Implied Terms
Cases
Irish Telephone Rentals v. Irish Civil Service Building Society Ltd.
[1991] IEHC 1; [1991] ILRM 880
Costello J
(b) Did the defects in the system constitute a breach of contract?
11. Clause 2 of the principal hiring contract (and in the supplementary hiring contracts) provided that the agreed hiring rent was to be paid during the continuance of the contract ‘for the hire of the installation and for maintenance of same in good working order’. The defects which I have outlined seem to me to be a breach of the plaintiff’s obligation under this clause as they failed to provide installations during the continuance of the hiring in good working order. The working order of the system by 1988 could not be described as being ‘good’ and it seems to me that the plaintiffs were in breach of an express term of their contracts.
12. The defendants were also in breach of a term implied by the Sale of Goods and Supply of Services Act 1980. By virtue of s. 39 of that Act in every contract for ‘the supply of a service’, where the supplier is acting in the course of a business and where goods are supplied under the contract there is a term implied that the goods will be of ‘merchantable quality’. In this case the contract which was entered into between the parties was for the supply of a telecommunications service. The plaintiff entered into the contract in the course of its business as suppliers of such a service. And goods, namely, a switchboard, console and telephone sets, were supplied under it. ‘Merchantable quality’ has the same meaning in s. 39 as it has in s. 14 (3) of the Sale of Goods Act 1893 (inserted by s. 10 of the 1980 Act). Goods are of ‘merchantable quality’ if they are as fit for the purpose for which goods of that kind are commonly bought and as durable as it is reasonable to expect. The durability of the goods is not in question in this case. What the defendants contend, and I think correctly contend, is that the goods which they hired were not fit for the purpose of providing a reasonably efficient telephone system. There was, in my judgment, a breach of the term implied by s. 39 of the 1980 Act.
(c) Did the plaintiffs breach of contract discharge the defendants from further performance of the contract?
13. The issue which arises now for consideration is one which arises in many cases. It does not follow that because one party is guilty of a breach of contract that the other may treat himself as discharged from obligation further to perform the contract.
14. There may be many cases in which the court, when presented with a problem of this sort, may be required to consider whether the term which was broken was ‘a condition’ or a ‘warranty’ or, a ‘fundamental term’ of the contract but, as the frequently cited case of Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 1 QB 26 shows, this is by no means a necessary exercise to be undertaken in every case. I think the approach suggested by the judgment of Diplock LJ at pp.65 and 66 of the report is appropriate to this case. In answer to the question ‘In what event will a party be relieved of his undertaking to do that which he has agreed to do but has not yet done?’ he said:-
15. The contract may itself expressly define some of these events, as in the cancellation clause in a charter party; but, human prescience being limited, it seldom does so exhaustively and often fails to do so at all. In some classes of contracts such as sale of goods, marine insurance, contracts of affreightment, evidenced by bills of lading and those between parties to bills of exchange, parliament has defined by statute some of the events not provided for expressly in individual contracts of that class; but where an event occurs the occurrence of which neither the parties nor parliament have expressly stated will discharge one of the parties from further performance of his undertakings, it is for the court to determine whether the event has this effect or not.
16. The test whether an event has this effect or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?
17. If this question is posed in this case there can be only one answer to it. The ‘event’ which occurred in this case is the development of a situation in which the installation which the defendants had hired significantly failed to fulfil its purpose. This ‘event’ has deprived the defendant of the whole of the benefit which it was intended the defendant would obtain from the hiring agreements. The defendant was therefore, in my opinion, discharged from further performing the hiring agreements and was entitled to treat the contract as being at an end and request the plaintiff to take back their installations. It follows therefore that the plaintiffs are not entitled to rely on clause 11 of the contract and that their claim for damages for breach of the hiring contracts relating to the telephone installations also fails.
The broadcasting contracts
18. The first of these contracts, designed to provide a paging system in the defendant’s head office premises, was dated 17 January 1985, a supplementary contract being dated 18 January 1989. Under these contracts the plaintiff let on hire to the defendant a 60-watt amplifier, a microphone and a number of loudspeakers for a period of 12 years, the terms of hiring being similar to those in the telephone contracts. There was a rent review clause, by the application of which the annual rent had increased to £1,438.16 when the contracts were terminated. Using the formula contained in clause 11 on agreed liquidated damages in the event of repudiation the plaintiff’s claim the sum of £7,936.27 liquidated damages for the nine years remaining of the hiring contract together with a quarter’s rent claimed to be due for 1988.
19. The circumstances of this part of the case are entirely separate from those relating to the telephone contract. The complaint here is that the loudspeakers were too loud and that they had no individual volume controls to enable the sound to be reduced as a result of which some had to be disconnected. Three were disconnected on Mr. Kelly’s floor and six others may have been. But the evidence also establishes that this defect could have been easily remedied by what has been referred to as ‘tapping’ the offending loudspeakers. I do not think, therefore, that the defendant has established any breach by the plaintiff of these contracts; it should have given an opportunity to the plaintiff to rectify the complaint. Even if a breach of contract had been established it was not one which would have entitled the plaintiff to terminate the contract on the basis that the breach discharged its obligation to continue the hiring.
20. What falls therefore now for consideration is whether the plaintiff is entitled to an award under clause 11 or whether this clause, as the defendants contend, is a penalty clause and therefore unenforceable. If it is then I must assess damages according to common law principles.
21. Clause 11 provides as follows:-
22. If the subscriber that is, the defendant shall repudiate this contract and the company that is, the plaintiff shall accept such repudiation so as to terminate this contract the company may thereupon remove the installation and the subscriber shall pay to the company all payments then accrued and also a sum equal to the present value on a 5% basis of the remaining rentals that would have been payable under this contract if not so terminated less an allowance of 25% to cover the estimated cost of maintenance and value of recovered material. The said sums shall be payable as liquidated damages it being an agreed estimate of the loss the company would suffer.
23. I have the following comments to make on this clause.
(1) The estimate of the plaintiff’s loss arising from premature termination is based on the gross rents outstanding for the unexpired term of the contract. However, the clause accepts, and correctly accepts, that the plaintiff is not entitled to the full amount of these rents. It also accepts that whatever may be the figure for the agreed loss which the plaintiff may suffer that figure should be discounted because instead of receiving the balance of the rents in installments over the years an accelerated payment of the rent will be made to the plaintiff. The discount in clause 11 is 5%. Whilst the defendant readily accepts the principle of discounting it is urged that the sum estimated for the plaintiff’s loss should be discounted at a higher rate.
(2) The figure for the gross rent is to be reduced, according to clause 11, by a further 25% of the discounted rent because (a) the plaintiff will have been saved maintenance costs during the unexpired term and (b) an allowance should be given for the value of the installations recovered. The plaintiff’s evidence is that the 25% deduction was calculated by allowing a figure of 5% of the discounted gross rent as the percentage attributable to maintenance charges and 20% of the discounted gross rent as the percentage attributable to the value of the returned installations.
(3) It will be observed that the formula is based on a deduction from the gross amount of the outstanding rent of a sum equivalent to 28.75% of the gross rent (25% of 5% of the gross rents) in respect of the estimated cost of maintenance and the estimated value of the recovered installations. The clause was attempting to make an estimate of what the plaintiff would lose by the contract’s premature termination. As the correct measure of the plaintiff’s loss on premature termination at any point of time during the life of the contract is the profit it would have earned in the outstanding period of the contract’s life the formula in clause 11 can only be correct if it produces a figure which approximates to that profit. It follows, therefore that this clause can be shown to be a correct estimate of the plaintiff’s loss if in every case of premature termination the profit thereby lost is 71.25% of the gross rental then outstanding.
(4) Clause 11 is a standard clause. All the plaintiff’s hiring contracts contain this estimate of the loss suffered on each of the plaintiff’s contracts should they be prematurely terminated. The defendant has submitted that the sum calculated in accordance with the condition does not represent a genuine pre-estimate of the actual loss which the plaintiff sustained as a result of the wrongful repudiation of the hiring agreement but is a penalty clause which the court should not enforce. The courts have evolved various rules for considering whether a stipulated sum is a penalty or a genuine pre-estimate. That which is relevant to present case is that stated by Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. Ltd [1915] AC 79 at 87:-
24. It will be held to be a 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.
25. The application of this principle is to be seen in the majority decision of the Court of Appeal in England in Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 in which the court considered a contract for the hiring of a telephone-answering machine for a seven year period which was repudiated before the hiring began. The hiring agreement contained a clause which made provision in the event of premature termination for the payment of agreed liquidated damages equal to 50% of the total of the rentals due. In deciding that the sum of 50% was a genuine pre-estimate of loss and not a penalty Lord Diplock examined what would be recoverable by way of damages assessed on common law principles and concluded that because 50% of the gross rent would not produce a figure which was ‘extravagantly greater’ than those damages the clause was enforceable.
26. Before considering in greater detail the operation in this case of clause 11, I should give some more detail of how the plaintiff’s claim is made up.
27. The plaintiff has calculated that there were nine full years of the agreement to run from the date of termination. The annual rent at that time (which had been increased over the years pursuant to the rent revision clause) was then £1,438.16. This annual rent was discounted over a nine year period by 5% giving a discounted figure of £10,222.15. There was added to this one quarter’s rent unpaid in 1988 (that is, £359.51) giving a total of £10,581.66. A figure of 25% of this sum was then calculated, that is a sum of £2,645.42. This was deducted from the sum of £10,581.69 giving a figure of £7,936.27. It is to be noted that the gross rent for the unexpired nine year period of the hiring was £13,043.62 according to these calculations.
28. I have come to the conclusion that the formula contained in clause 11 does not produce a liquidated sum that can properly be regarded as a genuine pre-estimate made at the date of the contract of the loss which the plaintiff would suffer should the contract be prematurely determined and that it is in reality a penalty and therefore unenforceable. My reasons are as follows:-
(a) In estimating the plaintiff’s loss clause 11 correctly allows a deduction from the gross rents of the sums saved in maintenance charges. But the evidence establishes that the 5% figure is an estimate not of all the maintenance charges which would have been incurred had the contract run its course but only an estimate of the cost of materials used in maintenance and expenses such as daily allowance, petrol and the travelling expenses of maintenance staff. The wages of the maintenance staff are excluded. Support for this approach is claimed by the plaintiff from an unreported judgment of the High Court in England (the transcript of which was made available) in the case of Telephone Rentals Ltd (the plaintiff’s English parent company) v Photophone Ltd, delivered 8 February 1957 . I do not think that this approach is correct and, with respect, I cannot follow that judgment to which I was referred. In estimating the loss which the plaintiff would suffer the draftsman of clause 11 should have attempted to estimate the net profit which the plaintiff would have earned had the contract been performed. This net profit should have been calculated by deducting the actual total costs of maintenance and not only a proportion of those costs. It seems to me that this error produces an estimate very much in excess of the plaintiff’s actual loss and cannot be regarded as a genuine pre-estimate of that loss.
(b) The clause makes no allowance for other deductions which in my judgment should have been made from the gross rent figure. The evidence establishes that when originally fixing the rent under the contract the plaintiff took into account not only the likely maintenance charges but also finance charges, administrative costs and engineering costs. Any genuine calculation of the actual loss likely to be suffered from premature termination should make an allowance for these charges as otherwise the plaintiff would receive more than the profit it would have made had the contract run its course. As I will show later it would have been a simple enough matter to estimate what that profit would have been. But by only deducting maintenance charges (and only a portion of such charges at that) the clause seriously overestimates the profit which the plaintiff would have made on the hiring.
(c) Part of the 25% deduction is based on an estimate of the value of the materials obtained at the date of premature termination. The evidence established that the clause was based on the assumption that this value would be 20% of the discounted gross rents. This, in my view, is an entirely arbitrary figure and cannot be regarded as a genuine pre-estimate of the value of the recovered installations. It is to be borne in mind that the hiring was to last for twelve years and that there was a rent variation clause. Perhaps by a coincidence 20% of the discounted rent might at some point during that period approximate to the depreciated value of the installations. But this would be mere coincidence; there is no real connection between the figures produced by these calculations. The facts of this case illustrate the point. 20% of the discounted rent at the date of termination of the broadcasting contracts was £2,116. But in fact the installations when returned were valueless. 20% of the discounted value of the outstanding rents under the telephone contracts was £16,789. In fact their value was only £7,500 (only the switchboard being marketable). It seems to me that the relationship between discounted value of outstanding rents due at any point of time during the contract and the then value of the installations at that point of time is so tenuous that an estimate of the plaintiff’s loss based on this connection cannot be a genuine one.
(d) The result of the operation of the formula is to award a liquidated sum equal to 71.25% of the gross rent, less 5% for accelerated payment. This predicates a net profit of 71.25% had the contract not been terminated. This is quite an enormous net profit. Whilst the onus is on the party who alleges that a clause in a contract is a penalty and not a genuine pre-estimate of the loss which would be suffered by premature termination I think the onus is discharged once the clause in question is based on the assumption that this is an estimate of the profit the plaintiff lost. The plaintiff is engaged in the business of letting goods on hire. Its turnover in its profit and loss account would therefore (apart from an occasional and small sum received for goods recovered prematurely and sold) represent its annual rents received under all its contracts. Its profit and loss account would show the net profit (after deducting all maintenance charges administrative and financial charges and depreciation). This would indicate the average net profit on each of its hiring contracts. If clause 11 (which is a standard clause in all its contracts) is a correct estimate of the net profit made on each of its hiring contracts this would mean that the net profit figure in its profit and loss account would be about 71.25% of its turnover.
29. The plaintiff has not produced its profit and loss account and so l do not know what it shows. But I am entitled to apply the knowledge of financial affairs which is available to every reader of the daily press from which companies’ net profits as a percentage of their turnover is shown for an extensive range of different classes of businesses. These, of course, vary widely. In the retail trade a net profit of 10% of turnover is an average figure. In some manufacturing companies it may be considerably less or considerably more. A net profit of 71% of turnover would be a staggeringly large one in any business and in the absence of proof that this is what the plaintiff earned I am driven to the conclusion that the estimate of loss contained in clause 11 is not a genuine pre-estimate but is a penalty.
30. I cannot therefore allow the plaintiff’s claim based on clause 11 and must assess damages based on the actual loss I think the plaintiff suffered.
31. The plaintiff recovered back the equipment let under the contracts but was unable to re-let or sell them. The plaintiff’s damages will therefore be an estimate of the profit lost on the transaction, appropriately discounted for accelerated payment. The gross rent which would have been received for the nine year balance of the contract was £13,043.62 (assuming no increase, in the rent, an assumption the plaintiff has made in its calculations). I have been given no information as to what the plaintiff’s average net profit is, but bearing in mind that the evidence establishes that the plaintiff’s business is a competitive one (which would oblige them to keep their hiring charges at a reasonable competitive level) and that the plaintiff is a long established firm (which would give it the benefit of a considerable good-will) I would consider it probable that a net profit of 20% of gross rents is what the plaintiff would have earned on average. There is nothing to suggest that there are any special circumstances which would justify an award for breach of this particular contract on a basis higher than average net profit and so the plaintiff’s loss of profit for the last nine years of this transaction is £2,608.72 (20% of £13,043.62). I have very little evidence to help me on how this sum should be discounted and I will, in the absence of evidence, accept the 5% figure contained in clause 11. This means that there should be a deduction of £130.47, giving an award for the loss the plaintiff has suffered for this period of £2,478.29. To this to be added the loss in relation to one quarter of the 1988 rent, namely, £359.51. 20% of this sum, discounted by 5% is £68.04. This gives a total figure for damages of £2,546.69. The plaintiff is entitled to an award of this sum.
32. I have assessed damages in the light of the facts established in this case. I do not think I am required to assess them on the different basis which the facts established in In the matter of Rank (Ireland) Ltd [1988] ILRM 751 required.
McKenna v. Best Travel Ltd. t/a Cypriana Holidays
[1996] IEHC 42; [1998] 3 IR 57
Lavan J
Counsel for the Plaintiff alleges breach of contract under the Sale of Goods Act, under the Sale of Goods and Supply of Services Act, 1980 and breach of a further implied condition that the Defendants would not knowingly expose the Plaintiff to a significant risk to her life, limb or health which they were aware of or ought to have been aware of, and that they would warn the Plaintiff of any dangers travelling to selected destinations where there would be significant risk and that they would take all reasonable steps to ensure the Plaintiff’s safety including using goods which would be reasonably fit for their intended purpose. These expressed or implied conditions were allegedly breached in that the Plaintiff was exposed to significant risk, was given no advice as to any possible dangers inherent in travelling to certain parts of Israel, especially while the Intefata was active. The bus used by the Defendant’s agent was not fitted with reinforced glass. Furthermore or in the alternative the Plaintiff alleges negligence and breach of duty of care owed to the Plaintiff in failing to warn the Plaintiff of the dangers in recommending the Holy Land as a holiday destination, in failing to organise the trip so as to minimise the risk to the Plaintiff by permitting the Plaintiff to travel through Bethlehem in a bus easily identifiable as Israeli.
3. The first Defendant claimed that reasonable care was taken by daily checking of routes and there was no warning with respect to this route on this particular day. No attack on a tourist bus had taken place in the nine months previous to the incident according to Mr. Lawyer or ever according to Mr. Caspi. There was no evidence that warning should have been given to tourists not to take organised bus tours, a completely different category to Israeli scheduled buses, nor is there any evidence that the coach used was unsuitable. They submit that there as no duty of care in Irish Law requiring travel agents to warn clients of a probable risk to their health posed by the client’s chosen destination. In England the duty of care to protect from the criminal activity of others may arise where injury to the injured party from such criminal conduct was “highly likely” as per Smith -v- Littlewoods Organisation Limited , 1987, 1 All England Reports at page 710. Further assuming that the duty of care is that recognised in Wortherly -v- Greyhound Corporation , 365 S.O. 2D at 177, that is and I quote:-
“To warn passengers of dangers which are reasonably foreseeable and which might cause harm.”
4. The First Defendant submits that there was no danger of which the Plaintiff ought to have been warned.
5. The Second Defendant claims that it was an agent of the First Defendant and therefore it is the First Defendant who should be sued. Concerning the trip to Israel they are not agents for the Plaintiff or First Defendant. Even if they were on principle in Hedley Byrne & Company Limited -v- Helier and Partners Limited , 1964 Appeal Cases at 465, the duty would be to take reasonable care in giving advice and the Plaintiff never sought advice or said she was going on that particular trip.
6. On the Second Defendant’s defence of the general rule of an agency as espoused by Wright J. in Montgomery -v- U.K. Mutual S.S. Association Limited , 1891, 1 Queen’s Bench at 371:-
“This is a general rules and the intention of the parts and parties and the particular circumstances surrounding the contract can render the agent liable.”
7. I make that comment clearly pointing out that I am deciding this case and this particular matter without reference to Council Directive No. 90/314/EEC, which came into effect on the 13th June, 1990 with regard to the claim of breach of contract.
8. The Sale of Goods and the Supply of Services Act, 1980, Section 39 includes as implied conditions in a contract for the supply of services that:-
“the supplier will (b) supply the service with due skill, care and diligence, (c) that where materials are used they will be sound and reasonably fit for the purpose for which they are required.”
9. As regards the first implied condition the routes in this case were checked each morning and no warning had been issued for that route on that morning. The fact that nothing like this had ever happened before would seem to indicate that the Defendants exercised the due care required as their precautions were effective.
10. The Plaintiff contended that the bus should have been fitted with reinforced glass. However no evidence has been adduced that this was common practice or indeed recommended practice and therefore on the basis of Wilson -v- Best Travel, 1993, 1 All England Reports at 353 this argument fails.
11. The issue of Israeli registration plates making the bus easily identifiable as an Israeli bus has not been proven as a causative factor in the attack. In addition to Mr. Caspi’s evidence of approximately 2,000 trips to Jerusalem and Bethlehem each year by such buses with no prior attack having been complained of this would seem to rule out this factor. Allowing for the public sentiment in the West Bank after the invasion of Kuwait it is possibly more likely that the fact that the occupants of buses were easily identifiable as westerners, which was a factor in the attack and this would not have been disguised by different registration plates on the bus.
12. Counsel for the Plaintiff cites a further implied condition in all holiday contracts that the operator will not knowingly expose the holiday maker to significant risk to life, limb or health. This appears to be the opinion of the authors Nelson, Jones and Stewart in, and I quote, ” A practical guide to package holiday law and contract “, derived from the decision in Anns -v- Merton London Borough Council , 1978 Appeal Cases at 728, a case of tortuous liability and therefore not an implied condition in contract. The only other implied condition could derive from Davey -v- Cosmos Air Holidays , 1989 CLY at 327. There is a county court case in England where the Judge held a breach of an applied term of contract and I quote:-
“To take such steps as are reasonable taking all the circumstances into account to avoid exposing their clients to any significant risk of damage or injury to their health.”
13. For the same reasons that the Defendant did not breach the implied condition under the Act it would seem that neither did they breach this condition, should it apply, reasonable care having been taken.
14. Turning to law on the Duty of Care in Tort as laid down in Donoghue -v- Stephenson , 1932 Appeal Cases at 562, and stated by Lord Wilberforce in Anns -v- London , in Anns -v- Merton London Borough Council at 751, this was affirmed in Ireland by the Supreme Court in Ward -v- McMaster , 1989, 9 Irish Law Reports Monthly 400, 409 by McCarthy J. who refused to dilute the words of Lord Wilberforce and preferred to, and I quote:-
Cite as: [1991] ILRM 880, [1991] IEHC 1
BSS Group Plc v Makers (UK) Ltd (t/a Allied Services)
[2011] EWCA Civ 809 , [2011] TCLR 7
.
The facts
I take these from the judge’s reserved judgment, as supplemented by agreed matters. In 2006 Greene King decided to renovate its Earl of Derby public house in Cambridge (‘the property’). It instructed Cubitt Theobald Limited to do the work and in July 2007 that company sub-contracted the plumbing work to Makers. The work included the installation of new water services.
In July 2007 Makers entered into a labour only sub-contract with the claimants for the installation of the piping for a fixed price of £4,100. It instructed them that they were to replace the existing copper piping with a new plastic piping system called ‘Uponor’ (also known as ‘Unipipe’: Unipipe is the product and Uponor the manufacturer). Makers was to provide the claimants with the materials. It ordered them from BSS, whose staff at its Cambridge branch dealt with the orders. The claimants began work on 9 July 2007 and from that date BSS supplied Makers with the materials that the claimants required. They included Uponor piping, Uponor compression adaptors and 22mm isolating valves. The valves supplied in July (described in evidence by Mr Denman, the BSS representative who supplied them, as a ‘cheap imported valve with no particular make’) caused no problem. The problem arose on 24 August when the claimants used a different type of valve that was supplied by BSS on 12 August. I must, however, first refer to the documents of central relevance to the issues. They were created in the second week of August.
On 8 August Mr Carter (of Makers) sent a fax to Mr Chamberlain (of BSS). It was stated to be ‘Re Earl of Derby, Cambridge’ (i.e. the property) and asked for a quotation ‘for the following items for the above project. ASAP.’ It listed 18 classes of items of specified dimensions. Three items were identified as Uponor items, being different lengths of pipe of 32mm, 50mm and 63mm diameter. Three other items were identified as specifically to be used with such Uponor pipes, namely (a) ’16 x 1.1/4″ BSP [British Standard Pipe] with adapter to 32mm Uponor’, (b) ‘1 x 2″ stop tap with built in DOC adapters to 63mm Uponor’, and (c) ‘1 x 2″ DCV 2″ bushed adapter to 63mm Uponor.’ The other 12 items, such as bends, couplings, tees, rings and backplates and, in particular, ’15 x 22mm Ballofix valves’, made no reference to Uponor. The list did not refer to Uponor adaptors although BSShad in July supplied such adaptors to Makers. The judge found that ‘by’ 8 August (which, in the light of the evidence, meant before 8 August) BSS knew that the Uponor system was being used for the pipe work at the property.
BSS responded to that inquiry by a quotation faxed back on 8 August and signed by Mr MumbyCroft. It was in respect of 25 items and included, for example, the three lengths of Uponor pipe referred to in Makers’ inquiry, although BSS described it under its alternative name of ‘Unipipe’, as it did in relation to all the Uponor items it quoted. Its response to the request for a quotation for 15 ‘Ballofix valves’ was for part no 86310113, namely ’22m CXC CP/DZR Boss Miniball [Valve] CU [Compression] WRC’, the cost for 15 such valves being £151.65. Whilst there is a particular make of valve known as a ‘Ballofix’ valve, ‘Ballofix’ is, according to the evidence, also a generic term for valves of such kind. The Ballofix valve for which BSS was quoting was its own manufactured brand. It is designed for use with copper piping. It differed from the isolating valves BSS had earlier supplied in July.
Makers then placed orders with BSS on (as the judge found) 9 and 10 August, although the first order was apparently dated 8 August. The first order, marked for the attention of Mr MumbyCroft, was for 25 items, of which the seventh was ’15 x 22mm. Boss Miniball [valves] CU [Compression] WRC’, the relevant valves, namely the ones for which BSS had just quoted. The second order, marked for the attention of Mr Pound, was for eight items, of which the fifth was ’20 x 2.25mm Brass [Compression] Adaptor 770004 Unipipe’, i.e. Uponor compression adaptors. BSS delivered the items on 12 August. The Uponor adaptor comprises two brass components that can ostensibly be used in conjunction with a Ballofix valve to enable a Uponor pipe to be sealed off: one part of the adaptor fits into the other, the whole is attached to the pipe and the valve is then screwed into the adaptor..
The claimants were working in a bathroom at the property on 23 August. To enable them to do so, the water supply had been turned off. They replaced certain pipework and, at the end of the working day, had to seal off three pipes upon which they been working. This was necessary because when the property resumed service as a public house in the evening, the water supply would be turned on again. There was no evidence that all three pipes were sealed with like components, but what the evidence did show was that the claimants sealed one of the pipes by fitting to it a Uponor compression adaptor that Makers had bought from BSS (whether one ordered on 10 August or earlier was not proved) and then sealing the pipe off by screwing into the adaptor one of the 22mm Boss miniball valves that Makers had ordered on 9 August. The claimants turned the water back on, waited for half an hour to check for leaks and then left the property. During the evening, the water pressure increased. Early on 24 August, the valve blew off the end of the pipe resulting in a substantial flood and damage to the ground floor of the property.
An expert, James Garry, reported on 3 October 2008 on the cause of the valve failure and expressed two conclusions. First, the 22m Boss miniball valve was incompatible with the Uponor compression adaptor: the two components could not make a perfect fit because of conflicting screw threads. Second, however, they would appear to fit together to make a secure joint and, unless the claimants had undertaken a specific check on the threads, they would have been unaware of their incompatibility: once tightened, the joint would appear secure and it would only fail when subjected to significant pressure.
Makers’ case against BSS was that it had made known to BSS that it would be using the Boss miniball valve in conjunction with the Uponor adaptor and that BSS was in consequence in breach of the term implied by section 14(3) of the 1979 Act: the valves were not fit for their intended purpose since they were incompatible with the Uponor adaptor. Its primary case was that its contracts manager, Mr Carter, had told Mr Chamberlain, a BSS salesman, of the proposed joint use of the two items and that Mr Chamberlain had confirmed their compatibility. The judge, however, rejected that case and Makers does not challenge that finding.
Having rejected that case, the judge nonetheless found that Makers had specified a particular purpose to BSS, namely that the valves were being bought for use with Uponor pipes. For that conclusion, the judge relied upon the fax inquiry, quotation and orders. He found, first, that Makers thereby expressly made that purpose known to BSS, saying in paragraph 59:
‘The Fax enquiry, the written quotation and the written order all place these items squarely within an order for Uponor pipe and accessories. The order was for delivery to site at The Earl of Derby. By 8th August 2007 [BSS] was well aware that the Uponor system was being used for the job.’
The judge rejected as unsustainable BSS’s argument that the valves might have been ordered for use in another job. If he was wrong that the purpose was expressly made known, he found, for the same reasons, that it was made known by implication.
The judge rejected BSS’s argument that this was an ‘idiosyncrasy’ case. He said:
’62. Counsel for [BSS] argued that this was an “idiosyncrasy” case where no liability should attach to the seller. He relied upon the House of Lords decision in Slater v. Finning [1997] AC 473. The principle is accurately expressed in the headnote. “Where a buyer purchased goods from a seller who dealt in goods of that description there was no breach of the implied condition for fitness … where the failure of the goods to meet the intended purpose arose from an idiosyncrasy, not made known to the seller by the buyer, in the buyer or in the circumstances of the use of the goods by the buyer, and that that principle applied whether or not the buyer was himself aware of the idiosyncrasy.” The case concerned a boat and its engine and camshafts. Another example was referred to in the case of Griffiths v. Peter Conway, Ltd [1939] 1 All ER 685 where the purchaser of a fur coat had unusually sensitive skin. These were plainly cases of an idiosyncrasy.
63. In this case the Uponor pipe and adaptor is perfectly normal. No doubts tens of thousands of metres of pipe and thousands of adaptors are manufactured each year. These are items which [BSS] customarily supplies. The Boss valves are [BSS’s] own brand. This valve and this adapter do not fit together. There is no idiosyncrasy in either part. They are simply incompatible the one with the other. This is not an idiosyncrasy case.’
He also found that, whether its purpose was made known expressly or by implication, it was clear that Makers was relying on BSS’s skill and judgment as to the compatibility of the valve and the adaptor. He therefore found for Makers on liability, ordered an inquiry as to damages and awarded Makers 80% of the costs of the liability issue.
The appeal
Mr Diggle’s first submission in support of BSS’s appeal was that the judge did not direct himself correctly as to the test for determining whether or not, for the purposes of section 14(3), Makers had made known the purpose for which it would be using the Boss miniball valve. He referred us to Henry Kendall, supra, in which at [1969] 2 AC 31, 79F, in relation to section 14(1) of the Sale of Goods Act 1893, Lord Reid explained that if the relevant term is to be implied, the buyer’s purpose must be stated with sufficient particularity to enable the seller to exercise his skill and judgment in making or selecting appropriate goods. He also referred us to Slater and Others v. Finning Ltd [1997] AC 473, in particular to Lord Steyn’s words at 487C to G:
‘It is sufficient that the seller was aware of the buyer’s purpose. On the other hand, it must be borne in mind that our law generally subscribes to an objective theory of contract. What matters in this context is how a reasonable person, circumstanced as the seller was, would have understood the buyer’s purpose at the time of the making of the contract: Hardwick Game Farm v. Suffolk Agricultural Poultry Producers Association [1969] 2 AC 31, 81 [the Henry Kendall case].
In the present case the buyers did not expressly communicate their purpose to the sellers. The question is what could the sellers fairly have been expected to infer about the buyers’ purpose from the circumstances of the case. … The correct approach is well settled. In Goode, Commercial Law, 2nd ed. (1995), p. 335, Professor Roy Goode explains:
“The seller is entitled to assume that the goods are required for their normal purpose, or one of their normal purposes, unless otherwise indicated by the buyer. Accordingly, if the buyer requires the goods for a non-normal purpose, he must take steps to acquaint the seller of this fact before the contract is made, otherwise the seller, if unaware of the special purpose for which the goods are bought, will not be considered to undertake that they are suitable for that purpose.”
In other words, the implication will normally be that the goods are fit for the purpose for which the goods would ordinarily be used.’
In his criticism of the judge’s conclusion, Mr Diggle submitted that he failed to mention the correct test to be applied; and failed to consider the matter from the perspective of the reasonable man ‘circumstanced as the seller was.’
Mr Diggle’s second submission was that an analysis of the documents upon which the judge relied anyway did not justify the conclusion that they either expressly or impliedly communicated a sufficiently particular purpose to BSS. They nowhere stated that the Boss miniball valve was to be used with the Uponor compression adaptor. Makers’ initial fax inquiry did not refer to Uponor adaptors. BSS’s fax response gave a quotation for the offending valve, but that was irrelevant as it was a BSSdocument. Makers’ order of 9 August was for valves, not for adaptors. Its order for adaptors was made on 10 August and so resulted in a contract strictly separate from the valve contract. The effect of all this was that BSS was unable to exercise its skill and judgment in selecting the components.
Mr Diggle also pointed out that Makers’ fax of 8 August and its orders of 9 and 10 August were addressed to different individuals at BSS and he said that it would be to impose too high a contractual duty upon BSS to require its staff to check each component for compatibility with components forming part of a different order. He submitted further that Makers is a large concern, with experience of projects of this kind such that, absent the communication of a particular purpose to BSS, BSS was entitled to rely upon Makers’ procedures to ensure that only compatible components were used together. It cannot, he said, have been BSS’s duty to test each component for compatibility with other components.
To the question as to the purpose for which BSS did foresee Makers using the valves, Mr Diggle replied that they were designed by BSS for use with copper piping. BSS’s position was that, even though the judge found that by 8 August it knew that Makers was changing the copper piping at the property for plastic Uponor piping and that all its orders from BSS were in relation to that particular project, it was nonetheless entitled to assume that Makers might also have been ordering copper piping for the project from some other supplier and that it would be using the valves in connection with such copper piping. In Mr Diggle’s submission, BSS did not have sufficient information to know that the project at the property was an exclusively Uponor plastic one.
Mr Diggle’s third submission was that the problem in the case only arose from what he said was an idiosyncrasy, namely the incompatibility between the Boss miniball valve and the Uponor adaptor, one which only emerged because Makers’ sub-contractors used the two components together. Slater, supra, supported the proposition that there will be no breach of section 14(3) where the failure of goods to meet the intended purpose arises from an idiosyncrasy (whether or not the buyer was aware of it) not made known to the seller by the buyer. Following his citation from Sir Wilfred Greene MR’s judgment in Griffiths v. Peter Conway Ltd [1939] 1 All ER 685, Lord Keith of Kinkel expressed the relevant principle as follows, at [1997] AC 473, 483C:
‘As a matter of principle, therefore, it may be said that where a buyer purchases goods from a seller who deals in goods of that description there is no breach of the implied condition of fitness where the failure of the goods to meet the intended purpose arises from an abnormal feature or idiosyncrasy, not made known to the seller by the buyer, in the buyer or in the circumstances of the use of the goods by the buyer. That is the case whether or not the buyer is himself aware of the abnormal feature or idiosyncrasy.’
Mr Diggle’s final submission was that the judge dealt inadequately with the issue of reliance. He ought, he said, to have found that Makers did not rely on BSS’s skill and judgment. That was because, in the circumstances outlined, the fax inquiry did not refer to Uponor adaptors and BSS was unable to exercise any skill or judgment. Mr Diggle’s perhaps more significant point was that Makers apparently regarded the claimants as responsible for testing the components and was relying on their skill and judgment, not BSS’s.
In that connection, Mr Diggle relied on the witness statement of Paul Vickers of Makers made in early 2010 in support of the amended case that Makers was then advancing against the claimants. Makers’ case was that the claimants were negligent in failing to check the compatibility of the adaptor and valve. Mr Vickers did not give oral evidence before the judge but Mr Diggle put his statement in evidence and relied in particular on paragraphs 4 and 5:
‘4. I have seen the Witness Statement of Mark Dowdeswell [a Uponor employee] who states that he specifically instructed Mr Daniel [a claimant] to be careful about the compatibility of the thread on the adaptor and valve.
5. … I accept that [the claimants] did not select the material but as experienced plumbers if they had not previously had much experience of Uponor pipe then it would be a matter for them to ensure that they understood what was required, and if they wanted either the brochure or technical information they should have asked for it. I was aware they did not have experience of this system and hence I arranged Mr Dowdeswell’s instruction. Though they say that they received no instructions as to compatibility I do not believe that that is the case because of what Mr Dowdeswell says. The fact that we had been assured by the suppliers that the valve was compatible is I believe irrelevant because I do not think that anybody ever said that to [the claimants]. As [the claimants] had been warned about incompatible valves, I would have expected them to take special care to ensure that the fitting was done properly.’ (Emphasis supplied).
The assurance to which Mr Vickers referred in the penultimate sentence was one the judge found had not in fact been given. Mr Diggle’s point, however, was that Mr Vickers was here disavowing any reliance by Makers on an exercise of skill or judgment by BSS in relation to the compatibility of the relevant components but was relying on the claimants to carry out a test necessary to ensure that they were in fact compatible.
Mr Levy, in supporting the judge’s decision, also relied on Lord Steyn’s words in Slater (see paragraph [18] above), in particular that the ordinary implication will normally be that goods sold are fit for the purpose for which they would ordinarily be used. He also submitted that it is sufficient that the seller knew that the purpose made known by the buyer was likely, or liable, or not unlikely, to include the particular purpose for which the goods were in fact used, in this case a use of the relevant valves in conjunction with a Uponor adaptor. In that context, he referred to Lord Guest’s observations in Ashington Piggeries [1972] AC 441, at 477E to F.
As for Mr Diggle’s assertion that the judge did not assess the position by reference to the perception of the reasonable man in the circumstances of BSS, that was not, Mr Levy said, of direct relevance because the judge’s primary finding was that Makers’purpose was, by the relevant documents, expressly made known to BSS. A reference to the perception of the reasonable man strictly only arose in the context of the judge’s secondary finding that the purpose was made known by implication. In that context, in addition to the words of Lord Steyn, Mr Levy referred us to the similar observations of Lord Morris of Borth-y-Guest in Henry Kendall at [1969] 2 AC 31, at 91C to D. In the present case, the judge inferred from the facts that the requisite test was satisfied. In doing so, he was necessarily considering whether a seller, circumstanced as BSS was, would have understood that it was reasonably likely that Makers would use the valve and Uponor adaptor in conjunction with each other. That was a matter for his judgment and the Court of Appeal ought not to second-guess the way in which he exercised it.
In developing that submission, Mr Levy acknowledged that the documents did not state expressly that the valve was to be used with the Uponor adaptor. But that, he said, was an obvious inference from the fact that both parts were ordered together for the same project. He drew attention to some relevant history. Makers’ first order to BSS on 5 July 2007 (which was not in evidence) resulted in a delivery on 9 July. The despatch note of 9 July (which was in evidence) showed that the second item was for 18 x 22mm chrome isolating valves and the fifth was for 20 Unipipe adaptors. Those items were used together and gave rise to no problem. Those valves differed from the Boss brand that BSS quoted on 8 August BSS and supplied on 12 August.
The July order was handled by Mr Denman of BSS. In the course of cross-examination, Mr Denman accepted that the isolating valves supplied in July could be used with Uponor pipes but said that they could only be so used with adaptors and of course he accepted that Uponor adaptors were also supplied in July. His position appeared to be that the ordinary use of the valves would be with copper pipe but to Mr Levy’s question that ‘… it is just as likely, is it not, that [the adaptors] are for use with the valves?’he replied that ‘It’s possible but then that wasn’t for me to concern myself with.’ Mr Denman also accepted that Makers’ fax of 8 August made clear that the project involved the use of the Uponor pipe system. Mr Levy relied heavily on the fact that the judge had found, in paragraph 59, that the August documents all placed the valves ‘squarely within an order for Uponor pipe and accessories’ (Mr Levy’s emphasis), and that BSS knew by 8 August that the Uponor system was being used for the job. That was sufficient to fix BSS with the knowledge that it was likely that the valves supplied in August would be used for sealing Uponor pipes in conjunction with Uponor adaptors. The fact that the valves and adaptors ordered in August were ordered on consecutive days made no material difference. Adaptors had been supplied in July and BSS knew that the project was a Uponor one.
Mr Levy acknowledged that the documents did not state that the Boss valve was to be used with the Uponor adaptor. The judge, however, found that the documents conveyed that ‘the purpose for which the valves were bought was for use with Uponor pipes’ and, Mr Levy said, BSS ought reasonably to have foreseen that they would be so used. He was dismissive of the point that the orders of 9 and 10 August were addressed to different individuals: the documents were addressed to BSS. Moreover, Makers’original fax inquiry had merely asked for a quotation for ’15 x 22m Ballofix valves’ and would, by inference, have been satisfied by the supply of isolating valves of the like type as BSS had originally supplied and which had caused no problem. The response to that inquiry was, however, that BSS quoted for its own brand Boss miniball valves. In addition, as the judge found, BSS promoted itself as a specialist distributor of pipeline, heating and mechanical services equipment, it was a supplier of Uponor products and it had the Uponor product brochure. That brochure, when referring to its compression adaptors, expressly warned that they were ‘[t]o be used with Uponor MLCP compression fitting bodies or bodies of a compatible thread. Please ensure that threads are compatible prior to fixing.’
The judge was, said Mr Levy, also right to reject the ‘idiosyncrasy’ argument. There was no evidence or finding that either component was defective. The problem was simply that they were not compatible. It was reasonably likely that the adaptors and valves would be used with the Uponor pipes but it was not a case in which there was some unforeseeable peculiarity in the particular circumstances of the use of the goods by Makers or the claimants.
As for the suggestion that Makers were relying not on BSS but on the claimants, Mr Levy accepted that in its amended Defence and Counterclaim, Makers had asserted that the claimants owed it, and had breached, a duty to test the valve for compatibility with the adaptor. That issue was never, however, adjudicated upon as the claim was settled. It did not, however, follow that any such reliance upon the claimants was exclusive and the judge found, in paragraph 66, that it was ‘perfectly clear that [Makers] was relying on the skill and judgment of [BSS] in this case whether the purpose was express or implied.’ Mr Levy was disposed to accept that Makers may have placed some reliance on the claimants, but said it could only have been doing so in relation to issues of compatibility that would have been apparent: Makers could not have placed any greater reliance on the claimants. It was, he said, apparent that Makers was relying upon BSS to provide appropriate components for the project.
Discussion
I shall express my conclusions by reference to the four questions that Clarke LJ in Jewson (see paragraph [6] above) identified as material in assessing a claim for a breach of the implied term imposed by section 14(3).
Makers was using a Uponor system for its project at the property. BSS knew by 8 August 2007 that it was using such a system: BSS had in July supplied Uponor components for the project, including Uponor adaptors. It had also supplied isolating valves in July, in respect of which Mr Denman recognised that it was ‘possible’ that they would used with the Uponor adaptors. Makers’ fax inquiry of 8 August explained on its face that the items in respect of which it was inviting a quotation were for the same project. Six of the 18 items the subject of that inquiry were expressly described as, or to be used with, ‘Uponor’ items. Others were not, including item seven for ’15 x 22mm Ballofix valves.’ It is, I consider, an irresistible inference from that fax inquiry that Makers was making known to BSS that it intended to use such valves as a device intended to regulate or control the flow of water in pipes used in the project. Moreover, it is I consider also an obvious inference that it was making known to BSSthat it intended to use such valves in conjunction with the Uponor plastic pipe that BSS knew it was using. At the veryleast, it must have been apparent to BSS that Makers was likely so to use the valves.
Makers had therefore made known a particular purpose for which the valves were intended to be used; and it was likely that they would be used with the Uponor plastic pipes. Whilst I would, with respect, fall short of endorsing the judge’s finding that Makers made known its purpose expressly, I consider that the judge was entitled to find, as he did, that Makers impliedly made known to BSS the purpose for which it wished to buy the valves. When on 9 August it ordered 15 of the valves for which BSS had quoted in response to the fax inquiry – BSS’s own brand – it was obvious to BSS for what purpose Makers was buying them. I would uphold the judge’s finding that Makers made known to BSS the purpose of its request for a quotation in respect of 22m Ballofix valves and for its subsequent order of the Boss miniball valves for which BSShad quoted.
Were the valves so ordered fit for that purpose? The judge found they were not because their thread was incompatible with that of the Uponor adaptors with which they were likely to be used for the purpose of sealing off the plastic Uponor pipe. In my viewthere is no answer to this. The valves that BSS supplied were its own brand and were specifically designed for use with copper piping. They were incompatible for use with the Uponor adaptors with which they were likely to be used. BSS’s supply of its own valves appears to me to have been fairly remarkable bearing in mind that it had no basis for any assumption that Makers was going to be using any copper pipe in the project, but there is no need to say more than that. The valves that it supplied were not reasonably fit for the requisite purpose because they were incompatible with the Uponor adaptors and would be likely to (and on 24 August 2007 did) fail when used in conjunction with them.
A sub-issue arising in relation to this issue is whether, as Mr Diggle submitted, this is an ‘idiosyncrasy’ case. I do not, with respect, consider that there is any substance in this submission and the judge was right to reject it. The point is most easily illustrated by reference to Griffiths in which the buyer bought from the seller a coat made specially for her. The coat was apparently fit for its purpose save that, because the purchaser had an abnormally sensitive skin, the wearing of the coat caused her to contract dermatitis, a consequence that would not have been suffered by a purchaser who did not have such sensitive skin. The purchaser had not, however, made the seller aware of her sensitivity and, that being so, the seller was not in breach of the implied term as to fitness because he did not know that he had to cater for the needs of a person of such sensitivity. Only if he had been informed of that could he have exercised his skill and judgment as to the quality of coat he had to provide.
The present case is nothing like that. The Uponor adaptor and the Boss valve were each sound components. BSS supplied the former and it both manufactured and supplied the latter. On the premise (the applicable one in this context) that it knew that the adaptor and valve were likely to be used in conjunction for the purpose of sealing off Uponor plastic piping, it knew all that it needed to know in order to exercise its skill and judgment as to whether the items were compatible. As far as BSS knew, there were no relevant unknowns about either item. BSS was a specialist dealer and simply had to exercise its skill and judgment in assessing whether they both worked together. In this connection, and as a supplier of Uponor equipment, BSS had the Uponor brochure, which explained in relation to the relevant adaptor that it was ‘[t]o be used with Uponor MLCP compression fitting bodies or bodies of a compatible thread. Please ensure that threads are compatible prior to fixing.’ In applying its skill and judgment as to the suitability of its own Boss value for use in connection with such an adaptor, the application of the most modest skill and judgment ought to have informed BSS of the need to check the compatibility of the Uponor adaptor with its own brand of valve. It did not do so. It supplied its own valve without exercising any judgment as to its suitability for use with the Uponor adaptor.
The third question is whether BSS had shown that Makers did not rely on BSS’s skill and judgment. The judge recorded, in paragraph 64, BSS’s concession that reliance is normally inferred if the purpose is made known. That concession was rightly made. In Henry Kendall [1969] 2 AC 31, at 115G, a case under section 14(1) of the 1893 Act, Lord Pearce noted that ‘[t]he whole trend of authority has inclined towards an assumption of reliance wherever the seller knows the particular purpose.’ If the buyer’s purpose was shown, it was an easy step to infer reliance: see Ashington [1972] AC 441, at 477G, per Lord Guest; and, also at 505B to C, where Lord Diplock pointed out that a buyer who has made known the purpose of his proposed purchase and had selected a seller who made it his business to supply goods which are used for purposes of that kind will thereby convey to the seller that he is relying on the seller’s skill and judgment to ensure that the goods are fit for that particular purpose. Whilst the drawing of an inference of reliance was easier in a case in which the buyer had stated his purpose expressly, that was not a necessary precondition of the drawing of such an inference: see Henry Kendall [1969] 2 AC 31, at 81, per Lord Reid.
The present case, however, was brought under section 14(3) of the 1979 Act, and – as is implicit in Clarke LJ’s point (iii) referred to in paragraph [6] above and as was explained by Lord Steyn in Slater, supra, [1997] AC 473, at 486C to D – the burden under section 14(3) in relation to reliance has now been reversed. The position now is that in a case in which the buyer has made known his purpose, there is prima facie an implied condition of fitness which the seller can defeat only by proof that the buyer did not rely, or that it was unreasonable for him to rely, on the skill or judgment of the seller. Thus, having arrived at Clarke LJ’s third question, the only issue is whether BSS discharged the burden that was upon it.
It was argued both before the judge and us that because Makers arranged for the claimants to have some training in the fitting of the Uponor system (which was provided by two individuals, including one from Uponor), Makers was relying not on BSS to provide a valve that would be compatible with the Uponor adaptor but upon the claimants to check whether the supplied valve was so compatible, including by testing the system at five times normal pressure. Mr Diggle also placed particular reliance on the passages from Mr Vickers’ witness statement that I have quoted.
The judge rejected that attempt to disprove reliance and I consider that he was entitled to. The logic of the argument was apparently that Makers was content to buy any old 22mm valve, whether or not it worked with the Uponor system, and was relying exclusively on the claimants to do the tests necessary to ensure that it did so work. That appears to me to be unreal. BSS was a specialist dealer, which supplied the Uponor system and made and sold its own brand of 22mm valves, being valves that it recommended for purchase by Makers for use in its Uponor system. It appears to me to be obvious that Makers was relying upon BSS to quote for and sell it a valve that was compatible with that system. It may be that it was also relying upon the claimants to test the system when installed to make sure that it worked properly, but I would regard it as unreal to analyse that as reflecting that it was relying upon the claimants to satisfy themselves as to the compatibility of the component items which it had already bought from BSS.
As for the reliance that Mr Diggle placed upon Mr Vickers’ witness statement, I would not attach to it the significance that Mr Diggle suggested. First, if there was any ambiguity in what Mr Vickers was saying in the passage in his witness statement that I have emphasised, the judge did not have the advantage of oral evidence from him by which he might have explained it. Second, I am anyway unwilling to infer from that passage that Mr Vickers was saying that Makers had not placed reliance upon BSS as to the fitness for purpose of the valve that BSS had supplied. On the contrary, he there refers to the assurance as to compatibility which he claimed that BSS had given Makers, evidence which is consistent only with his position that Makers had placed reliance upon BSS, although in the event the judge rejected Makers’ case that an express oral assurance of compatibility had been given. His point in the emphasised passage goes no further than saying that he did not understand that anyone at BSS had given a like assurance of compatibility to the claimants; and that therefore, as the claimants had apparently been warned about incompatible valves, they ought to have taken special care to check the fittings. I would not accept that that evidence justifies a conclusion, contrary to the judge’s finding, that Makers had not relied upon BSS’s skill and judgment in selecting the appropriate valves. I consider therefore that the judge was also entitled to find the necessary reliance. He referred, at paragraph 65, to the observations of Lord Morris in Henry Kendall [1969] 2 AC 31, at 95, that ‘Nor does the fact that on arrival of the goods there will or may be analysis of them negative a reliance on skill or judgment.’ The authorities show that the reliance required for section 14(3) purposes need not be exclusive, but that partial reliance can suffice: see Ashington [1972] AC 441, at 468H, per Lord Hodson, and at 490B, per Lord Wilberforce; and Jewson [2004] 1 Lloyd’s Law Reports 505, at paragraphs [54] to [58], per Clarke LJ.
The final question is whether it was unreasonable for Makers to rely upon BSS’s skill and judgment. The judge did not deal with that expressly, nor is it clear that any separate argument was addressed to him on it; and I did not understand any such separate argument to have been addressed to us either. But he cannot have overlooked the ‘unreasonable’ issue, since he had quoted section 14(3) in paragraph 57, immediately before focussing on the issues he had to decide. The inference is that he was satisfied that there was no question of any reliance by Makers’ reliance having been unreasonable. Again, in my view there can be no criticism of such a conclusion.
I would dismiss the appeal.
Sir David Keene :
I agree.
Lord Justice Pill :
Nash & Ors v Paragon Finance Plc
[2001] EWCA Civ 1466 [2001] 2 All ER (Comm) 1025, [2002] WLR 685, [2002] 2 P & CR 20, [2002] 2 All ER 248, [2002] 1 WLR 685, [2002] 1 P & CR DG13, [2001] EWCA Civ 1466
Dyson LJ
Section 3(2)(b)(i) of the Unfair Contract Terms Act 1977
Section 3 of the Act provides so far as material:
“(1) This section applies as between contracting parties where one of them deals as consumer or on the other’s written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term—
…
(b) claim to be entitled—
(i) to render a contractual performance substantially different from that which was reasonably expected of him, or
(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,
except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness”
It is submitted on behalf of the appellants that they were reasonably entitled to expect that, in performing their side of the bargain, the Claimant would not apply rates which were substantially out of line with rates applied by comparable lenders to borrowers in comparable situations to the appellants. It is contended that the setting of interest rates is “contractual performance” within the meaning of section 3(2)(b) of the 1977 Act, and that the Claimant set interest rates that defeated that expectation.
The first question is whether the fixing of rates of interest under a discretion given by the contract was “contractual performance” within the meaning of section 3(2)(b). Mr Broatch submits that it is. He relies on two authorities. The first is Timeload Ltd vBritish Telecommunications PLC [1995] EMLR 459. In that case, the plaintiff set up a free telephone inquiry service, and entered into a contract with BT whereby BT provided the plaintiff with the use of a certain telephone number. There was a clause in the contract which authorised BT to terminate apparently without reason. BT gave one month’s notice of termination, and the plaintiff sought an injunction to restrain BT from terminating. It was held by the court of appeal that it was at least arguable that a clause purporting to authorise BT to terminate without reason purported to permit partial or different performance from that which the plaintiff was entitled to expect, and that section 3(2) of the 1977 Act applied. But the licence agreement imposed clear performance obligations on BT. Thus, clause 1.1 obliged BT to provide the various services there set out. In these circumstances, it is not difficult to see why the court thought that it was at least arguable that a clause authorising termination of the obligation to provide those services for no good reason purported to permit a contractual performance different from that which the customer might reasonably expect.
The second authority is The Zockoll Group Ltd v Mercury Communications Ltd [1999] EMLR 385. This was another telecommunications case. The plaintiff planned to set up a network of franchisees to provide goods and services to the public in response to telephone inquiries. It entered into a contract with Mercury under which it obtained a number of telephone numbers. Mercury wished to withdraw one number from the plaintiff and asserted that it was entitled to do so at its sole discretion. The plaintiff brought proceedings and relied on section 3(2)(b)(i) of the 1977 Act. The court held that the withdrawal of the disputed number did not render the contractual performance substantially different from what was expected. Mr Broatch points out that it is implicit in the decision of the court that it was accepted that the withdrawal of the disputed number was capable of being contractual performance substantially different from that which it was reasonable to expect.
In my judgment, neither of these authorities assists Mr Broatch’s submission. In both cases, the defendant telecommunications provider was contractually bound to provide a service. The question was whether the withdrawal of the service in the particular circumstances of the case was such as to render the contract performance (ie the provision of that service) substantially different from that which it was reasonable for the other contracting party to expect. The present cases are quite different. Here, there is no relevant obligation on the Claimant, and therefore nothing that can qualify as “contractual performance” for the purposes of section 3(2)(b)(i). Even if that is wrong, by fixing the rate of interest at a particular level the Claimant is not altering the performance of any obligation assumed by it under the contract. Rather, it is altering the performance required of the appellants.
There appears to be no authority in which the application of section 3(2)(b)(i) to a situation similar to that which exists in this case has been considered. The editors of Chitty on Contracts (28th edition) offer this view at paragraph 14-071:
“Nevertheless it seems unlikely that a contract term entitling one party to terminate the contract in the event of a material breach by the other (e.g. failure to pay by the due date) would fall within paragraph (b), or, if it did so, would be adjudged not to satisfy the requirement of reasonableness. Nor, it is submitted, would that provision extend to a contract term which entitled one party, not to alter the performance expected of himself, but to alter the performance required of the other party (e.g. a term by which a seller of goods is entitled to increase the price payable by the buyer to the price ruling at the date of delivery, or a term by which a person advancing a loan is entitled to vary the interest payable by the borrower on the loan).”
In my judgment, this passage accurately states the law. The contract term must be one which has an effect (indeed a substantial effect) on the contractual performance reasonably expected of the party who relies on the term. The key word is “performance”. A good example of what would come within the scope of the statute is given at paragraph 14-070 of Chitty. The editors postulate a person dealing as a consumer with a holiday tour operator who agrees to provide a holiday at a certain hotel at a certain resort, but who claims to be entitled, by reference to a term of the contract to that effect, to be able to accommodate the consumer at a different hotel, or to change the resort, or to cancel the holiday in whole or in part. In that example, the operator has an obligation to provide a holiday. The provision of the holiday is the “contractual performance”. But that does not apply here.
Mr and Mrs Staunton: the Stabilised Rate Facility
As I explained at paragraph 5 of this judgment, the Stabilised Rate Facility enabled Mr and Mrs Staunton to cap the amount of interest payable each month and defer payment of the excess by granting a “monthly credit” and converting the credit (up to a maximum of £10500) into part of the capital amount of the loan. The Offer of Loan incorporated certain Special Conditions in respect of the Stabilised Rate Facility. Condition 2 provided that:
“The Company’s obligation to credit any Monthly Credit shall cease if the amount of the next Monthly Credit when aggregated with Monthly Credits previously paid and amounts of Interest capitalised or accrued in accordance with Condition 5 would equal or be greater than the Maximum Deferred Interest shown on the Offer of Loan.”
In other words, once the maximum deferred interest of £10500 was reached, Mr and Mrs Staunton ceased to be entitled to the benefit of the cap. If that occurred, they would inevitably face a jump in interest rates.
Mr Falkowski submits that they were not warned of the jump in interest rates that would occur once the Stabilised Rate Period came to an end. What was required was an explanation in plain and intelligible language of the way in which the Facility would operate. The failure of the contract documents to do this rendered the credit bargain extortionate, since it grossly contravened ordinary principles of fair dealing: see section 138(1)(b) of the 1974 Act.
In my view, there is nothing misleading or underhand about the contract documentation. It may not be especially easy for a lay person to understand. But it does clearly describe the way in which the Stabilised Rate Facility works. It does not even contravene ordinary principles of fair dealing, let alone contravene them grossly. I would reject Mr Falkowski’s argument.
Conclusion
In my judgment, therefore, these appeals must be dismissed. This may seem a harsh result, since it is clear that the appellants have suffered serious hardship as a result of the increases in interest rates. But the 1974 Act provides borrowers with only limited protection from the working of the free market. Parliament has empowered the court to intervene only where a bargain is grossly unfair to the borrower, either because the payments required to be made are grossly exorbitant, or because it otherwise grossly contravenes ordinary principles of fair dealing. Nothing less will do. For the reasons that I have explained, money lending agreements which contain provisions for variable rates of interest are also subject to an implied term of limited scope, but that cannot avail the appellants in this case. If greater protection is to be accorded to borrowers, that is a matter for Parliament.
Mr Justice Astill:
I agree.
Lord Justice Thorpe:
I also agree.
Axa Sun Life Services Plc v Campbell Martin Ltd & Ors
[2011] EWCA Civ 133 [2011] 2 Lloyd’s Rep 1, [2011] EWCA Civ 133, 138 Con LR 104, [2012] Bus LR 203, [2011] 1 CLC 312
Burnton LJ
Issue 1: Clause 24: the entire agreement clause
The Respondents accepted that in view of the decision of this Court in Springwell Navigation Corp v J P Morgan Chase Bank [2010] EWCA Civ 1221, by which we are bound, an entire agreement clause such as clause 24 in a signed written agreement is effective in accordance with its terms. However, the Respondents reserved their right to seek to argue in the Supreme Court that Springwell was wrongly decided. All parties accepted that as a matter of the construction of clause 24 it was effective to exclude collateral warranties. The Appellant submitted that it was also effective as a matter of its true construction to exclude misrepresentations or liability for them. The Respondents submitted that it was insufficiently clear and unequivocal to exclude misrepresentations or liability for them. For the Appellant, Mr Picken QC submitted that clause 24 excluded any implied terms. Mr Spink QC, for the Defendants in the Ideal, Bennett and Mortgage UK proceedings, submitted that it did not, and his submissions were adopted by Mr McMeel on behalf of the Defendants in the Kymin proceedings.
The effect of clause 24 on misrepresentations is less clear than its effect on what might in its absence be collateral warranties. Since this is a question of construction, it depends on the precise words of the clause and indeed of the Agreement as a whole, and it is not necessarily helpful to rely on judgments on differently worded provisions. There is nonetheless a comparison to be made with the provisions considered by the Court of Appeal in Deepak v ICI [1999] 1 Lloyd’s L Rep 387, which was held to exclude collateral warranties but not misrepresentations, and to the clause considered by Ramsey J in BSkyB v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC). Furthermore, there are, as Mr Picken accepted, well known contractual provisions that clearly and unequivocally refer to misrepresentations.
I have no doubt that clause 24 does not exclude or supersede misrepresentations as to matters that are not the subject of the terms of the Agreement. Notwithstanding the words “This Agreement … constitute the entire agreement and understanding between us in relation to the subject matter thereof” and “this Agreement shall supersede any prior … representations … between you and us relating to the subject matter of this Agreement” I do not think that the clause is sufficiently clear for this purpose. Indeed, I have difficulty in seeing how a written agreement can “supersede” a representation that does not relate to the terms of the agreement. Thus I think that a representation by AXA such as “We are the largest insurance company in the country”, if false and relied upon, is not superseded by the clause.
In an effort to give some effect to the inclusion of the word “representations”, I initially considered that a representation that relates to the terms of the Agreement could be excluded or superseded. However, having read and been convinced by Lord Justice Rix’s compelling judgment, I have resiled from this position. In summary, in addition to the difficulty of reading “representations” as including “misrepresentations”, as Lord Justice Rix points out, such representations do not relate to “the subject matter” of the Agreement, but to the terms of the Agreement. The context too points away from the interpretation contended for by AXA.
It follows that clause 24 has no effect on misrepresentations of fact. I would add, however, that it seems to me that most of the statements alleged to be misrepresentations may well be, on analysis, either advice or what in the absence of clause 24 would be at best collateral warranties.
In the case of Campbell Martin, the implied terms referred to in the order for the trial of the preliminary issues are:
8.1 AXA would process all business submitted to it by (Campbell Martin) with reasonable care and without any unreasonable delay.
8.2 AXA would ensure that its computer processes operated efficiently so as to facilitate the completion of business submitted without unreasonable delay.
8.3 AXA would not unreasonably delay or unreasonably refuse or fail to approve the appointment of suitable company representatives recruited by (Campbell Martin).
The same assumed implied terms are set out in the orders in the Harry Bennett and Ideal Financial proceedings. No implied terms are mentioned in the Kymin order.
None of the orders specifies the basis for the implication of the terms alleged by the Defendants. It is apparent, however, that the Defendants allege that they are to be implied in order to give business efficacy to the Agreements. In other words, the implied terms are said to be intrinsic to the Agreements, and true implications. In my judgment, such terms, if otherwise to be implied, are not excluded by clause 24. As intrinsic provisions of the Agreement, they are within the expression “This Agreement and the Schedules and documents referred to herein” in the first sentence, and they are not “prior” to the Agreement, and therefore are unaffected by the second sentence. The Agreement might have included, but does not include, an express specific exclusion of such implied terms.
On the other hand, terms that might be implied as a result of matters extrinsic to the written Agreements would, in my view, be excluded by clause 24.
It follows, in my judgment, that Issue 1 cannot be answered by a simple “Yes” or “No”, because most of the alleged representations are not representations of fact. However, the exclusion of alleged collateral warranties should be given a simple affirmative answer, and the exclusion of the alleged implied terms should be given a simple negative answer.
Issue 2: Clause 15.2: no set off
Apart from UCTA, I see no basis in the assumed facts set out in the orders for the trial of the preliminary issues for clause 15.2 not to take effect in accordance with its terms: see Coca Cola Financial Corp v Finsat Ltd [1998] QB 43. Mr Spink and Mr McMeel sensibly did not contend that it does not do so.
There was a suggestion that a defendant could seek a stay of any judgment obtained by AXA pending determination of its counterclaim. I do not think that this is right. It would be inconsistent with clause 15.2 for the court, in the exercise of its discretion, to order such a stay: see Coca Cola Financial Corp v Finsat Ltd at 858H to 859A, Continental Illinois National Bank vPapanicolaou [1986] 2 Lloyd’s Rep 441.
Issue 3: clause 1.6 of Schedule 4: conclusive evidence
Although the order for the trial of preliminary issues referred to clause 1.6, and not to clause 5.5, they have similar functions and effect. I shall refer to clause 1.6, but the issues it raises apply equally to clause 5.5.
Again, there was no dispute before us as to the contractual effect of clause 1.6. Such clauses have long been used: see Society of Lloyd’s v Fraser and ors (unreported, Court of Appeal 31 July 1998); see too IIG Capital v Van der Merwe [2008] EWCA Civ 542. Clause 1.6 takes effect in accordance with its terms. The answer to Issue 3 is Yes.
Issue 4: UCTA and section 3 of the Misrepresentation Act 1967
(a) Scope
(i) Clause 24
It is common ground that the Agreements were on AXA’s standard terms of business, so that section 3 of UCTA applies to them. The Respondents contend that both that section and section 3 of the Misrepresentation Act 1967 apply to them. The Appellants submitted that neither provision does, since the effect of clause 24 is to exclude any effective misrepresentation or collateral warranty.
An entire agreement such as clause 24 is not an exemption clause of the kind with which UCTA was and is principally concerned. Since it prevents any collateral contract or warranty from coming into existence, it is not the subject of section 3(2)(a), since there is no collateral contract of which AXA could be in breach. Nor does section 13 materially assist the Respondents, for the same reason.
However, different considerations apply to section 3(2)(b)(i). Quite how that ‘paragraph’ should operate is not entirely clear, as is demonstrated by the somewhat tentative discussion in Chitty on Contracts, 30th edition, at paragraph 14-073. I have no doubt that it is principally aimed at the small print that entitles a party to a contract to provide something other than that defined by the principal terms of the contract, as where a holiday company reserves the right to substitute a hotel or resort for that specified in the main part of the contract. In most cases, as Chitty suggests, the performance reasonably expected of a party is that which is defined by the written contract between the parties. But this ‘paragraph’ of section 3 refers not to the performance specified in the contract but to the performance “which was reasonably expected” of that party. It seems to me that in appropriate circumstances a pre-contractual representation or promise may affect the performance that is reasonably expected of a party. It follows that clause 24 may be subject to the reasonableness test in UCTA in relation to both collateral warranties and representations. However, section 3(2)(b)(i) will only come into play in the present cases if it is possible to identify both the performance by AXA that was reasonably expected and that defined by the contract. The effect of clause 24, if any, on a representation such as “We are the largest insurance company in England” will not be within the scope of section 3(2)(b)(i).
Mr Picken submitted that, since the effect of clause 24 is that the parties agree that there have been no misrepresentations, section 3 of the Misrepresentation Act cannot apply to it. While I see the logic of his submission, to my mind his approach to section 3 is too formalistic. Looked at sensibly and practically, if, contrary to my view, clause 24 has the effect for which he contends, it excludes AXA’s liability for misrepresentations it made, and would be subject to the statutory requirement of reasonableness in this respect too.
(ii) Clause 15.2
In Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600 the Court of Appeal held that a provision materially identical to clause 15.2 was within the scope of section 3 of UCTA as extended by section 13. That decision is binding on us, even if I disagreed with it, which I do not. The clause is valid only to the extent that it is reasonable.
(iii) Clause 1.6 of Schedule 4: conclusive evidence
It is common ground that clause 1.6 of Schedule 4 is subject to the requirement of reasonableness in UCTA. In my judgment, this is correct. Clause 1.6 does have the effect of excluding the Defendants’ right of set off, which, if it is an equitable set off, goes to reduce the sum due from them to AXA.
Have AXA satisfied the requirement of reasonableness?
The position of the parties in relation to this issue changed during the course of the hearing. Initially, all counsel asked the Court to decide this issue notwithstanding the lack of any decision by the judge and the lack of relevant findings of fact. However, during the course of the hearing, concerns were expressed, not least by myself, that the Court was being asked a hypothetical question, on incomplete or non-existent factual findings. This led Mr Spink QC to reconsider his position, and ultimately to submit that the Court should not address this issue. In the end, the Court decided to hear full submissions, with a view to then deciding whether or not it should address and answer this issue.
I fully understand and sympathise with the desire of the parties to obtain even a qualified or provisional answer on this issue. The sums involved in this litigation are not great, and anything that will assist the parties to resolve their differences without incurring the costs of a full trial is to be supported.
Whether the requirement of reasonableness is satisfied depends not only on the terms of the contract and the contractual provision in question, but also on “the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”. Section 11 of UCTA expressly requires the Court to have regard to such circumstances, as Mr McMeel pointed out. The Act requires the Court to have regard in particular to the matters set out in Schedule 2. They are:
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); …
Paragraphs (d) and (e) are inapplicable to the present claims.
The Defendants pointed out that AXA had failed to plead the facts and matters it relied upon for its case that the terms in issue were reasonable. Indubitably, AXA should have done so, but it seems that no objection was made to the evidence being adduced by AXA below, and it is now too late for the Defendants to take this pleading point. Nonetheless, the lack of proper pleading, by either AXA or by the Defendants, has I think resulted in a lack of appropriate analysis.
The only evidence before the judge, apart from the matters set out in the agreed orders for the trial of the preliminary issues, was given by Sean McKillop, an employee of AXA. Relatively little of his cross-examination addressed the issues that require to be addressed under UCTA.
In my judgment, the starting point in the consideration of the question of reasonableness is that the Agreements were made between commercial organisations and in a commercial context. Admittedly, AXA was an immeasurably larger organisation than the companies with which it contracted, and the guarantors of the companies’ liabilities were, I assume, persons of modest means. However, as financial advisors, they were accustomed to deal with written agreements, such as insurance and pension policies, and I think it fair to assume that they would generally, if not always, advise their clients to ensure that they were content with the written terms of their policies. I would therefore have expected the Defendants to have read the Agreements, and in the case of the individual Defendants the guarantees that they signed. The Agreements state both on the front page and in the veryfirst clause 1.1 that they set out the terms of the company Defendants’ appointment as AXA’s Appointed Representative. The contents page lists in capital letters clause 15 entitled “Set Off”, and clause 24, entitled “Entire Agreement”. Clause 1, which I would expect a Defendant to read first, makes it clear in clauses 1.8 and 1.9 that there are restrictions on the right to sell products other than AXA’s, as does clause 2.1.
None of the Defendants gave evidence that they had not read or had not had an adequate opportunity to read the Agreement into which he entered, or which he signed on behalf of a company. Nor was it suggested to Mr McKillop that they had had no such opportunity (though it may well be that he would have been unable to give any evidence on the point). The contractual provisions in issue are not unusual in the insurance industry: the evidence before the judge was that they are standard terms. Two of the company Defendants, Ideal Financial Planning and Harry Bennett, had entered into previous agreements with AXA on materially identical terms.
In these circumstances, I consider that the Defendants “knew or ought reasonably to have known of the existence and extent” of the terms in question.
If it be right that other insurance companies required their representatives to enter into similar contracts, it cannot be said that the Defendants had “an opportunity of entering into a similar contract with other persons, but without having to accept a similar term”. However, they could have carried on business, or continued to carry on business, as independent financial advisers. If they had done so, they would have had to be authorised as IFAs by the FSA, whereas as a result of entering into the Agreements their authorisation and their regulation became the responsibility, and a cost, of AXA. To have been directly authorised by the FSA would have involved work and expense, as Mr McKillop said in evidence, but the approximate sums involved, or indeed the procedures involved, were not in evidence. I can assume that the cost and work involved in being a wholly independent financial adviser are not so great as to make it an impracticable alternative to regulation through an insurance company, since if they were there would be no independent financial advisers. Clearly avoiding the costs involved in direct authorisation is an incentive to regulation as an appointed representative of, and through, an insurance company, and to this extent the Defendants could have avoided terms such as those now in issue.
The purpose of entire agreement clauses such as clause 24 is obvious. It was accurately described by Lightman J in Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s L Rep 611:
7. The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence as is suggested in Chitty on Contract 28th ed. Vol 1 para 12-102: it is to denude what would otherwise constitute a collateral warranty of legal effect.
A clause such as clause 24 gives both sides certainty as to the terms of their contract. In circumstances in which the sums involved in any dispute are likely to be relatively modest, if unchallenged it has the effect of limiting the costs involved in litigation; indeed, it may result in litigation being avoided. It is nonetheless more beneficial to AXA than to the Defendants, since it is AXAwho decided on the terms of the Agreement.
The effect of clause 24 is limited to collateral warranties. I consider that sensible parties, faced with a written agreement of the length and detail of the Agreements, would not expect it to be attended by oral collateral agreements, and would expect their contract to be contained in the document they sign. Furthermore, if the Appointed Representative is dissatisfied, it may at any time terminate the Agreement under clause 13.3 on 2 months’ notice. This is a relatively short notice period. Thus the Appointed Representative is not tied in to the Agreement for an extensive period.
Weighing up all these considerations, I have concluded that clause 24 was a reasonable provision to have been included in the Agreements.
In relation to clause 15.2, in my judgment in considering whether it is a reasonable provision it is necessary to consider what were the claims that when entering into the Agreements the parties would have envisaged as falling within “All monies payable by you to us under this Agreement” and what “credit, set-off or counterclaim” they would or should have envisaged as being available to the Defendants. The former would be clawbacks of commission, due from the Defendants as a result of cancellation or termination of insurance policies by their clients, and moneys repayable under Schedule 4.
Schedule 4 concerned the financial and other assistance provided by AXA to the Defendants under the Agreements. In the case of Campbell Martin, for example, AXA provided a “Business Benefits Allowance” of £43,032 and an “Initial Development Allowance” of £77,000, plus a number of computers and printers. Paragraph 1.1.3 of Schedule 4 required the Development Allowance to be used for the purpose of developing the business carried on by the Defendants pursuant to their Agreement: an unspecific obligation. Paragraph 1.1.4 was even less specific in relation to the Business Benefits Allowance, providing only that it was provided by AXA “on the terms from time to time applicable to the Business Benefit in question a copy of which will be supplied on request”. Those terms are not in evidence. The total of the Development Allowance and the Business Benefits Allowance was referred to as “the Aggregate Benefits”.
Schedule 4 also specified Annual Commission Targets and a “Five Year Commission Target”. The total of the Annual Commission Targets was the Five Year Commission Target of £1,763,720. Each of these figures seems to be a calculated figure: for example, the Year 3 Commission Target is £367,224. There is no evidence or information before the Court as to how or on what basis these Commission Targets were arrived at and agreed. They are not the same in the Agreements in issue in these appeals, but were specific to and different in each Agreement. If I have to make any assumption, given that the Agreements must be construed as a whole and the orders for the trial of the preliminary issues do not include any assumption that the figures were arrived at on any basis inconsistent with the other provisions of the Agreements, I would assume that the parties agreed that on a single-tie basis these Commission Targets were reasonably achievable.
Schedule 4 provides for a calculated proportion of the Aggregate Benefits to become repayable in the event that the Appointed Representative’s Cumulative Commission Earnings for any year are less than the specified Cumulative Commission Target for that year.
Clause 13.1 of each Agreement provides for a contractual duration of 5 years, but that is a maximum duration, since under clauses 13.2 and 13.3 either party may terminate the Agreement at any time on giving 2 months’ notice. If either party does terminate the Agreement during the 5 year period, a calculated proportion of the Aggregate Benefits will be repayable by the Appointed Representative if its Cumulative Commission Earnings are less than the Five Year Commission Target. In effect, as I understand the Agreement, in such circumstances the Aggregate Benefits are treated as if they would have been amortised over the 5 year period, so that premature termination results in the unamortised Benefits being repayable.
We had no submissions on the meaning or effect of clauses 5.5 of the Agreement and clause 1.6 of Schedule 4. However, the expression “manifest error” in the present context is not as unambiguous as might at first seem. “Manifest” may mean “apparent on the face of the document”, as where the document is a certificate under clause 1.6 of Schedule 4. If so, it may be difficult to see how any error could be manifest in that sense. I think, therefore, that “manifest” in this context has the wider meaning of “obvious”.
I would expect the Appointed Representative to be able to keep track of the commission payable on policies and other financial products it sold pursuant to the Agreement, and on commission clawbacks resulting from its clients cancelling or terminating policies. If so, it would have no difficulty in itself calculating its Commission Earnings, and from that in making the calculations set out in Schedule 4. It should therefore be able to demonstrate that any statement or certificate signed by AXA for the purposes of clause 1.6 of that Schedule, if incorrect, is subject to a manifest error. In my view, therefore, clause 1.6 is a reasonable provision for the purposes of UCTA.
For similar reasons I consider clause 5.5 to be reasonable. A failure of AXA to pay commission on a policy taken out by a client of an Appointed Representative which it has brought about will be an obvious, and therefore manifest, error on the part of AXA.Any incorrect calculation of commission will similarly be challengeable as subject to such error: any such calculation will be obviously wrong.
Very different considerations apply to clause 15.2. It is signposted in the list of contents, under the heading “Set Off”, so that it should be obvious to the Appointed Representative that there is a contractual provision affecting rights of set off. Clause 15.1 expressly authorises AXA to set off any liability of the Appointed Representative against sums payable to it. Clause 15.2, on the other hand, would prevent the Appointed Representative who is owed commission from being able to set off what it is owed against its liability under Schedule 4, and also prevent the Appointed Representative from being able to set off his claim for damages for factual misrepresentation. We have no explanation of AXA’s requirement for this clause. In the absence of such an explanation, I would hold that it has not shown that the clause is reasonable for the purposes of UCTA.
Rix LJ
Issue 1: Clause 24: the entire agreement clause
The Respondents accepted that in view of the decision of this Court in Springwell Navigation Corp v J P Morgan Chase Bank [2010] EWCA Civ 1221, by which we are bound, an entire agreement clause such as clause 24 in a signed written agreement is effective in accordance with its terms. However, the Respondents reserved their right to seek to argue in the Supreme Court that Springwell was wrongly decided. All parties accepted that as a matter of the construction of clause 24 it was effective to exclude collateral warranties. The Appellant submitted that it was also effective as a matter of its true construction to exclude misrepresentations or liability for them. The Respondents submitted that it was insufficiently clear and unequivocal to exclude misrepresentations or liability for them. For the Appellant, Mr Picken QC submitted that clause 24 excluded any implied terms. Mr Spink QC, for the Defendants in the Ideal, Bennett and Mortgage UK proceedings, submitted that it did not, and his submissions were adopted by Mr McMeel on behalf of the Defendants in the Kymin proceedings.
The effect of clause 24 on misrepresentations is less clear than its effect on what might in its absence be collateral warranties. Since this is a question of construction, it depends on the precise words of the clause and indeed of the Agreement as a whole, and it is not necessarily helpful to rely on judgments on differently worded provisions. There is nonetheless a comparison to be made with the provisions considered by the Court of Appeal in Deepak v ICI [1999] 1 Lloyd’s L Rep 387, which was held to exclude collateral warranties but not misrepresentations, and to the clause considered by Ramsey J in BSkyB v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC). Furthermore, there are, as Mr Picken accepted, well known contractual provisions that clearly and unequivocally refer to misrepresentations.
I have no doubt that clause 24 does not exclude or supersede misrepresentations as to matters that are not the subject of the terms of the Agreement. Notwithstanding the words “This Agreement … constitute the entire agreement and understanding between us in relation to the subject matter thereof” and “this Agreement shall supersede any prior … representations … between you and us relating to the subject matter of this Agreement” I do not think that the clause is sufficiently clear for this purpose. Indeed, I have difficulty in seeing how a written agreement can “supersede” a representation that does not relate to the terms of the agreement. Thus I think that a representation by AXA such as “We are the largest insurance company in the country”, if false and relied upon, is not superseded by the clause.
In an effort to give some effect to the inclusion of the word “representations”, I initially considered that a representation that relates to the terms of the Agreement could be excluded or superseded. However, having read and been convinced by Lord Justice Rix’s compelling judgment, I have resiled from this position. In summary, in addition to the difficulty of reading “representations” as including “misrepresentations”, as Lord Justice Rix points out, such representations do not relate to “the subject matter” of the Agreement, but to the terms of the Agreement. The context too points away from the interpretation contended for by AXA.
It follows that clause 24 has no effect on misrepresentations of fact. I would add, however, that it seems to me that most of the statements alleged to be misrepresentations may well be, on analysis, either advice or what in the absence of clause 24 would be at best collateral warranties.
In the case of Campbell Martin, the implied terms referred to in the order for the trial of the preliminary issues are:
8.1 AXA would process all business submitted to it by (Campbell Martin) with reasonable care and without any unreasonable delay.
8.2 AXA would ensure that its computer processes operated efficiently so as to facilitate the completion of business submitted without unreasonable delay.
8.3 AXA would not unreasonably delay or unreasonably refuse or fail to approve the appointment of suitable company representatives recruited by (Campbell Martin).
The same assumed implied terms are set out in the orders in the Harry Bennett and Ideal Financial proceedings. No implied terms are mentioned in the Kymin order.
None of the orders specifies the basis for the implication of the terms alleged by the Defendants. It is apparent, however, that the Defendants allege that they are to be implied in order to give business efficacy to the Agreements. In other words, the implied terms are said to be intrinsic to the Agreements, and true implications. In my judgment, such terms, if otherwise to be implied, are not excluded by clause 24. As intrinsic provisions of the Agreement, they are within the expression “This Agreement and the Schedules and documents referred to herein” in the first sentence, and they are not “prior” to the Agreement, and therefore are unaffected by the second sentence. The Agreement might have included, but does not include, an express specific exclusion of such implied terms.
On the other hand, terms that might be implied as a result of matters extrinsic to the written Agreements would, in my view, be excluded by clause 24.
It follows, in my judgment, that Issue 1 cannot be answered by a simple “Yes” or “No”, because most of the alleged representations are not representations of fact. However, the exclusion of alleged collateral warranties should be given a simple affirmative answer, and the exclusion of the alleged implied terms should be given a simple negative answer.
Issue 2: Clause 15.2: no set off
Apart from UCTA, I see no basis in the assumed facts set out in the orders for the trial of the preliminary issues for clause 15.2 not to take effect in accordance with its terms: see Coca Cola Financial Corp v Finsat Ltd [1998] QB 43. Mr Spink and Mr McMeel sensibly did not contend that it does not do so.
There was a suggestion that a defendant could seek a stay of any judgment obtained by AXA pending determination of its counterclaim. I do not think that this is right. It would be inconsistent with clause 15.2 for the court, in the exercise of its discretion, to order such a stay: see Coca Cola Financial Corp v Finsat Ltd at 858H to 859A, Continental Illinois National Bank vPapanicolaou [1986] 2 Lloyd’s Rep 441.
Issue 3: clause 1.6 of Schedule 4: conclusive evidence
Although the order for the trial of preliminary issues referred to clause 1.6, and not to clause 5.5, they have similar functions and effect. I shall refer to clause 1.6, but the issues it raises apply equally to clause 5.5.
Again, there was no dispute before us as to the contractual effect of clause 1.6. Such clauses have long been used: see Society of Lloyd’s v Fraser and ors (unreported, Court of Appeal 31 July 1998); see too IIG Capital v Van der Merwe [2008] EWCA Civ 542. Clause 1.6 takes effect in accordance with its terms. The answer to Issue 3 is Yes.
Issue 4: UCTA and section 3 of the Misrepresentation Act 1967
(a) Scope
(i) Clause 24
It is common ground that the Agreements were on AXA’s standard terms of business, so that section 3 of UCTA applies to them. The Respondents contend that both that section and section 3 of the Misrepresentation Act 1967 apply to them. The Appellants submitted that neither provision does, since the effect of clause 24 is to exclude any effective misrepresentation or collateral warranty.
An entire agreement such as clause 24 is not an exemption clause of the kind with which UCTA was and is principally concerned. Since it prevents any collateral contract or warranty from coming into existence, it is not the subject of section 3(2)(a), since there is no collateral contract of which AXA could be in breach. Nor does section 13 materially assist the Respondents, for the same reason.
However, different considerations apply to section 3(2)(b)(i). Quite how that ‘paragraph’ should operate is not entirely clear, as is demonstrated by the somewhat tentative discussion in Chitty on Contracts, 30th edition, at paragraph 14-073. I have no doubt that it is principally aimed at the small print that entitles a party to a contract to provide something other than that defined by the principal terms of the contract, as where a holiday company reserves the right to substitute a hotel or resort for that specified in the main part of the contract. In most cases, as Chitty suggests, the performance reasonably expected of a party is that which is defined by the written contract between the parties. But this ‘paragraph’ of section 3 refers not to the performance specified in the contract but to the performance “which was reasonably expected” of that party. It seems to me that in appropriate circumstances a pre-contractual representation or promise may affect the performance that is reasonably expected of a party. It follows that clause 24 may be subject to the reasonableness test in UCTA in relation to both collateral warranties and representations. However, section 3(2)(b)(i) will only come into play in the present cases if it is possible to identify both the performance by AXA that was reasonably expected and that defined by the contract. The effect of clause 24, if any, on a representation such as “We are the largest insurance company in England” will not be within the scope of section 3(2)(b)(i).
Mr Picken submitted that, since the effect of clause 24 is that the parties agree that there have been no misrepresentations, section 3 of the Misrepresentation Act cannot apply to it. While I see the logic of his submission, to my mind his approach to section 3 is too formalistic. Looked at sensibly and practically, if, contrary to my view, clause 24 has the effect for which he contends, it excludes AXA’s liability for misrepresentations it made, and would be subject to the statutory requirement of reasonableness in this respect too.
(ii) Clause 15.2
In Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600 the Court of Appeal held that a provision materially identical to clause 15.2 was within the scope of section 3 of UCTA as extended by section 13. That decision is binding on us, even if I disagreed with it, which I do not. The clause is valid only to the extent that it is reasonable.
(iii) Clause 1.6 of Schedule 4: conclusive evidence
It is common ground that clause 1.6 of Schedule 4 is subject to the requirement of reasonableness in UCTA. In my judgment, this is correct. Clause 1.6 does have the effect of excluding the Defendants’ right of set off, which, if it is an equitable set off, goes to reduce the sum due from them to AXA.
Have AXA satisfied the requirement of reasonableness?
The position of the parties in relation to this issue changed during the course of the hearing. Initially, all counsel asked the Court to decide this issue notwithstanding the lack of any decision by the judge and the lack of relevant findings of fact. However, during the course of the hearing, concerns were expressed, not least by myself, that the Court was being asked a hypothetical question, on incomplete or non-existent factual findings. This led Mr Spink QC to reconsider his position, and ultimately to submit that the Court should not address this issue. In the end, the Court decided to hear full submissions, with a view to then deciding whether or not it should address and answer this issue.
I fully understand and sympathise with the desire of the parties to obtain even a qualified or provisional answer on this issue. The sums involved in this litigation are not great, and anything that will assist the parties to resolve their differences without incurring the costs of a full trial is to be supported.
Whether the requirement of reasonableness is satisfied depends not only on the terms of the contract and the contractual provision in question, but also on “the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”. Section 11 of UCTA expressly requires the Court to have regard to such circumstances, as Mr McMeel pointed out. The Act requires the Court to have regard in particular to the matters set out in Schedule 2. They are:
(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); …
Paragraphs (d) and (e) are inapplicable to the present claims.
The Defendants pointed out that AXA had failed to plead the facts and matters it relied upon for its case that the terms in issue were reasonable. Indubitably, AXA should have done so, but it seems that no objection was made to the evidence being adduced by AXA below, and it is now too late for the Defendants to take this pleading point. Nonetheless, the lack of proper pleading, by either AXA or by the Defendants, has I think resulted in a lack of appropriate analysis.
The only evidence before the judge, apart from the matters set out in the agreed orders for the trial of the preliminary issues, was given by Sean McKillop, an employee of AXA. Relatively little of his cross-examination addressed the issues that require to be addressed under UCTA.
In my judgment, the starting point in the consideration of the question of reasonableness is that the Agreements were made between commercial organisations and in a commercial context. Admittedly, AXA was an immeasurably larger organisation than the companies with which it contracted, and the guarantors of the companies’ liabilities were, I assume, persons of modest means. However, as financial advisors, they were accustomed to deal with written agreements, such as insurance and pension policies, and I think it fair to assume that they would generally, if not always, advise their clients to ensure that they were content with the written terms of their policies. I would therefore have expected the Defendants to have read the Agreements, and in the case of the individual Defendants the guarantees that they signed. The Agreements state both on the front page and in the veryfirst clause 1.1 that they set out the terms of the company Defendants’ appointment as AXA’s Appointed Representative. The contents page lists in capital letters clause 15 entitled “Set Off”, and clause 24, entitled “Entire Agreement”. Clause 1, which I would expect a Defendant to read first, makes it clear in clauses 1.8 and 1.9 that there are restrictions on the right to sell products other than AXA’s, as does clause 2.1.
None of the Defendants gave evidence that they had not read or had not had an adequate opportunity to read the Agreement into which he entered, or which he signed on behalf of a company. Nor was it suggested to Mr McKillop that they had had no such opportunity (though it may well be that he would have been unable to give any evidence on the point). The contractual provisions in issue are not unusual in the insurance industry: the evidence before the judge was that they are standard terms. Two of the company Defendants, Ideal Financial Planning and Harry Bennett, had entered into previous agreements with AXA on materially identical terms.
In these circumstances, I consider that the Defendants “knew or ought reasonably to have known of the existence and extent” of the terms in question.
If it be right that other insurance companies required their representatives to enter into similar contracts, it cannot be said that the Defendants had “an opportunity of entering into a similar contract with other persons, but without having to accept a similar term”. However, they could have carried on business, or continued to carry on business, as independent financial advisers. If they had done so, they would have had to be authorised as IFAs by the FSA, whereas as a result of entering into the Agreements their authorisation and their regulation became the responsibility, and a cost, of AXA. To have been directly authorised by the FSA would have involved work and expense, as Mr McKillop said in evidence, but the approximate sums involved, or indeed the procedures involved, were not in evidence. I can assume that the cost and work involved in being a wholly independent financial adviser are not so great as to make it an impracticable alternative to regulation through an insurance company, since if they were there would be no independent financial advisers. Clearly avoiding the costs involved in direct authorisation is an incentive to regulation as an appointed representative of, and through, an insurance company, and to this extent the Defendants could have avoided terms such as those now in issue.
The purpose of entire agreement clauses such as clause 24 is obvious. It was accurately described by Lightman J in Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s L Rep 611:
7. The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence as is suggested in Chitty on Contract 28th ed. Vol 1 para 12-102: it is to denude what would otherwise constitute a collateral warranty of legal effect.
A clause such as clause 24 gives both sides certainty as to the terms of their contract. In circumstances in which the sums involved in any dispute are likely to be relatively modest, if unchallenged it has the effect of limiting the costs involved in litigation; indeed, it may result in litigation being avoided. It is nonetheless more beneficial to AXA than to the Defendants, since it is AXAwho decided on the terms of the Agreement.
The effect of clause 24 is limited to collateral warranties. I consider that sensible parties, faced with a written agreement of the length and detail of the Agreements, would not expect it to be attended by oral collateral agreements, and would expect their contract to be contained in the document they sign. Furthermore, if the Appointed Representative is dissatisfied, it may at any time terminate the Agreement under clause 13.3 on 2 months’ notice. This is a relatively short notice period. Thus the Appointed Representative is not tied in to the Agreement for an extensive period.
Weighing up all these considerations, I have concluded that clause 24 was a reasonable provision to have been included in the Agreements.
In relation to clause 15.2, in my judgment in considering whether it is a reasonable provision it is necessary to consider what were the claims that when entering into the Agreements the parties would have envisaged as falling within “All monies payable by you to us under this Agreement” and what “credit, set-off or counterclaim” they would or should have envisaged as being available to the Defendants. The former would be clawbacks of commission, due from the Defendants as a result of cancellation or termination of insurance policies by their clients, and moneys repayable under Schedule 4.
Schedule 4 concerned the financial and other assistance provided by AXA to the Defendants under the Agreements. In the case of Campbell Martin, for example, AXA provided a “Business Benefits Allowance” of £43,032 and an “Initial Development Allowance” of £77,000, plus a number of computers and printers. Paragraph 1.1.3 of Schedule 4 required the Development Allowance to be used for the purpose of developing the business carried on by the Defendants pursuant to their Agreement: an unspecific obligation. Paragraph 1.1.4 was even less specific in relation to the Business Benefits Allowance, providing only that it was provided by AXA “on the terms from time to time applicable to the Business Benefit in question a copy of which will be supplied on request”. Those terms are not in evidence. The total of the Development Allowance and the Business Benefits Allowance was referred to as “the Aggregate Benefits”.
Schedule 4 also specified Annual Commission Targets and a “Five Year Commission Target”. The total of the Annual Commission Targets was the Five Year Commission Target of £1,763,720. Each of these figures seems to be a calculated figure: for example, the Year 3 Commission Target is £367,224. There is no evidence or information before the Court as to how or on what basis these Commission Targets were arrived at and agreed. They are not the same in the Agreements in issue in these appeals, but were specific to and different in each Agreement. If I have to make any assumption, given that the Agreements must be construed as a whole and the orders for the trial of the preliminary issues do not include any assumption that the figures were arrived at on any basis inconsistent with the other provisions of the Agreements, I would assume that the parties agreed that on a single-tie basis these Commission Targets were reasonably achievable.
Schedule 4 provides for a calculated proportion of the Aggregate Benefits to become repayable in the event that the Appointed Representative’s Cumulative Commission Earnings for any year are less than the specified Cumulative Commission Target for that year.
Clause 13.1 of each Agreement provides for a contractual duration of 5 years, but that is a maximum duration, since under clauses 13.2 and 13.3 either party may terminate the Agreement at any time on giving 2 months’ notice. If either party does terminate the Agreement during the 5 year period, a calculated proportion of the Aggregate Benefits will be repayable by the Appointed Representative if its Cumulative Commission Earnings are less than the Five Year Commission Target. In effect, as I understand the Agreement, in such circumstances the Aggregate Benefits are treated as if they would have been amortised over the 5 year period, so that premature termination results in the unamortised Benefits being repayable.
We had no submissions on the meaning or effect of clauses 5.5 of the Agreement and clause 1.6 of Schedule 4. However, the expression “manifest error” in the present context is not as unambiguous as might at first seem. “Manifest” may mean “apparent on the face of the document”, as where the document is a certificate under clause 1.6 of Schedule 4. If so, it may be difficult to see how any error could be manifest in that sense. I think, therefore, that “manifest” in this context has the wider meaning of “obvious”.
I would expect the Appointed Representative to be able to keep track of the commission payable on policies and other financial products it sold pursuant to the Agreement, and on commission clawbacks resulting from its clients cancelling or terminating policies. If so, it would have no difficulty in itself calculating its Commission Earnings, and from that in making the calculations set out in Schedule 4. It should therefore be able to demonstrate that any statement or certificate signed by AXA for the purposes of clause 1.6 of that Schedule, if incorrect, is subject to a manifest error. In my view, therefore, clause 1.6 is a reasonable provision for the purposes of UCTA.
For similar reasons I consider clause 5.5 to be reasonable. A failure of AXA to pay commission on a policy taken out by a client of an Appointed Representative which it has brought about will be an obvious, and therefore manifest, error on the part of AXA.Any incorrect calculation of commission will similarly be challengeable as subject to such error: any such calculation will be obviously wrong.
Very different considerations apply to clause 15.2. It is signposted in the list of contents, under the heading “Set Off”, so that it should be obvious to the Appointed Representative that there is a contractual provision affecting rights of set off. Clause 15.1 expressly authorises AXA to set off any liability of the Appointed Representative against sums payable to it. Clause 15.2, on the other hand, would prevent the Appointed Representative who is owed commission from being able to set off what it is owed against its liability under Schedule 4, and also prevent the Appointed Representative from being able to set off his claim for damages for factual misrepresentation. We have no explanation of AXA’s requirement for this clause. In the absence of such an explanation, I would hold that it has not shown that the clause is reasonable for the purposes of UCTA.
London Borough of Southwark v IBM UK Ltd
[2011] EWHC 549 : [2011] EWHC 549 (TCC), 135 Con LR 136
Akenhead J
Statutorily Implied Terms and UCTA
Reliance is, ultimately, only based by Southwark on the Sale of Goods Act 1979. It is first necessary to consider whether this Act applies at all in the context of this case. Relevant parts of the Act are as follows:
“1 (1) This Act applies to contracts of sale of goods made on or after (but not to those made before) 1 January 1894.
2 (1) A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.
14 (1) Except as provided by this section and section 15 below and subject to any other enactment, there is no implied [term] about the quality or fitness for any particular purpose of goods supplied under a contract of sale.
(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality…
(2B) [set out earlier in this judgment].
(2C) The term implied by subsection (2) above does not extend to any matter making the quality of goods unsatisfactory—
(a) which is specifically drawn to the buyer’s attention before the contract is made,
(b) where the buyer examines the goods before the contract is made, which that examination ought to reveal…
(3) Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known—
(a) to the seller, or
(b) where the purchase price or part of it is payable by instalments and the goods were previously sold by a credit-broker to the seller, to that credit-broker,
any particular purpose for which the goods are being bought, there is an implied [term] that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller or credit-broker.
61 (1) In this Act, unless the context or subject matter otherwise requires,—
“goods” includes all personal chattels other than things in action and money…”
A preliminary question to consider is whether the Arcindex Contract was a contract for the sale of goods at all. That involves a consideration first as to whether under Section 2(1) there was to be a “transfer” of “property in goods” and secondly whether “goods” were being sold. I have formed the view that there was here no “transfer” of property in goods for the purposes of the 1979 Act. The Order talks about IBM “supplying” the Arcindex software “under Orchard’s Software Licence Terms defined in Appendix A” and there is a money consideration (£67,000). What was provided by IBM was in effect a licence from Orchard to Southwark to use the software and, therefore, there is no transfer of property. Although the licence is expressed by Appendix A to be a “perpetual licence”, this is said to be a licence “on the terms and conditions contained” in Appendix A. Some of these other terms in Appendix A point strongly to there being no transfer of property in the software. Clause 8.1 specifically talks about “title, copyright and all other proprietary rights in the Software” remaining vested in Orchard. Because copyright is identified as a specific right being retained, the use of the words “title” and “other proprietary rights” suggests strongly that ownership rights are retained. The termination provision in Clause 10 requires Southwark to return at Orchard’s request or destroy all copies, forms and parts of the software covered by the licence. Again that points to property in the software remaining all the time with Orchard. The licence was subject to other restrictions; for instance by Clause 3 of Appendix A it could only be used by Southwark and any “commercial partners”. The software by Clause 7 was not to be modified without Orchard’s consent.
It is therefore unnecessary to decide whether software can be “goods” for the purposes of the 1979 Sale of Goods Act. There is no binding authority which Counsel or I have been able to find on this topic. However, my view, which is necessarily obiter, is that in principle software could be “goods” within the meaning of that Act. I base this view on the following:
(a) Although a CD (compact disc) with nothing on it is worth very little, there is no restriction in the Sale of Goods Act on any goods being excluded from the Act by reason of their low value. CDs are physical objects and there is no reason why they should not be considered as goods.
(b) The fact that a CD is impressed with electrons to add functions and values to it simply gives a CD a particular attribute. Thus, if a customer buys a music CD with a Beethoven symphony or a Mumford & Sons album on it, it must be “goods” and it should, if new, be of satisfactory quality. There can be no difference if the CD contains software.
(c) The definition of “goods” is expressed to be an inclusive rather than an exclusive one. Put another way, the Act is not excluding anything which might properly be considered as goods. It follows that “goods” are not simply “personal chattels”, although a music or software CD may also fall into the category of being a personal chattel.
So far as this issue is concerned, one will need always to examine the contractual terms pursuant to which the customer acquires the software. If, as here, it is simply a licence to use that is being granted albeit for a money consideration, there may be no transfer of property. In principle, a licence to use, if that is all it is, may well not transfer any property or title in the goods in question. However, if the arrangement between the parties can be said to involve the transfer of property to the buyer, I see no reason why in principle software that is so transferred can not be “goods” for the purposes of the Act. There is in reality only one authority by way of an obiter remark against this view. In St Albans City and District Council v International Computers [1996] 4 All ER 481, Sir Iain Glidewell said:
“…in order to answer the question, however, it is necessary to distinguish between the programme and the disc carrying the programme.
In both the Sale of Goods Act 1979 section 61 and the Supply of Goods and Services Act personal chattels other than things in action and money…” Clearly a disc is within this definition. Equally clearly, a programme, of itself, is not.
…in the present case, it is clear that the defective programme 2020 was not sold, and it seems probable that it was not hired. The evidence is that in relation to many of the programme releases, an employee of ICL went to St Albans’ premises where the computer was installed taking with him a disc on which the new programme was included, and himself performed the exercise of transferring the programme into the computer.
As I have already said, the programme itself is not ‘goods’ within the statutory definition. Thus a transfer of the programme in the way I have described does not, in my view, constitute a transfer of goods.”
It is unclear in the current case whether the CDs containing the Arcindex programme were to be given to Southwark. Appendix B expressly talks about “new releases” to be “delivered to [Southwark] on CDs”. An inference is that the original software was also provided on CDs. On that basis, the CDs impressed with the software must be capable of being goods, in my view.
It follows from the above that the Sale of Goods Act does not apply and therefore the terms statutorily implied under that Act can not be applied to the Arcindex Contract. Even if they did, I am satisfied that by operation of UCTA the exclusions of the statutorily implied terms in the Arcindex Contract would be wholly reasonable and would stand. My reasoning is as follows:
(a) I accept that the effect of Section 6 of UCTA is, as between parties such as IBM and Southwark, that the statutorily implied term of fitness for purpose arising under Section 14 of the Sale of Goods Act 1979 will be excluded or restricted pursuant to a contractual term “only in so far as the term satisfies the requirement of reasonableness”.
(b) Having regard to the matters specified in Schedule 2 to UCTA as Section 11(2) requires, this is clearly a case in which it was wholly reasonable for the parties to legislate as they did. The parties were of broadly equal bargaining strength. Southwark had the opportunity to contract with Orchard and also chose the benefit of standard framework agreement terms. There can be no suggestion that Southwark did not or could reasonably not have known of the terms which excluded the implied terms; Southwark went through a protracted process negotiating the terms and clearly had lawyers involved. Finally, it does appear (as accepted by both experts) that there was some enhancement of Arcindex by Orchard to reflect what Southwark said it wanted. The reality is that the Arcindex contract was not, objectively looked at, an unfair or unreasonable one. By all accounts, Southwark was to get exactly what its staff wanted and was or would have been in the position by Clause 12 of the ICT Conditions to have all breaches remedied, to recover damages, albeit somewhat but not spectacularly limited, and indeed to terminate if there were material defaults which were not remedied within specified times.
Was There any Material Breach of the Arcindex Contract?
Given the fact that they could not materially access the remnants of the IBM and Orchard Systems, the experts did well to reach as much agreement as they did in their Joint Report No 2 dated 27 January 2011. Material parts of what they agreed in that Report are as follows:
“7. We agree that a major purpose of the project was to improve data quality and remove duplicates. The de-duplication within a single database was a reasonable objective.
8. From the results of the tests that were run at Southwark, we agree that a better mechanism of resolving duplicates would have helped…
10. ProfileStage and DataStage were not used in the test runs done by Southwark in August 2007.
11. ProfileStage would have given information about Southwark’s data and allowed improvement of the matching. We agreed that the matching rules used for the test could have been improved…
12. Some data cleansing could have been conducted in DataStage but not de-duplication, which requires matching of records which is a function of QualityStage…
14. Southwark did not use QualityStage directly for the tests – only through ArcIndex. In other words the user interface to QualityStage was that provided by ArcIndex. Using it this way, Southwark was limited to the functions supported by ArcIndex.
15. As far as we can tell, ArcIndex functions as described in the ArcIndex User Manual and we agree as to how it works and which of the functions relevant to the case it does or does not do.
16. A tool can assist in de-duplication by finding identical or similar records in a database. Whereas identical or near identical can be automatically regarded as duplicates, records that are just similar need to be reviewed before they can be considered as duplicates. It is the latter similar records or potential matches that lead to clerical review.
17. ArcIndex supported a clerical review process to allow the review/resolution of unresolved matches (and unhandled data) but the only way to review potential matches was to read a textual report which could be viewed on screen or printed out.
18. The textual report produced during the test runs in the whole CRM was large but we agree that the amount that needed to be reviewed could have been reduced by manipulation of the rules, for example by setting pass 1 tight (corresponding to definite duplicates/exact matches) and pass 2 loose (corresponding to potential matches). [Note 2 stated that this was “the situation using ArcIndex for de-duplication”.]
19. We also agreed that, if the matching rules are set loose to catch potential matches in ArcIndex, it would be necessary to sort out false duplicates before going any further.
20. We also noted that, if the data is of very poor quality, it may not be possible to resolve potential duplicates and this would not be a criticism of the systems.”
They also agreed that the SAP Brief is not a detailed requirements specification and that Southwark had not documented detailed requirements prior to February 2007 (Paragraphs 22 and 23). At Paragraphs 25 to 31, the experts accepted that QualityStage had a user interface and that QualityStage could have been used to produce lists of matches, potential matches and non-matches, in report form, an Excel spreadsheet or in a database format.
There is no evidence and indeed no suggestion that any of the software, either Websphere or Arcindex, was badly manufactured or installed. The real complaint is that in two respects Arcindex was not fit for purpose. The only two respects ultimately relied upon by Southwark are that there was no effective or proper facility for identifying and dealing with potential matches in the data which Arcindex would address or process and that there was no effective security provision.
The answer to all this primarily lies in the determination of what the relevant Southwark personnel identified and communicated to IBM and Orchard as Southwark’s requirements for the software (and other services) which they wished to procure from IBM.
I have already made it clear that Southwark simply has not proved on a balance of probabilities that the SAP Brief was provided to IBM on the basis that the rather generalised requirements which it contains were and remained Southwark’s requirements for the software and related services project which Southwark embarked on with IBM. This is of some importance because clearly initially Southwark was looking for a complete “MDM System” from SAP prior to IBM’s involvement and even initially when Southwark approached IBM. It was only when Southwark made it clear that they could not afford the £1.5m to £2m price tag which IBM indicated for a complete system that Southwark lowered its sights at least so far as IBM and Orchard were concerned. Whereas the goal remained one of ultimately achieving an MDM system, it seems likely that the requirements for the IBMprocurement were significantly less than those for a full system procurement.
There is the clearest evidence which I accept that the Southwark team in 2006 carried out a detailed investigation mostly into Arcindex. They received the Arcindex User Guide and White Paper and had at least two if not more detailed demonstrations of what Arcindex could provide. The team was an intelligent one well versed in IT matters and they gave every impression that they fully understood what it was that Arcindex could and would provide. I am led inexorably to the factual conclusion that the Southwark team in 2006 and at all times up to the arrival of Ms Troy was wholly satisfied that Arcindex met its requirements and reflected exactly what it wanted. Southwark has chosen to call as witnesses not one of the five or six people who were intimately involved on behalf at Southwark prior to the advent of Ms Troy. Any one of Messrs Katz, Orrom, Nuttall, Currey and Ojejinmi or Ms Leahy could have provided useful evidence one way or the other about what the communicated pre-contract requirements were but the Court has not been provided with the benefit of their evidence. As I have already said, I do not draw a negative inference as such that they would have given evidence unhelpful to Southwark.However, the evidence from the IBM witnesses and Mr Leventhal points very clearly towards the conclusion referred to above. The very facts that Mr Katz did not record in any contemporaneous documents in 2006 or 2007 that he was in any way dissatisfied with what IBM and Orchard had provided, and that in August 2007 he expressed his gratitude amongst others to IBM for what they had done up to the time that he signed off on the project, particularly in the context of the contents of his End of Project Report, corroborates the conclusion.
The experts accept at Paragraph 15 of their joint report that “ArcIndex functions as described in the ArcIndex User Manual”. As was said colloquially at one stage during the trial, Arcindex does “what it says on the box”. An analogy is the potential car purchaser who might want an off-road vehicle but, having looked at the brochure for an on-road vehicle, says to the salesman “that’s what I want” and buys that vehicle. There will be no cause of action against the garage that the car is no good off the road. The salesman will reply, with justification: “you got exactly what you asked for”. That is essentially what has happened in Southwark’s case.
The main complaint relating to potential matches stems from Ms Troy’s belief and experience that an MDM system should have a relatively easy to operate method of identifying potential matches. I accept that a primary purpose was de-duplication of the information. That undoubtedly involves finding a way of identifying matches or duplicates so that, for instance, a Mr A Smith who appears on five different records will show up as giving rise to 5 matches, four of which can be identified as duplicates and in effect removed so that there is left one master or golden record for Mr A Smith. It is common ground between the experts, and I accept, that Arcindex should usually be used with data which has already been standardised and cleansed and that then, sometimes by trial and error initially, rules or criteria are fixed in Arcindex for the reception of the cleaned up data. That will produce only two categories: matches and non-matches. There is no separate category as such for potential matches, that is a category of records which do not satisfy the rules or criteria for matches, but which are sufficiently close to merit a clerical review by a human being. However, there was, as the experts said in their Joint Report and indeed in evidence, a number of ways of identifying by way of Arcindex what might fall into the category of “potential matches”. The first is that set out in Paragraph 18 of the Joint Report which involves in effect doing two runs or passes. The first pass would involve the setting of sufficiently tight rules so that only matches or duplicates were found; as Paragraph 19 of the Joint Reports indicates, those matches would then be dealt with so that on the next run or pass they would not show up as matches. The second run would then involve setting looser rules so that a second and different batch of (albeit less certain) matches were identified. These would be potential matches which would need to be the subject matter of a clerical review. Another way of identifying potential matches would be to carry out a review of the textual report either on-screen or as printed out. That review could be tailored so that the reviewers were on the lookout for certain types of closely related information. The names for instance would or could be shown in alphabetical order and that would make a review easier. I accept that this latter approach would have taken substantial human resources at least initially; once the information had removed the duplication from it (the de-duplication initially involving substantial resources), the systems would be rational and only contain single entries for people and places so that later work of de-duplication would involve much less human resource. Of course, the Southwark team recognised that Southwark would have to “cut its cloth” to fit its budgetary constraints.
Mr Katz effectively said in his End of Project report that the Websphere and Arcindex software would have provided Southwark with operational benefits from data cleaning, standardisation and matching which Southwark did not currently have and that the project was closed down before any of these benefits could be realised. On any account, Arcindex, if operated sensibly and properly with cleansed and standardised information, would have been of substantial use to Southwark because, at the very least, it could be used to identify and take out a vast amount of duplicated or matching information which would effectively de-clog the source systems and avoid or reduce in a substantial measure the risk of errors being made in the treatment of people and premises.
In my judgement, Southwark got by way of Arcindex exactly what its then team knew that they were getting and what it decided that it wanted and needed within its budgetary constraints. It follows from my findings that I am satisfied on a balance of probabilities that Arcindex as supplied by Orchard to Southwark was of satisfactory quality and suitable not only generally but also for the specific purposes which Southwark’s personnel had identified to IBM and Orchard as their requirements.
The reality is, now recognised by both experts, that QualityStage was able to provide even what Ms Troy latterly from Southwark’s standpoint believed Arcindex did not provide but should have provided, namely an ability to identify and produce three lists of records, matches, potential matches and non-matches. Subject to one factual conundrum, I would have no doubt that, even if a better provision for potential matches could have been required within Arcindex, it could not be considered to be unsuitable in the context that related software provided by IBM, namely QualityStage, could and would provide that better facility. The factual conundrum relates to the workshop of 3 October 2007 at which there was effectively unchallenged evidence that “there was no feasible solution to support the Claimants’ MDM requirements with the current WebSphere modules purchased” (as set out in Ms Troy’s witness statement at Paragraph 86). It remains unclear, even if one accepts this evidence at face value, what was being referred to as the Claimants’ “MDM requirements”. Ms Troy had produced documents listing a large number of requirements which she believed had not been met by Arcindex but should have been so met. Many of those “requirements” have not been pursued in these proceedings, ultimately or at all, as giving rise to any default on the part of IBM. It may well be the case that Websphere could not support all these requirements; for instance, the ability to support “real time integration” is not raised as a complaint against IBM albeit that Websphere may not have been able to provide it; however this was not something which was explored in evidence at the trial. In any event, it was not suggested seriously or at all that in some way IBM was estopped from asserting that QualityStage could and did provide no potential matches function. In reality, therefore in spite of this apparent factual discrepancy, it would not have prevented me from finding that overall Arcindex was suitable in any event and in the light of the availability within QualityStage of the facility to deal with potential matches.
Finally, with regard to alleged breaches, I am satisfied that Southwark has failed to prove its case on a balance of probabilities in relation to access to screens being restricted to a user profile. Although it is the case that Arcindex did not support such a restriction, as the experts agree, I am not satisfied that it was a requirement of Southwark. The argument that it was a requirement stems from some general words used in the SAP Brief: “Definition of user roles and authorizations”. Quite what was meant by that expression objectively let alone subjectively by the Southwark team involved in 2006 and early 2007 is unclear. It is certainly not a term of art which would have a specific meaning to anyone involved in a MDM system procurement. In my view, all it means is that someone, and it could be Southwark, the supplier of any software or the two of them in tandem, would have to define who would be permitted to use the software and what any given type of or specific user would be required or allowed to do with the software. I do not see how it must be defined as meaning that the software provided by IBM or Orchard has to have built into it an ability to control and restrict access to any given software.
In any event, I am not satisfied on a balance of probabilities that, whatever this expression meant or was taken to mean, it was to be a requirement which either Southwark or IBM expected, anticipated or required IBM to satisfy. Indeed I am satisfied on a balance of probabilities that it was not a requirement which IBM was expected to satisfy. My primary reason for making this finding is that the Southwark team knew exactly what they required and what they were getting and therefore must have known prior to the Arcindex Contract that Arcindex would not itself provide restrictions on unauthorised users. The second reason is that there is clear evidence, which I accept, that Southwark was planning on itself providing an access platform to Arcindex through the Portal which Southwark was setting up to enable users of one sort or another to view Arcindex. It should have been possible therefore to secure restrictions on access to Arcindex through the Portal. Overall corroboration for this lies in the (albeit negative) fact that there is no hint in the documentation or evidence that anyone thought that Arcindex should provide this facility until, latterly, Ms Troy came on the scene.
It follows from the above that any claim for breach of contract in relation to unsatisfactory quality or lack of fitness for purpose fails and what was left of Southwark’s case as a whole fails on the issue of liability.
Causation
In the light of my findings on liability, it is unnecessary to consider causation. Out of deference to the arguments put forward however, I will summarise what my views are. Of course, these proceedings are not a public enquiry into what went wrong; these proceedings are concerned with whether Southwark can prove its case on causation as to whether the decision to abandon the software installed by IBM and Orchard was caused by any breaches of contract on the part of IBM. As no breaches have been established, causation in that sense has not been proved. However, there was no evidence from anyone within Southwark involved in the decision-making as to why the installation was abandoned. Ms Troy was a consultant and not a direct employee of Southwarkand there is no suggestion that she was party to the decision. In that sense as well, Southwark has not proved its case linking the decision to abandon with any breaches. There appears to have been a growing perception between Ms Troy and Ms Leahy that the MDM project as it had developed by mid June 2007 had been misconceived and inadequately defined. This explains why, extraordinarily, the decision to close down the project was done without reference to the project manager, Mr Katz and why at least initially Ms Leahy and Ms Troy in their Review Findings Report of early September 2007 stated that the proposed MDM programme did not have a specific business sponsor and that there were a number of significant gaps in the functionality “mainly due to a lack of definition of MDM’s requirements”; they went on to say that the scope was incomplete and integration of MDM to other systems was not fully considered. They suggested that in these circumstances what had been provided was not fit for purpose. Southwark later went on to complain that IBM had been “complicit” in effect in letting things go wrong; the use of the word “complicit” is tantamount to saying that IBM should have advised Southwark that Southwark was going wrong. That of course is no part of its pleaded case, as finally maintained.
If I had found that Southwark had established the breach in relation to only the restrictions on access, I would positively have found that causation had not been proved. The evidence from the experts was that for a relatively few thousand pounds this problem could have been overcome and the evidence does not suggest that this breach featured significantly if at all in the decision to terminate the relationship between the parties. If I had found that Southwark had established the breach or breaches in relation to the absence of an effective facility within Arcindex to address potential matches, I would have found that Southwark had not proved its case on a balance of probabilities. My concern in those circumstances would have been the absence of any evidence from any decision-maker within Southwark and there would have been judicial reluctance to base a decision on inference when decision-makers could have been called as witnesses. There is, apart from exchanged correspondence, no contemporaneous documentation which I have seen which identifies any corporate thought process within Southwark about terminating the relationship or abandoning the software. The position is complicated additionally by the fact that there were many complaints originally pleaded but later abandoned and others not pleaded by Southwark. In the absence of evidence from the decision-makers, I would not readily have been in a position to find on a balance of probabilities that it was the potential matches complaint which was a sufficient cause of the decision to establish causation.
Decision
There will be judgement for IBM and Southwark’s claim is dismissed.