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Supreme Court of Canada

Contracts—Licensing agreement—Interpretation—Royalty rate—Earlier agreements—Conflicting provisions in agreements—Ambiguity—Extrinsic evidence as to scope of application of new agreement admissible.

By an agreement the appellant (M), the owner of patents for automatic pinsetters, granted to B the exclusive right to sell the pinsetter in Canada. B and M were to seek an appropriate manufacturer and from that manufacturer M would receive a royalty of $375 for each machine sold. M licensed the respondent (A) as the manufacturer and by an agreement between B and A it was agreed that all pinsetters manufactured by A would be purchased by B and that A would manufacture only in accordance with orders by B. By a later agreement M granted to A the exclusive right to manufacture the pinsetters and A agreed to pay M a licence fee of $375 for each machine sold to B. A was to manufacture only in accordance with orders received from B. Subsequently, under a new agreement between M and A, the latter was given the licence to manufacture and sell throughout the world. This agreement included a different royalty formula.

Litigation arose in which the issue was whether the royalty payable for each machine was $375 or the greater of 10 per cent of the net selling price or $250. For the period in question, A paid at the rate of 10 per cent of the net selling price. M sued for $54,824.58, which was the difference between what would have been paid at the $375 rate and what was actually paid. The judgment at trial was reversed on appeal and the action dismissed.

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Held: The appeal should be allowed and the judgment at trial restored.

In the context of the four agreements, the licence to manufacture and sell throughout the world given by M to A could not apply in Canada.

It could not be said that the new agreement was clear and unambiguous in relation to the Canadian situation. Extrinsic evidence was therefore admissible to determine the question whether or not this written agreement applied in any way to Canadian sales. Such evidence made it clear that Canadian sales were never intended to be affected. The royalty remained at $375 for these sales.

APPEAL from a judgment of the Court of Appeal for Ontario[1], reversing a judgment of Lacourciere J. Appeal allowed.

J.J. Carthy and B. Finlay, for the plaintiff, appellant.

D.K. Laidlaw, Q.C., and G.W. Glass, for the defendant, respondent.

The judgment of the Court was delivered by

JUDSON J.—The appellant, Mechanical Pin Resetter Company Limited, is the owner of patents for automatic pinsetters used in bowling alleys. The respondent, Canadian Acme Screw & Gear Limited, is a manufacturer licensed by Mechanical to manufacture these pinsetters. The issue in this litigation is whether the royalty payable for each machine is $375 or the greater of 10 per cent of the net selling price or $250. For the period in question in this action, Acme paid at the rate of 10 per cent of the net selling price. Mechanical sued for $54,824.58, which is the difference between what would have been paid at the $375 rate and what was actually paid. The judgment at trial was for payment of the larger sum. This judgment was reversed on appeal and the action dismissed. Mechanical now asks for the restoration of the judgment at trial for payment of the sum of $54,824.58.

[Page 630]

The problem requires the examination of four written agreements:

1. By an agreement of December 30, 1957, Mechanical granted to Brunswick-Balke-Col-lender Company of Canada Limited the exclusive right to sell the pinsetter in Canada for the duration of the patents and any renewal. Brunswick and Mechanical were to seek an appropriate manufacturer and from that manufacturer Mechanical would receive a royalty of $375 for each machine sold.

2. Mechanical licensed Acme as the manufacturer and by an agreement dated January 27, 1959, between Brunswick and Acme, it was agreed that all pinsetters manufactured by Acme would be purchased by Brunswick and that Acme would manufacture only in accordance with orders by Brunswick. The term of this agreement was for 15 years from its date, subject to renewal by mutual agreement.

3. By agreement dated March 19, 1959, Mechanical granted to Acme the exclusive right to manufacture the pinsetters and Acme agreed to pay Mechanical a licence fee of $375 for each machine sold to Brunswick. Acme was to manufacture only in accordance with orders received from Brunswick. The term of this agreement was 15 years from its date, subject to renewal by mutual agreement.

In the year 1962 three similar agreements were executed by the same parties concerning a further invention by Mechanical of a duckpin pinsetter at a slightly different royalty. It is unnecessary to set them out in detail and they need no further mention in these reasons.

4. The last agreement to be dealt with is dated March 12, 1963. It is between Mechanical and Acme. Brunswick is not a party although it is naturally frequently mentioned in view of agreements 1 and 2 above summarized. I will set out the recitals in para. 1 and then make my comments on them:

WHEREAS Mechanical has granted to Brunswick of Canada Limited the right to sell Pinsetters in Canada; and

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WHEREAS Mechanical has licensed Acme to manufacture Pinsetters under agreements dated March 19, 1959 and May 30, 1962 (this is the duckpin agreement) under the terms of which Acme is to sell Pinsetters for resale within the territorial limits of Canada only to Brunswick of Canada Limited, and the parties desire to enter into this agreement which to the extent permissible in view of the previous commitments of the parties hereto to Brunswick of Canada Limited shall be and be deemed to supersede the said two agreements dated March 19, 1959 and May 30, 1962; and

WHEREAS Acme is desirous of undertaking the manufacture and selling of Pinsetters throughout the world except in Japan, subject to the rights heretofore granted by Mechanical to Brunswick of Canada Limited.

NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto do hereby agree as follows:

1. Mechanical hereby grants to Acme, subject to the hereinbefore recited rights granted to Brunswick of Canada Limited, the sole and exclusive license to manufacture Pinsetters, subject to the conditions herein named, to the end of the term for which the Licensed Patents have been granted or any extension thereof and to sell the same throughout the world except in Japan.

Mechanical contends that this new agreement applied and could only apply to the export market in view of the Mechanical-Brunswick agreement and the Brunswick-Acme agreement in 1 and 2 above. Acme contends that it applies also to Canada.

As to clause 1, my opinion is that the licence to manufacture and sell throughout the world given by Mechanical to Acme cannot apply to Canada in the context of these four agreements. The position of Mechanical and Acme in relation to the Canadian market is this. Acme can only manufacture in accordance with orders given by Brunswick and can sell only to Brunswick. This is in accordance with agreement 2. No further agreement between Mechanical and Acme could affect this position. Brunswick had rights under this agreement for a term of 15 years at a minimum. Under agreement 1, Bruns-

[Page 632]

wick had exclusive selling rights in Canada for the life of the patents and any renewals. Therefore, in my opinion, when clause 1 of the new agreement refers to “manufacture and sale throughout the world”, these words cannot include Canada.

I will next deal with paras. 2 and 3(a) of the new agreement:

2. Acme shall keep accurate accounts of all Pinsetters manufactured by it and shall within thirty days following the end of each month make a full and complete return to Mechanical of all Pinsetters manufactured and sold by Acme during such month.

3. At the time of making returns as aforesaid, Acme shall pay to Mechanical license fees as follows:

(a) in respect of each complete pinsetting machine manufactured and sold by Acme during the month in respect of which the return is being made of whichever is the greater of ten percent (10%) of the net selling price or two hundred and fifty dollars ($250) and

As to the royalty clause in 3(a), it cannot impose a royalty of more than $375 on Brunswick. This is a real possibility during the term of the agreement. I notice from the pleadings in this action that the basis of payment is already 10 per cent of the net selling price, which is obviously more than the alternative of $250. I am not saying that Acme cannot decrease the royalty below the previous figure of $375. There would, of course, be no sense in doing this. Without some further agreement, it would be merely putting money into Brunswick’s pocket. But if 10 per cent of the net selling price ever exceeds $375, Brunswick cannot be bound to pay a price which includes any excess royalty over $375 per machine.

The next paragraph with which I wish to deal is para. 8. It provides for a minimum royalty.

8. In the event that the license fees payable by Acme to Mechanical hereunder in any calendar

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year commencing with the calendar year 1964 shall by Acme to Mechanical in respect of all Pinsetters be less than the total of the license fees payable sold by Acme to Brunswick of Canada Limited during the calendar year 1964 plus the sum of $25,000 (which total is hereinafter called the “minimum royalty”) then Mechanical shall be entitled after first giving six months’ notice to Acme requiring Acme to pay to Mechanical the difference between the license fees payable hereunder and the minimum royalty to terminate this agreement if Acme shall not during such period of six months pay to Mechanical such difference as aforesaid.

The minimum royalty under the new agreement is to be (a) the licence fees payable by Acme in respect of all pinsetters sold by Acme to Brunswick plus, (b), $25,000. This leaves untouched what the licence fees payable in respect of Brunswick’s sales are—$375 per machine or, according to the new formula in 3(a), if 3(a) can apply to the Acme-Brunswick sales.

Paragraph 17 reads:

17. The license hereby granted shall be exclusive with Acme, and Mechanical hereby covenants and agrees that it will not during the term of this license except to the extent (if any) that it is presently bound to do so by any agreements which it has heretofor entered into with Brunswick of Canada Limited, grant to any other person, firm or corporation any license or other rights in the Licensed Patents or in any other patents or applications therefore covering improvements which are dominated by one or more claims of the Licensed Patents.

This paragraph recognizes the rights of Brunswick (if any)and consequently limits the scope of the application of the new agreement.

Paragraph 19 reads:

The parties agree that the aforesaid agreements dated March 19, 1959 and May 30, 1962 shall be and the same are terminated and superseded by this agreement; provided however, that to the extent that the parties are bound by, agreements which they have entered into with Brunswick of Canada

[Page 634]

Limited and accordingly not entitled to terminate each other with a view to amending any agree-such agreements the same shall remain in full force and effect and the parties agree to cooperate with ments which they may have with Brunswick of Canada Limited in order to give effect to the provisions of this agreement.

There is a recognition here that there is need for negotiation with Brunswick in order to give effect to the provisions of this agreement. The negotiations with Brunswick would obviously concern (a) the rights of exclusive sale within Canada and the right to give instruction to manufacture, and (b) the amount of the royalty.

On my analysis of the new agreement I cannot say that it is clear and unambiguous in relation to the Canadian situation. On some points it is definitely against any possible application to sale and manufacture in Canada. The real ambiguity is whether the new royalty rate can apply to sales in Canada until the rate exceeds $375 per machine. I think it clear that this is the maximum rate to which Brunswick can be subjected. I am therefore of the opinion that extrinsic evidence is admissible to determine the question whether or not this written agreement applies in any way to Canadian sales. On a consideration of this extrinsic evidence, the learned trial judge found in favour of Mechanical that the new agreement did not “affect in any way the Canadian sales.” He was right in admitting the evidence and right in his assessment of this evidence. My conclusion is that the Canadian sales are not affected in any way and that the royalty remains at $375 for these sales.

The extrinsic evidence is to the following effect:

Following the signing of these agreements there were discussions between representatives of Mechanical and of Acme on three subjects. The first subject discussed was the improvement of the Canadian market by arranging a three party agreement among Mechanical, Acme and Brunswick whereby each of the three would

[Page 635]

lower its profit with the hope of increasing sales. The discussions concerning this subject led to no conclusion and were still being pursued as late as February 14, 1964.

The second subject discussed did not include Brunswick and concerned the manufacture by Acme and the licensing by Mechanical of pin-setters (fivepin and duckpin) for sale outside Canada. The discussions on this subject led to the new agreement between Mechanical and Acme dated March 12, 1963, whereby sales made thereunder were to be on a royalty basis of $250 for each pinsetter, or 10 per cent of net sales.

The third subject did not include Brunswick and concerned “project hasty”, the development of a new combination machine for sale by Acme throughout the world. “Project hasty” never came to anything but was provided for in para. 14 of the new agreement.

The evidence is that it was then necessary to negotiate with Brunswick to permit Acme to sell to parties other than Brunswick and to permit the tooling, manufactured at Brunswick’s expense, to be used for that purpose. The need for these negotiations is clearly referred to in para. 19 quoted above. There is no evidence that any such approach was ever made.

No sales of pinsetters were ever made outside of Canada and on July 18, 1963, well after the date of the new agreement, Acme paid Mechanical royalties under the old 1959 agreements at the rate of $375 a unit. Subsequent to that payment a new employee of Acme brought to the attention of the assistant treasurer that the new agreement of March 12, 1963, should be construed so as to reduce the royalty and on August 27, 1963, Acme purported to make a payment for units sold in Canada based on the lower licence fee in the agreement of March 12, 1963.

Mechanical immediately informed Acme that it was never intended that Canadian sales be included in the royalty calculation under the agreement, but received no indication from Acme of what position it took other than that invoices continued to come in to Mechanical based on

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the lower calculation. No evidence was led by Acme, other than that of the company accountant, who knew nothing about the above-mentioned discussions.

All sales subsequent to March 12, 1963, were made in Canada and were made to Brunswick. The writ was issued on November 1, 1965.

The basis of the decision in the Court of Appeal in reversing the learned trial judge was that there was no ambiguity in the new agreement and that the words “throughout the world except in Japan” must be taken to mean what they say. The fallacy of this ratio is that these words do not stand alone. The new agreement has to be interpreted side by side with agreement 1 between Mechanical and Brunswick and agreement 2 between Brunswick and Acme. If this is done, there is an argument and even a preponderance that the words cannot apply to the Canadian situation and Canadian sales. The real question in this appeal is as to the scope of the application of the new agreement, what it applies to not in isolation but when considered along with the other agreements and with the known situation of the parties themselves and one other party, who would undoubtedly be affected. Both the trial judge and the Court of Appeal have used the word “ambiguity”. To me this is scarcely an adequate description of the problem.

On an examination of all three documents, namely agreement 1, agreement 2 and agreement 4, there are conflicting provisions. In spite of an attempt in agreement 4 between Mechanical and Acme to replace agreement 3, the original licensing agreement for the pinsetters and also the duckpin licensing agreement, the conflicts which emerge are such as to permit extrinsic evidence as to the scope of application. I have already expressed the opinion that on a reading of the agreements themselves there is a preponderance in favour of limiting the scope of agreement 4 to exclude Canada until arrangements could be made with Brunswick. The extrinsic evidence, which is uncontradicted, makes it clear that Canadian sales were never intended to be affected.

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I would allow the appeal with costs both here and in the Court of Appeal, and restore the judgment at trial.

Appeal allowed with costs.

Solicitors for the plaintiff, appellant: Arnup, Foulds, Weir, Boeckh, Morris & Robinson, Toronto.

Solicitors for the defendant, respondent: Ro-senfeld, Schwartz, Glass & Malcolmson, Toronto.



[1] [1969] 2 O.R. 61, 4 D.L.R. (3d) 359, 58 C.P.R. 226.

 

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