Can arrears that were never pursued during an agreement still be sought after its termination?

Termination of Agreement Effective Even though Payments not Enforced

Anne of Green Gables Licensing Authority Inc. v. Avonlea Traditions Inc. 2000 CanLII 22663 (ON SC)

The plaintiff/licensors in this case took no steps to enforce arrears for the entire length of a licensing contract. They terminated the licensing agreement, but the defendant continued to sell the licensed products. Because of the extended period of forbearance, the court did not award interest on the royalties due before the contract was terminated. It appears that because of this forbearance, the defendant did not take the termination letter seriously. The plaintiffs’ position was strong in part because the contract contained clear provisions governing both termination and the effect of termination on the rights and obligations of the parties.

Drafters should ensure that the termination clause is clear, and sets out the effects of termination.

In Anne of Green Gables Licensing Authority Inc. v. Avonlea Traditions Inc. 2000 CanLII 22663 (ON SC), the agreement in issue concerned licensing of IP related to “Anne of Green Gables”, and could be terminated by licensors for cause, such as failure to pay royalties as provided for in paragraph 20(e), which provided: “In addition to termination rights provided elsewhere in the Agreement, the Licensors shall have the right, at their option, to terminate this Agreement if the Licensee … fails to make timely payment of royalties when due … On such termination the Licensee shall have no further rights to use any theme or name licensed hereunder in any territory (whether or not previously used in any territory) and shall permanently discontinue use of any such theme or name or similar theme or name associated with the works of Lucy Maud Montgomery.”

The defendant admitted that as of the date when the agreement was terminated, the sum of $255,042.66 was owing for outstanding royalties and sub‑license fees. Notwithstanding the termination of the license agreement, at the date of trial the defendant continued to sell merchandise bearing the certification mark, “This product is officially licensed by the heirs of L.M. Montgomery”, with a copy of the signature of L.M. Montgomery.

The defendant alleged that the plaintiff had terminated the agreement in bad faith. The court found no evidence of bad faith. The termination letter provided for a six-month extension for the license on a nonexclusive basis. Various contacts were made to enter into a new non-exclusive license agreement, but these were rebuffed or ignored. After termination, a further offer was made by PEI to structure the sale of the defendant, but the defendant did not respond to the proposal. The defendant’s claims were dismissed.

To read the full case on CanLII, click here.