Neutral Citation No. [2003] EWCA Civ. 1669

Case No: A3/2003/0984

and

Andrew Hunter (instructed by Saunders & Co.) for the Appellants

Jonathan Nash (instructed by Denton, Wilde & Sapte) for the Respondents

Hearing dates : 23 November 2003

1. This is an appeal with permission of Clarke LJ on limited grounds from a judgment dated 15^th April 2003 given by Mr Julian Flaux QC, sitting as a deputy High Court judge in the Commercial Court. The appellants are Cine Bes Filmcilik ve Yapimcilik A.S. (a Turkish cable television company which I shall call "Cine 5") and Avrupa Ve Amerika Holding A.S. ("Avrupa"). They have not renewed their application to appeal on other grounds on which Clarke LJ refused permission on paper. The first respondent is United International Pictures ("UIP"), a joint venture company established by the second, third, and fourth respondents, Paramount Pictures International (a division of Viacom International (Netherlands) B.V.), Universal Studios International B.V. and MGM International Television Distribution, Inc. The second, third and fourth respondents are described in relevant licence agreement as "the Studios".
2. The proceedings arise out of a licence agreement signed by the parties and dated as of 1 May 2000. The parties had previously signed a letter dated 4^th May 2000, by which they undertook to enter into such a licence agreement in the form of schedule 1 to that letter. The background is that there had been a previous licence between UIP and Cine 5 dated February 1994. This had given rise to claims by UIP against Cine 5 and Avrupa as well as a counterclaim, both due for trial in June 2000. The letter dated 4^th May 2000 recorded the terms on which the parties had agreed to resolve that litigation. Upon receipt by UIP of US$3,863,090 and an acceptable letter of credit and upon withdrawal by Cine 5 and Avrupa of their counterclaims, UIP agreed irrevocably to withdraw its claims. The parties’ signatures in respect of the agreement in schedule 1 were held by the opposite parties’ solicitors to the order of the signatories pending receipt by UIP of such sum and letter of credit, and such agreement was expressly provided to be null, void and of no effect should such sum and the letter of credit not be received or should the counterclaims not be withdrawn. These pre-conditions were in the event performed and so the licence agreement became unconditional.
3. The licence agreement was expressed to be

…. between United International Pictures ("UIP"/"Licensor"). Cine Bes Filmcilik ve Yapimcilik A.S. (the "Licensee"). Avrupa Ve Amerika Holding A.S. ("Guarantor"), Paramount Pictures International, a division of Viacom International (Netherlands) B.V. ("Paramount"), Universal Studios International B.V. ("Universal") and MGM International Television Distribution, Inc. ("MGM") (Paramount, Universal and MGM are collectively herein the "Studios" and individually a "Studio") …."

Under the agreement Cine 5 as the Licensee received and undertook obligations in respect of an

"Exclusive licence for exhibitions of available UIP titles (the "Films") on the Licensee’s encrypted Pay Movie Channel "Cine" (the "Movie Channel")."

The start date of the licence was 1^st May 2000 and its "Expiration Date" 31^st March 2003. UIP also granted

"protection against authorised exhibitions of the same Language of Transmission on basic cable and free TV (together herein "Free TV") and Pay TV in the Territory during a Film’s Licence Period"

[and]

protection against authorised promotions of the Films on Free TV in the same Language of Transmission during such Film’s Licence Period".

The "Territory" as defined consisted of Turkey and Turkish-language Cyprus.

 

4. The agreement also contained in clause 10.B an "Option to Renew" whereby:

"Each of Paramount, Universal and MGM or any of their subsidiaries, affiliates or associated companies shall each separately have an option (i.e. three options in the aggregate) to require Licensee to enter into a five (5) year pay television output/re-run licence agreement with them commencing upon the Expiration Date, the terms of each such new agreement to be the same as those herein set out …..

[The clause then went on to provide certain exceptions to the principle that the terms should be the same.]

The three options herein above set out shall be exercisable by notice in writing to Licensee at any time on or before 1 October 2002 and can for the avoidance of doubt, be exercised by each Studio, or any of its subsidiaries, affiliates or associated companies separately and independently of each other."

5. Under clause 14(c) i) Cine 5 was bound to provide and maintain

"one or more …. Irrevocable Standby Letters of Credit in the form set out in Appendix C or such other form as shall be acceptable in all respects to UIP from a US bank reasonably approved by UIP which are to be valid for 1 year (the "LCs")"

Any such letter of credit were to be for an aggregate amount not less than US$5 million; and were to be

"renewed for further annual terms not less than 15 days prior to their expiry and …. to remain in effect until 3 months after the end of the Licence Period of the last Film licensed hereunder."

Cine 5’s associated company, Avrupa, confirmed under clause 14(ii) that it would guarantee Cine 5s’ obligations under the agreement, and signed the agreement accordingly.

6. Clause 16 provided for an "AB Amount" of US$4,836,155, and for an "AB Account", consisting of "the AB Amount held by the Licensee and not yet used to date". It went on that:

"UIP and/or the Studios, their subsidiaries, associated companies and affiliates may use the AB Amount in the AB Account at any time before the Expiration Date in Exchange for:

(a) advertising of products of UIP, and/or the Studios, their subsidiaries, associated companies and affiliates as follows .…

(b) barter time as follows ….

Upon any termination by UIP of its obligations hereunder, whether pursuant to the provisions of Clause 17 below or otherwise at law or in equity the full outstanding amount of the AB Amount in the AB Account shall immediately become due and payable by Licensee to UIP in US dollars. For the avoidance of doubt Guarantor acknowledges that the payment of such sums constitutes part of the "Guaranteed Obligations" under the Guarantee."

Clause 17 read:

"17. "Termination: Without prejudice to any of UIP’s rights and remedies at law or in equity in respect of any defaults hereunder by Licensee or Guarantor, it is expressly agreed that if at any time UIP is not secured by LCs or by the proceeds of a drawdown in full of the LCs for any Film with a current Availability Date, UIP shall have the right, exercisable by notice in writing to Licensee, and without prejudice to any other rights or remedies available to it in law or in equity in respect of such breach, to accelerate the payment of all Licence Fees that would fall due to UIP hereunder in respect of all Films listed in Appendix B, which sum shall thereupon become immediately due and payable by Licensee to UIP, and to terminate all its future obligations to Licensee hereunder, whereupon the AB Amount shall become payable in accordance with Clause 16 above, and all rights licensed in respect of all Films shall terminate and revert to UIP and Licensee shall have no further rights (including exploitation rights) in connection with any such Films. In the event of any such termination Licensee shall pay to UIP in addition to all Licence Fees due and all damages sustained or incurred as a result of such termination all actual and reasonably incurred enforcement costs of UIP including those incurred by UIP in connection with the Litigation up to and including the date upon which the Court Order dismissing the legal proceedings in the High Court of Justice between UIP and Licensee and Guarantor (case no. HQ99-04130) is sealed."

 

Clause 20 provided for interest on late payments at 3% above US Prime Rate, compounded monthly, and payable from the date a payment fell due under the agreement. Clause 35 provided:

"Termination or suspension of this Agreement for whatever cause shall be without prejudice to the accrued rights of either party. Notwithstanding termination of this Agreement (for whatever cause) all obligations of the Licensee under this Agreement shall where relevant survive termination and the Licensor shall be entitled to require performance of such obligations."

7. In 2001 the Turkish government abandoned the crawling peg exchange rate mechanism (which tied the Turkish lire to a basket of currencies including the US dollar) and allowed the lire to float. Thereafter, Cine 5 defaulted in the payment of licence fees due under the agreement and failed to renew any US dollar letter of credit under clause 14(i). On 5^th June 2002 solicitors for the respondents wrote to Cine 5 claiming on behalf of UIP and the Studios to terminate in accordance with clause 17 and to accept Cine 5’s defaults as repudiatory breaches of the agreement. Their letter claimed payment to UIP of (a) licence fees due up to the date of such termination (amounting in fact to US$ 4,017,323.65), (b) licence fees which would have become payable up to the Expiration Date, (c) the full AB Amount of US$4,836,155 (no part of this having been utilised), (c) litigation costs in respect of the proceedings withdrawn when the agreement as of 1 May 2000 was entered into, (d) damages in respect of all licence fees that would have fallen due to the Studios during the five year option period set out in clause 10B of the agreement and (e) interest on these sums at the rate of 3% above US prime rate provided by clause 20. The present proceedings were commenced on 29^th July 2002, making the like claims - save that damages related to the alleged loss of the five year option are now claimed by the Studios, which also claim interest at a commercial rate rather than at 3% per annum under clause 20.
8. The matter came before Mr Julian Flaux QC on an application by the respondents for summary judgment. The appellants raised a number of defences: (1) that the whole agreement was frustrated, (2) that clauses 16 and 17 were unenforceable penalty clauses, in so far as they provided for payments on termination for breach by Cine 5, (3) that there were triable issues of construction, going to the quantum recoverable under clause 17, (4) that there were triable issues relating to the Studios’ claims for loss of the options contained in clause 10.B; in this last connection the appellants contended: (i) that such options were separate contracts or severable, and survived any termination by UIP of the agreement, (ii) that the Studios caused their own loss, by failing to exercise the options prior to UIP’s termination of the agreement and (iii) that there should be a trial as to whether the Studios would in fact have exercised their options. The judge rejected all these defences. Permission to appeal was granted only in respect of and this appeal is confined to points (2) and (4). The question is in each case whether the appellants have shown any real prospect of a successful defence or any other reason for a trial. Most of the issues are issues of law and/or construction, which both parties have invited us to determine finally, one way or the other, at this point. However, if and to the extent that we conclude that clauses 16 and 17 appear arguably penal, the respondents submit that we should direct a trial to determine in the light of factual evidence whether they should nevertheless be regarded as containing genuine pre-estimates of loss.
9. Point (2) – are clauses 16 and 17 unenforceable as penalty clauses? It is not suggested that clause 17 is invalid in so far as it embraces or confirms the appellants’ obligation to pay licence fees already accrued due to UIP as at the date of termination of the agreement. The clause in that respect merely reflects a pre-existing and continuing obligation. Nor is the clause in any way untoward in stipulating for termination of all UIP’s future obligations. That would anyway follow from UIP’s exercise of its contractual right to terminate for Cine 5’s breach.
10. The appellants submit that the rest of the clause must be viewed as a whole, and that it is invalid so far as it purports to provide for a large number of different consequences, all favourable to UIP, in such as way as would in the ordinary course over-compensate UIP for any loss suffered from the termination. These consequences are (i) the accelerated payment of all future licence fees which would have fallen due for payment to UIP up to the Expiration Date, (ii) payment of the AB Amount, (iii) the termination and reversion to UIP of all rights in connection with currently licensed films, (iv) payment of damages and (v) payment of all actual and reasonably incurred enforcement costs of UIP, including those incurred in the litigation withdrawn in consideration of the making of the agreement.
11. The general scope of the law relating to penalties was identified by Lord Browne-Wilkinson giving the advice of the Privy Council in Workers Trust Bank Ltd. v. Dojap Ltd. [1993] AC 573:

"In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit (customarily 10% of the contract price) on the sale of land. ….."

12. The classic distinction drawn by Lord Dunedin in Dunlop Pneumatic Tyre Company v. New Garage and Motor Company Ltd. [1915] AC 79, 86f was between a payment on breach stipulated as in terrorem of the offending party and a genuine covenanted pre-estimate of damage. Lord Dunedin added that the question was one of construction of each contract, to be decided as at the time of its making, not the time of breach. He offered as tests which might prove "helpful, or even conclusive", these:

"a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach ..….

(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ….. This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A. promised to pay B. a sum of money on a certain day and did not do so, B. could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable ….. is probably more interesting than material.

(c) There is a presumption (but no more) that it is penalty when "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage".

On the other hand:

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties….."

13. Although the phrase in terrorem has appeared in many cases since Dunlop, there is force in Lord Radcliffe’s comment in Campbell Discount Co. Ltd. v. Bridge [1962] AC 600, 622, that

"I do not find that that description adds anything to the idea conveyed by the word "penalty" itself, and it obscures the fact that penalties may quite easily be undertaken by parties who are not in the least terrorised by the prospect of having to pay them …."

A more accessible paraphrase of the concept of penalty is that adopted by Colman J in Lordsvale Finance Plc v. Bank of Zambia [1996] QB 752, 762G, when he said that Dunlop Pneumatic Tyre showed that:

"whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred."

14. In Philips Hong Kong Ltd. v. The AG of Hong Kong (1993) 61 BLR 49, the Privy Council in advice delivered by Lord Woolf underlined test (a) suggested by Lord Dunedin, endorsed the view that the "court should not be astute to descry a ‘penalty clause’" and emphasised that it would "normally be insufficient …. to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss" (pp.58-59). However, Lord Woolf went on:

"A difficulty can arise where the range of possible loss is broad. Where it should be obvious that, in relation to part of the range, the liquidated damages are totally out of proportion to certain of the losses which may be incurred, the failure to make special provision for those losses may result in the "liquidated damages" not being recoverable. (See the decision of the Court of Appeal on very special facts in Ariston SRL v Charly Records Ltd (1990) The Independent 13 April 1990.) However, the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. Any other approach will lead to undesirable uncertainty especially in commercial contracts "

15. I have also have found valuable Colman J’s further observation in Lordsvale at pp.763g-764a, which indicate that a dichotomy between a genuine pre-estimate of damages and a penalty does not necessarily cover all the possibilities. There are clauses which may operate on breach, but which fall into neither category, and they may be commercially perfectly justifiable. In the case before him, Colman J was concerned with a provision for prospective increase in the interest rate payable by a borrower, following the borrower’s default. He said that, although the payment of liquidated damages is "the most prevalent purpose" for which an additional payment on breach might be required under a contract

"…. the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach."

16. Another decision relied on by the respondents before us is Oresundsvarvet AB v. Marcos Diamantis Lemos (The "Angelic Star") [1988] 1 Ll.R. 122. The Court of Appeal held that it was not penal for a provision to accelerate payment of capital sums, due under a "delivery credit" arrangement, upon a failure to comply with the conditions upon which credit was extended. The delivery credit had been made available to the purchaser as an "option", in default of exercise of which the full price was payable in cash. So there was nothing penal about providing for payment of the capital to be accelerated on any default (provided that the interest which would have been payable for deferring payment under the credit was not also payable).
17. Consequences (i) and (ii) would afford the respondents 100% of the benefits expected from the running of the licence for its full course to the Expiration Date, without allowing any credit for (a) UIP’s retention and ability to exploit the films which would have become available to be licensed to Cine 5 during the rest of the licence period and (b) UIP’s recovery of, and ability to exploit for the balance of their licence periods, films with licences still current on 5^th June 2002. The appellants point out that licence fees for any film within (b) accrued due in full as soon as such film became available (see clause 14(b)), and have been paid or are recoverable accordingly (see paragraph 11 above).
18. The respondents accept that consequence (i) may be penal, although they do not concede that it is and wish to contend the contrary at trial. However, they submit that the clause can be severed as regards consequence (i), leaving the other consequences unaffected. The particular consequences on which argument therefore centres are consequence (ii) (payment of the AB Amount) and, so far as it provides for payment of costs incurred in the litigation withdrawn in consideration of the making of the agreement, consequence (v). I focus for the moment on consequence (ii) alone.
19. As an illustration of severance in this area, the respondents refer to The "Angelic Star" [1988] 1 Ll.R. 122. Neill LJ at p.126f (left) and Ralph Gibson LJ at p.126e (right)-127g (left) there rejected an argument that, if the clause included a penalty element (by purporting to make future interest payments immediately payable on default occurring under the loan), that also invalidated the provision accelerating the payment of the outstanding loan. As Ralph Gibson LJ said at p.126-127:

"The doctrine relating to penalties is not a rule of illegality: it is a rule by which the Court refuses to sanction legal proceedings for recovery of a penalty sum, a rule which the Court had produced and maintained for purposes of public policy: see per Lord Radcliffe: Campbell Discount Company Ltd. v Bridge [1962] A.C. 600 at p.622. The rule is, in my judgment, not designed to strike down any more of a lawful contract than is necessary to give effect to the Court’s purpose of applying public policy; and, moreover, the rule should be applied so as to interfere as little as possible with the proper enforcement of a lawful contract according to its terms. Parties to a contract are free expressly to stipulate not only the primary obligations and rights under the contract but also the secondary rights and obligations, i.e. those which arise upon non-performance of any primary obligation by one of the parties to the contract: see per Lord Justice Diplock (as he then was): Robophone Facilities Ltd. v Blank, [1966] 1 W.L.R. 1428 at 1446B. Lord Justice Diplock continued:

……But the right of parties to a contract to make such a stipulation is subject to the rule of public policy that the court will not enforce it against the party in breach if it is satisfied that the stipulated sum was not a genuine estimate of the loss likely to be sustained by the party not in breach, but was a sum in excess of such anticipated loss and thus, if exacted, would be in the nature of a penalty or punishment imposed upon the contract-breaker. Where the court refuses to enforce a "penalty clause" of this nature, the injured party is relegated to his right to claim that lesser measure of damages to which he would have been entitled at common law for the breach actually committed if there had been no penalty clause in the contract."

20. The Angelic Star was concerned with a delivery credit, essentially a contract for a loan, although provided as part of a shipbuilding contract. The loan was to be repaid by bills of exchange accepted by the vessel’s purchaser, and was to be secured by mortgage of the vessel. On default, the contract provided for repayment of the loan and enforcement of the security. The vessel was duly arrested and sold, and her proceeds credited against the accelerated obligation to repay the loan. What Neill and Ralph Gibson LJJ were accepting was the possibility of severing a provision for additional monetary payment, in the amount of the interest payments which would only have been earned if the loan had remained outstanding.
21. The present contract is more complex in nature than a loan. Its termination did not just leave the respondents out of pocket. It restored proprietary benefits which the respondents thereby became able to exploit, for whatever worth they might have. And it did not do this by way of security for payment of monetary obligations. Clause 17 contains a scheme providing for the monetary consequences of termination for breach. That on any view requires care, since termination may occur sooner or later in the course of a long term licence contract and market conditions at the date of termination may greatly affect the actual loss suffered by the terminating party. But the critical point is that the innocent party’s actual loss in such a case is a single "net" amount derived by drawing a balance sheet (cf Chitty on Contracts, 28^th Ed. Vol. 1, para. 27-001). On the one side are benefits lost and on the other side benefits received by reason of the termination. Clause 17 does not attempt any balance. It simply lists, as consequences (i) and (ii), particular monetary benefits lost by reason of the termination. For good measure, it adds, as consequence (iv), a general provision for payment of damages. That underlines the fact that consequences (i) and (ii) are introduced as minima, intended to be recoverable without further enquiry. The resulting problem is that clause 17 contains no contractual provision or mechanism for giving any credit, against sums recoverable under consequences (i) and (ii), in respect of the proprietary benefits recovered on termination by the respondents.
22. Consequence (iii) does not provide for any monetary payment, and no question therefore arises about its validity. It is an understandable commercial provision, in that it secures a clean break, by restoring to UIP all its property immediately. Nevertheless, it yields a benefit which would at common law have to be brought into account in any assessment of the respondents’ actual loss resulting from a termination. The issue is thus not about the consequence (iii), but about the validity of consequences (i) and/or (ii) in the light of both consequence (iii) and the more general failure to provide any mechanism for crediting any value possessed by films which would have been the subject of future licences. If both consequences (i) and (ii) are valid, the effect must be to over-compensate the respondents - unless it was contemplated in May 2000 that the relevant films would be absolutely or substantially valueless in the respondents’ hands apart from the licence to the appellants. That qualification does not on its face represent a probable factual hypothesis, and (in the absence of any evidence to support it) on any view merits trial. It is true that the actual receipts from re-licensing films to the one other Turkish cable television channel (Digiturk, which it appears has 600,000 viewers) appear to have been relatively small, but that was following the collapse of the Turkish currency and in depressed market conditions which were evidently not foreseen on either side in May 2000.
23. The respondents submit that the problem can be avoided by severing clause 17, so far as it provides for consequence (i). That would leave consequence (ii) (payment of the AB Amount). But if consequence (i) is or may be penal, because it fails to allow for the benefit of the value of future licences, the failure to make any similar allowance in respect of the value, during the balance of their current licence periods, of films subject to licences current as at 5^th June 2002 is only different in degree. Licences current as at 5^th June 2002 could have up to either 12 or 15 months outstanding, depending on the films to which they related (cf clause 13(a) and (b)). The respondents’ actual loss from termination can only be calculated by allowing for the value of films during the balance of licence periods current at termination. The respondents’ suggestion (without any evidence) that the parties would not have contemplated that films recovered would have any or any substantial value during the balance of their current licences merits trial.
24. Arguments that the court should not be astute to ‘descry a penalty clause" and should be careful not to apply too stringent a standard diminish in force when (a) the whole scheme of clause 17 ignores one side of the balance sheet and (b) the respondents accept, as a result, that at least consequence (i) is arguably penal.
25. It is no answer to the problem identified in paragraph 23 that the only specific monetary obligation imposed under clause 17, apart from consequence (i), consists in an obligation to pay the AB Amount. The respondents’ actual loss on termination is a loss arising from drawing an overall balance. The AB Amount derives from a particular clause of the contract. Actual loss on termination is not viewed or calculated on a clause by clause basis. It is an overall loss.
26. The AB Amount represents the value of advertising or barter time to which the respondents would have been entitled had the licence run its full course. The respondents had not in the period of over 2 years since the inception of the licence used any of their entitlement to such time. It might be questioned whether they would have used any or all of it before 31^st March 2003, or what loss they may have suffered from having (at least notionally) to purchase equivalent time elsewhere. On the other hand, the appellants were in breach for much of the first two years, and, more importantly, the question whether consequence (ii) constitutes a genuine pre-estimate of the benefit lost through termination should be viewed as at the date of entry into of the licence, when Turkish market conditions were evidently buoyant, not as at 5^th June 2002, when they were very depressed. So, if this were no more than a contract for provision of air time to the value of the AB Amount, I would be very unenthusiastic about any argument that a provision for payment of the AB Amount on breach was penal, rather than a genuine pre-estimate of the loss suffered through non-availability of time on the appellant’s channels.
27. The problem arises because the AB Amount is only one component in an overall balance, and any genuine pre-estimate of actual loss would have to relate to the net overall balance, not to the amount of a single component. I do not, in these circumstances, consider that consequence (ii) can stand independently, when the contract makes no allowance for the credit received from the recovery of the benefit of film licences. Even if one treats consequence (i) as deleted, one would suppose that films under current licences would, in the more benign market conditions existing in May 2000, have been expected to have had some value on termination during the balance of their licence periods.
28. It is also no answer to the problem identified in paragraph 23 that, if consequence (i) is penal, the respondents will have a common law claim to damages against which any appropriate allowances for such value could be set. The respondents do not of course accept that consequence (i) is penal. But, assuming that it is, the loss of future licence fees may not have caused the respondents any damages (e.g. if at termination the market value of future films were to equal or exceed the value of such fees). Clause 17 provides no mechanism in that event for crediting, against the AB Amount payable under consequence (ii), the value, during the balance of their current licence periods, of films subject to licences current as at 5^th June 2002.
29. For these reasons, I would, with respect for the judge’s careful analysis, conclude that he was wrong to treat in isolation one component of the respondents’ potential loss on termination, the payment of the AB Amount. The actual loss which the respondents could be expected to suffer on termination cannot be compartmentalised in this way. The operation and validity of clause 17 also requires to be viewed overall. The problem on this basis is that the clause looks only at one side of the balance sheet, and fails to address the countervailing benefits which would, on their face, appear likely to have been contemplated by the parties as flowing from any termination. I would therefore hold that the appellants have shown a triable issue to the effect that both consequences (i) and (ii) in clause 17 are penal. Whether they are actually penal must be determined in the light of evidence, in view of the respondents’ contention that the parties may when contracting have thought that the films recovered on 5^th June 2002 (the subject of future and current licences) would have had no significant value in the respondents’ hands.
30. I turn to consequence (v), costs. No problem arises so far as this covers costs of the present enforcement proceedings. In that respect, clause 17 was not stipulating for a sum which was penal. Strictly, it was not even stipulating for a loss in respect of which it could have claimed damages. Although in one sense the present proceedings were "caused" by the termination, their immediate cause is the appellants’ alleged failure to meet their secondary obligations arising from the termination. Any right to costs is thus at common law generally a matter of judicial discretion (as indeed is any claim to interest on sums unpaid). But clauses providing for the recovery of enforcement costs or for interest are familiar, e.g. in loan contracts. Such clauses have a legitimate commercial purpose, which takes them outside the scope of the law relating to penalties.
31. What then of the position relating to the costs of the previous litigation? The appellants submit in relation to them that the contract introduces a claim, on termination, which fails to reflect any loss which could be recoverable in law; alternatively, if there is any basis on which such a claim could be made, it is inconsistent with that on which consequences (i) and (ii) proceed, and would give rise to dual recovery on opposite hypotheses. In either case, they submit, consequence (v) must be regarded an invalid penalty.
32. The principal feature of the prior litigation costs is that these are actual costs, which the respondents incurred and were seeking in the prior litigation, but which they agreed to forego when a settlement was reached and when a new licence agreement was made. This feature differentiates the present case from the type of penal provision familiar from the authorities, which involves a payment which either does not reflect or considerably exceeds any actual outgoing or loss of profit. But the appellants submit that a past outgoing, which could not have been recovered in damages, is no different in law from a non-existent or over-estimated loss. They distinguish The Angelic Star as a case where the loan was an established obligation which was (on one basis or another, cash or credit) unquestionably enforceable. They accept that, in some circumstances, a contractual claimant may recover losses incurred or benefits foregone as a result of entering into a contract. However, that, they point out, would have to be as an alternative to any claim for the overall loss arising from breach of the contract (cf Chitty on Contracts 28^th Ed. Vol. 1 para. 27-002). So, here, they submit, clause 17 must be penal in so far as it purports to provide for the recovery both of losses arising from the breach (consequences (i), (ii) and (iv)) and recovery of costs foregone by entering into the contract (consequence (v)).
33. I do not accept the appellants’ analysis. Clause 17 provides for payment of the prior costs "in the event of" such a termination. But I do not consider that their payment should be regarded as a penalty attached to Cine 5’s breach of the agreement. Rather, it is one of the terms on which the respondents were prepared to forego further pursuit of the prior litigation against Cine 5 and Avrupa. There could have been no objection if the respondents had stipulated for payment of such costs outright, or if they had stipulated for them but agreed to forego payment as long as the licence agreement was entered into and duly performed. In relation to the actual costs of prior litigation, I consider that the parties were free to make any agreement they wished. The mere fact that they chose to make such costs depend on the (non-)performance of their fresh licence agreement, foregoing such costs in the meanwhile, does not mean that the obligation to pay such costs, which has now matured, should be regarded as a penalty imposed for breach of that agreement. Colman J’s analysis in Lordsvale of the boundaries of the doctrine relating to penalties is here in my view of relevance. The agreement regarding past litigation costs was understandable in the overall context of the settlement of the prior litigation. It would be wrong to treat it as if it was there to deter Cine 5 from, or to penalise or punish Cine 5 for, any default. It was an understandable and reasonable commercial condition upon which UIP was prepared to dispose of the prior litigation, and to enter into the fresh licence. Whether the benefit thereby obtained in costs requires to be credited against any damages which may be recoverable in respect of the termination (if all or part of clause 17 is an unenforceable penalty) does not arise at this stage and need not be considered.
34. Point (4)(i) – were the options separate contracts or severable, so as to survive any termination by UIP of the agreement? That one and the same document can constitute a bundle of separate contracts is clear. Witness, for example, the position of individual subscribers to a composite insurance, issued by Lloyd’s and/or insurance companies, as mentioned in Touche Ross & Co. v. Baker [1992] 2 Ll.R. 207. But it is also clear that, when there is a bundle of separate contracts, some or all of the subscribers may, as a matter of construction, be tied together, so that their rights or duties have to be viewed en bloc. That gave rise to the central issue in Touche Ross & Co. v. Baker. Lloyd’s syndicates at that time consisted of individual names. The assured was entitled to operate the relevant extension clause in relation to one or more particular syndicates differently from the way in which it operated it in relation to other syndicate(s). It could not have claimed to operate it differently as between different individuals within one and the same syndicate.
35. I am for present purposes prepared to accept that the present document contains on analysis a bundle of contracts, involving the different parties to it to a greater or lesser extent. To take an obvious point, the guarantor, Avrupa, is only a signatory and party to it, to the extent of its role as guarantor. UIP is not expressed to be a party to the option, since it was apparently contemplated that its activity as the Studios’ joint venture company would not continue beyond the first licence period. The Studios were not expressed to be parties to most of the licence obligations relating to the first period. On the other hand, clause 33 only allows assignments by UIP of "this Agreement, in such a way that the collective obligations of UIP and/or the Studios afford substantially the same protection and rights to the Licensee as in this Agreement"; and the arrangements regarding the AB Amount and Account were expressly in favour of "UIP, and/or the Studios, their subsidiaries, associated companies and affiliates" - although the final sentence of clause 16 required payment of the full outstanding AB Amount, upon any termination by UIP of its obligations under the agreement, to be made "to UIP". Clause 17, dealing more generally with termination, also provides throughout for payments "to UIP".
36. The conclusion that the document embraces a bundle of contracts does not determine whether termination by UIP under clause 17 has any and if so what effect on the options granted under clause 10.B in favour of the Studios, or whether it leaves them, as the appellants contend, as surviving independent contracts. The point is one of construction. The latter conclusion would give rise to a very curious position. Termination for breach, which might occur at any time during the first licence, would end any ongoing contractual obligations, as between UIP and Cine 5 (save those concerned with the winding up of the relationship, such as clause 17 so far as valid, and clauses 35 to 37). But the options "to renew" in favour of the Studios would continue to exist and would be potentially exercisable (until 1^st October 2002) for a fresh, five year period with effect from 31^st March 2003. Cine 5 would in the meantime be uncertain where it stood or what alternative arrangements it could make. The law can cater for flying freeholds, but the suggested analysis has more in common with levitation.
37. In response, the appellants ask rhetorically what would have happened if one or more of the Studios exercised an option prior to termination (e.g. here, prior to 5^th June 2002). Any option had to be exercised by latest 1^st October 2002, so it can also be asked what would have happened, if, after the exercise of an option on say 30^th September 2002, the appellants had broken the contract, perhaps for the first time, leading to its termination by UIP. I am prepared to assume that, in such circumstances, the Studios’ entitlement to a licence, as a result of the exercise of the option, would have continued, despite the subsequent termination. There may be a contrary argument, to the effect that it is a pre-condition of any fresh licence in favour of the Studios that it should continue as a "renewal" commencing "upon the Expiration Date" of the original licence. But it is unnecessary to reach any conclusion on this. The agreement itself distinguishes between the effect of termination upon "accrued" and other rights: see clause 35. The option to renew cannot itself be regarded as an "accrued" right, merely because it appears in the agreement from its inception. But such an option, once exercised, clearly gives rise to an accrued right, in the form of the Studios’ entitlement to a fresh, five year licence. So, assuming that the Studios’ and Cine 5’s entitlement to and obligations under such a licence would survive in such circumstances, that situation is expressly distinguished from the present by clause 35.
38. Reverting to the present situation, the general intention was obviously that the options should be exercised and exercisable only by way of continuation (or "renewal") of the prior licence. That is so, even though the options are expressed to be in favour of the Studios themselves, rather than the Studios’ joint venture creature, UIP. What is suggested here is not renewal, but effectively revival of a fresh relationship by exercise of the option after termination of the relationship with UIP, and at a time when UIP would be expected to be pursuing claims under clause 17. If UIP was entitled to and did terminate under clause 17 (e.g. as here, for failure by Cine 5 to provide a letter of credit), it cannot sensibly have been thought that the Studios should have, or would wish to have, any such option at such a time. As a matter of construction, therefore, the option(s) promised to the Studios never became available for execution.
39. This leaves for consideration whether the Studios can claim damages for loss of their option(s). In my judgment, they can. The grant of the options was part of the consideration provided under the agreement, to which the Studios were parties in their own right. Under clause 10.B and under the head of "Option to renew", Cine 5 agreed that each of the Studios "shall each separately have an option …. to enter into a five … year …. licence agreement with them commencing on the Expiration Date". It was a necessary implication of this positively granted option that Cine 5 would not, by repudiating the original licence in favour of UIP, prevent the option(s) granted in favour of the Studios from ever arising. Cine 5’s performance of its own obligations to the Studios’ joint venture company, UIP, cannot be viewed as if it were some sort of frustrating event or pre-condition, beyond Cine 5’s control, failure of which would simply render the option inapplicable.
40. Point (4)(ii) – did the Studios cause their own loss, by failing to exercise the options prior to UIP’s termination of the agreement? The appellants’ submission is that the Studios could, after Cine 5 fell into breach and at any time up to UIP’s termination, have exercised the option(s), so as in some way to pre-empt the effect of any such termination. The submission underlines the unreality of the appellants’ case regarding exercise of the options. If the Studios’ joint venture company, UIP, was entitled and about to terminate for breach of the basic licence, the Studios cannot have been obliged to "mitigate" their potential loss of their options by exercising them, and cannot be regarded as having "caused" their own loss by failing to do so. To exercise the option to renew would have involved the Studios committing themselves to a fresh, five year relationship with Cine 5, in the face of Cine 5’s breach causing the breakdown of UIP’s first, three year relationship with Cine 5. No-one could sensibly expect the Studios to do this. Moreover, the whole argument assumes that the Studios could be said to have caused or failed to mitigate loss otherwise flowing from the termination by inaction before UIP treated Cine 5’s breaches as justifying termination of the first licence on 5^th June 2002. Prior to that date, Cine 5’s only breaches consisted in failure to pay for and/or take available films. Such breaches could in no way be "mitigated" by any exercise by the Studios of their option to renew.
41. Although unnecessary for my decision, I also see very considerable force in the respondents’ submission that any exercise by the Studios of the option to renew prior to 5^th June 2002 could well also have led to substantial legal arguments by Cine 5 (the reverse of those now mounted) that the agreement was a composite agreement, which could no longer be terminated for breach by UIP once it had been affirmed by the Studios by the exercise of the option.
42. Point (4)(iv) – should there have been a trial of the issue whether the Studios would in fact have exercised their options? The judge acknowledged that the onus was on the respondents to prove that the Studios would have exercised their options. Nonetheless, he held that there was no real prospect, requiring a trial, of any other conclusion. The claim that the Studios has suffered loss and damage in respect of its loss of the options is supported by statements of truth by officers of the respondents, on the basis that the options would have been more valuable to the Studios than any alternative licensing arrangements which they would have been likely to obtain: see the particulars of claim paragraph 8 and the reply paragraph 11. The defence served 13^th September 2002, attested to by officers of the appellants and Avrupa, said that by March 2003 Cine 5’s subscriber numbers would have been such (i.e. so depressed) that the Studios would have been able to generate greater revenues from licensing Turkish cable television rights elsewhere. The respondents’ solicitors’ witness statement dated 20^th January 2003 served in support of the application for summary judgment and based on information from officers of the respondents responded on this point in paragraph 25, by pointing to the guaranteed minimum subscriber numbers which would have applied under the terms of any fresh licence to Cine 5, and to the collapse of actual subscriber numbers following the collapse of the Turkish economy. When the appellants’ head of acquisitions, Mr Oktar, came to reply on 26^th March 2003 he failed to address the response on this aspect at all. He simply pointed out that none of the respondents had by 5^th June 2002 taken any steps to exercise or given any indication that they were considering exercising the option. That, as the judge observed, is hardly surprising, bearing in mind the time available for its exercise on or by 1^st October 2002. One may add that it is even less surprising in circumstances where Cine 5 had been in repeated breach since early 2002 (see the letter dated 5^th June 2002), and UIP and the Studios are likely to have been reviewing their position regarding termination for some time before 5^th June 2002.
43. The appellants also point to evidence that the Studios were unwinding their joint venture company, UIP. But that, as the judge observed, is entirely consistent with the agreement, which conferred the options on the Studios, rather than UIP. The appellants finally submit that there should be a full investigation and if necessary trial in case material, documentary or oral, emerges which undermines the respondents’ case that they would have exercised the options, if Cine 5 had performed the original licence in favour of UIP. Like the judge, I do not think that the appellants have shown any real prospect of a defence that they would not have exercised the options in the circumstances, which on the evidence prevailed with regard to the marketing of such Turkish language cable television films. I would therefore dismiss the appeal on this point also.
44. It follows that in my judgment this appeal should succeed in one respect, in that there should be a trial not merely of the issue whether clause 17 is penal in providing for consequence (i) (accelerated payment of all future licence fees), but also of an issue whether it is penal in providing in addition for recovery of consequence (ii) (payment of the AB Amount). In other respects, I would dismiss this appeal. I would, as invited by counsel, also determine positively that clause 17 is not penal in providing for recovery of the costs of the prior litigation. The summary judgment awarded to the Studios in respect of the loss of their options stands.

Lord Justice Thomas :

 

45. I agree but wish to add a brief word of my own in relation to the issue as to whether clauses 16 and 17 were penal, in view of the fact that I have also reached a different conclusion from that of the Deputy Judge.
46. The unusual feature of the dispute in relation to these clauses arises because in addition to making the payment of various specified sums due on breach, including the AB amount, clause 17 also expressly provided for the termination of all the rights to the films for which payment had already been made or was due. UIP therefore were in a position to exploit the balance of the licence period of such films for their own benefit, even though they had been paid in respect of that period by Cine 5. UIP were not, however, under the terms of the clause required to bring into account against what was to be paid to them (including the AB amount) any benefit they received from that exploitation.
47. If damages were to be calculated in the ordinary way for the loss UIP had suffered from breach, it was accepted by UIP that any benefits that UIP obtained through exploiting the balance of the period by licensing the films to others would have to be brought into account; such benefits would be ones arising in the ordinary course of business as a consequence of the termination. However the contract provided no mechanism for such benefits to be brought into account under clause 17.
48. The short issue was whether UIP had for the purposes of summary judgment application under Part 24 shown that there was no realistic prospect of Cine 5 establishing that clauses 16 and 17 were penal, even though the clauses failed to provide a mechanism for bringing the benefits of exploitation into account against sums that were payable, other than those already accrued due.
49. It is clear from the authorities to which reference has already been made by Mance LJ that a clause may be penal if it cannot be justified as being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. A decision on whether it is penal involves a careful examination of the circumstances which is not possible on a Part 24 application. There is, in my view, sufficient evidence to suggest that it would have been envisaged that on breach, the termination of the rights to the films for which payment had been made would confer benefits upon UIP; however, the terms of the clauses make it clear that these were not to be brought into account against the sums payable on termination including the AB amount.
50. In those circumstances I cannot reach a final conclusion that the clauses were not penal; they might not be, but there are two issues. First, in my view the question must be investigated at trial as to why what appear to be benefits which would accrue to UIP were not to be brought into account, if the clauses were to operate as a genuine pre-estimate of the loss to be suffered by the innocent party on breach. A genuine pre-estimate would ordinarily imply consideration being given to bringing into account the material and significant matters that went to the ascertainment of the actual loss suffered by the innocent party. Because there was a failure to include within the clauses a provision for bringing into account a benefit to the innocent party that would at first sight have been obvious to the parties at the time the contract was made, there is, in my view, a real issue as to whether the clauses were intended as a genuine pre-estimate of the loss. There might, of course, be reasons why the clauses were not penal, even though the benefits were not to be brought into account under their terms, but no conclusion can be reached, in my view, without the investigation appropriate to a trial.
51. Second, in my view clause 17 cannot be severed in the way suggested by UIP so that the AB amount remained payable, even if the remainder of the clause was penal. The clause was concerned with the sums to be paid on termination; apart from the provision which confirmed the obligation to pay the sums already accrued due, it should be looked at as a whole as to what is to be paid on termination. If the apparent benefit, arising from the termination of the film rights, which was to be derived from the opportunity to exploit the balance of the licence period of films for which Cine 5 had paid, had to be brought into account, it had to be brought into account against the sums which became payable on termination including the AB amount. That was because the AB amount was but one component of the whole of the clause the validity of which depended on whether it provided for a genuine pre-estimate of the loss.

Lord Justice Peter Gibson:

52. I also agree, but in deference to the careful and lucid judgment of the judge I too add a few words of my own on the one point on which we are differing from him.
53. I confess that at one stage I was attracted by the judge’s approach to the AB Amount in para. 27 of his judgment that, like the outstanding fees, the unused AB Amount, being the agreed value of the free advertising or barter time to be made available to the Claimants during the course of the contract, was recoverable as a debt against which no credit for any mitigation fell to be set.
54. However, I am persuaded by Mance L.J.’s judgment that that is not correct. By cl. 17 of the agreement upon termination "the AB Amount shall become payable in accordance with Clause 16 above, and all rights licensed in respect of all Films shall terminate and revert to UIP …." UIP was therefore on termination to be free to exploit the Films, and provided that it was not foreseen by the parties at the time of the agreement that that would be of no value to UIP, there is no reason in principle why that benefit should not be taken into account in any genuine pre-estimate of loss consequent on termination to be set against the AB Amount. Whilst the evidence relating to receipts from licensing to the rival to Cine 5, Digiturk, suggests that the benefit from exploitation of the Films is likely to be only modest, it is important to view the matter as at the date of the agreement, when the financial conditions in Turkey were not as dire as they became in 2001 on the collapse of the Turkish lira. I therefore agree that there is a triable issue as to whether the provision for payment of the AB Amount is penal (in addition to the provision for the payment of future licence fees) and that to that limited extent the appeal should be allowed.