Termination Rights Gone Wrong: Lessons from the Zaha Hadid Case

In late 2024, Mr. Justice Adam Johnson delivered his judgment in Zaha Hadid Ltd v Zaha Hadid Foundation [2024] EWHC 3325 (Ch), offering valuable insights into the interpretation of indefinite agreements with unilateral termination clauses, and setting significant precedents for drafting licence agreements.

The crux of the dispute

The dispute centred on a trade mark licence agreement between Zaha Hadid Limited (the “Company”) and the Zaha Hadid Foundation (the “Foundation”), involving the use of Dame Zaha Hadid’s name and related trade marks. Clause 12 of the agreement, allowed only the Licensor (the Foundation) to unilaterally terminate the licence, leaving the Licensee (the Company) bound indefinitely with no clear right to terminate. The Company sought declarations to end the agreement, arguing that (1) the unilateral termination clause should be interpreted as providing either party with the right to terminate on reasonable notice, and (2) the agreement as a whole was unlawful under the doctrine of restraint of trade.

Termination and the question of construction

The parties debated whether identifying a right of termination, where none was explicitly stated, involved interpreting the existing terms or implying new ones. The Company argued that it was a matter of interpretation, and explicitly stated that it was not seeking to imply a new term.

Johnson J emphasised that interpreting an agreement is a “unitary exercise,” requiring an iterative process of checking proposed interpretations against the contract as a whole, and its commercial consequences. Having reviewed the agreement’s language and considering Clause 12 in context, the Court concluded that the Licensor should have wide powers of termination and the Licensee should have none. Despite the clause’s one-sided nature, this was consistent with the agreement’s overall structure. Incidentally, the judge pointed out that it was not necessary to determine the positions of the parties at the time of contracting in order to resolve the question of interpretation. 

Restraint of trade

The Company’s second argument centred on the doctrine of restraint of trade. It claimed that the agreement’s indefinite nature, combined with its onerous obligations – including a 6% royalty on all global income (even income unrelated to the trade marks) and a requirement to use 'best endeavours' to promote and expand the licensed services worldwide – unfairly restricted its ability to trade freely. However, the Court found no actionable restraint.

The doctrine, reaffirmed in Quantum Advisory Ltd v Quantum Actuarial LLP [2021] EWCA Civ 227, has historically been applied to specific terms of agreements. In this case, the Company contended that the cumulative effect of the obligations rendered the deal excessively one-sided and left it trapped in an unfair bargain. While the threshold for engaging the doctrine is somewhat unclear and cannot be precisely defined, it requires more than a mere limitation on freedom of action (paragraph 46 of the judgment). 

Upon review of the facts, the Court found that the agreement had brought significant value to the Company, as evidenced by its commercial success and growth under the arrangement. The royalty payments and promotional obligations were deemed commercially reasonable, reflecting the Foundation’s legitimate interest in preserving Dame Zaha Hadid’s legacy. The Court was, however, hesitant to question the fairness of the mutually agreed deal. As Johnson J observed, ‘there is no public policy which demands an apparently profitable commercial bargain.' Accordingly, the agreement was found to be neither unreasonable nor contrary to public policy.

Implications for licence drafting

The judgment offers two key takeaways for drafting licence agreements. First, clarity in termination provisions is essential. The decision emphasises the importance of having explicit and precise termination clauses. For agreements that are intended to be indefinite, parties should carefully assess whether including mutual termination rights could address any perceived imbalance created by one-sided terms.

Second, navigating restraint of trade risks requires a thoughtful approach. Even demanding commercial obligations are unlikely to trigger the restraint of trade doctrine if they are proportionate, negotiated at arms length (with the assistance of legal advisors), and aligned with the licensor’s legitimate interests. It is crucial for parties to evaluate the scope and duration of these obligations in relation to the benefits they provide. In short, the restraint of trade doctrine cannot be used to retroactively insert terms that were overlooked or omitted during the drafting process.