Case No. IP-2021-000073

facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve. [19] The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. Judicial observations such as those of Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974] AC 235, 251 and Lord Diplock in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191, 201, quoted by Lord Carnwath JSC at para 110, have to be read and applied bearing that important point in mind. [20] Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party. [21] The fifth point concerns the facts known to the parties. When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties. Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties. [22] Sixthly, in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention. An example of such a case is Aberdeen City Council v Stewart Milne Group Ltd 2012 SC (UKSC) 240, where the court concluded that “any . . . approach” other than that which was adopted “would defeat the parties’ clear objectives”, but the conclusion was based on what the parties “had in mind when they entered into the contract”: see paras 21 and 22.”15.Mr Caddick KC for Paddington relies upon and draws my attention to some helpful guidance contained in Chapter 1 of Lewison’s The Interpretation of Contracts (7th ed), which he has set out in his skeleton argument, which seeks to draw together the relevant guidance of the higher courts. I have read that but in the interests of space will not set it out here.The implication of terms16.Similarly, I do not understand there to be any dispute about the law as regards the implication of terms in a contract. The leading authority remains Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742. However, a comprehensive and helpful summary of the principles deriving from this and other authorities was recently provided by Carr LJ (with whom Coulson LJ and King LJ agreed) in Yoo Design Services Limited v Iliv Realty Pte Limited [2021] EWCA Civ 560 at [47]-[52]. After cautioning at [47] that: “The implication of contractual terms involves a "different and altogether more ambitious undertaking" than the exercise of contractual interpretation which identifies the true meaning of the language in which the parties have expressed themselves: the interpolation of terms to deal with matters for which, ex hypothesi, the parties have themselves made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of the "extraordinary" power so to intervene…”,Carr LJ provided the following guidance at [51]:“[51] In summary, the relevant principles can be drawn together as follows:i) A term will not be implied unless, on an objective assessment of the terms of the contract, it is necessary to give business efficacy to the contract and/or on the basis of the obviousness test;ii) The business efficacy and the obviousness tests are alternative tests. However, it will be a rare (or unusual) case where one, but not the other, is satisfied;iii) The business efficacy test will only be satisfied if, without the term, the contract would lack commercial or practical coherence. Its application involves a value judgment;iv) The obviousness test will only be met when the implied term is so obvious that it goes without saying. It needs to be obvious not only that a term is to be implied, but precisely what that term (which must be capable of clear expression) is. It is vital to formulate the question to be posed by the officious bystander with the utmost care;v) A term will not be implied if it is inconsistent with an express term of the contract;vi) The implication of a term is not critically dependent on proof of an actual intention of the parties. If one is approaching the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time;vii) The question is to be assessed at the time that the contract was made: it is wrong to approach the question with the benefit of hindsight in the light of the particular issue that has in fact arisen. Nor is it enough to show that, had the parties foreseen the eventuality which in fact occurred, they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred;viii) The equity of a suggested implied term is an essential but not sufficient pre-condition for inclusion. A term should not be implied into a detailed commercial contract merely because it appears fair or merely because the court considers the parties would have agreed it if it had been suggested to them. The test is one of necessity, not reasonableness. That is a stringent test.”D. THE RDA17.The only evidence I have of the purpose and intention of the parties at the time the RDA was executed is the RDA itself. That provides in the first recital that the RDA “sets out the terms of an unwritten agreement dating back to the 1970’s between Paddington and Pixdene regarding the net merchandising income from the worldwide exploitation of the Paddington merchandising rights. This Agreement is intended to formalise into writing and therefore replace that unwritten agreement.”18.The second recital provides that “For the sake of clarity, Paddington maintains the right to vary the computation of the net payment to Pixdene, for example, but not limited to, it’s [sic] right to deduct further payments prior to payment to Pixdene such as for example, Paddington’s approved legal expenses, trademark expenses, marketing expenses or participation granted to third parties for services judged by Paddington to be of commercial advantage to Paddington, including but not limited to its, merchandising income. At no point however, shall such deductions be limited solely to the net income being paid to Pixdene.” This gives a very wide scope to Paddington to instruct the Agent to make deductions, so reducing the final share of the net Paddington Bear worldwide merchandising income paid by the Agent to Paddington. 19.I have already summarised the third recital and clause 1 of the RDA. It is important to keep in mind that Paddington’s obligation under clause 1 is to pay to Pixdene a defined share (10%) of that final share of the net Paddington Bear worldwide merchandising income paid by the Agent to Paddington. 20.Clause 2 provides for quarterly payments to Pixdene no later than 30 days after the last day of defined quarters in each calendar year. 21.Clause 3 provides that the RDA “constitutes a valid and binding obligation on each party, enforceable in accordance with its terms and shall bind and inure to the benefit of the parties’ successors and assigns”. 22.Clause 4 provides that the RDA is governed by the law of England and Wales with a submission to the exclusive jurisdiction of the Courts of England.23.Clause 5 is the Audit clause with which we are concerned.24.Clause 6 provides that the RDA may be amended only in writing as mutually agreed by the parties. It also provides that it may not be assigned by Pixdene without Paddington’s prior consent in writing, not to be unreasonably withheld, but that Paddington “shall be entitled to freely assign this Agreement”. Related to this is Clause 9, a wide-ranging survival clause. It is clear from these provisions that it was intended by the parties that (i) Paddington should not be constrained from selling, licensing, leasing, transferring or assigning its rights in the merchandising of Paddington Bear, nor from changes in its own ownership, share allocation or name; and (ii) nor should Pixdene’s rights under the RDA be defeated by such actions. 25.Clause 7 provides Paddington with a “Right of First Refusal” and a “Right of Last Refusal”. The former applies if Pixdene has a third party offer to acquire its participation rights in the Paddington merchandising. It provides that if Pixdene wishes to dispose of such rights, then it shall give written notice to Paddington “and immediately thereafter negotiate with Paddington with respect to such disposal. If after the expiration of fifteen (15) business days following notice from Pixdene to Paddington, no agreement has been reached then Pixdene shall be free to negotiate elsewhere subject to Paddington’s Right of Last Refusal set out in clause 7(b) below”.26.The Right of Last Refusal is expressed in clause 7(b) to mean “if Pixdene and Paddington fail to reach an agreement pursuant to Paddington’s Right of First Refusal and Pixdene receives any bona fide offer for its participation rights in the Paddington Merchandising, Pixdene shall notify Paddington in writing of such offer specifying the particulars thereof, including the name of the offeror, the proposed financial terms and all other terms of such offer. During the period of fifteen (15) business days after said notice, Paddington shall have the exclusive option to acquire the participation rights upon the same financial terms and such other terms as are set forth in such notice… otherwise Pixdene shall be free to accept said bona fide offer, provided that if such offer is not consummated within thirty (30) calendar days following the expiration of said fifteen (15) day period, Paddington’s option shall revive and shall apply to such proposed offer again and to each and every further offer or offers at any time received by Pixdene”.27.Clause 7(c) amounts to a call option by Paddington: “Pixdene shall, if requested by Paddington to do so in writing, sell its participation rights in the Paddington Merchandising… to Paddington in the event that the shares in Paddington and/or the Paddington Merchandising is sold to a third party (unrelated to the Bond family).”28.I have set out those details of Clause 7 not because they have any direct relevance to the matters that I must determine, but because they are non-standard provisions of some complexity and sophistication, which appear to have been carefully and professionally drafted and closely negotiated. This provides me with some information about the context of the drafting and agreement of the RDA, which otherwise is a relatively short and simple agreement. I will come back to this. 29.Clause 8 provides that the RDA is the “final, complete and exclusive” statement of the terms of the Agreement. Neither party rely on it as both seek the Court to imply terms.E. DETERMINATION OF ISSUES30.Paddington makes the general submission that Pixdene is asking the court to construe clause 5 in a way that gives rise to additional rights and obligations which are “legally, logically and linguistically different” to the plain meaning of the words of clause 5, without any justification. It asks me to carry out my task of construing the clause with the context in mind, which includes that:i)The RDA was a professionally drafted agreement between two legally represented parties;ii)It expressly says that it is intended to “formalise” the parties’ rights and obligations; andiii)In the absence of any ambiguity, the words chosen by the parties should be given their natural meaning.31.I accept (ii) which is clear on the face of the RDA, and (iii) which I have already identified as a relevant principle in my section on the relevant law. In relation to (i), I have no direct evidence on the point, but am satisfied on the balance of probabilities that Pixdene, at least, was legally represented at the time, for the following reasons: (a) as I have set out, the RDA, although short, contains some sophisticated and non-standard provisions which strongly suggest they have been professionally drafted and negotiated, particularly in relation to rights of first refusal etc; (b) the copy of the RDA in the bundle discloses that on 13 March 2013, the day after execution of the RDA, it was faxed from Suttons Solicitors, who act for Pixdene in these proceedings and I infer were also advising Pixdene on the RDA; and (c) the RDA gives Pixdene’s address as “c/o 15 Thayer Street, W1U 3JX” which was the address of Suttons Solicitors at the time.32.However also part of the context is that, as Pixdene submits, clause 5 is drafted for Pixdene’s benefit. Without this audit right, Pixdene would have no way of verifying whether Paddington had complied with its obligation to pay Pixdene royalties under clause 1 of the RDA.33.I will deal with the issues out of order, as I find it convenient to address them this way.Who can inspect?34.There is no dispute that a third party auditor can inspect pursuant to clause 5. The question of whether Pixdene also has such a right is not identified as an issue in the case and Pixdene does not explicitly argue that it does. However, as I will go on to consider, Pixdene argues that clause 5 should be construed to require Paddington to send to Pixdene in advance of inspection all the documents which it is required to make available for inspection, which is tantamount to inspection itself (or some hitherto unknown concept of “pre-inspection”, perhaps), so there is a blurring of the lines there which, given the difficult relationship between the parties, I consider should be drawn sharply. Accordingly I will deal with it.35.The language of Clause 5 specifies only a right for a third party auditor to inspect Paddington’s documents. It does not specify that Pixdene may inspect those documents, although it would be easy to do so. There must be a reason for that drafting choice, and the most obvious reason which presents itself is that the parties agreed that Pixdene should not have direct access to Paddington’s documents. I agree with Paddington that it is relevant that the parties agreed the wording of clause 5 not only to exclude reference to Pixdene, but also to specify that a third party auditor had right of inspection. In other words, not any auditor (such as, for example, an internal auditor at Pixdene). “Third party” are therefore words of limitation which, in my judgment, must have been chosen to ensure that whoever was coming in to inspect those documents for the purposes of audit, was independent of Pixdene (and, indeed, Paddington). The language is clear and, in my judgment, unambiguous in this respect, and I am satisfied it cannot be construed as providing Pixdene with a right of inspection. 36.Nonetheless should such a right be implied? The facts that Pixdene was not explicitly given a right to inspect, and that the parties agreed that any auditor must be a third party, militate against the implication of such a term in my judgment, because I agree with Paddington’s submission that clause 5 appears to be deliberately constructed to keep Pixdene away from Paddington’s documentation, whilst putting in place a mechanism for Pixdene to ensure that Paddington has complied with its obligations under the RDA. The implication of a term giving Pixdene a right of inspection is therefore neither obvious nor necessary but the opposite: it would, in fact, undermine the very purpose of the careful choice of language in clause 5.Issue 2(a) – Does clause 5 require Paddington to provide Pixdene with copies of inspected documents?37.Pixdene’s position is that it is entitled to copies, including electronic copies, of all documents inspected as part of an audit under Clause 5. In relation to the provision of copies to Pixdene (as distinct from provision of copies to the auditor, which I will deal with shortly), it submits:i)Copies would assist Pixdene in taking legal advice as to whether it had sufficient basis to bring a claim in relation to underpayments identified by the auditor. It makes commercial sense for Pixdene to be provided with copies during the audit to reduce costs through the provision of advice at an early stage and by pleading claims by reference to supporting documents and facts drawn from such documents;ii)It is critical for Pixdene to receive copies of inspected documents to enforce its rights pursuant to the RDA.38.Paddington’s position is that: i)Clause 5 means what it says. It gives no right to inspect to Pixdene itself (as I have found); andii)Pixdene’s right for a third party auditor to inspect does not require and cannot be construed as requiring Paddington to provide Pixdene with copies of the relevant documents either during or in advance of an inspection, as it is silent on the point, and should not be implied. Discussion and determination39.I have already held that clause 5 gives Pixdene no right to inspect, no such right should be implied, and I have found that the parties’ purpose in agreeing clause 5 in the form it is in, is to keep Pixdene away from Paddington’s information whilst putting in place a mechanism for Pixdene to ensure Paddington’s compliance with its obligations under the RDA. 40.Clause 5 is silent on the issue of whether Paddington is obliged to provide copies of documents for inspection to Pixdene. I agree that the wording cannot be construed to contain such an obligation, and that it should not be implied, for the same reasons that I have found no right of Pixdene to inspect: because it would thwart the purpose of clause 5.41.Whether it might be convenient, or cost-effective, or of assistance for Pixdene to have copies of Paddington’s inspected documents, as Pixdene submits, is not the point. That is not what the parties agreed in the RDA, and it would fatally undermine the purpose for which clause 5 was constructed. It follows that I am satisfied that clause 5 does not require Paddington to provide Pixdene with any copies of documents made available for inspection by the third party auditor.42.In relation to Pixdene’s submission that it is “critical” for Pixdene to receive copies of inspected documents to enforce its rights pursuant to the RDA, I do not accept that submission. In my judgment, it is critical that Pixdene understands the auditor’s conclusions and the basis upon which those have been reached, but that does not require disclosure of documents by Paddington to Pixdene. I am satisfied that it is likely that initial legal advice can be obtained on the basis of the auditor’s report, which may be sufficient to produce a letter of claim or to particularise a claim. If copies of certain of the inspected documents are necessary to enable Pixdene properly to consider or bring proceedings for enforcement, then Pixdene can seek copy documents from Paddington or make an application for pre-action disclosure or obtain them in disclosure in enforcement proceedings.Issue 4 – Is an audit inspection under clause 5 limited to a physical on-site inspection of documents in Paddington’s offices, during normal working hours?43.Pixdene submits that Paddington should provide it and/or the third party auditor with copy documents before attending at Paddington’s offices for inspection “with any questions to be answered”, otherwise it might necessitate several visits to the data room, increasing the costs and logistical burden of an audit. 44.Paddington submits that the notice is necessary so that Paddington has time to assemble the relevant documentation ready for inspection by the third party auditor, and that the only possible interpretation of the reference to “normal working hours” in clause 5 is that Pixdene can only insist on an inspection in the presence of Paddington’s representatives and/or under Paddington’s control. It submits there would be no need to refer to “normal working hours” if the inspection could take place without such representatives being present.45.Paddington also submits that although there is no reference to the venue being ‘Paddington’s offices’ or otherwise being specified, it is obvious that the inspection is to take place at a venue of Paddington’s choosing. In particular, it submits, there is nothing to suggest that Paddington would have to transport all its records to some other location (such as the third party auditor’s offices) to enable the auditor to carry out the inspection. Discussion and determination46.I accept Paddington’s submission that the fact that clause 5 provides that inspection requires prior written notice, and is to be carried out “during normal working hours”, shows that the parties at the time of agreeing the clause, were envisaging (i) a physical inspection of documents by the third party auditor (ii) at a place under Paddington’s control. If inspection of documents was envisaged by setting up a data room at the auditor’s offices, for example, then it would not be necessary to specify that inspection could take place only “during normal working hours” as there would be nothing to stop the auditor from working late or at weekends, for example. I am also satisfied that is what the reasonable person with all the relevant knowledge at the time of the RDA would have understood the parties to mean by the language. These are Paddington’s documents to which access is being strictly controlled by Paddington, as agreed by the parties in clause 5.47.Clause 5 does not specify the venue for inspection, but I do not have difficulty in construing the clause as meaning any premises under Paddington’s control which Paddington may reasonably choose. The RDA is governed by the laws of England and Wales so I doubt that setting up the data room outside of the jurisdiction was envisaged or would be so understood by the reasonable man. 48.I do not agree with Paddington’s submission that clause 5 can properly be construed as obliging the third party auditor to inspect only in the presence of Paddington’s representatives: I am satisfied that the fact that the parties specified an independent, third party auditor, with his own professional obligations, would be understood by that reasonable person to mean that such a person can be trusted to carry out the inspection professionally without requiring further supervision. Nor do I think such a provision should be implied as it is neither necessary (for the reasons I have given) nor is it obvious. To the contrary, it would be quite usual to usher such an auditor into the data room and let him get on with it without supervision, to be ushered out again at the end of normal working hours. 49.Nor can I understand how clause 5 can possibly be construed to mean that Paddington is obliged to send the documents to the third party auditor (in some sort of pre-inspection?) in advance of making the documents available for inspection, thereby rendering the actual inspection (and notice, and requirement for normal working hours) pointless. That drives a coach and horses through the purpose of this carefully chosen language of clause 5, as the reasonable man would identify. I reject Pixdene’s submission on this point. Issue 6 – What information is the third party auditor entitled to share with Pixdene?50.Pixdene’s position is that the auditor may share with Pixdene all information obtained during the audit. It submits that:i)there is no distinction drawn in clause 5 between information which the auditor may share and the auditor may not share;ii)there is no need to prevent Pixdene from being provided with confidential information as Pixdene has no interest in disclosing that information to third parties, and Paddington is adequately protected by the law in relation to breach of confidence;iii)without the right to share documents with its client, the clause is unworkable as the auditor may require instructions from Pixdene in relation to information and documents being audited: to contextualise that information; to understand Pixdene’s rights and to focus the auditor’s efforts on the issues of the greatest importance to Pixdene; andiv)an interpretation which does not allow the auditor to share information gained during the audit is open to abuse by Paddington by “incentivis[ing] it to over-designate information as confidential”.51.Paddington accepts that it is implicit in the entitlement for a third party auditor to inspect documents for the purposes of auditing compliance, that it is also entitled to report to Pixdene whether or not Paddington has complied with the RDA, the amount of any underpayment by Paddington, and the basis for such a conclusion. However, it submits there is nothing to suggest that the auditor can go further and share with Pixdene any other information, and in particular confidential or privileged information, derived from the inspection. It submits, as I have accepted, that the intention in imposing a requirement for a “third party” auditor must have been to keep Paddington’s documents and confidential information away from Pixdene.Discussion and determination52.If the parties at the time of entry into the RDA considered that Pixdene should have full access to the information that the auditor was given the right to inspect, there seems to be no reason why it would not have given Pixdene a right to inspect those documents itself. I have explained why I am satisfied that clause 5 should not be construed as giving such a right and nor should such a right be implied. 53.Whether or not there is a need to keep Pixdene away from Paddington’s information, as Pixdene submits there is not, is not relevant in my judgment. It is enough that the parties have, as I have found, agreed clause 5 in order to keep Pixdene away from Paddington’s information and allow inspection only by a third party auditor. That was their intention and the reason they agreed the language of clause 5 as they did.54.For the same reason, nor do I accept Pixdene’s submission that clause 5 is unworkable, commercially incoherent or inefficacious without implying a right for Pixdene to receive copies of the documents from the auditor. Pixdene has all the information it needs to instruct the auditor, and the context for the audit is found in the RDA. The auditor’s job is well-defined in clause 5 – to verify Paddington’s compliance with the RDA. The focus of that is, of course, to verify that Paddington has paid to Pixdene, pursuant to clause 1, 10% of the final share of the net Paddington Bear worldwide merchandising income paid by the Agent to Paddington, after payment by the Agent of all prior participations in Paddington Bear worldwide merchandising revenue and all other deductions. Accordingly, I do not understand Pixdene’s submission that it needs access to documents to ensure that the auditor “understands Pixdene’s rights” and so Pixdene can “focus the auditor’s efforts on the issues of the greatest importance to Pixdene”. Pixdene’s rights flow from the RDA, not from any other of the inspected documents, and whatever issues may be of the greatest importance to Pixdene, clause 5 only provides for inspection of Paddington’s documents pursuant to an audit right “to verify Paddington’s compliance with the RDA”.55.For those reasons, I do not consider that clause 5 provides a blanket right to Pixdene to copies of inspected documents from the auditor. 56.However clause 5 is not, in my view, entirely silent on the question of disclosure of information from the third party auditor. I am satisfied that the parties must have intended that the third party auditor permitted to inspect under clause 5 would be entitled to share with Pixdene:i)the conclusion reached on the audit (i.e. whether or not Paddington has complied with its obligations under the RDA); ii)the basis of that conclusion, and if an underpayment is found;iii)what further sums are due from Paddington; and iv)the basis of calculation of such sums; as this is implicit, in my view, in a common sense understanding of the meaning and purpose of an audit. 57.As Paddington accepts, permitting a third party auditor to inspect for the purposes of assessing compliance of its obligations to Pixdene must carry with it the intention that the auditor will report his findings. Accordingly, I am satisfied either that the reasonable person with all the background knowledge at the time would have understood the language of clause 5 to mean that the auditor would be permitted to disclose to Pixdene only