Friday, March 15, 2013

Licensee's rights and remedies against third parties

Earlier this week, the Court of Appeal revisited the very interesting issue of the rights of a licensee and the remedies available against third parties. Leaving aside the tax-context of the case, the two issues before the Court were (i) whether a licensee can enter into a contract with a third party in relation to a right not conferred on the licensee by the license; and (ii) whether a licensee may sue a third party for trespass even if it does not itself enjoy rights of occupation or possession under the license.


In Vehicle Control Services v HMRC, the licensee (VCS) provided parking control services to owners/occupiers of land (clients). Pursuant to the license in this case, the client continued to remain the lawful occupier of the land, while VCS undertook to provide parking control services at the car park situated on the land. VCS would issue parking permits to vehicle owners nominated by the client at a fixed charge. These permits were issued by VCS in its own name and the client's role was limited to nominating the recipients. VCS would then examine the car park and if it found vehicles not clearly displaying valid permits it could take a series of measures including the issue of a parking charge notice, vehicle immobilisation and towing away. In addition, VCS was to display warning signs at the property indicating that the car park was for authorised permit holders only. The notice also set out the requirement for valid permits or tickets to be displayed, various other rules and the charges that are imposed for failure to comply with the rules. Finally, this warning stated "You are entering into a contractual agreement. Do not park in this area unless you fully understand and agree to the above contractual terms". The dispute in this case arose out of the tax treatment of parking charges paid by motorists to VCS for the non-display of the required permits.

The first question before the Court was whether the payments made pursuant to the parking charge notices (affixed to cars not displaying the permit) were payments made by motorists to VCS for breach of contract, or if they were part of the consideration paid by the client to VCS for the parking control services. The tax authorities argued that these were not payments for breach of contract because VCS did not have any right to occupy the property and therefore could not enter into a contract with motorists for the right to park in the property. Therefore, the respondent contended that there was a contract instead directly between the motorists and the client, and parking charges were paid for the breach of that contract. Since these charges were due to the client, by allowing VCS to retain these payments, the client in fact was paying additional consideration to VCS for the services provided under the license. On this basis, the tax authorities contended that these parking charges were subject to VAT.

If the parking charges were not damages for breach of contract, the second question before the Court was whether they were nevertheless damages for trespass, or again were payments made to the client and therefore additional consideration paid to VCS by the client. The respondent argued that since VCS was a mere licensee without the right to occupy/posses the property, it did not have the right to sue for trespass. Therefore, no damages were payable by the motorists to VCS and the payments formed part of the consideration paid under the license.

On the first question, the Court of Appeal held that there is an important distinction between making a contract and having the power to perform it. Emphasising this point, Lewison LJ observed "There is no legal impediment to my contracting to sell you Buckingham Palace. If (inevitably) I fail to honour my contract then I can be sued for damages". Therefore, the fact that VCS could not have honoured its part of the contract with motorists without the client's co-operation did not mean that it could not enter into a contract to provide parking space to motorists. Had the client subsequently enforced its rights of occupation of the property and refused to allow motorists to park, the motorists would have a claim against VCS for breach of contract. However, till such time as the client co-operated, there was a valid contract between VCS and the motorists, for the breach of which VCS was entitled to claim damages from the motorists. The Court also rejected the argument that VCS was acting as the client's agent merely because the client nominated persons to whom the permits would be issued. The client's right to nominate permit holders was merely a restriction on whom VCS could contract with, but did not take away from the fact that it entered into contracts with the motorists as a principal and not as an agent. Further, since the permits and the warning signs referred only to VCS and made no mention of the client, even if VCS was acting as an agent it was acting for an undisclosed principal. Since agents for undisclosed principals can sue and be sued under contracts with third parties, such an agency would not affect the legal nature of the payments made by the motorists to VCS. Therefore, the parking charges paid by motorists to VCS were damages for breach of contract and not additional consideration paid to VCS by the client.

On the second question, the Court of Appeal relied on its earlier decision in Manchester Airport plc v Dutton, where Laws LJ had observed, "the true principle is that a licensee not in occupation may claim possession against a trespasser if that is a necessary remedy to vindicate and give effect to such rights of occupation as by contract with his licensor he enjoys … The principle applies although the licensee has no right to exclude the licensor himself. Elementarily he cannot exclude any occupier who, by contract or estate, has a claim to possession equal or superior to his own. Obviously, however, that will not avail a bare trespasser". The license here entitled VCS to tow away vehicles which infringed the terms of parking and therefore entitled VCS to eject trespassers. In order to vindicate that right (and the rights it had pursuant to the contracts with motorists) it was essential for VCS to have the right to sue trespassers.

The important point to note is that the license in Dutton granted the licensee the 'right to enter and occupy', which was different from the license in the present case. However, Lewison LJ observed that the two principles emerging from Dutton were- (a) The court has power to grant a remedy to a licensee which will protect but not exceed his legal rights granted by the licence; and (b) In every case the question must be, what is the reach of the right, and whether it is shown that the defendant's acts violate its enjoyment. Citing other cases with similar outcomes, Lewison LJ concluded that the principles emerging from Dutton were not limited to cases in which the licensee has a right to possession or occupation. Therefore, VCS did have the right to sue motorists in trespass and the parking charges could be considered damages for trespass.

In sum, this case is a useful reminder of the rights and remedies available to a licensee against third parties, and reiterates that a licensee's limited rights against the licensor do not always limit its rights against third parties. In particular, the extension of Dutton to cases where the licensee does not have the right of possession or occupation is likely to be of significance in future cases.

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