appeal skeleton and transcript 6 March 2024 page 118 lines 18-23).

I have addressed Alaska’s reliance on [32] of the Court of Appeal judgment above. Alaska relied on an analogy drawn by Virgin in prior proceedings with a lease of real property, submitting “it is not …typical that a lease will require payment where the property is not used and the landlord is simultaneously entitled to lease it for occupation by a third party”. However the analogy is not apt. A lease of real property is rivalrous, in the sense that leasing the property to one party necessarily precludes leasing the same property to use by another in the same period. However, trademarks can be the subject of more than one (non-exclusive) licence, but the licensee still benefits from a right to use not available to non-licensees.