Lonsdale v Leofelis: Battle of the breaches

The High Court has recently found in favour of the Lonsdale group in two related

applications for summary judgement in Leofelis SA v. Lonsdale Sports Ltd [2012] EWHC

485 (Ch) concerning a claim brought by Leofelis for damages arising from Lonsdale’s

repudiatory breach of a trade mark license agreement.

The decision has ramifications for both claims of repudiatory breach as well as for any

damages which may be recovered.

Background

A party is able to terminate a contract and claim damages where the other commits a

repudiatory breach. However, where the terminating party is subsequently unable to prove the

repudiatory breach, it may itself be liable in a counterclaim by the non-terminating party for

breach of contract.

Where a terminating party terminates for the wrong reason, or later discovers a better ground

for termination, it is entitled to retrospectively validate its termination on a different ground.

In Boston Deep Sea Fishing & Ice Co v. Ansell [1888] 39 Ch. D. 339, an employer was able

to rely on the employee’s repudiatory conduct to justify dismissal even though at the time of

dismissal, that conduct was unknown to the employer.

This was reiterated by Greer J in Taylor v. Oakes, Roncoroni & Co. [1922] 127 LT 267 at

269 as ‘a long established rule of law that a contracting party, who, after he has become

entitled to refuse performance of his contractual obligations, gives a wrong reason for his

refusal, does not thereby deprive himself of a justification which in fact existed, whether he

was aware of it or not.’

Lonesdale v. Leofelis

Lonsdale granted Leofelis an exclusive licence to use trademarks within certain European

territories in return for royalties. Leofelis sublicensed these marks to manufacturers in return

for royalties itself, with the written agreement of Lonsdale, as required. The agreement was

due to expire in 2008, but was renewable to 2014 at the option of Leofelis.

In September 2007, Leofelis purported to terminate the agreement on the basis that Lonsdale

had obtained an injunction against a German licensee of Leofelis, which it claimed repudiated

the agreement. However, Lonsdale denied repudiation and demanded that Leofelis continue

its payment of royalties. On appeal, it was held that Leofelis did not have valid grounds to

terminate the agreement as Lonsdale was entitled to obtain the injunction in Germany.

Lonsdale subsequently brought a claim for breach of contract against Leofelis and applied for

summary judgement. Through disclosure, Leofelis learned that Lonsdale had, in fact,

breached the exclusive agreement by licensing the relevant marks to another party, something

completely unknown to Leofelis at the time their own licence was agreed and later,

terminated. Leofelis argued, in its counterclaim, that its termination was retrospectively valid

on different grounds to those it relied upon at the time. While this was accepted by the court,

Leofelis was only entitled to damages up to the point of termination only.

The reasoning

As a matter of logic, the court accepted that the agreement would have been terminated in

any event. Notwithstanding the valid ground for termination, Leofelis had brought the

agreement to an end for other reasons as well, thereby limiting any royalties it would have

received.

To ignore the invalid termination would amount to awarding Leofelis a windfall which did

not represent its true losses. The loss of royalties from 2007 to 2008 was not caused by

Lonsdale’s repidiatory breach; in fact they were caused by the Leofelis’ termination. Ross J

accepted that the court should not award damages on a false factual matrix, for the remaining

term of the agreement or until 2014, knowing full well that the contract would not have lasted

that long.

On this point, the court relied upon The Golden Victory [2007] UKHL 12, [2007] 2 AC 353,

where the House of Lords held that damages would not simply be calculated and awarded on

the date of breach without regard for subsequent events which would have resulted in the

contract being shortened for other reasons.

Effect on terminating parties

The Lonsdale action highlights a number of areas for those advising parties contemplating the

termination of an agreement.

Firstly, is the party able to prove the grounds it relies upon to the requisite standard? It is for

the party claiming repudiatory breach to show ‘… whether, looking at all the circumstances

objectively, that is from the perspective of a reasonable person in the position of the innocent

party, the contract breaker has clearly shown an intention to abandon and altogether refuse to

perform the contact,’ Lord Justice Etherton in Eminence v Heaney [2010] EWCA Civ 1168,

at 31.

Secondly, have all of the grounds available been expressed in the letter of termination? The

innocent party ought to consider any other grounds it may have to terminate the agreement

and not simply rely upon its right to raise other grounds later. While the court may validate a

termination retrospectively, it is unlikely that the court will disregard any purported

termination when considering causation and loss.

Finally, have damages properly been considered? Causation aside, it is clear that courts are

unwilling to simply award damages for the entire contract term without regard to other facts

which would have brought the contract to an end. The limiting event may result from an

independent party (such as war in The Golden Victory) or an act of either party. Parties

should realistically calculate loss and obtain evidence to substantiate it. On the latter point,

while Lonsdale had committed a repudiatory breach by breaking the exclusive license

agreement in certain territories, Leofelis was unable to satisfy the court that this had deprived

it of any royalties as it did not sublicense the marks in the territories in question anyway.

IQBAL MOHAMMED