23 October 2018

A recent Court of Session case about intellectual property highlights that even Pre-action Protocol correspondence cannot cure a failure to plead fair notice or a legally relevant case. BTO Associate Lynn Richmond discusses.

The recent Court of Session decision in Westerton (UK) Limited v Edge Energy Limited has served as a reminder to practitioners of the standard of pleadings required in the Commercial Court and the need to avoid any ambiguity in contracts that regulate the use of Intellectual Property (“IP”).

Taking shortly, the parties entered into a contract to develop certain tools for the oil and gas industry. The contract sought to regulate the ownership and use of the parties’ IP rights. The Pursuer claimed that the Defender had misused its IP. Their claim was stated on the basis of asserted breaches of the contract and not any wider claim for infringement of its IP (or any other property rights) under the general law. The Defender took issue with the relevancy and specification of the Pursuer’s pleadings.

It was said against the Defender that its criticisms of the Pursuer’s pleadings were outdated “pleading points” that should not be entertained in the Commercial Court. Indeed, it is well known that the approach in actions on the Commercial Roll is that pleadings are to be in “abbreviated form” and the circumstances of the action “summarised”. The basis for this approach is that disputes being heard in the commercial court ought to be fully formed before they arrive at court, having been fully discussed in pre-litigation communication. Before action is raised, parties should be well aware of each other’s’ case. Overriding these considerations, however, is a requirement of fair notice. Departing from the traditional rules of pleading often raises anxiety in pleaders. Just how much specification is required for “fair notice”?

The court found, as a matter of contractual interpretation, that the specified clause in the contract between the parties could not found the breach of contract alleged by the Pursuer in respect of the Intellectual Property. The contractual claim was therefore irrelevant. It was argued for the Pursuer that the drawing of a distinction between contractual rights and property rights under the general law was an artificial one. Reliance was placed on its fourth plea in law, which was stated widely and proceeded on the basis that the Defender was simply “obliged” not to use the IP in question. The plea was not restricted simply to contractual obligations. An inference was drawn that the Pursuer’s position was that the plea was sufficiently wide to catch a breach of a property right and thus a non-contractual claim was relevantly pled.

This approach was given short shrift by the court. The Commercial Court is no different to any other and a defender is entitled to fair notice of a relevant claim. The averments of fact were to be looked at when considering relevance, not the pleas in the law. If the claim advanced by the Pursuer was one of a breach of property rights under the general law, the Defender was entitled to fair notice of that claim and of the property right said to have been breached. The nature of the rights said to be infringed would have a direct impact upon any defence open to the Defender. Whilst the Pursuer may have given sufficient notice of the acts which it considered to be a misuse of its IP, without properly specifying a relevant breach of its rights it had not given fair notice of its claim. Such lack of fair notice went beyond a mere pleading point but, rather, to the heart of the Pursuer’s claim.

As a final point, Lord Bannatyne notes that in the event he was against the Pursuer he had been invited by it to put the case out by order to address the issue of relevancy. This would presumably have been done by way of seeking leave to amend. His Lordship declined to do so and, instead, dismissed the action in its entirety. It is noted that the Pursuer was well aware of the argument it was facing and had numerous opportunities to seek leave to amend to attempt to cure the deficiencies in its pleadings. It chose not to do so and, rather, debated the arguments. There is an inference that there might just have been some sympathy shown to a motion for leave to amend if it had been made even during the debate and, indeed, his Lordship indicates that he would have allowed amendment if the only issue of relevancy and specification had been one not so pivotal to the Pursuer’s case. However, the opportunities to seek leave to amend in respect of the central issue having been missed, the decision shows that the court will be reluctant to exercise its discretion to afford a party a further life line if the deficiencies in its pleadings go to the heart of its case.

Not only is the decision a timely reminder to litigators that relevant and specific pleadings are still necessary even in commercial actions, it also underlines the need for clarity and tight drafting in intellectual property clauses and contracts.

IP rights are one of the most common property rights which are owned by one party and licensed for use by another party. Contracts granting positive rights to third parties for the use of IPR should clearly set out the parameters of the rights granted. However the Westerton case highlights the importance of equally specific drafting when an owner of IP rights seeks to reserve rights and prevent third parties from using these rights without proper authorisation.

Lord Bannatyne was critical of the Pursuer’s conflation of the right of ownership and the right of use and those drafting contract should be aware of the perils of the “it goes without saying” approach.

The decision of the court also serves to highlight the distinction between contractual and proprietary rights. The contract in question clearly sets out the parties’ proprietary rights. It was, however, silent on regulation of use of the property in question. The Pursuer was therefore unable to establish a breach of contract for want of a contractual clause regulating use.

Interestingly, the Pursuer did not seek to argue that a clause restricting use should be implied into the contract (although it appears unlikely that this argument would have gained much traction). It seems unlikely that the Pursuer would have been able to meet the necessary test to imply the necessary terms into the contract given the very clear differences that are usually drawn in respect of the ownership and use of IPR.

The Westerton decision is therefore not as surprising as it first may seem and is a stark reminder to both litigators and non-contentious lawyers to ensure that contracts regulating IP rights are clear and unambiguous.