Termination of a licence

What happens when one party has no termination rights?

The recent decision in Zaha Hadid Ltd v The Zaha Hadid Foundation [2024] EWHC 3325 (Ch) provides important guidance on the interpretation of indefinite contracts and the limits of the restraint of trade doctrine.

A dispute had arisen from a long-standing trade mark licence agreement that allowed Zaha Hadid Ltd (the Practice) to use the “Zaha Hadid” name and marks but only gave the licensor (originally Dame Zaha Hadid and later her Foundation (the Foundation)) the right to terminate. When the Practice sought to end the agreement by giving notice, the High Court was asked to decide whether such a right could be implied and whether the arrangement unlawfully restricted the Practice’s ability to trade.

The facts

In 2013, the late Dame Zaha Hadid (licensor) and the Practice entered into a trade mark licence agreement.

Under that licence, the Practice could use the Zaha Hadid name / associated trade marks in return for payment of a royalty of 6 % of net income, including revenues not strictly derived from use of the marks.

The licence was drafted as having indefinite duration, unless terminated earlier under the express termination provisions in clause 12. However, the clause 12 termination rights were only given to the licensor. After Dame Zaha’s death, the Foundation inherited the licensor’s rights. The Practice thereafter sought to terminate the licence by giving 12 months’ notice, alleging:

• the contract should be interpreted to allow termination by either party on reasonable notice; and
• that the one-sided arrangement was void or should be voided as an unlawful restraint of trade.

The issues

The High Court had to resolve primarily whether, despite the absence of express termination rights, the licence should be interpreted so as to allow termination on reasonable notice by either party.

The court also had to decide whether the contractual arrangement operated as a restraint of trade because the licence (with no mutual termination right and which imposed certain obligations indefinitely) unlawfully restricted the Practice’s freedom to trade.

The outcome

The court found, in favour of the Foundation, that the licence should, on proper interpretation, be read as giving only the licensor a right to terminate, not the licensee. The language of clause 12 and the overall structure supported that one-sided approach.

The court also held that there was no restraint of trade. The court felt that the Practice was, in essence, dissatisfied with the commerciality of the deal rather than it being a genuinely unreasonable restriction on its ability to act commercially. It was noted that the Practice had enjoyed considerable benefit from the licence over many years.

Comment

This is not the first case about whether contracts of indefinite duration should carry an implied right of termination, described as a kind of break clause, to prevent one party from being bound forever and in the past, the courts have held that licences without express notice provisions could be terminated on reasonable notice.

However, this case appears to represent a change to a more restrictive approach, as the court found that an indefinite contract does not automatically carry a mutual termination right and that instead, the parties’ express terms and the commercial context will prevail, taking into account the express wording, the surrounding context and the parties’ overall intentions.

Similarly, the decision is a reminder that the restraint of trade test remains high, in that the restriction must go beyond being burdensome or disadvantageous and must unreasonably restrict a party’s freedom to trade in a way that cannot be justified on legitimate grounds. Being burdensome or disadvantageous is not enough.

If you are considering entering into an indefinite agreement, caution and careful drafting are required. Consideration should be given to what happens if business circumstances change and if, when and how a party will be able to exit the agreement.  

If you would like to discuss any of the issues raised in this article, please get in touch.

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