Limiting Liability
Cases
Chapelton v Barry Urban District Council
[1940] 1 KB 532
Slesser LJ
“ As I read the learned county court judge’s judgment (and we have had the advantage of a note taken by Mr. Carey Evans in addition to the summary reasons which the learned county court judge gives for his decision), he said that the plaintiff had sufficient notice of the special contract printed on the ticket and was, accordingly, bound thereby – that is to say, as I understand it, that the learned county court judge has treated this case as a case similar to the many cases which have been tried in reference to conditions printed on tickets, and more particularly, on railway tickets – and he came to the conclusion that the local authority made an offer to hire out this chair to Mr. Chapelton only on certain conditions, which appear on the ticket, namely, that they, the council, would not be responsible for any accident which arose from the use of the chair, and they say that Mr. Chapelton hired the chair on the basis that that was one of the terms of the contract between him and themselves, the local authority.
Questions of this sort are always questions of difficulty and are very often largely questions of fact. In the class of case where it is said that there is a term in the contract freeing railway companies, or other providers of facilities, from liabilities which they would otherwise incur at common law, it is a question as to how far that condition has been made a term of the contract and whether it has been sufficiently brought to the notice of the person entering into the contract with the railway company, or other body, and there is a large number of authorities on that point. In my view, however, the present case does not come within that category at all. I think that the contract here, as appears from a consideration of all the circumstances, was this: The local authority offered to hire chairs to persons to sit upon on the beach, and there was a pile of chairs there standing ready for use by any one who wished to use them, and the conditions on which they offered persons the use of those chairs were stated in the notice which was put up by the pile of chairs, namely, that the sum charged for the hire of a chair was 2d. per session of three hours. I think that was the whole of the offer which the local authority made in this case. They said, in effect: “We offer to provide you with a chair, and if you accept that offer and sit in the chair, you will have to pay for that privilege 2d. per session of three hours.”
I think that Mr. Chapelton, in common with other persons who used these chairs, when he took the chair from the pile (which happened to be handed to him by an attendant, but which, I suppose, he might have taken from the pile of chairs himself if the attendant had been going on his rounds collecting money, or was otherwise away) simply thought that he was liable to pay 2d. for the use of the chair. No suggestion of any restriction of the council’s liability appeared in the notice which was near the pile of chairs. That, I think, is the proper view to take of the nature of the contract in this case. Then the notice contained these further words: “The public are respectfully requested to obtain tickets properly issued from the automatic punch in their presence from the Chair Attendants.” The very language of that “respectful request” shows clearly, to my mind, that for the convenience of the local authority the public were asked to obtain from the chair attendants tickets, which were mere vouchers or receipts showing how long a person hiring a chair is entitled to use that chair. It is wrong, I think, to look at the circumstance that the plaintiff obtained his receipt at the same time as he took his chair as being in any way a modification of the contract which I have indicated. This was a general offer to the general public, and I think it is right to say that one must take into account here that there was no reason why anybody taking one of these chairs should necessarily obtain a receipt at the moment he took his chair – and, indeed, the notice is inconsistent with that, because it “respectfully requests” the public to obtain receipts for their money. It may be that somebody might sit in one of these chairs for one hour, or two hours, or, if the holiday resort was a very popular one, for a longer time, before the attendant came round for his money, or it may be that the attendant would not come to him at all for payment for the chair, in which case I take it there would be an obligation upon the person who used the chair to search out the attendant, like a debtor searching for his creditor, in order to pay him the sum of 2d. for the use of the chair and to obtain a receipt for the 2d. paid.
I think the learned county court judge has misunderstood the nature of this agreement. I do not think that the notice excluding liability was a term of the contract at all, and I find it unnecessary to refer to the different authorities which were cited to us, save that I would mention a passage in the judgment of Mellish L.J. in Parker v. South Eastern Ry. Co.,[1] where he points out that it may be that a receipt or ticket may not contain terms of the contract at all, but may be a mere voucher, where he says: “For instance, if a person driving through a turnpike-gate received a ticket upon paying the toll, he might reasonably assume that the object of the ticket was that by producing it he might be free from paying toll at some other turnpike-gate, and might put it in his pocket unread.” I think the object of the giving and the taking of this ticket was that the person taking it might have evidence at hand by which he could show that the obligation he was under to pay 2d. for the use of the chair for three hours had been duly discharged, and I think it is altogether inconsistent, in the absence of any qualification of liability in the notice put up near the pile of chairs, to attempt to read into it the qualification contended for. In my opinion, this ticket is no more than a receipt, and is quite different from a railway ticket which contains upon it the terms upon which a railway company agrees to carry the passenger. This, therefore, is not, I think, as Mr. Ryder Richardson has argued, a question of fact for the learned county court judge. I think the learned county court judge as a matter of law has misconstrued this contract, and looking at all the circumstances of the case, has assumed that this condition on the ticket, or the terms upon which the ticket was issued, has disentitled the plaintiff to recover. The class of case which Sankey L.J. dealt with in Thompson v. London, Midland and Scottish Ry. Co.,[2] which seems to have influenced the learned county court judge in his decision, is entirely different from that which we have to consider in the present appeal.
This appeal should be allowed.
MacKinnon LJ
I agree that this appeal should be allowed. The learned county court judge decided this case relying upon a dictum of Sankey L.J. when he was speaking of a transaction which was totally different to this one. If a man does an act which constitutes the making of a contract, such as taking a railway ticket, or depositing his bag in a cloak-room, he will be bound by the terms of the document handed to him by the servant of the carriers or bailees; but if he merely pays money for something and receives a receipt for it, or does something which clearly only amounts to that, he cannot be deemed to have entered into a contract in the terms of the words that his creditor has chosen to print on the back of the receipt, unless, of course, the creditor has taken reasonable steps to bring the terms of the proposed contract to the mind of the man. In this case there was no evidence upon which the learned county court judge could find that the defendants had taken any steps to bring the terms of their proposed contract to the mind of the plaintiff. In those circumstances, I am satisfied that the defendants could not rely upon the words on the back of the ticket issued to the plaintiff, and, having admittedly been negligent in regard to the condition of the chair, they had no defence to the plaintiff’s cause of action.
Goddard LJ
I agree. In my view the cases which deal with railway tickets, cloak-room tickets, or documents issued by bailees when they take charge of goods, have no analogy to this case. In this case the appellant paid 2d. in order to have the right to sit on a chair on the beach, and he was asked to take a ticket in the form of a receipt for that purpose, and was given a document which shows nothing on the face of it, except that the man had the right to sit in the chair until 7.30 P.M. on the day when the accident occurred and the fact that the ticket was not transferable. I cannot imagine that anybody paying 2d. under those circumstances for the privilege of sitting in a chair on the beach would think for one moment that some conditions were being imposed upon him which would limit his ordinary rights, or that the document he received when paying his 2d. was a contractual document in any shape or form. I think the ticket he received was nothing but a receipt for his 2d. – a receipt which showed him how long he might use the chair. I think the learned judge below was wrong in thinking that the case of Thompson v. London, Midland and Scottish Ry. Co.,[3] upon which he seems to have relied, had any bearing on the present case. One must have regard to the facts of the case and the general circumstances of the case. In my opinion, Thompson v. London, Midland and Scottish Ry. Co.[3] has no bearing at all on this case.”
Hardwick Game Farm v Suffolk Agricultural and Poultry Producers Association Ltd
[1968] UKHL 3 [1969] 2 AC 31
Lord Reid
MY LORDS,
In the case of S.A.P.P.A. and Grimsdale there was a verbal contract
followed on the next day by a Sold Note which contained a condition in the
following terms:
” Sellers not accountable for weight, measure or quality after delivery
” from ship, mill or granary. The buyer under this contract takes the
” responsibility of any latent defects.”
In the course of dealing between the parties the practice was that on each
occasion when a deal was effected between Mr. Golden on behalf of
S.A.P.P.A. and Mr. Thearle on behalf of Grimsdale the Sold Note invariably
followed the verbal contract. All the judges in the Court of Appeal expressed
the view that the conditions in the Sold Note were incorporated in the
contract between the parties. I agree with this conclusion. Havers J. held
that the Sold Note was not incorporated in the contract by reason of some
observations by Lord Devlin in McCutcheon v. David Macbrayne [1964]
1 W.L.R. 125 at page 134 when he said:
” Previous dealings are relevant only if they prove knowledge of the
” terms, actual and not constructive, and assent to them. If a term
” is not expressed in a contract, there is only one other way in which it
” can come into it and that is by implication. No implication can be
” made against a party of a term which was unknown to him. If previ-
” ous dealings show that a man knew of and agreed to a term on 99
occasions there is a basis for saying that it can be imported into
” the hundredth contract without an express statement. It may or may
” not be sufficient to justify the importation—that depends on the
” circumstances; but at least by proving knowledge the essential begin-
” ning is made. Without knowledge there is nothing.”
The rest of the members of the House did not concur in this obiter dictum
of Lord Devlin and there is nothing, in my view, in McCutcheon to conflict
with the decision of the Court of Appeal. In McCutcheon there was a verbal
contract for the carriage of a motor car by sea, but the course of dealing
between the parties differed from previous occasions in that on the relevant
occasion a Risk Note was not, as before, signed by the consignor of the motor
car. In the present case S.A.P.P.A. by continuing to conduct their business
with Grimsdale on the basis of the Sold Notes which contained the relevant
condition and by not objecting to the condition must be taken to have assented
to the incorporation of these terms in the contract. The remaining question
is whether the clause applies so as to exempt Grimsdale from liability. Exemp-
tion clauses must be construed strictly (Adamastos Shipping Co. v. Anglo
Saxon Petroleum Co. Ltd. [1959] A.C. 133) and the exception must be ex-
pressed in sufficiently clear words. I cannot find that condition 17 is in
sufficiently clear terms to exempt Grimsdale of responsibility.
Grimsdale and Kendall and Holland Colombo
In this situation I am content to follow the Court of Appeal to this extent,
that the purpose for which Grimsdale required the meal was made known to
Kendall and Holland Colombo, namely for re-sale in smaller quantities for
compounding as a food for cattle and poultry and that this purpose was
sufficiently specific to come within the meaning of ” particular purpose “,
under section 14 (1). In the Irish case of Wallis v. Russell [1902] 2 I.R. 585
it was held that on a sale of fresh crabs to a customer the purpose indicated
for which the goods were required was for human consumption and that this
was a particular purpose within section 14 (1). Palles C.B. at page 598 said:
” So much for the first ground of limitation relied upon. I come now
” to the second—on the meaning of ‘ particular purpose’. As to that
” I have but little to say. The well-known judgment of Best, C.J. in
” Jones v. Bright 5 Bing. 853 points out the distinction between two
” classes of warranty, or, strictly speaking, of warranty and condition,
” that are dealt with in the two sub-sections under consideration: 1, fit-
” ness for a particular purpose ; 2, that the goods shall be of a merchant-
” able quality. Where no purpose is mentioned, there is a warranty, or
” condition, as the case may be, that the goods are, in the words of Best
” C.J. ‘ fit for some purpose’ or, in other words, merchantable as such;
” where a particular purpose is mentioned, the warranty or condition is
” that they shall be reasonably fit for that purpose. I think that that
” distinction, which has been established by the course of legal decision
” for a century, shows that the words ‘ particular purpose’ in a case of
” this description have a technical meaning; that it is not so much par-
” ticular purpose as distinct from general purpose; but it is purpose
” stated to the seller, as distinct from absence of purpose stated to the
” seller. In the absence of purpose stated, the warranty is that the article
” shall be fit for some purpose—in other words, merchantable ; where
” the purpose is stated, the warranty is that it shall be fit for that purpose.
” I cannot doubt that the purpose of using for human food is a ‘ par-
” ‘ ticular purpose’ within the meaning of the sub-section.”
The Court of Appeal affirmed the decision of the Chief Baron.
While it may be clear that the particular purpose for which the goods were
required was made known to the supplier, the difficult question arises in
connection with the subsequent part of section 14 (1). The particular pur-
pose must be made known ” so as to show that the buyer relies on the
” seller’s skill and judgment”. I have difficulty in acceding to what I
understand to be the views of the rest of your Lordships on this point. In
Manchester Liners v. Rea Ltd. [1922] 2 A.C. 74 the fact that the particular
purpose was made known to the seller was sufficient to raise the inference
that the buyer relied on the seller’s judgment and skill. In Grant v. Australian
Knitting Mills [1936] AC 85 Lord Wright at page 99 said:
” The first exception, if its terms are satisfied, entitles the buyer to
” the benefit of an implied condition that the goods are reasonably fit
” for the purpose for which the goods are supplied, but only if that
” purpose is made known to the seller ‘ so as to show that the buyer
” ‘ relies on the seller’s skill or judgment’. It is clear that the reliance
” must be brought home to the mind of the seller, expressly or by
” implication. The reliance will seldom be express: it will usually arise
” by implication from the circumstances: thus to take a case like that
” in question, of a purchase from a retailer, the reliance will be in
” general inferred from the fact that a buyer goes to the shop in the
” confidence that the tradesman has selected his stock with skill and
” judgment: the retailer need know nothing about the process of manu-
” facture: it is immaterial whether he be manufacturer or not: the main
” inducement to deal with a good retail shop is the expectation that the
” tradesman will have bought the right goods of a good make: the
” goods sold must be, as they were in the present case, goods of a
” description which it is in the course of the seller’s business to supply:
” there is no need to specify in terms the particular purpose for which
” the buyer requires the goods, which is none the less the particular
” purpose within the meaning of the section, because it is the only
” purpose for which any one would ordinarily want the goods.”
It must depend on the circumstances of each case whether that inference
can fairly be drawn. In Cammell Laird v. Manganese Bronze and Brass Co.
[1934] A.C. 402 at page 423 Lord Wright said:
” But the more difficult question remains whether the particular pur-
” pose for which the goods were required was not merely made known,
” as I think it was, by the appellants to the respondents, but was made
” known so as to show that the appellants as buyers relied on the sellers’
” skill and judgment. Such a reliance must be affirmatively shown ; the
” buyer must bring home to the mind of the seller that he is relying
” on him in such a way that the seller can be taken to have contracted
” on that footing. The reliance is to be the basis of a contractual
” obligation.”
I can well understand where the sale is by a manufacturer or a retailer to a
customer that the inference can easily be drawn. But Grimsdale and Kendall
and Holland Colombo were all dealers on the London Cattle Food Market
buying and selling goods of the same description possibly on the same day,
certainly from day to day. The section may apply to dealers inter se as
Shields v. Honeywell & Stein [1953] 1 Lloyd’s Rep. 359 shows. But there
is an air of unreality, in my view, in the idea that either of these dealers relied
on the other’s skill and judgment. It may well be that they trusted each
other’s honesty, as one of them said, but that is not the same thing as relying
on each other’s skill and judgment to select goods suitable for the particular
purpose for which they were required. There is, in my view, great force
in the judgment of Diplock L.J. in the Court of Appeal when he analyses
his reasons for saying that the implied warranty in section 14 (1) did not
apply to ordinary sales between dealers on the London Cattle Food Trade
Market, and I respectfully agree with his conclusion.
In the case of Grimsdale and Kendall and Holland Colombo the latent
defect clause is in the following terms:
” LATENT DEFECT—The Goods are not warranted free from de-
” fect, rendering same unmerchantable, which would not be apparent
” on reasonable examination, any statute or rule of law to the contrary
” notwithstanding.”
A long line of authority has decided that an exemption from breach of
warranty will not exempt for breach of condition (see Wallis v. Pratt &
Haynes [1910] 2 K.B. 1003; [1911] A.C. 394: Baldry v. Marshall [1925]
1 K.B. 260). I agree with the Court of Appeal that the latent defects clause
does not exempt Kendall and Holland Colombo.
As an addendum to these remarks I wish to mention a Scottish case
which was referred to in argument (Flynn v. Scott [1949] SC 442). This
decision appears to run counter to the principle in Wallis v. Russell (supra)
upon the construction of section 14 (1) which case has been followed in
many subsequent English cases. Flynn v. Scott which was decided by Lord
Mackintosh in the Outer House would appear to conflict with the decision in
the English case of Bartlett v. Sidney Marcus Ltd. [1965] W.L.R. 1013.
Both were cases of the sale of secondhand motor cars.
L’Estrange v F Graucob Ltd
[1934] 2 KB 394
Scrutton LJ
“ The present case is not a ticket case, and it is distinguishable from the ticket cases. In Parker v. South Eastern Ry. Co. Mellish L.J. laid down in a few sentences the law which is applicable to this case. He there said:
“In an ordinary case, where an action is brought on a written agreement which is signed by the defendant, the agreement is proved by proving his signature, and, in the absence of fraud, it is wholly immaterial that he has not read the agreement and does not know its contents.”
Having said that, he goes on to deal with the ticket cases, where there is no signature to the contractual document, the document being simply handed by the one party to the other:
“The parties may, however, reduce their agreement into writing, so that the writing constitutes the sole evidence of the agreement, without signing it; but in that case there must be evidence independently of the agreement itself to prove that the defendant has assented to it. In that case, also, if it is proved that the defendant has assented to the writing constituting the agreement between the parties, it is, in the absence of fraud, immaterial that the defendant had not read the agreement and did not know its contents.”
In cases in which the contract is contained in a railway ticket or other unsigned document, it is necessary to prove that an alleged party was aware, or ought to have been aware, of its terms and conditions. These cases have no application when the document has been signed. When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.”
Maugham LJ
“ There can be no dispute as to the soundness in law of the statement of Mellish LJ in Parker v South Eastern Ry Co,[6] which has been read by my learned brother, to the effect that where a party has signed a written agreement it is immaterial to the question of his liability under it that he has not read it and does not know its contents. That is true in any case in which the agreement is held to be an agreement in writing.
…..
In this case it is, in my view, an irrelevant circumstance that the plaintiff did not read, or hear of, the parts of the sales document which are in small print, and that document should have effect according to its terms. I may add, however, that I could wish that the contract had been in a simpler and more usual form. It is unfortunate that the important clause excluding conditions and warranties is in such small print.”
Parker v South Eastern Railway
[1877] 2 CPD 416
Lindley J
“On the finding of the jury, I think we cannot say that the defendants did not accept the article, to be taken care of by them, without any special terms. Henderson v Stevenson, therefore, is undistinguishable from this case, except for the words “see back,” which did not appear on the face of the ticket in that case. But the findings here make that distinction immaterial. After the conclusions of fact which the jury have drawn, it is, upon the authority of that case, quite immaterial whether the special terms relied on were on the front or on the back of the ticket.”
Court of Appeal
Mellish LJ
“I am of opinion, therefore, that the proper direction to leave to the jury in these cases is, that if the person receiving the ticket did not see or know that there was any writing on the ticket, he is not bound by the conditions; that if he knew there was writing, and knew or believed that the writing contained conditions, then he is bound by the conditions; that if he knew there was writing on the ticket, but did not know or believe that the writing contained conditions, nevertheless he would be bound, if the delivering of the ticket to him in such a manner that he could see there was writing upon it, was, in the opinion of the jury, reasonable notice that the writing contained conditions. ”
Baggallay LJ concurred, and predicted that the same result would be reached by the jury (in Mr Parker’s favour). Bramwell LJ dissented, holding that reasonable notice should be a question of law, and that he would have decided in favour of the railway company.
Chapelton v Barry Urban District Council
[1940] 1 KB 532
Slesser LJ
“As I read the learned county court judge’s judgment (and we have had the advantage of a note taken by Mr. Carey Evans in addition to the summary reasons which the learned county court judge gives for his decision), he said that the plaintiff had sufficient notice of the special contract printed on the ticket and was, accordingly, bound thereby – that is to say, as I understand it, that the learned county court judge has treated this case as a case similar to the many cases which have been tried in reference to conditions printed on tickets, and more particularly, on railway tickets – and he came to the conclusion that the local authority made an offer to hire out this chair to Mr. Chapelton only on certain conditions, which appear on the ticket, namely, that they, the council, would not be responsible for any accident which arose from the use of the chair, and they say that Mr. Chapelton hired the chair on the basis that that was one of the terms of the contract between him and themselves, the local authority.
Questions of this sort are always questions of difficulty and are very often largely questions of fact. In the class of case where it is said that there is a term in the contract freeing railway companies, or other providers of facilities, from liabilities which they would otherwise incur at common law, it is a question as to how far that condition has been made a term of the contract and whether it has been sufficiently brought to the notice of the person entering into the contract with the railway company, or other body, and there is a large number of authorities on that point. In my view, however, the present case does not come within that category at all. I think that the contract here, as appears from a consideration of all the circumstances, was this: The local authority offered to hire chairs to persons to sit upon on the beach, and there was a pile of chairs there standing ready for use by any one who wished to use them, and the conditions on which they offered persons the use of those chairs were stated in the notice which was put up by the pile of chairs, namely, that the sum charged for the hire of a chair was 2d. per session of three hours. I think that was the whole of the offer which the local authority made in this case. They said, in effect: “We offer to provide you with a chair, and if you accept that offer and sit in the chair, you will have to pay for that privilege 2d. per session of three hours.”
I think that Mr. Chapelton, in common with other persons who used these chairs, when he took the chair from the pile (which happened to be handed to him by an attendant, but which, I suppose, he might have taken from the pile of chairs himself if the attendant had been going on his rounds collecting money, or was otherwise away) simply thought that he was liable to pay 2d. for the use of the chair. No suggestion of any restriction of the council’s liability appeared in the notice which was near the pile of chairs. That, I think, is the proper view to take of the nature of the contract in this case. Then the notice contained these further words: “The public are respectfully requested to obtain tickets properly issued from the automatic punch in their presence from the Chair Attendants.” The very language of that “respectful request” shows clearly, to my mind, that for the convenience of the local authority the public were asked to obtain from the chair attendants tickets, which were mere vouchers or receipts showing how long a person hiring a chair is entitled to use that chair. It is wrong, I think, to look at the circumstance that the plaintiff obtained his receipt at the same time as he took his chair as being in any way a modification of the contract which I have indicated. This was a general offer to the general public, and I think it is right to say that one must take into account here that there was no reason why anybody taking one of these chairs should necessarily obtain a receipt at the moment he took his chair – and, indeed, the notice is inconsistent with that, because it “respectfully requests” the public to obtain receipts for their money. It may be that somebody might sit in one of these chairs for one hour, or two hours, or, if the holiday resort was a very popular one, for a longer time, before the attendant came round for his money, or it may be that the attendant would not come to him at all for payment for the chair, in which case I take it there would be an obligation upon the person who used the chair to search out the attendant, like a debtor searching for his creditor, in order to pay him the sum of 2d. for the use of the chair and to obtain a receipt for the 2d. paid.
I think the learned county court judge has misunderstood the nature of this agreement. I do not think that the notice excluding liability was a term of the contract at all, and I find it unnecessary to refer to the different authorities which were cited to us, save that I would mention a passage in the judgment of Mellish L.J. in Parker v. South Eastern Ry. Co.,[1] where he points out that it may be that a receipt or ticket may not contain terms of the contract at all, but may be a mere voucher, where he says: “For instance, if a person driving through a turnpike-gate received a ticket upon paying the toll, he might reasonably assume that the object of the ticket was that by producing it he might be free from paying toll at some other turnpike-gate, and might put it in his pocket unread.” I think the object of the giving and the taking of this ticket was that the person taking it might have evidence at hand by which he could show that the obligation he was under to pay 2d. for the use of the chair for three hours had been duly discharged, and I think it is altogether inconsistent, in the absence of any qualification of liability in the notice put up near the pile of chairs, to attempt to read into it the qualification contended for. In my opinion, this ticket is no more than a receipt, and is quite different from a railway ticket which contains upon it the terms upon which a railway company agrees to carry the passenger. This, therefore, is not, I think, as Mr. Ryder Richardson has argued, a question of fact for the learned county court judge. I think the learned county court judge as a matter of law has misconstrued this contract, and looking at all the circumstances of the case, has assumed that this condition on the ticket, or the terms upon which the ticket was issued, has disentitled the plaintiff to recover. The class of case which Sankey L.J. dealt with in Thompson v. London, Midland and Scottish Ry. Co.,[2] which seems to have influenced the learned county court judge in his decision, is entirely different from that which we have to consider in the present appeal.
This appeal should be allowed.
MacKinnon LJ
I agree that this appeal should be allowed. The learned county court judge decided this case relying upon a dictum of Sankey L.J. when he was speaking of a transaction which was totally different to this one. If a man does an act which constitutes the making of a contract, such as taking a railway ticket, or depositing his bag in a cloak-room, he will be bound by the terms of the document handed to him by the servant of the carriers or bailees; but if he merely pays money for something and receives a receipt for it, or does something which clearly only amounts to that, he cannot be deemed to have entered into a contract in the terms of the words that his creditor has chosen to print on the back of the receipt, unless, of course, the creditor has taken reasonable steps to bring the terms of the proposed contract to the mind of the man. In this case there was no evidence upon which the learned county court judge could find that the defendants had taken any steps to bring the terms of their proposed contract to the mind of the plaintiff. In those circumstances, I am satisfied that the defendants could not rely upon the words on the back of the ticket issued to the plaintiff, and, having admittedly been negligent in regard to the condition of the chair, they had no defence to the plaintiff’s cause of action.
Goddard LJ
I agree. In my view the cases which deal with railway tickets, cloak-room tickets, or documents issued by bailees when they take charge of goods, have no analogy to this case. In this case the appellant paid 2d. in order to have the right to sit on a chair on the beach, and he was asked to take a ticket in the form of a receipt for that purpose, and was given a document which shows nothing on the face of it, except that the man had the right to sit in the chair until 7.30 P.M. on the day when the accident occurred and the fact that the ticket was not transferable. I cannot imagine that anybody paying 2d. under those circumstances for the privilege of sitting in a chair on the beach would think for one moment that some conditions were being imposed upon him which would limit his ordinary rights, or that the document he received when paying his 2d. was a contractual document in any shape or form. I think the ticket he received was nothing but a receipt for his 2d. – a receipt which showed him how long he might use the chair. I think the learned judge below was wrong in thinking that the case of Thompson v. London, Midland and Scottish Ry. Co., upon which he seems to have relied, had any bearing on the present case. One must have regard to the facts of the case and the general circumstances of the case. In my opinion, hompson v. London, Midland and Scottish Ry. Co. has no bearing at all on this case.
”
J Spurling Ltd v Bradshaw
[1956] EWCA Civ 3, [1956] 1 WLR 461; [1956] 2 All ER 121; [1956] 1 Lloyd’s Rep 392
Denning LJ
If the clause is taken literally, it is wide enough to exempt the company from any obligation to redeliver the goods. It would mean that if the managing director sold the orange juice to somebody else, or used it up for the company’s purposes, maybe by mistake or even dishonestly, the company would not be liable; or if some discontented storeman took the bung out of a barrel and let the orange juice escape, the company still would not be liable. If the clause went to those lengths, it would be very unreasonable and might for that reason be invalid on the lines which Baron Bramwell indicated in Parker v. South Eastern Railway Company (1877) 2 C.P.D. 416, at p. 428; but I do not think this clause is to be construed as widely as that. These exempting clauses are nowadays all held to be subject to the overriding proviso that they only avail to exempt a party when he is carrying out his contract, not when he is deviating from it or is guilty of a breach which goes to the root of it. Just as a party who is guilty of a radical breach is disentitled from insisting on the further performance by the other, so also he is disentitled from relying on an exempting clause. For instance, if a carrier by land agrees to collect goods and deliver them forthwith, and in breach of that contract he leaves them unattended for an hour instead of carrying them to their destination, with the result that they are stolen, he is disentitled from relying on the exempting clause. That was decided in 1944 by this Court in the case of Bontex Knitting Works, Ltd. v. St. John’s Garage (1944) 60 T.L.R. 253, expressly approving the judgment of Mr. Justice Lewis in the same volume at p. 44; or if a bailee by mistake sells the goods or stores them in the wrong place, he is not covered by the exempting clause: see the decision of Mr. Justice McNair in Woolmer v. Delmer Price, Ltd. [1955] 1 Q.B. 291.
The essence of the contract by a warehouseman is that he will store the goods in the contractual place and deliver them on demand to the bailor or his order. If he stores them in a different place, or if he consumes or destroys them instead of storing them, or if he sells them, or delivers them without excuse to somebody else, he is guilty of a breach which goes to the root of the contract and he cannot rely on the exempting clause. But if he should happen to damage them by some momentary piece of inadvertence, then he is able to rely on the exempting clause: because negligence by itself, without more, is not a breach which goes to the root of the contract (see Swan, Hunter, and Wigham Richardson, Ltd. v. France Fenwick Tyne and Wear Company, Ltd. [1953] 2 Lloyd’s Rep. 82, at p. 88), any more than non-payment by itself is such a breach: see Mersey Steel and Iron Company, Ltd. v. Naylor, Benzon & Co. (1884) 9 App. Cas. 434, at p. 443. I would not like to say, however, that negligence can never go to the root of the contract. If a warehouseman were to handle the goods so roughly as to warrant the inference that he was reckless and indifferent to their safety, he would, I think, be guilty of a breach going to the root of the contract and could not rely on the exempting clause. He cannot be allowed to escape from his obligation by saying to himself: “I am not going to trouble about these goods because I am covered by an exempting clause.”
Another thing to remember about these exempting clauses is that in the ordinary way the burden is on the bailee to bring himself within the exception. A bailor, by pleading and presenting his case properly, can always put on the bailee the burden of proof.
In the case of non-delivery, for instance, all he need plead is the contract and a failure to deliver on demand. That puts on the bailee the burden of proving either loss without his fault—which, of course, would be a complete answer at common law—or, if it was due to his fault, it was a fault from which he is excused by the exempting clause: see Cunard Steamship Company, Ltd. v Buerger [1927] A.C. 1; (1926) 25 Ll.L.Rep. 215, and Woolmer v. Delmer Price, Ltd. [1955] 1 Q.B. 291. I do not think that the Court of Appeal in Alderslade v. Hendon Laundry, Ltd. [1945] K.B. 189, had the burden of proof in mind at all.
Likewise with goods that are returned by the bailee in a damaged condition, the burden is on him to show that the damage was done without his fault: or that, if fault there was, it was excused by the exempting clause. Nothing else will suffice.
But, where the only charge made in the pleadings—or the only reasonable inference on the facts—is that the damage was due to negligence and nothing more, then the bailee can rely on the exempting clause without more ado. That was, I think, the case here. As I read the pleadings, and the way the case was put to the Judge, Mr. Bradshaw was complaining of negligence and nothing more. The clause therefore avails to exempt the warehousemen, provided always that it was part of the contract.
This brings me to the question whether this clause was part of the contract. Mr. Sofer urged us to hold that the warehousemen did not do what was reasonably sufficient to give notice of the conditions within Parker v South Eastern Railway Company. I quite agree that the more unreasonable a clause is, the greater the notice which must be given of it. Some clauses I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient. The clause in this case, however, in my judgment, does not call for such exceptional treatment, especially when it is construed, as it should be, subject to the proviso that it only applies when the warehouseman is carrying out his contract and not when he is deviating from it or breaking it in a radical respect. So construed, the Judge was, I think, entitled to find that sufficient notice was given. It is to be noticed that the landing account on its face bold Mr. Bradshaw that the goods would be insured if he gave instructions; otherwise they were not insured. The invoice, on its face, told him they were warehoused “at owner’s risk.” The printed conditions, when read subject to the proviso which I have mentioned, added little or nothing to those explicit statements taken together.
Next it was said that the landing account and invoice were issued after the goods had been received and could not therefore be part of the contract of bailment: but Mr. Bradshaw admitted that he had received many landing accounts before. True he had not troubled to read them. On receiving this account, he took no objection to it, left the goods there, and went on paying the warehouse rent for months afterwards. It seems to me that by the course of business and conduct of the parties, these conditions were part of the contract.
In these circumstances, the warehousemen were entitled to rely on this exempting condition. I think, therefore, that the counterclaim was properly dismissed, and this appeal also should be dismissed.”
Olley v Marlborough Court Hotel
[1949] 1 KB 532
Denning LJ, Singleton LJ and Bucknill LJ
“The only other point in the case is whether the hotel company are protected by the notice which they put in the bedrooms, “The proprietors will not hold themselves responsible for articles lost or stolen, unless handed to the manageress for safe custody.” The first question is whether that notice formed part of the contract. Now people who rely on a contract to exempt themselves from their common law liability must prove that contract strictly. Not only must the terms of the contract be clearly proved, but also the intention to create legal relations – the intention to be legally bound – must also be clearly proved. The best way of proving it is by a written document signed by the party to be bound. Another way is by handing him before or at the time of the contract a written notice specifying its terms and making it clear to him that the contract is on those terms. A prominent public notice which is plain for him to see when he makes the contract or an express oral stipulation would, no doubt, have the same effect. But nothing short of one of these three ways will suffice. It has been held that mere notices put on receipts for money do not make a contract. (See Chapelton v. Barry Urban District Council) So, also, in my opinion, notices put up in bedrooms do not of themselves make a contract. As a rule, the guest does not see them until after he has been accepted as a guest. The hotel company no doubt hope that the guest will be held bound by them, but the hope is vain unless they clearly show that he agreed to be bound by them, which is rarely the case.
Assuming, however, that Mrs. Olley did agree to be bound by the terms of this notice, there remains the question whether on its true interpretation it exempted the hotel company from liability for their own negligence. It is said, and, indeed, with some support from the authorities, that this depends on whether the hotel was a common inn with the liability at common law of an insurer, or a private hotel with liability only for negligence. I confess that I do not think it should depend on that question. It should depend on the words of the contract. In order to exempt a person from liability for negligence, the exemption should be clear on the face of the contract. It should not depend on what view the courts may ultimately take on the question of whether the house is a common inn or a private hotel. In cases where it is clearly a common inn or, indeed, where it is uncertain whether it is a common inn or a private hotel, I am of opinion that a notice in these terms would not exempt the hotel company from liability for negligence but only from any liability as insurers. Indeed, even if it were clearly not a common inn but only a private hotel, I should be of the same opinion. Ample content can be given to the notice by construing it as a warning that the hotel company is not liable, in the absence of negligence. As such it serves a useful purpose. It is a warning to the guest that he must do his part to take care of his things himself, and, if need be, insure them. It is unnecessary to go further and to construe the notice as a contractual exemption of the hotel company from their common law liability for negligence. I agree that the appeal should be dismissed.”
McCutcheon v David MacBrayne Ltd
[1964] UKHL 4
Lord Reid
“The only other ground on which it would seem possible to import these conditions is that based on a course of dealing. If two parties have made a series of similar contracts each containing certain conditions, and then they make another without expressly referring to those conditions it may be that those conditions ought to be implied. If the officious bystander had asked them whether they had intended to leave out the conditions this time, both must, as honest men, have said “of course not”. But again the facts here will not support that ground. According to Mr. McSporran, there had been no consistent course of dealing ; sometimes he was asked to sign and sometimes not. And, moreover, he did not know what the conditions were. This time he was offered an oral contract without any reference to conditions, and he accepted the offer in good faith.
The Respondents also rely on the Appellant’s previous knowledge. I doubt whether it is possible to spell out a course of dealing in his case. In all but one of the previous cases he had been acting on behalf of his employer in sending a different kind of goods and he did not know that the Respondents always sought to insist on excluding liability for their own negligence. So it cannot be said that when he asked his agent to make a contract for him he knew that this or, indeed, any other special term would be included in it. He left his agent a free hand to contract, and I see nothing to prevent him from taking advantage of the contract which his agent in fact made. “The judicial task is not to discover the actual intentions of each party: it is to decide what each was reasonably entitled to conclude from the attitude of the other” (Gloag, Contract p. 7). In this case I do not think that either party was reasonably bound or entitled to conclude from the attitude of the other as known to him that these conditions were intended by the other party to be part of this contract. I would therefore allow the appeal and restore the interlocutor of the Lord Ordinary.”
Lord Devlin
“Your Lordships were referred to the dictum of Blackburn, J. in Harris v Great Western Railway Company (1876) 1 QBD 515, at 530. The passage is as follows:-
“And it is clear law that where there is a writing, into which the terms of any agreement are reduced, the terms are to be regulated by that writing. And though one of the parties may not have read the writing, yet, in general, he is bound to the other by those terms; and that, I apprehend, is on the ground that, by assenting to the contract thus reduced to writing, he represents to the other side that he has made himself acquainted with the contents of that writing and assents to them, and so induces the other side to act upon that representation by entering into the contract with him, and is consequently precluded from denying that he did make himself acquainted with those terms. But then the preclusion only exists when the case is brought within the rule so carefully and accurately laid down by Parke, B., in delivering the judgment of the Exchequer in Freeman v Cooke, that is, if he ‘ means his representation to be acted upon, and it is acted upon accordingly: or if, whatever a man’s real intentions may be, he so conduct himself that a reasonable man would take the representation to be true, and believe that it was meant that he should act upon it, and did act upon it as true.”
If the ordinary law of estoppel was applicable to this case, it might well be argued that the circumstances leave no room for any representation by the sender on which the carrier acted. I believe that any other member of the public in Mr. McCutcheon’s place,—and this goes for lawyers as well as for laymen,—would have found himself compelled to give the same sort of answers as Mr. McCutcheon gave ; and I doubt if any carrier who serves out documents of this type could honestly say that he acted in the belief that the recipient had ” made himself acquainted with the contents “. But Blackburn, J. was dealing with an unsigned document, a cloakroom ticket. Unless your Lordships are to disapprove the decision of the Court of Appeal in L’Estrange v Graucob [1934] 2 KB 394,—and there has been no suggestion in this case that you should,—the law is clear, without any recourse to the doctrine of estoppel, that a signature to a contract is conclusive.
This is a matter that is relevant to the way in which the Respondents put their case. They say that the previous dealings between themselves and the Appellant, being always on the terms of their ” risk note “, as they call their written conditions, the contract between themselves and the Appellant must be deemed to import the same conditions. In my opinion, the bare fact that there have been previous dealings between the parties does not assist the Respondents at all. The fact that a man has made a contract in the same form ninety-nine times (let alone three or four times which are here alleged) will not of itself affect the hundredth contract in which the form is not used. Previous dealings are relevant only if they prove knowledge of the terms, actual and not constructive, and assent to them. If a term is not expressed in a contract, there is only one other way in which it can come into it and that is by implication. No implication can be made against a party of a term which was unknown to him. If previous dealings show that a man knew of and agreed to a term on ninety-nine occasions, there is a basis for saying that it can be imported into the hundredth contract without an express statement. It may or may not be sufficient to justify the importation,—that depends on the circumstances; but at least by proving knowledge the essential beginning is made. Without knowledge there is nothing…
If the Respondents had remembered to issue a risk note in this case, they would have invited your Lordships to give a curt answer to any complaint by the Appellant. He might say that the terms were unfair and unreasonable, that he had never voluntarily agreed to them, that it was impossible to read or understand them and that anyway if he had tried to negotiate any change the Respondents would not have listened to him. The Respondents would expect him to be told that he had made his contract and must abide by it. Now the boot is on the other foot. It is just as legitimate, but also just as vain, for the Respondents to say that it was only a slip on their part, that it is unfair and unreasonable of the Appellant to take advantage of it and that he knew perfectly well that they never carried goods except on conditions. The law must give the same answer: they must abide by the contract they made. What is sauce for the goose is sauce for the gander. It will remain unpalatable sauce for both animals until the legislature, if the courts cannot do it, intervenes to secure that when contracts are made in circumstances in which there is no scope for free negotiation of the terms, they are made upon terms that are clear, fair and reasonable and settled independently as such. That is what Parliament has done in the case of carriage of goods by rail and on the high seas.”
Thornton v Shoe Lane Parking Ltd
[1971] 2 QB 163; [1971] 1 All ER 686; [1970] EWCA Civ 2
Lord Denning MR
“The important thing to notice is that the company seek by this condition to exempt themselves from liability, not only for damage to the car, but also for injury to the customer howsoever caused. The condition talks about insurance. It is well known that the customer is usually insured against damage to the car. But he is not insured against damage to himself. If the condition is incorporated into the contract of parking, it means that Mr. Thornton will be unable to recover any damages for his personal injuries which were caused by the negligence of the company.
We have been referred to the ticket cases of former times from Parker v South Eastern Railway Co (1877) 2 CPD 416 to McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125. They were concerned with railways, steamships and cloakrooms where booking clerks issued tickets to customers who took them away without reading them. In those cases the issue of the ticket was regarded as an offer by the company. If the customer took it and retained it without objection, his act was regarded as an acceptance of the offer: see Watkins v Rymill (1833) 10 QBD 178, 188 and Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41, 47. These cases were based on the theory that the customer, on being handed the ticket, could refuse it and decline to enter into a contract on those terms. He could ask for his money back. That theory was, of course, a fiction. No customer in a thousand ever read the conditions. If he had stopped to do so, he would have missed the train or the boat.
None of those cases has any application to a ticket which is issued by an automatic machine. The customer pays his money and gets a ticket. He cannot refuse it. He cannot get his money back. He may protest to the machine, even swear at it. But it will remain unmoved. He is committed beyond recall. He was committed at the very moment when he put his money into the machine. The contract was concluded at that time. It can be translated into offer and acceptance in this way: the offer is made when the proprietor of the machine holds it out as being ready to receive the money. The acceptance takes place when the customer puts his money into the slot. The terms of the offer are contained in the notice placed on or near the machine stating what is offered for the money. The customer is bound by those terms as long as they are sufficiently brought to his notice before-hand, but not otherwise. He is not bound by the terms printed on the ticket if they differ from the notice, because the ticket comes too late. The contract has already been made: see Olley v Marlborough Court Ltd [1949] 1 KB 532. The ticket is no more than a voucher or receipt for the money that has been paid (as in the deckchair case, Chapelton v Barry Urban District Council [1940] 1 KB 532) on terms which have been offered and accepted before the ticket is issued.
In the present case the offer was contained in the notice at the entrance giving the charges for garaging and saying “at owner’s risk,” i.e., at the risk of the owner so far as damage to the car was concerned. The offer was accepted when Mr Thornton drove up to the entrance and, by the movement of his car, turned the light from red to green, and the ticket was thrust at him. The contract was then concluded, and it could not be altered by any words printed on the ticket itself. In particular, it could not be altered so as to exempt the company from liability for personal injury due to their negligence.
Assuming, however, that an automatic machine is a booking clerk in disguise – so that the old fashioned ticket cases still apply to it. We then have to go back to the three questions put by Mellish LJ in Parker v South Eastern Railway Co, 2 CPD 416, 423, subject to this qualification: Mellish LJ used the word “conditions” in the plural, whereas it would be more apt to use the word “condition” in the singular, as indeed the lord justice himself did on the next page. After all, the only condition that matters for this purpose is the exempting condition. It is no use telling the customer that the ticket is issued subject to some “conditions” or other, without more: for he may reasonably regard “conditions” in general as merely regulatory, and not as taking away his rights, unless the exempting condition is drawn specifically to his attention. (Alternatively, if the plural “conditions” is used, it would be better prefaced with the word “exempting,” because the exempting conditions are the only conditions that matter for this purpose.) Telescoping the three questions, they come to this: the customer is bound by the exempting condition if he knows that the ticket is issued subject to it; or, if the company did what was reasonably sufficient to give him notice of it.
Mr. Machin admitted here that the company did not do what was reasonably sufficient to give Mr. Thornton notice of the exempting condition. That admission was properly made. I do not pause to inquire whether the exempting condition is void for unreasonableness. All I say is that it is so wide and so destructive of rights that the court should not hold any man bound by it unless it is drawn to his attention in the most explicit way. It is an instance of what I had in mind in J Spurling Ltd v Bradshaw [1956] 1 WLR 461, 466. In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it – or something equally startling.
But, although reasonable notice of it was not given, Mr. Machin said that this case came within the second question propounded by Mellish L.J., namely that Mr. Thornton “knew or believed that the writing contained conditions.” There was no finding to that effect. The burden was on the company to prove it, and they did not do so. Certainly there was no evidence that Mr. Thornton knew of this exempting condition. He is not, therefore, bound by it.
Mr. Machin relied on a case in this court last year – Mendelssohn v Normand Ltd. [1970] 1 QB 177. Mr. Mendelssohn parked his car in the Cumberland Garage at Marble Arch, and was given a ticket which contained an exempting condition. There was no discussion as to whether the condition formed part of the contract. It was conceded that it did. That is shown by the report in the Law Reports at p. 180. Yet the garage company were not entitled to rely on the exempting condition for the reasons there given.
That case does not touch the present, where the whole question is whether the exempting condition formed part of the contract. I do not think it did. Mr. Thornton did not know of the condition, and the company did not do what was reasonably sufficient to give him notice of it.
I do not think the garage company can escape liability by reason of the exemption condition. I would, therefore, dismiss the appeal.”
Hollier v Rambler Motors (A.M.C.) Ltd.
[1971] EWCA Civ 12 [1972] 2 WLR 401, [1972] 2 QB 71, [1972] 1 All ER 399, [1971] EWCA Civ 12, [1972] RTR 190
Salmon LJ
The primary point taken in the court below was that condition 2 was not part of the contract between the parties because the delivery note was never supplied to the defendants at all. That the judge rejected on the facts; he found that the delivery note was supplied in the same jiffy bag with the transparencies, and that finding is not challenged in this court. He made no finding however that Mr. Beeching or any other representative of the defendants read condition 2 or any of the other printed conditions, and it is overwhelmingly probable that they did not.
An alternative argument for the defendants, in this court as below, was to the effect that any contract between the parties was made before the defendants knew of the existence of the delivery note viz. either in the course of the preliminary telephone conversation between Mr. Beeching and Miss Fraser, or when the jiffy bag containing the transparencies was received in the defendants’ premises but before the bag was opened. I regard these submissions as unrealistic and unarguable. The original telephone call was merely a preliminary enquiry and did not give rise to any contract. But the contract came into existence when the plaintiffs sent the transparencies to the defendants and the defendants, after opening the bag, accepted them by Mr. Beeching’s phone call to the plaintiffs at 3.10 on the 5th March. The question is whether condition 2 was a term of that contract.
There was never any oral discussion of terms between the parties before the contract was made. In particular there was no discussion whatever of terms in the original telephone conversation when Mr. Beeching made his preliminary enquiry. The question is therefore whether condition 2 was sufficiently brought to the defendants’ attention to make it a term of the contract which was only concluded after the defendants had received, and must have known that they had received the transparencies and the delivery note.
This sort of question was posed, in relation to printed conditions, in the ticket cases, such Parker v. South Eastern Railway L.R.2 C.P.D. 416, in the last century. At that stage the printed conditions were looked at as a whole and the question considered by the courts was whether the printed conditions as a whole had been sufficiently drawn to a customer’s attention to make the whole set of conditions part of the contract; if so the customer was bound by the printed conditions even though he never read them.
More recently the question has been discussed whether it is enough to look at a set of printed conditions as a whole. When for instance one condition in a set is particularly onerous does something special need to be done to draw customers’ attention to that particular condition? In an obiter dictum in J. Spurling Ltd. v. Bradshaw [1956] 1 W.L.R.461 at page 466 (cited in Chitty on Contracts 25th Ed. Vol. 1 at page 408) Lord Justice Denning stated that “Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient”.
Then in Thornton v. Shoe Lane Parking Ltd. (1971) 2.Q.B. 163 both Lord Denning M.R. and Lord Justice Megaw held as one of their grounds of decision, as I read their judgments, that where a condition is particularly onerous or unusual the party seeking to enforce it must show that that condition, or an unusual condition of that particular nature, was fairly brought to the notice of the other party. Lord Denning at pages 169H-170D re-stated and applied what he had said in the Spurling case, and held that the court should not hold any man bound by such a condition unless it was drawn to his attention in the most explicit way. Lord Justice Megaw deals with the point at pages 172F-173E where he says:
“I agree with Lord Denning M.R. that the question here is of the particular condition on which the defendants seek to rely, and not of the conditions in general. when the conditions sought to be attached all constitute, in Lord Dunedin’s words [1918] A.C. 846, 847, ‘the sort of restriction … that is usual’, it may not be necessary for a defendant to prove more than that the intention to attach some conditions has been fairly brought to the notice of the other party. But at least where the particular condition relied on involves a sort of restriction that is not shown to be usual in that class of contract, a defendant must show that his intention to attach an unusual condition of that particular nature was fairly brought to the notice of the other party. How much is required as being, in the words of Lord Justice Mellish L.J., 2 C.P.D. 416, 424, ‘reasonably sufficient to give the plaintiff notice of the condition’, depends upon the nature of the restrictive condition.
In the present case what has to be sought in answer to the third question is whether the defendant company did what was reasonable fairly to bring to the notice of the plaintiff, at or before the time when the contract was made, the existence of this particular condition. This condition is that part of the clause – a few words embedded in a lengthy clause – which Lord Denning M.R. has read, by which, in the midst of provisions as to damage to property, the defendants sought to exempt themselves from liability for any personal injury suffered by the customer while he was on their premises. Be it noted that such a condition is one which involves the abrogation of the right given to a person such as the plaintiff by statute, The Occupiers Liability Act 1957. True, it is open under that statute for the occupier of property by a contractual term to exclude that liability. In my view, however, before it can be said that a condition of that sort, restrictive of statutory rights, has been fairly brought to the notice of a party to a contract there must be some clear indication which would lead an ordinary sensible person to realise, at or before the time of making the contract, that a term of that sort, relating to personal injury, was sought to be included. I certainly would not accept that the position has been reached today in which it is to be assumed as a matter of general knowledge, custom,practice, or whatever is the phrase that is chosen to describe it, that when one is invited to go upon the property of another for such purposes as garaging a car, a contractual term is normally included that if one suffers any injury on those premises as a result of negligence on the part of the occupiers of the premises they shall not be liable.”
Counsel for the plaintiffs submits that Thornton v. Shoe Lane Parking was a case of an exemption clause and that what their Lordships said must be read as limited to exemption clauses and in particular exemption clauses which would deprive the party on whom they are imposed of statutory rights. But what their Lordships said was said by way of interpretation and application of the general statement of the law by Lord Justice Hellish in Parker v. South Eastern Railway and the logic of it is applicable to any particularly onerous clause in a printed set of conditions of the one contracting party which would not be generally known to the other party.
Condition 2 of these plaintiffs’ conditions is in my judgment a very onerous clause. The defendants could not conceivably have known, if their attention was not drawn to the caluse, that the plaintiffs were proposing to charge a “holding fee” for the retention of the transparencies at such a very high and exorbitant rate.
At the time of the ticket cases in the last century it was notorious that people hardly ever troubled to read printed conditions on a ticket or delivery note or similar document. That remains the case now. In the intervening years the printed conditions have tended to become more and more complicated and more and more one-sided in favour of the party who is imposing them, but the other parties, if they notice that there are printed conditions at all, generally still tend to assume that such conditions are only concerned with ancillary matters of form and are not of importance. In the ticket cases the courts held that the common law required that reasonable steps be taken to draw the other parties’ attention to the printed conditions or they would not be part of the contract. It is in my judgment a logical development of the common law into modern conditions that it should be held, as it was in Thornton v. Shoe Lane Parking, that, if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party.
In the present case, nothing whatever was done by the plaintiffs to draw the defendants’ attention particularly to condition 2; it was merely one of four columns’ width of conditions printed across the foot of the delivery note. Consequently condition 2 never, in my judgment, became part of the contract between the parties.
I would therefore allow this appeal and reduce the amount of the judgment which the judge awarded against the defendants to the amount which he would have awarded on a quantum meruit on his alternative findings, i.e. the reasonable charge of £3.50 per transparency per week for the retention of the transparencies beyond a reasonable period, which he fixed at 14 days from the date of their receipt by the defendants.
Bingham LJ
In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as “playing fair”, “coming clean” or “putting one’s cards face upwards on the table”. It is in essence a principle of fair and open dealing. In such a forum it might, I think, be held on the facts of this case that the plaintiffs were under a duty in all fairness to draw the defendants’ attention specifically to the high price payable if the transparencies were not returned in time and, when the 14 days had expired, to point out to the defendants the high cost of continued failure to return them.
English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness. Many examples could be given. Thus equity has intervened to strike down unconscionable bargains. Parliament has stepped in to regulate the imposition of exemption clauses and the form of certain hire purchase agreements. The common law also has made its contribution, by holding that certain classes of contract require the utmost good faith, by treating as irrecoverable what purport to be agreed estimates of damage but are in truth a disguised penalty for breach, and in many other ways.
The well known cases on sufficiency of notice are in my view properly to be read in this context. At one level they are concerned with a question of pure contractual analysis, whether one party has done enough to give the other notice of the incorporation of a term in the contract. At another level they are concerned with a somewhat different question, whether it would in all the circumstances be fair (or reasonable) to hold a party bound by any conditions or by a particular condition of an unusual and stringent nature.
In the leading case of Parker v. The South Eastern Railway Company [1877] 2 C.P.D. 416 Lord Justice Baggallay plainly thought on the facts that the plaintiffs were right, Lord Justice Bramwell that they were wrong; Lord Justice Mellish thought that there had been a misdirection and there should be a re-trial, a view in which the other members of the court concurred. The judgments deserve to be re-read. Lord Justice Mellish said (at page 422):
“Now, I am of opinion that we cannot lay down, as a matter of law, either that the plaintiff was bound or that he was not bound by the conditions printed on the ticket, from the mere fact that he knew there was writing on the ticket, but did not know that the writing contained conditions. I think there may be cases in which a paper containing writing is delivered by one party to another in the course of a business transaction, where it would be quite reasonable that the party receiving it should assume that the writing contained in it no condition, and should put it in his pocket unread.”
At page 423 he added:
“The railway company, as it seems to me, must be entitled to make some assumptions respecting the person who deposits luggage with them; I think they are entitled to assume that he can read, and that he understands the English language, and that he pays such attention to what he is about as may be reasonably expected from a person in such a transaction as that of depositing luggage in a cloak-room. The railway company must, however, take mankind as they find them, and if what they do is sufficient to inform people in general that the ticket contains conditions, I think that a particular plaintiff ought not to be in a better position than other persons on account of his exceptional ignorance or stupidity or carelessness. But if what the railway company do is not sufficient to convey to the minds of people in general that the ticket contains conditions, then they have received goods on deposit without obtaining the consent of the persons depositing them to the conditions limiting their liability.”
Lord Justice Baggallay’s analytical approach was somewhat similar (at page 425-6):
“Now as regards each of the plaintiffs, if at the time when he accepted the ticket, he, either by actual examination of it, or by reason of previous experience, or from any other cause, was aware of the terms or purport or effect of the endorsed conditions, it can hardly be doubted that he became bound by them. I think also that he would be equally bound if he was aware or had good reason to believe that there were upon the ticket statements intended to affect the relative rights of himself and the company, but intentionally or negligently abstained from ascertaining whether there were any such, or from making himself acquainted with their purport. But I do not think that in the absence of any such knowledge or information, or good reason for belief, he was under any obligation to examine the ticket with the view of ascertaining whether there were any such statements or conditions upon it.”
Both these Lords Justices were, as it seems to me, distinguishing the case in which it would be fair to hold a party bound from the case in which it would not. But this approach is made more explicit in the strongly-worded judgment of Lord Justice Bramwell (at page 427):
“The plaintiffs have sworn that they did not know that the printing was the contract, and we must act as though that was true and we believed it, at least as far as entering the verdict for the defendants is concerned. Does this make any difference? The plaintiffs knew of the printed matter. Both admit they knew it concerned them in some way, though they said they did not know what it was; yet neither pretends that he knew or believed it was not the contract. Neither pretends he thought it had nothing to do with the business in hand; that he thought it was an advertisement or other matter unconnected with his deposit of a parcel at the defendants’ cloak-room. They admit that, for anything they knew or believed, it might be, only they did not know or believe it was, the contract. Their evidence is very much that they did not think, or, thinking, did not care about it. Now they claim to charge the company, and to have the benefit of their own indifference. Is this just? Is it reasonable? Is it the way in which any other business is allowed to be conducted? Is it even allowed to a man to ‘think’, ‘judge’, ‘guess’, ‘chance’ a matter, without informing himself when he can, and then when his ‘thought’, ‘judgment’, ‘guess’ or ‘chance’ turns out wrong or unsuccessful, claim to impose a burthen or duty on another which he could not have done had he informed himself as he might?”
He continued in the same vein at page 428:
“Has not the giver of the paper a right to suppose that the receiver is content to deal on the terms in the paper? What more can be done? Must he say, ‘Read that’? As I have said, he does so in effect when he puts it into the other’s hands. The truth is, people are content to take these things on trust. They know that there is a form which is always used – they are satisfied it is not unreasonable, because people do not usually put unreasonable terms into their contracts. If they did, then dealing would soon be stopped. Besides, unreasonable practices would be known. The very fact of not looking at the paper shews that this confidence exists. It is asked: What if there was some unreasonable condition, as for instance to forfeit £1000 if the goods were not removed in forty-eight hours? Would the depositor be bound? I might content myself by asking: Would he be, if he were told ‘our conditions are on this ticket’, and he did not read them. In my judgment, he would not be bound in either case. I think there is an implied understanding that there is no condition unreasonable to the knowledge of the party tendering the document and not insisting on its being read – no condition not relevant to the matter in hand. I am on opinion, therefore, that the plaintiffs, having notice of the printing, were in the same situation as though the porter had said, ‘Read that, it concerns the matter in hand’; that if the plaintiffs did not read it, they were as much bound as if they had read it and had not objected.”
This is not a simple contractual analysis whether an offer has been made and accepted.
In Hood v. Anchor Line (Henderson Brothers) Ltd. [1918] AC 837, an appeal from the Court of Session, the question was whether a steamship company had effectively protected itself against liability for injury to a passenger. Lord Finlay L.C. at 842 posed the simple question: “What more could have been done to bring the conditions to the notice of the passenger?” Viscount Haldane approached the matter in a more general way (at page 843):
“There is a large and varied class of cases where the legal duty of a member of society to his neighbour cannot be laid down a priori or without examining the special circumstances of the situation. The duty in these instances is ascertained by a standard which depends, not on mere general principles fashioned by the jurist, for no such general principles can provide for all the concrete details of which account must be taken, but on the opinion of reasonable men who have considered the whole of the circumstances in the particular instance and can be relied on to say how, according to accepted standards of conduct, a reasonable man ought to behave in these circumstances towards the neighbour towards whom he is bound by the necessities of the community to act with forbearance and consideration.”
And (at page 845) he added:
“It is true that Mr. May did not look at the envelope closely or refer to the condition. He took the contract away and put it in a safe, and ultimately gave it to the appellant, who did not read it either. But I am of opinion that the real question was not whether they did read it, but whether they can be heard to say that they did not read it. If it had been merely a case of inviting people to put a penny into an automatic machine and get a ticket for a brief journey, I might think differently. In such a transaction men cannot naturally be expected to pause to look whether they are obtaining all the rights which the law gives them in the absence of a special stipulation. But when it is a case of taking a ticket for a voyage of some days, with arrangements to be made, among other things, as to cabins and luggage, I think ordinary people do look to see what bargain they are getting, and should be taken as bound to have done so and as precluded from saying that they did not know.”
Lord Dunedin (at page 846-7) said:
“Accordingly it is in each case a question of circumstance whether the sort of restriction that is expressed in any writing (which, of course, includes printed matter) is a thing that is usual, and whether, being usual, it has been fairly brought before the notice of the accepting party.”
These authoritative passages appear to base the law very firmly on consideration of what is fair in all the circumstances.
J. Spurling v. Bradshaw [1956] 1 WLR 461 concerned an exemption clause in a warehousing contract. The case is now remembered for the observations of Lord Justice Denning at page 466:
“This brings me to the question whether this clause was part of the contract. Mr. Sofer urged us to hold that the warehousemen did not do what was reasonably sufficient to give notice of the conditions within Parker v. South Eastern Railway Co. I quite agree that the more unreasonable a clause is, the greater the notice which must be given of it. Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.”
Here, therefore, is made explicit what Lord Justice Bramwell had perhaps foreshadowed, that what would be good notice of one condition would not be notice of another. The reason is that the more outlandish the clause the greater the notice which the other party, if he is to be bound, must in all fairness be given.
McCutcheon v. David Macbrayne Ltd. [1964] 1 WLR 125 is a case out of the common run because the document containing the contractual exemption was neither issued nor signed. The interest of the case for present purposes lies in two passages in the speeches of Lord Reid and Lord Pearce. Lord Reid (at page 128) said:
“If it could be said that when making the contract Mr. McSporran knew that the respondents always required a risk note to be signed and knew that the purser was simply forgetting to put it before him for signature, then it might be said that neither he nor his principal could take advantage of the error of the other party of which he was aware. But counsel frankly admitted that he could not put his case as high as that.”
Lord Pearce (at page 138) expressed a similar opinion:
“This is not a case where there was any bad faith on the part of the pursuer or his agent. Had the pursuer’s agent snatched at an offer that he knew was not intended, or deliberately taken advantage of the defenders’ omission to proffer their usual printed form for his signature, the situation would be different and other considerations would apply.”
Here again, as it seems to me, one finds reference to a concept of fair dealing that has very little to do with a conventional analysis of offer and acceptance.
Lastly I would mention Thornton v. Shoe Lane Parking Ltd. [1971] 2 QB 163. Lord Denning M.R. (at page 169-170) said:
“Assuming, however, that an automatic machine is a booking clerk in disguise – so that the old fashioned ticket cases still apply to it. We then have to go back to the three questions put by Mellish L.J. in Parker v. South Eastern Railway Co., 2 C.P.D. 416, 423, subject to this qualification: Mellish L.J. used the word ‘conditions’ in the plural, whereas it would be more apt to use the word ‘condition’ in the singular, as indeed the lord justice himself did on the next page. After all, the only condition that matters for this purpose is the exempting condition. It is no use telling the customer that the ticket is issued subject to some ‘conditions’ or other, without more: for he may reasonably regard ‘conditions’ in general as merely regulatory, and not as taking away his rights, unless the exempting condition is drawn specifically to his attention. (Alternatively, if the plural ‘conditions’ is used, it would be better prefaced with the word ‘exempting’, because the exempting conditions are the only conditions that matter for this purpose.)
Telescoping the three questions, they come to this: the customer is bound by the exempting condition if he knows that the ticket is issued subject to it; or, if the company did what was reasonably sufficient to give him notice of it. Mr. Machin admitted here that the company did not do what was reasonably sufficient to give Mr. Thornton notice of the exempting condition. That admission was properly made. I do not pause to inquire whether the exempting condition is void for unreasonableness. All I say is that it is so wide and so destructive of rights that the court should not hold any man bound by it unless it is drawn to his attention in the most explicit way. It is an instance of what I had in mind in J. Spurling Ltd. v. Bradshaw [1956] 1 WLR 461, 466. In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it – or something equally startling.”
The judgment of Lord Justice Megaw (at pages 172-173) was to similar effect:
“So I come to the third of the three questions. That question, if I may return to the speech of Lord Dunedin in Hood v.Anchor Line (Henderson Brothers) Ltd. [1918] AC 837, 846, 847 was posed by him in this way:
‘Accordingly it is in each case a question of circumstance whether the sort of restriction that is expressed in any writing (which, of course, includes printed matter) is a thing that is usual, and whether, being usual, it has been fairly brought before the notice of the accepting party.’.
That, though it is more fully stated by Lord Dunedin, is essentially the same question, I think, as was formulated by Mellish L.J. in Parker’s case, 2 C.P.D. 416, 424 at the very end of his judgment, where he said that the question which ought to have been left to the jury was: whether the railway company did what was reasonably sufficient to give the plaintiff notice of the condition. (I emphasise the use by Mellish L.J. of the definite article and of the word ‘condition’ in the singular.) I agree with Lord Denning M.R. that the question here is of the particular condition on which the defendants seek to rely, and not of the conditions in general.
When the conditions sought to be attached all constitute, in Lord Dunedin’s words [1918] A.C. 846, 847, ‘the sort of restriction … that is usual’, it may not be necessary for a defendant to prove more than that the intention to attach some conditions has been fairly brought to the notice of the other party. But at least where the particular condition relied on involves a sort of restriction that is not shown to be usual in that class of contract, a defendant must show that his intention to attach an unusual condition of that particular nature was fairly brought to the notice of the other party. How much is required as being, in the words of Mellish L.J. 2 C.P.D. 416, 424, ‘reasonably sufficient to give the plaintiff notice of the condition’, depends upon the nature of the restrictive condition.” The tendency of the English authorities has, I think, been to look at the nature of the transaction in question and the character of the parties to it; to consider what notice the party alleged to be bound was given of the particular condition said to bind him; and to resolve whether in all the circumstances it is fair to hold him bound by the condition in question. This may yield a result not very different from the civil law principle of good faith, at any rate so far as the formation of the contract is concerned.
Turning to the present case, I am satisfied for reasons which Lord Justice Dillon has given that no contract was made on the telephone when the defendants made their initial request. I am equally satisfied that no contract was made on delivery of the transparencies to the defendants before the opening of the jiffy bag in which they were contained. Once the jiffy bag was opened and the transparencies taken out with the delivery note, it is in my judgment an inescapable inference that the defendants would have recognised the delivery note as a document of a kind likely to contain contractual terms and would have seen that there were conditions printed in small but visible lettering on the face of the document. To the extent that the conditions so displayed were common form or usual terms regularly encountered in this business, I do not think the defendants could successfully contend that they were not incorporated into the contract.
The crucial question in the case is whether the plaintiffs can be said fairly and reasonably to have brought condition 2 to the notice of the defendants^ The judge made no finding on the point, but I think that it is open to this court to draw an inference from the primary findings which he did make. In my opinion the plaintiffs did not do so. They delivered 47 transparencies, which was a number the defendants had not specifically asked for. Condition 2 contained a daily rate per transparency after the initial period of 14 days many times greater than was usual or (so far as the evidence shows) heard of. For these 47 transparencies there was to be a charge for each day of delay of £235 plus VAT. The result would be that a venial period of delay, as here, would lead to an inordinate liability. The defendants are not to be relieved of that liability because they did not read the condition, although doubtless they did not; but in my judgment they are to be relieved because the plaintiffs did not do what was necessary to draw this unreasonable and extortionate clause fairly to their attention. I would accordingly allow the defendants’ appeal and substitute for the judge’s award the sum which he assessed upon the alternative basis of quantum meruit.
In reaching the conclusion I have expressed I would not wish to be taken as deciding that condition 2 was not challengeable as a disguised penalty clause. This point was not argued before the judge nor raised in the notice of appeal. It was accordingly not argued before us. I have accordingly felt bound to assume, somewhat reluctantly, that condition 2 would be enforceable if fully and fairly brought to the defendants’ attention.
O’Brien v MGN Ltd
[2001] EWCA Civ 1279 [2002] CLC 33LADY JUSTICE HALE:
The claimant suffered a cruel disappointment on Monday 3 July 1995. He thought that he had won £50,000 in the scratchcard game played in the Daily Mirror that day. Mirror Group Newspapers thought otherwise. The issue is whether the contract between them incorporated the Mirror Group’s rules. It would make an excellent question in an undergraduate contract law seminar or examination. Like all good questions, it is easy to ask and difficult to answer. On 29 June 2000, in the Queen’s Bench Division of the High Court sitting in Liverpool, HHJ Hegarty QC answered it in the affirmative and dismissed the claimant’s claim. He gave permission to appeal to this court.
……
On Sunday 9 July 1995 the Editor of the People wrote an article apologising for the ‘mix-up’. She said that the only cards eligible for the telephone prize on 3 July were those from the Daily Mirror of Saturday 1 July and the Sunday Mirror of Sunday 2 July. This was because the ‘Ring and Win Today’ section in the Daily Mirror giving details of the Mystery Bonus Hotline had referred to ‘three chances to win’:
‘This is because you have THREE cards to play. One was in The People yesterday and another in the Sunday Mirror – and you already had a card in Saturday’s Daily Mirror.’
The Editor explained that in fact there were only two eligible cards, because there had been no ‘card in The People yesterday’. Hence, she said, anyone with a card issued in The People on 25 June 1995 was not eligible for a prize. She apologised and announced a special draw for one prize of £50,000, for which all those with cards from The People of 25 June showing two sums of £50,000 would be eligible. In addition, a further £50,000 would be shared equally among all those with such cards. The claimant’s card was entered in the draw. It was unsuccessful, but he did receive £33.97 as his share of the extra £50,000.
Eventually the claimant began these proceedings. MGN Ltd raised a number of defences. One was the argument put forward in the article of 9 July: that only holders of cards issued with the Daily Mirror for Saturday 1 July, the Sunday Mirror for Sunday 2 July, and The People for Sunday 2 July could be eligible. However that defence was abandoned shortly before the trial so the judge did not consider it. Another was that any contract between the parties was a gaming or wagering contract covered by s 18 of the Gaming Act 1845. This too was abandoned shortly before the trial. The judge did not think it necessary to invite submissions on whether this might be an illegal contract, but emphasised that he expressed no view on the lawfulness the game whether at common law or under the 1845 Act or under any other relevant legislation.
That left only the point upon which the case was decided: whether or not the contract between claimant and defendant incorporated the “Rules”. The first announcement of the game, in the Daily Mirror on 29 April 1995, had a heading in capital letters with white text in a black box INSTANT SCRATCH RULES. Under this were printed eight numbered paragraphs (“the Rules”). Rules 2 and 5 read as follows:
‘2. The prizes for each game will be awarded to the player or players who make a successful claim.
‘5. Should more prizes be claimed than are available in any prize category for any reason, a simple draw will take place for the prize.’
……
Conclusion
In my view the judge was right to hold that the contract was made on 3 July. The offer was contained in the paper that day. In my view it was accepted when the claimant telephoned to claim his prize. The offer and therefore the contract clearly incorporated the term ‘Normal Mirror Group rules apply’. The words were there to be read and it makes no difference whether or not the claimant actually read or paid attention to them.
The question, therefore, is whether those words, in the circumstances, were enough to incorporate the Rules, including Rule 5, into the contract. In the words of Bingham LJ in Interfoto Library Ltd v Stiletto Ltd [1989] 1 QB 433, at p 445E, can the defendant ‘be said fairly and reasonably to have brought [those rules] to the notice of’ the claimant? This is a question of fact. It is clear from the passage in the same judgment quoted earlier (at para 13) that one has to look at the particular contract made on the particular day between the particular parties. But what is fair and reasonable notice will depend upon the nature of the transaction and upon the nature of the term. As Dillon LJ summed it up in Interfoto, at pp 438H to 439A:
‘In the ticket cases the courts held that the common law required that reasonable steps be taken to draw the other parties’ attention to the printed conditions or they would not be part of the contract. It is, in my judgment, a logical development of the common law into modern conditions that it should be held, as it was in Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163, that if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party.’
Bingham LJ put the same point in this way at p 443C:
‘ . . . what would be good notice of one condition would not be good notice of another. The reason is that the more outlandish the clause the greater the notice which the other party, if he is to be bound, must in all fairness be given.’
In my view, although Rule 5 does turn an apparent winner into a loser, it cannot by any normal use of language be called ‘onerous’ or ‘outlandish’. It does not impose any extra burden upon the claimant, unlike the clause in Interfoto. It does not seek to absolve the defendant from liability for personal injuries negligently caused, unlike the clause in Thornton v Shoe Lane Parking. It merely deprives the claimant of a windfall for which he has done very little in return. He bought two newspapers, although in fact he could have acquired a card and discovered the hotline number without doing either. He made a call to a premium rate number, which will have cost him some money and gained the newspaper some, but only a matter of pennies, not pounds.
The more difficult question is whether the rule is ‘unusual’ in this context. The judge found that the claimant knew that there was a limit on the number of prizes and that there were relevant rules. Miss Platell’s evidence was that these games and competitions always have rules. Indeed I would accept that this is common knowledge. This is not a situation in which players of the game would assume that the newspaper bore the risk of any mistake of any kind which might lead to more people making a claim than had been intended. Some people might assume that the ‘get out’ rule would provide for the prize to be shared amongst the claimants. Some might assume that it would provide for the drawing of lots. In the case of a single prize some might think drawing lots more appropriate; but it seems to me impossible to say that either solution would be ‘unusual’. There is simply no evidence to that effect. Such evidence as there is was to the effect that such rules are not unusual.
In any event, the words ‘onerous or unusual’ are not terms of art. They are simply one way of putting the general proposition that reasonable steps must be taken to draw the particular term in question to the notice of those who are to be bound by it and that more is required in relation to certain terms than to others depending on their effect. In the particular context of this particular game, I consider that the defendants did just enough to bring the Rules to the claimant’s attention. There was a clear reference to rules on the face of the card he used. There was a clear reference to rules in the paper containing the offer of a telephone prize. There was evidence that those rules could be discovered either from the newspaper offices or from back issues of the paper. The claimant had been able to discover them when the problem arose.
The judge had ‘great sympathy for Mr O’Brien who struck me as a thoroughly decent young man who must have suffered a cruel disappointment when his hopes were raised only to be dashed.’ There can be little sympathy for a newspaper which introduces such a game to attract publicity and readers, and then devotes space which could have been devoted to printing the Rules to hyperbole about the prizes to be won and the people who have won them. But the fact of the matter is that there was nothing at all outlandish about the rules of this game and indeed it would have been surprising if there had been no protection on the lines of Rule 5. I would dismiss this appeal.
SIR ANTHONY EVANS:
I agree that the appeal should be dismissed, but I do so for one reason only. I feel constrained to accept Mr Carr QC’s final submission, that this Court should not interfere with the Judge’s finding on an issue of fact, unless the finding is clearly wrong. The issue is whether the respondents took reasonable steps to draw the particular term to the notice of those who are to be bound by it (quoting from the judgment of Lady Justice Hale, para.23).
The words “Normal Mirror Group rules apply” clearly formed part of the contract. Unless it was established that the claimant had actual knowledge of Rule 5, which it was not, it is immaterial in my judgment that he had had the opportunity to read it on previous occasions, or was aware from the earlier editions of the newspapers that some Rules did exist. If those matters were relevant, it would mean that whether he was bound by it would itself be a matter of chance in the individual case.
There was no obvious reason why the Rules could not appear in every edition which offered tickets for the game, except as my Lady has said the editor’s wish to use the space for publishing hyperbole about the prizes to be won and the people who had won them. The reference to the Rules could have been accompanied by some indication of where they had been printed or could be found, for example ‘last Friday’s copy’ or ‘published on’ a particular weekday. Instead, on Monday 3 July the only publication in the Daily Mirror during the previous month had been on 10 June and 30 June. A person reading the offer on 3 July could not be expected to have ready access to back issues, even if he or she knew what date to look for. Whether the reader could discover what the Rules were was left essentially as a matter of chance. The promise of significant riches, in my judgment, deserve more.
I would also have considered that a Rule which gave the ‘winner’ no more than a further chance to obtain the prize was sufficiently onerous, if not unusual, to require greater prominence than was given to this one. This, in my judgment, was the strength of Mr Crystal’s main submission.
However, the judge concluded differently, and my colleagues agree with him. I cannot say that he was clearly wrong, and so reluctantly, I must agree that the appeal should be dismissed.
LORD JUSTICE POTTER:
For the reasons given by Hale LJ I agree that this appeal should be dismissed.
ORDER: Appeal dismissed with costs; appellant’s costs to be assessed if not agreed in accordance with Community Legal Service (costs) Regulations or their predecessors as appropriate application for permission to appeal to the House of Lords refused.
Noreside Construction Ltd v Irish Asphalt Ltd
[2014] IESC 68 (02 December 2014)
[2014] IESC 68
Dunne J
The status of the delivery dockets and the signing of same
I am satisfied that the parties herein reached a concluded agreement following their negotiations on the 26th March, 2003. This could be described as the “master” contract. I am also of the view that on every subsequent occasion when an order was placed and a delivery of aggregate was made, a separate and distinct contract was made in respect of each such delivery which incorporated the terms and conditions of the “master” agreement negotiated between the parties as to the price for the goods to be supplied, depending on whether the goods were to be collected or delivered, credit terms and so on. It was always open to the parties to vary the terms and conditions of the “master” contract between them. The question at issue between the parties is whether the use of delivery dockets on numerous occasions had the effect of varying the terms of the contracts by the incorporation of Irish Asphalt’s terms and conditions into the series of contracts made over the course of Noreside’s project at Griffith Avenue as contended by Irish Asphalt. The answer to this question gives rise to an analysis as to whether or not the delivery dockets relied on by Irish Asphalt are contractual documents. I now propose to consider this question.
McMeel in the Construction of Contracts (11th Ed. at para. 15.56) commented on the question of whether or not a particular document is a contractual document as follows:
“A first hurdle to overcome is whether the document is of a character that it could be reasonably expected would contain terms and conditions. Is it a contractual document? This can either be satisfied by actual knowledge of the receiving party that it contains terms or by an objective test: would the reasonable recipient expect it to contain conditions? This is relevant to all modes of incorporation. A distinction has to be drawn between documents which effect or form part of the background to the formation of the contract, and post-contractual documents. The former are an obvious source of terms, whereas a court may conclude that the latter came too late to prove an argument of incorporation. Auld L.J. has drawn this distinction:
‘A document may have a contractual purpose as a contract making document or in the execution of an existing contract. Documents such as a time sheet, an invoice or a statement of account are within the latter category. They do not normally have a contractual effect in the sense of the making or the varying of a contract.’ (Grogan v. Robin Mededith Plant Hire [1996] CLC 1127 at 1130 CA).
That may be an appropriate distinction to draw so far as ‘one off’ arguments about incorporation by signature or notice are concerned. It may go too far if the argument is that incorporation has arisen by a course of dealing or of industry standard terms. In that context both invoices and other administrative documents are often the basis of an argument of incorporation based on the parties’ practice.”
Mr. Darling Q.C., on behalf of Irish Asphalt placed particular emphasis on the last paragraph of the passage quoted above from McMeel.
Treitel, The Law of Contract (12th Ed.) contains the following explanation of the nature of a document at paragraph 7 – 006:
“Nature of the Document. An exemption clause is not incorporated in the contract if the document in which it is set out (or referred to) is not intended to have contractual force: e.g. if the document is a mere receipt for payment. On the other hand, the mere fact that a document is called a ‘receipt’ will not prevent it from having contractual effect. A document will have such effect if the party to whom it was handed knew it was intended to be a contractual document or if it was handed to him in such circumstances as to give him reasonable notice of the fact that it contained conditions. It will also be contractual if it is obvious to a reasonable person that it must have been intended to have this effect. This will be the case if the document is of a kind that generally contains contractual terms. Whether a document falls into this class depends on current commercial practice, which may vary from time to time.”
As I have said, it is my view that each delivery of aggregate was a separate and distinct contract which incorporated the terms of the “master” contract concluded by the parties. The evidence as to the creation of these contracts was that a delivery of aggregate was ordered by oral “call off” in a telephone call by an operative or site foreman of Noreside, received by an operative of Irish Asphalt and then delivered to Noreside’s construction site, which arrangement was then recorded by the delivery docket which noted the amount of aggregate provided, the particular type of aggregate and whether the aggregate was either collected or delivered to the site. They were simply for the purpose of recording what occurred. As is clear from the passage referred to above from McMeel, such documents may come too late to prove an argument of incorporation. The status of a delivery note in any given situation will depend very much on the facts and circumstances of the particular case.
The fundamental question in this case is whether the delivery dockets have contractual effect. These delivery dockets contain a reference to terms and conditions but none are expressly set out or identified. Are these delivery dockets intended to have contractual effect? There is no doubt that the delivery dockets herein were important documents in the execution of the contracts given that they were relied on for the purpose of checking that the amounts set out on invoices that had to be paid by Noreside to Irish Asphalt was correct. To that extent, there is no dispute between the parties that the delivery dockets had an important role to play in the overall contractual relationship between the parties.
This Court was referred to an extensive range of case law and academic commentary in the written and oral submissions of Irish Asphalt herein and in the case of James Elliot Construction Limited v. Irish Asphalt Limited which was heard immediately before this case. The case law and academic commentary was considered at length in the judgment of the Court in that case. That case also concerned the role of delivery dockets of the same defendant/appellant which contained the same phrase on the delivery dockets. It is not necessary to set out in detail all of the authorities referred to in the judgment of the Court in James Elliot Construction Limited v. Irish Asphalt Limited delivered immediately before this judgment but it would be useful to refer to a number of the relevant authorities. Thus, in the case of Spurling Limited v. Bradshaw [1956] 1 WLR 461, reliance was placed on a document described as a “landing account”. That case concerned a defendant who had had dealings with the plaintiff warehousemen. A number of barrels of orange juice were delivered for storage and thereafter the defendant received a landing account which referred on its face to conditions printed in small type on the back including an exemption clause. The barrels of orange juice were subsequently found to be empty or so damaged as to be useless. The warehousemen sued for their charges for storage and the defendant counterclaimed for damages. Denning L.J. (at p. 467) stated:
“It is to be noticed that the landing account on its face told Mr. Bradshaw that the goods would be insured if he gave instructions; otherwise they were not insured. The invoice, on its face, told him they were warehoused ‘at owner’s risk’. The printed conditions, when read subject to the proviso which I have mentioned, added little or nothing to those explicit statements taken together.
Next it was said that the landing account and invoice were issued after the goods had been received and could not, therefore, be part of the contract of bailment: but Mr. Bradshaw admitted that he had received many landing accounts before. True he had not troubled to read them. On receiving this landing account, he took no objection to it, left the goods there, and went on paying the warehouse rent for months afterwards. It seems to me that by the course of business and conduct of the parties, these conditions were part of the contract.”
Similarly, in the case of British Road Services Ltd. v. Arthur V. Crutchley & Co. Ltd. [1968] 1 All ER 811, there was a reference to a delivery note. Following a long established course of business between the plaintiff carriers and the defendants, delivery notes for goods transported by the plaintiffs and delivered at the defendants’ warehouse would be handed back to the plaintiffs’ lorry drivers, on the defendants receiving the goods stamped “Received on AVC [that is the defendants’] Conditions”. Lord Pearson at p. 816 of the judgment in that case commented as follows:
“Now I come to the terms of the contract between the plaintiffs and the defendants. It was not proved that the plaintiffs’ conditions of subcontracting were ever sent to the defendants, and the defendants in evidence denied that they were subcontractors to the plaintiffs. The plaintiffs’ form of delivery note contained the words:
‘All goods are carried on the [plaintiffs’] conditions of carriage, copies of which can be obtained upon application to any office of the [plaintiffs].’
Under the long established course of business between the parties, however, the plaintiffs’ driver brought his delivery note into the defendants’ office at the Cotton Street warehouse and asked in effect if he could bring his load into the warehouse. If there was room in the warehouse, the permission would be given, and the delivery note would be rubberstamped by the defendants with the words ‘Received under AVC Conditions’, followed by the date and the address of the warehouse. The delivery note, thus converted into a receipt note, would be handed back to the plaintiffs’ driver and he would bring his load into the warehouse as instructed by the warehouse foreman. If this had only happened once, there would have been a doubt whether the plaintiffs’ driver was their agent to accept the defendants’ special contractual terms. This, however, happened frequently and regularly over many years at this and other warehouses of the defendants. Also the defendants’ invoices contained the words: ‘All goods are handled subject to conditions of carriage copies of which can be obtained on application’. It may perhaps be material to add that the defendants’ conditions of carriage were not peculiar to them, but were the conditions of carriage of Road Haulage Association Limited. At any rate, I agree with the decision of the Judge that the plaintiffs’ conditions were not, and the defendants’ conditions were, incorporated into the contract between these parties. The effect was that, while the nature of the defendants’ liability as bailees to the plaintiffs was unaffected, the liability was limited in amount to £800 per ton, which, when credit is given for sixty bottles of whisky recovered after the theft, produces a total in this case of £6,135.”
At first glance it may be difficult to see why there was a different approach taken to the plaintiffs’ terms and conditions in that case and those of the defendants. However, the reason is clear from the judgment of Lord Pearson – it was not proved that the plaintiffs’ conditions of sub-contracting were ever sent to the defendants; by contrast the defendants’ terms and conditions, although not peculiar to them, were the conditions of carriage of the Road Hauliers Association Limited and were incorporated into the contract by reference to the rubberstamping of the words “Received under AVC Conditions” on the delivery note. In other words, there could have been no doubt as to what the terms and conditions were.
Another case of interest and one which was relied on by the learned trial Judge herein is the decision in the case of Continental Tyre and Rubber Company Ltd. v. Trunk Taylor Company Ltd. [1985] S.C. 163. In that case, the delivery note which contained the phrase “All offers and sales are subject to company’s current terms and conditions of sale . . .” was a non-contractual document as it was “a document the only purpose of which was to record performance of a particular transaction with a view to payment”. Finlay Geoghegan J. placed particular reliance on the judgment in that case and accepted that the purpose of the delivery dockets herein was to record the supply of aggregate with a view to payment whilst acknowledging that the documents were crucial documents but in the execution of the contract already agreed. That case concerned the sale and delivery of tyres and a claim in respect of sums due in respect of those tyres. The tyres were alleged to have been rejected by customers of the defendants as not being of merchantable quality. The pursuers in the case, on the assumption that the warranty as to merchantable quality had been breached, pleaded that their liability was excluded by reference to their standard conditions of sale on a delivery note. They also relied on an argument that a recent and consistent course of dealing meant that the terms of the delivery note had been incorporated into the contract. Lord Brand, the Lord President at page 168 of his judgment stated:
“What has been called the ‘delivery note’ does not so describe itself. It is not and does not bear to be a contract note or ‘sold’ note of the kind considered in Hardwick Game Farm v. Suffolk Agricultural Poultry Producers Association [1966] 1 W.L.R. 287 . . . which purported to record the terms of the parties’ agreement, and which was tendered before performance. It is not and does not bear to be, either, an acknowledgement of order form, of the kind considered in Grayston Plant Ltd. v. Plean Precast Ltd. 1976 SC 206, purporting to record the terms on which the supply is made or to be made. The signature of the defenders’ employee is, as the form shows, required for one purpose and one purpose only. Opposite the box containing the signature are the following words: ‘Please note that your signature is proof that the quantity and description of the goods shown on this docket were received correctly’. There are not averments that the legend near the top left hand corner of the docket, referring to the pursuers’ ‘conditions of sale’, which is in small print and not in bold type, was ever drawn to the attention of the person who signed it, and it is not averred that signature of the docket was required before the delivery was made (cf. the very different circumstances in British Road Services Ltd. v. Arthur v. Crutchley & Co. Ltd. where the delivery note was overstamped, referring to the conditions upon which the warehouse keeper would receive the load, and handed to the plaintiffs’ driver before he brought his lorry into the premises; see the opinion of Lord Pearson at pp. 816 and 817).”
Reliance on a reference to terms and conditions said to be available on request was not sufficient to result in the incorporation of those terms and conditions into the contract between the parties in that case.
For completeness I should also refer to the decision in the case of Grogan v. Robin Meredith Plant Hire [1996] C.L.C. 1127, which was referred to in McMeel in the passage set out above and relied on by Finlay Geoghegan J. in the course of her judgment. That was a case in which the first named defendant, a plant hire company, approached Triact, a civil engineering contractor, seeking work. It was orally agreed that Triact would hire from the defendant a driver and a machine for an all-in rate of £14.50 an hour. Neither party mentioned any other terms. At the end of the first and second weeks, Triact’s site manager signed a timesheet recording the hours that had been worked by the first defendant’s driver. Toward the bottom of the timesheet was printed, “All hire undertaken under CPA conditions. Copies available on request”. Under the standard conditions of the Contractor’s Plant Association, if incorporated into the contract, Triact was bound to indemnify the first defendant against any liability incurred to third parties in the course of the hire. In the third week of hire the machine was involved in an accident in which the plaintiff was injured. The plaintiff issued proceedings against the first defendant and Triact seeking damages for personal injuries. There was consent to judgment by the defendants. The first defendant claimed that the CPA conditions were incorporated into the contract by the signing of the driver’s timesheet on Triact’s behalf. Triact was therefore liable to indemnify the first defendant in respect of its liability to the plaintiff. In the High Court it was held that the contract had been varied so as to incorporate the CPA conditions. The appeal was allowed. In the course of his judgment Auld L.J. said:
“I reject MT Turner’s proposition that the court should look only at the words of a signed document and disregard its nature or function. The central question, adopting and adapting the useful statement of principle in Chitty on Contracts (27th ed.), vol. 1, para. 12/008, is whether the time sheet in this case comes within the class of a document which the party receiving it knew contained, or which a reasonable man would expect to contain, relevant contractual conditions. Another way of putting it, as Kerr J did in Bahamas Oil Refining Co v Kristiansands Tankrederie A/S (‘The Polyduke’) [1978] 1 LI Rep 211 at pp. 215-216, is whether ‘the document purport[ed] to have contractual effect’. It has to be borne in mind too that the circumstance to which the question relates, the presentation and signing of a time sheet for work done under an existing contract, is one of alleged variation, not the initial making of a contract.”
Auld L.J. continued:
“A document may have a contractual purpose as a contract making document or in the execution of an existing contract. Documents such as a time sheet, an invoice or a statement of account are within the latter category. They do not normally have a contractual effect in the sense of making or varying a contract. The purpose of time sheets is not normally to contain or evidence the terms of a contract, but to record a party’s performance of an existing obligation under a contract.”
Auld L.J. went on to say:
“If, as appears, that was the common understanding of the purpose of the time sheets, the fact that they made reference to the CPA conditions, not previously part of the contract, cannot, in my view, be of any contractual significance. Certainly such a reference on an essentially administrative and accounting document raised in the execution of an existing contract, did not have the clarity of meaning and purpose required to effect a variation incorporating them into the contract. . . . The question in Chitty, to which I have already referred and have adopted, is whether the document purports to be a contract or to have contractual effect. The answer in each case requires consideration, not only of the nature and purpose of the document, but also the circumstances of its use as between the parties and their understanding of its purpose at the time.”
As I said previously, the learned trial Judge placed considerable reliance on the judgment in that case leading to the conclusion by the trial Judge that the delivery dockets in this case were crucial documents in the context of both the construction and quarrying industry. Their purpose was to record the amount and type of aggregate supplied, together with the date and place of delivery, with a view to payment. However, whilst accepting that they had a contractual purpose in the execution of the contract, they did not have contractual effect in the sense of making or varying a contract.
A number of points emerge from the authorities referred to above. First of all, a delivery docket can be a contractual document – whether it is or not depends on the facts and circumstances in a particular case. The purpose for which the delivery docket was created may be of relevance. The next point to note, and one which seems to me to be of critical importance, is that the delivery docket or other document at issue must contain the relevant terms and conditions relied on or at the very least contain a reference to specific terms and conditions such as the AVC conditions relied on in the case of British Road Services Ltd. v. Arthur V Crutchley & Co. Ltd. referred to above. In that case, the plaintiff did not succeed in having its conditions of subcontracting incorporated into the contract even though those terms and conditions were stated to be available “upon application” while the defendant’s terms and conditions were incorporated by means of a stamp placed on the delivery note stating “Received under AVC conditions”.
In other words, a party contending that the terms of a previously negotiated contract have been varied by a document such as a delivery docket, must be able to show that the document concerned “comes within the class of a document which the party receiving it knew contained, or which a reasonable man would expect to contain, relevant contractual conditions”. This may be by reference to specific terms and conditions either set out on the document itself or reference on the document to terms and conditions well known in a particular industry, such as the AVC conditions referred to above. It is difficult to see how a bland reference to terms and conditions being available on request, without more, will suffice for the purpose of making a contract or varying a contract. Thus, in my view, the learned trial judge was correct in concluding that the delivery dockets were not contractual documents and did not have contractual effect. They did not contain terms and conditions of the contract. They made no reference to price. They were created for the purpose of recording the type and amount of aggregate delivered and whether that aggregate was collected or delivered on site. This view is given further support by the fact that the signature on the delivery dockets was placed in a box headed “Materials received on behalf of Customer”. In the circumstances, the fact that the delivery dockets were signed on behalf of Noreside by its site foreman, operative or haulier does not have the effect of incorporating Irish Asphalt’s terms and conditions into the contracts between the parties by way of signature.
Reasonable notice and course of dealing
Lewison in The Interpretation of Contracts at p. 127 commented:
“It is not necessary to the incorporation of trading terms into a contract that they should be specifically set out provided that they are conditions in common form or usual terms in the relevant business. It is sufficient if adequate notice is given identifying and relying upon the conditions and they are available on request. Clear words of reference suffice to incorporate the terms referred to. Other conditions apply if the conditions or any of them are particularly onerous or unusual. . . .”
In the event that the delivery dockets were found not to be contractual documents and thus incorporated by signature into the contracts between the parties, Irish Asphalt contends that the delivery dockets provided on some 1,190 occasions to Noreside constituted reasonable notice of their terms and conditions and thus were incorporated into the contract between the parties. Generally, terms and conditions contained in an unsigned written document will not be incorporated into a contract unless the party to be bound had reasonable notice of those terms and conditions. The reason for this is straightforward. Terms and conditions relied on by a party in the context of an alleged breach of contract will often limit or exclude liability. They may provide for any contractual dispute to go to arbitration. There may be other important terms, for example, in relation to retention of title. It has been said that the more onerous an exemption clause contained in terms and conditions is, the greater the requirement for notice. This was graphically explained by Lord Denning M.R. in the case of Thornton v. Shoe Lane Parking [1971] 2 QB 163, at 170, where he stated of an exemption clause:
“. . . it is so wide and so destructive of rights that the court should not hold any man bound by it unless it is drawn to his attention in the most explicit way. . . . In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it – or something equally startling.”
Thus in a case such as this where the terms of Clause 8 of Irish Asphalt’s terms and conditions could only be described as onerous, it follows that in order to rely on the provisions of Clause 8 it is necessary for Irish Asphalt to demonstrate that it had given reasonable notice of those terms and conditions to Noreside.
It is not disputed that Mr. Regan of Noreside checked the delivery notes carefully for the purpose of ensuring that the amounts due by Noreside to Irish Asphalt on foot of invoices received by Noreside accurately reflected the goods supplied. Mr. Regan, in his evidence, confirmed that he checked the quantity, date and delivery docket number against invoices. Insofar as the phrase “The material is sold subject to our terms and conditions available on request” is concerned he said that he could not say with force that he had seen that phrase but when asked if he was aware that it was on the delivery dockets, he said “Possibly, yes”. It was never alleged before the High Court that the actual terms and conditions relied on by Irish Asphalt had been provided in any way to Noreside. The critical point emphasised by Irish Asphalt was that each delivery docket contained the proviso referred to above as to the terms and conditions being available on request. The essence of the case made by Irish Asphalt is that Mr. Regan, a person of authority within Noreside, saw the delivery dockets; therefore, he knew of the existence of terms and conditions relied on by Irish Asphalt and was willing to contract on that basis. He chose to turn a blind eye to Irish Asphalt’s terms and conditions and thus he took the risk of not actually ascertaining the specific terms and conditions. Put simply, he knew there were terms and conditions but chose not to find out what they were.
In the course of the written submissions reference was made to McMeel op. cit. at page 287, where the author explained the concept of incorporation by reasonable notice in the following terms:
“The second alternative route of incorporation is by reasonable notice. This is the principal mode of incorporation for unsigned printed documents. It first came to prominence in the nineteenth century ‘ticket cases’ as the industrial revolution and the railway age made standard terms a feature of everyday life. In the leading case of Parker v. South Eastern Railway Company, Mellish L.J. distinguished the case of incorporation by signature and continued:
‘The parties may, however, reduce their agreement into writing, so that the writing constitutes the sole evidence of the agreement, without signing it; but in that case there must be evidence independently of the agreement itself to prove that the defendant has assented to it. In that case, also, if it is proved that the defendant has assented to the writing constituting the agreement between the parties, it is, in the absence of fraud, immaterial that the defendant had not read the agreement and did not know its contents. Now if in the course of making a contract one party delivers to another a paper containing writing, and the party receiving the paper knows that the paper contains conditions which the party delivering it intends to constitute the contract, I have no doubt that the party receiving the paper does, by receiving and keeping it, assent to the conditions contained in it, although he does not read them, and does not know what they are’.” – See 1877 2 CPD 416, 420.
This passage suggests that in the ordinary case it is sufficient to prove that a document containing terms was provided by one party to or sent to the other and was retained without demur. As with incorporation by signature, Mellish L.J. was emphatic that reading or familiarity with the terms was irrelevant.
In Circle Freight International Limited v. Medeast Gulf Exports [1988] 2 Lloyd’s Rep. 427, CA, the invoices each stated in small print at the bottom:
“All business is transacted by the company under the current trading conditions of the [IFF] a copy of which is available on request.”
This was in the words of Bingham L.J. both “clear and legible” and “placed immediately below the price where the eye would naturally alight on it”. The exporters never requested a copy and none was sent. Having reviewed the authorities, Taylor L.J. concluded:
“. . . it is not necessary to the incorporation of trading terms into a contract that they should be specifically set out provided that they are conditions in common form or usual terms in the relevant business. It is sufficient if adequate notice is given identifying and relying upon the conditions and they are available on request.” [1988] 2 Lloyd’s Rep. 427, 433.”
A number of points emerge from the passages referred to above. First of all, although one can be bound by terms and conditions that one has not read, the document relied on by the party asserting the terms and conditions should actually contain either the conditions themselves or in some other way identify the terms and conditions relied on. As Taylor L.J. concluded in Circle Freight, it is not even necessary for the conditions to be set out specifically. He pointed out that it would be sufficient if adequate notice was given identifying and relying upon the conditions. In that case, there was a clear reference to the IFF terms on invoices created for the purpose of the contracts between the parties. Taylor L. J. added in the course of his judgment (at p. 433) the following observation:
“Here, the parties were commercial companies. There had been a course of dealing in which at least eleven invoices had been sent giving notice that business was conducted on the IFF terms at a place on the document where it was plain to be seen. Mr. Zacaria knew that some terms applied. He knew that forwarding agents might impose terms which would frequently be standard terms and would sometimes or frequently deal with risk. He never sought to ask for or about the terms of business. The IFF conditions are not particularly onerous or unusual and, indeed, are in common use. In these circumstances, despite Mr. Gompertz’s clear and succinct argument to the contrary, I consider that reasonable notice of the terms was given by the plaintiffs. Putting it another way, I consider that the defendants’ conduct in continuing the course of business after at least eleven notices of the terms and omitting to request a sight of them would have led and did lead the plaintiffs reasonably to believe the defendants accepted their terms. In those circumstances it is irrelevant that in fact Mr. Zacaria did not read the notices.”
Thus, it was held that the IFF conditions were incorporated in the contract. It is noteworthy that the invoices relied on made specific reference to IFF conditions. Therefore, the plaintiffs had, in the view of the Court, given adequate notice identifying the conditions they relied on.
A further authority referred to in the submissions on behalf of Irish Asphalt was the case of Baden v. Societe Generale S.A. [1993] 1 WLR 509 which was relied on in relation to the concept of knowledge. Peter Gibson J. in the course of his judgment described knowledge as follows:
“(i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.”
That case concerned the question of knowledge in the context of constructive trusteeship. It seems to me that there is a significant distinction between the type of knowledge a person can be said to have in the context of a constructive trust and the requirement to give reasonable notice of a particular state of affairs to another person. Knowledge in the manner explained by Gibson J. cannot be a substitute for the requirement of a party to give reasonable notice. It is for the party relying on an exemption clause to give reasonable notice of its terms and conditions and not for the party to be bound to be put on enquiry as to whether or not there may be terms and conditions containing an onerous exemption clause. I am not of the view that the case relied on assists the argument of Irish Asphalt on the question of reasonable notice.
The essence of the argument of Irish Asphalt is that the proviso on the delivery dockets, “This material is sold subject to the terms and conditions available on request”, was reasonable notice of the terms and conditions applicable. I cannot agree. At no stage was Noreside ever provided with a copy of Irish Asphalt’s terms and conditions. The terms and conditions were not identified in any shape or form or specified by reference to any known industry-wide terms and conditions. The position could have been otherwise if the proviso had identified some specific terms and conditions such as the IFF conditions referred to in the Circle Freight case. However that did not happen in this case and, accordingly, in my view, Irish Asphalt failed to give reasonable notice of its terms and conditions to Noreside.
Further, this is not a case in which the course of dealing between the parties could be relied on by Irish Asphalt to incorporate its terms and conditions into the contracts between the parties. The fact that the proviso is contained in a large number of delivery dockets does not assist Irish Asphalt in circumstances where Irish Asphalt has never given any reasonable notice of its terms and conditions to Noreside. Obviously, if Irish Asphalt had on numerous occasions supplied copies of its terms and conditions to Noreside but on a particular occasion had failed to do so, then in the context of a breach of contract on that occasion, it would be very difficult for Noreside to argue that it was not aware of the terms and conditions. The fundamental problem in this case for Irish Asphalt is that over the entire period of dealing between the parties, Irish Asphalt never supplied its terms and conditions to Noreside and in those circumstances I fail to see how it could be said that Irish Asphalt’s terms and conditions could have been incorporated into the series of contracts between the parties by a course of dealing.
Incorporation of terms by reference or by custom and practice
Very little needs to be said in relation to the argument that Irish Asphalt’s terms and conditions were incorporated into the contract between the parties by reference to the proviso contained on the delivery dockets. If it was the case that reference had been made to terms and conditions well known within the industry and identifiable as such, for example, as in the Circle Freight case by reference to the IIF conditions, I would be of the view that such terms and conditions could be incorporated into the contracts between the parties. If the reference was to some other document – for example – if the proviso made reference to “our terms and conditions as set out on our invoices”, the terms and conditions could be incorporated by such reference if the terms and conditions were, in fact, set out on the invoices. However, nothing of that kind happened here and the mere reference to terms and conditions without either specifying them in any way or otherwise identifying them is not, in my view, sufficient to incorporate the terms and conditions into a contract or series of contracts by reference. The basis on which terms and conditions could be incorporated by reference into a contract in any given case would clearly turn on its own facts and circumstances.
Finally, it was submitted on behalf of Irish Asphalt that the terms and conditions relied on by them were incorporated into the contracts by custom and practice. Lewison in Interpretation of Contracts 2007 referred to the principles governing incorporation by way of custom and practice in the following terms at page 221:
“A trade usage producing a customary meaning is a trade custom which must be proved as clearly and definitely as any other trade custom. In a market where buyers and sellers meet together habitually, they get into the habit of assuming that certain conditions or usages apply to all contracts they make. A usage grows up because everybody in the market, knowing the usages, tacitly assumes the contract he is making, whether as buyer or seller, is subject to the usage. The binding character of that usage is born of innumerable individual transactions entered into by the parties to them in the knowledge that certain usages are in practice habitually followed in that market. For a practice to amount to a recognised usage, it must be certain, in the sense that it is so well known in the market in which it is alleged to exist, that those who conduct business in the market contract with the usage as an implied term; and it must be reasonable.”
In making the argument that the terms and conditions were implied into the contract between Irish Asphalt and Noreside, Irish Asphalt relied on the evidence of Mr. Kennedy, a witness called by Irish Asphalt. Mr. Kennedy was a director of Roadstone and was responsible for a number of quarries and gravel operations. In the course of his evidence, he was asked if it was custom and practice within the industry to limit liability and he responded:
“Yeah, there are a number of reasons for that. At a macro level, obviously, there is the management of the risk in the business. In terms of proportionality, this business is a commoditised business. A commodity business, low value, high volume transactions, low value. So, for instance, in terms of a load of Clause 804, your typical cost delivered to site is, maybe €200. A profit margin for a business in the aggregates game, well run, is about €60. So where you are delivering material like that to a multimillion pound project you have to limit your risk. The second thing I would suggest is that, in relation to the industry, quarry companies or supply companies, they are not construction companies. And, again, if you look at it, they are at 21% VAT, the higher rate of VAT, which proves that they are a deliverer of materials, not a supplier of services, not a supplier of labour. So that’s a very distinguishing factor and that’s very important for people in the quarry industry. Because their customer base, typically, is in the construction industry and that customer base tends to be contractual. So the industry has to protect itself. . . .
Well, as said in my witness statement, I believe it to be custom and practice. My own experience is that all the major international players would have, either, a limited liability or a rejection of consequential loss. And I think a number of the larger family owned businesses in Ireland would have similar type statements.”
He went on to discuss Noreside’s terms and conditions and stated that he would never have accepted them:
“Question: “Why is that?
Answer: Because risk reward. It is a fundamental of our business that you can’t accept risk in the context of the type of reward you are getting in your business. Because it is a supply business. There are a number of reasons. One, just being practical about it, I may, you have no control over your product. You have certainly no control over your product if it is collected by the customer. You’d have no control when it gets to site. You have no control in terms of how it is used. So the industry, in general, in my experience, in my view, has always sought to protect itself as a result, we are not contractors, we are suppliers.”
In considering this issue, it is helpful to look at McDermott on Contract Law at para. 7.07 in which the author set out a number of requirements that must be fulfilled before a custom would be implied into a contract, namely:
(1) The custom must have acquired such notoriety that the parties must be taken to have known of it and intended it should form part of the contract.
(2) The custom must be certain.
(3) The custom must be reasonable, and the more unreasonable it is the harder it will be to prove that it exists.
(4) Until the Court takes judicial notice of a custom it must be proved by clear and convincing evidence.
(5) The custom must not be inconsistent with the express contract.
The case of O’Reilly v. Irish Press [1937] ILTR 194, considered this issue. Maguire P. commented:
“. . . a custom or usage of any kind is a difficult thing to establish . . . it must be proved by persons whose position in the world of journalism entitles them to speak with certainty and knowledge of its existence. I have to be satisfied that it is so notorious, well known and acquiesced in that in the absence of agreement in writing it is to be taken as one of the terms of the contract between the parties.”
The learned trial judge reviewed the evidence of Mr. Kennedy, that of Mr. Tuite on behalf of the defendant and the evidence of Mr. Regan. Mr. Regan, on behalf of Noreside, disputed the evidence of Mr. Kennedy and Mr. Tuite as to the existence of a custom or practice within the industry of a standard practice of including a limitation of liability clause in terms and conditions provided by quarry owners. Finlay Geoghegan J. concluded as follows at para. 50 of the judgment:
“In my judgment the evidence adduced by the defendant falls short of establishing a custom of a type which would permit the Court to find that where a contractor operating in the construction industry, such as the plaintiff, enters into a contract with a quarry operator for the supply of aggregate for a construction contract, it could be objectively determined that both parties must be taken to have known of it and intended that it should form part of the contract. On the evidence, I find that there may well have been a standard practice amongst the larger quarry owners of inserting, in their standard conditions of sale, a clause limiting liability to replacement of defective product, or excluding consequential loss and being unwilling to deviate therefrom. Nevertheless, in particular in the evidence of Mr. Kennedy, it appears to be acknowledged that a purchaser from the construction industry might well seek, albeit, perhaps, unsuccessfully, to obtain an indemnity against loss arising from defective product. I am not satisfied that there is evidence of a custom well known and according to which quarry operators were entitled to limit their liability for defective product to replacement product in the absence of the inclusion of an express contractual term to that effect. The practice, insofar as it existed, appears to have been of the inclusion of such an express contractual term.”
The learned trial Judge was not satisfied on the evidence that there was sufficient evidence of a custom well known within the quarry industry such that quarry owners or operators were entitled to limit their liability in the absence of the inclusion of an express contractual term. Indeed, as she noted, the practice, on the contrary, appears to have been to include such an express contractual term. Looking at the evidence of Mr. Kennedy overall, it seems that the height of his evidence was that he believed it to be custom and practice. He referred to his experience that all the major international players would have either a limited liability or a rejection of consequential loss clause. He added that a number of the larger family owned businesses would have similar type statements. This suggests to me that the practice varies between quarry operators who have a clause that relates to limited liability and those who have a clause rejecting liability for consequential loss. Thus even within the evidence of Mr. Kennedy himself there is a degree of inconsistency as to the approach taken. Further, it seems that not all those involved in the business operate on the basis of seeking to limit their liability in that way. Thus, having considered the evidence and the finding of the learned trial Judge on this issue, I cannot see any basis for arguing that there was any error in her conclusion on this topic. Accordingly, I am satisfied that the terms and conditions relied on have not been incorporated by reference or by custom and practice.
Conclusions:
(1) There was a master contract between the parties concluded on the 26th March, 2003 which fixed the terms and conditions on which the parties would trade for the duration of Noreside’s Griffith Avenue project.
(2) Thereafter, there were separate and distinct contracts in respect of each supply of aggregate.
(3) The delivery dockets, whilst important documents in the execution of the contracts, were not contractual documents.
(4) Irish Asphalt’s terms and conditions were not incorporated into the contracts by the signature of Noreside’s site foreman or other operatives on the delivery dockets.
(5) Irish Asphalt’s terms and conditions were never provided or made known to Noreside.
(6) Irish Asphalt did not provide reasonable or adequate notice of the terms and conditions to Noreside by means of the proviso on the delivery docket or otherwise.
(7) Irish Asphalt’s terms and conditions were not incorporated into the contract by reference.
(8) Irish Asphalt did not establish in evidence that there was a custom and practice in the industry such that its terms and conditions could be implied or incorporated into the contract between the parties.
This is a case in which Irish Asphalt have sought to rely on terms and conditions which would limit their liability to Noreside for the defective aggregate supplied to Noreside. Irish Asphalt could have incorporated their terms and conditions into the contracts by any number of simple steps. For example, their terms and conditions could have been printed on their delivery dockets or on their invoices. All that occurred in this case was the inclusion of a reference in the delivery dockets to terms and conditions. This did not indicate in any way what those terms and conditions were. It is difficult to see how one could be bound by terms and conditions which are not contained in a signed contractual document or by terms and conditions which are never provided, identified or disclosed or by terms and conditions said to be incorporated by custom or usage unless they are “so notorious, well known and acquiesced in” as to be taken to be incorporated into the terms in the contract, as Maguire P. explained in O’Reilly v. Irish Press. In my view, Irish Asphalt has failed to establish that its terms and conditions were incorporated into the contracts with Noreside on any basis.
In the circumstances, I would dismiss the appeal.
Unitherm Heating Systems Ltd -v- Wallace as official liquidator of BHT Group Ltd (In Liquidation)
[2015] IECA 191 (29 July 2015)
URL: http://www.bailii.org/ie/cases/IECA/2015/CA191.html
Cite as: [2015] IECA 191 Irvine J
Discussion
37. It is beyond doubt that the leading authority on proceeds of sale clauses at the time of the High Court judgment was that of Murphy J. in Carroll, a case in which the Court concluded that the relevant proceeds of sale clause did not create a fiduciary relationship between the buyer and seller but rather confined the seller to a charge over the funds received in respect of the resale of its goods, which required registration.
38. In reaching a contrary conclusion in the present case, the High Court judge distinguished not only the contractual provisions in both cases but also the manner in which the respective parties had conducted their business and, on that basis, found that the relationship of principal and agent existed.
39. For the purposes of considering the distinction drawn by the High Court judge between the two cases, I will briefly summarise the facts in Carroll.
40. In Carroll, the plaintiff, a well-known tobacco company, had supplied goods to the defendants (“Bourkes”) as retailers. Those companies had gone into liquidation. The contract between the parties contained a reservation of title clause which provided that no property in the goods would pass until all sums due to the plaintiff had been discharged. It also gave the defendants the right to resell the goods to a third party on their own account, but not as agents for the plaintiff. Further, the contract included a proceeds of sale clause which required the defendants to “hold all monies received from such sale or other disposition in trust for the company (“Carrolls”) and undertake to maintain an independent account of all sums so received and on request [to] provide all details of such sums and accounts”. No such account was ever established, a fact that the High Court judge concluded was probably known to Carrolls.
41. In the course of the liquidation an issue arose as to the plaintiff’s rights in respect of the proceeds of sale of the goods sold on by the defendants to third parties. The plaintiff argued that these were impressed with a trust in its favour, thus entitling it as a beneficiary standing in a fiduciary relationship with the defendants to trace such proceeds into any other property acquired therewith by the trustees.
42. Murphy J. set out the basic legal principles as follow ([1990] 1 IR 481, 483):-
“The issue in the present case relates to the right of Carrolls in respect of the proceeds of sale of the goods supplied by it. In this context too the basic legal principles are well established. Where a trustee or other person in a fiduciary position disposes of property the proceeds of sale are impressed with a trust which entitles the beneficiary or other person standing in the fiduciary relationship to trace such proceeds into any other property acquired therewith by the trustee … Whether fiduciary obligations are imposed on one party or another depends in part upon the character in which they contract and partly on the nature of the dealings in which they engage. Obviously one would be slow to infer that a vendor and purchaser engaged in an arms length commercial transaction undertook obligations of a fiduciary nature one to the other. On the other hand if one postulates that in any context one person is selling the goods of another the assumption of fiduciary obligations in relation to the sale and in particular the proceeds thereof might well be appropriate. It seems to me that the question must be asked: how does a party come to sell property of which he is not the owner? Is he selling as a trustee in pursuance of a power of sale? Is he selling as the agent of the true owner? Does the sale constitute a wrongful conversion? If any of those questions were answered in the affirmative it seems to me that the law would impose a trust on the proceeds of sale which would confer on the true owner the right to recover those proceeds from the actual seller or, if the proceeds were no longer in the seller’s hands, to trace them into any other property acquired with them.”
43. Murphy J. concluded that it was clear from the terms of the contract that it was envisaged that the defendants would sell on the goods on their own account and not as an agent for Carrolls. Accordingly, he could see no basis upon which to find a fiduciary duty. If such an obligation was to be found, it had to be established by reference to the actual bargain or in the conditions of sale. He was satisfied that the parties intended that the property would pass to the sub-purchaser who would become the full owner.
44. In coming to that conclusion, Murphy J. considered the following facts to be material. Firstly, the contract anticipated that, on the onward sale, the sub-purchaser would become full owner. Secondly, the clause specifically provided that Bourkes were not selling on as an agent of Carrolls, and this being so, they could not be considered a fiduciary. Thirdly, Bourkes could set their own price for the onward sale of the goods. This meant that, following their sub-sale, they were not necessarily going to be replaced by assets of equal value. Fourthly, while Bourkes were contractually obliged to place the monies received in respect of the onward sale of the goods into a separate account, no such account had been established, a fact which Murphy J. inferred was known to Carrolls. Fifthly, the contract provided for a four week credit period, a facility the purpose of which Murphy J. stated was uncertain if Bourkes were not free to use the proceeds during that period. Murphy J. analysed how that arrangement “properly implemented” would work given that the sums of money credited thereto, assuming that the goods were resold at a marked-up price, would be in excess of the amounts due by Bourkes to Carrolls. That being so, Carrolls, if entitled to have recourse to that account for the purposes of discharging monies due to them, would not be entitled to the entire fund which suggested to Murphy J. that the rights of the seller bore all of the characteristics of a mortgage or charge. The charge so created required registration under s. 99 of the Companies Act 1963 and in the absence of such registration was invalid.
45. In the course of his judgment, Murphy J. stressed the importance of looking beyond the contractual terms themselves and warned that the attachment of labels to the dealings of the parties was not determinative of their legal status. The rights of the parties and the nature of the transaction which they were engaged in had to be determined by reference to a consideration of the document as a whole as well as the obligations and rights which it imposed on the parties. Murphy J. expressed himself satisfied that the true nature of the relationship between the Carrolls and Bourkes was one of debtor/creditor and the fact that the proceeds of sale were dealt with by Bourkes in the ordinary course of their business supported that conclusion.
Judgment of the High Court
46. In the High Court, Peart J. found that the relationship between Unitherm and BHT was that of principal and agent rather than that of creditor and debtor. He did so by distinguishing the facts of the present case from those in Carroll. The factors he relied upon may be summarised as follows: –
(i) The contractual terms were different. In Carroll, the contract expressly provided that in the event of the sale of goods by Bourkes that they should “act on their own account and not as agent for Carrolls”. The clause in Unitherm’s standard conditions of sale, whilst providing that BHT was entitled to sell the goods to third parties “in the normal course of the buyer’s business”, also provided in an earlier clause that, pending the payment of all sums and the passing of property in the said goods, “a fiduciary relationship shall exist between the buyer and the company and the buyer shall hold the said goods as trustee for and on behalf of the company and shall return the same to the company on demand”. The monies so received were also to be placed in a separate account.
(ii) The manner in which Unitherm and BHT traded was very different to the manner in which Carrolls traded with Bourkes. The High Court judge placed emphasis on the following aspects of the dealings between Unitherm and BHT which he felt were indicative of the existence of a principal/agent relationship: –
(a) That the customer’s plans were sent by BHT to Unitherm so that it might provide a quotation.
(b) That Unitherm prepared a quotation for the customer/third party on BHT headed notepaper or alternatively on jointly headed notepaper.
(c) That the price of the goods when sold to the customer was fixed by Unitherm rather than BHT. In Carroll, Bourkes were free to sell on to the customer at whatever price they wished.
(d) That Unitherm’s profit on the onward sale to the customer was fixed by Unitherm at a percentage of the price which it had quoted for the goods.
(e) That in respect of certain categories of goods, Unitherm provided a commissioning service to the customer.
47. Two matters caused the High Court judge some difficulty when considering whether or not the relationship of principal and agent existed. Firstly, BHT had been granted a credit facility of 60 days, a term considered to be a strong indicator against the existence of a trust over the monies received from the onward sale of the goods given that it implies that the buyer is free to use those monies during the currency of that period. However, the High Court judge concluded that such a clause could be equally consistent with an opportunity being afforded to the buyer to obtain a purchaser for the goods before having to pay the seller, and thus the existence of such a term did not necessarily exclude the possibility of a principal and agent relationship. Secondly, there was the fact that the monies that were to be placed in a separate bank account would be in excess of what was due to the seller because of the mark-up on the onward sale. Such circumstances were normally indicative of the seller having a charge over the monies in that account to the extent only of its outstanding liabilities. To overcome such an inference, the High Court judge concluded that it was open to him to imply into the contract a term that the trust would only apply to that portion of the monies received which were due to the seller.
Decision
48. As was stated by Mummery J. in Compaq Computer Ltd v. Abercorn Group Ltd. [1993] B.C.L.C. 602, the seller’s aim in insisting on a retention of title clause or a proceeds of sale clause is to prevent the goods and the proceeds of sale of its goods from becoming part of the assets of an insolvent buyer, available to satisfy the claims of the general body of creditors.
49. However, as was made clear by Murphy J. in Carroll, it does not follow that, just because the seller has such an objective in mind, the protection which it seeks will be achieved. The court must consider the character in which the parties contracted and the nature of the dealings in which they engaged, apart from the contractual provisions themselves, in order to ascertain how the position of the seller was secured. It must also ensure that the substance of the scheme of registration prescribed by s. 99 of the 1963 Act is preserved and that this scheme is not circumvented or manipulated by artificial characterisations of the buyer/seller relationship.
50. What is not in dispute is that Unitherm, as the unpaid seller, must establish a fiduciary relationship between itself and BHT affecting the proceeds of sale by BHT of the goods in question in order to enjoy an equitable right to trace the monies received in respect of the onward sale into a mixed fund.
51. That being so, it is necessary to consider, firstly, whether the High Court judge was correct in finding that Unitherm and BHT traded as principal and agent such as to create such a fiduciary obligation on the part of BHT in respect of the monies received for the said goods from its customers. If not, it is necessary then to consider the alternative submission made in the course of this appeal which is that BHT sold Unitherm’s goods as trustee in possession, thus impressing the monies received in respect of their onward sale with a trust in favour of Unitherm. These questions must be answered in response to the liquidator’s submissions that the extent of Unitherm’s security is a charge on the book debts of BHT which is void for want of registration.
52. Given that the proceedings in the High Court were decided upon the basis of agency, I will firstly consider whether the High Court judge was correct in reaching that conclusion which he did as to the existence of a fiduciary duty arising from a relationship of principal and agent.
Principal and agent
53. Having considered carefully the evidence available on affidavit as to nature of the relationship between Unitherm and BHT, including the contractual obligations deriving from Unitherm’s standard conditions of sale and the 60 day credit agreement with BHT, I regret to say that I am not satisfied that the relationship between Unitherm and BHT was that of principal and agent.
54. Looking firstly to Unitherm’s standard conditions of sale in support of the existence of such a relationship, the language and wording of those conditions, presumably prepared by Unitherm’s legal advisors, is not demonstrative of an intention on the part of Unitherm to trade with BHT as its agent. The words “principal” and “agent” are not to be found anywhere in the document. Unitherm is described as the “seller” and BHT the “buyer”. An agent does not buy goods from its principal but makes a contract for sale which contractually binds its principal and the customer. Further, clause 11(b)(v) of these Standard Conditions permits BHT to sell the goods to third parties “in the normal course of the buyer’s business”. That clause is not consistent with the conclusion that BHT was selling as agent on Unitherm’s behalf and is, in my view, consistent only with BHT selling on its own account.
55. The same clause also provides that BHT, on the sale of Unitherm’s goods to its own customers, is deemed to have assigned to Unitherm the benefit of any claim which it had against a customer. In my view, such a provision is incompatible with BHT selling as an agent on Unitherm’s behalf. If BHT was selling as an agent, it could have no contractual rights against the customer which it might assign to Unitherm. Further, if BHT had sold as agent for Unitherm, Unitherm would be the contracting party and could sue the customer on its own behalf without the need for any such assignment.
56. Not only are the standard conditions of sale inconsistent with the existence of a fiduciary duty based upon a relationship of principal and agent but the conditions are devoid of the type of obligations that a court might expect to see if an agency relationship had existed between the parties. For example, there is no term which prohibits BHT competing with its principal, Unitherm, or one requiring BHT to comply fully with its directions.
57. Given that an agent acts as an intermediary to conclude a contract between the principal and the customer, if such an agency relationship existed, that should have been apparent from the documentation referable to the trading arrangement between Unitherm, BHT and the customer. Samples of the relevant documentation were exhibited in these proceedings. These demonstrate that BHT raised purchase orders from Unitherm and, consistent with that, Unitherm invoiced BHT/Heat Merchants as its customer. While quotations in respect of the price of goods required by customers were sent to the customer in the name of BHT, and sometimes on notepaper bearing the joint names of Unitherm and BHT, the fact of the matter is that it was BHT, solely, that invoiced the customer in respect of the supply of those goods, and it did so on its own behalf. None of the documentation exhibited is consistent with BHT and Unitherm being in anything other than an arms length vendor and purchaser or creditor and debtor relationship insofar as the onward sale of the goods by BHT was concerned.
58. Neither am I satisfied that the features identified by Peart J. concerning the manner in which Unitherm and BHT conducted their business were necessarily indicative of an agency relationship. For my part, all of those features which he identified in the course of his judgment are equally characteristic of ordinary commercial practice in the industry in question. For example, it does not necessarily follow that just because the supplier insists on fixing the retail price for the onward sale of its goods, and thereby fixes the retailer’s profit margin, the relationship between the parties should be considered to be one of principal and agent. That type of condition, I suspect, is likely based on market considerations such as the price at which the seller believes it will sell the maximum amount of product. If the mark-up is left to the discretion of the retailer, then that could adversely affect the supplier’s sales opportunities and is, in reality, simply a form of resale price maintenance. While clauses of this kind can sometimes give rise to legitimate competition law concerns, it has nonetheless been recognised that a seller has a legitimate interest in prescribing or controlling the price at which the product will ultimately be sold on to the consumer. It does not on that account make the buyer an agent of the seller.
59. Further, supplier warranties and/or commissioning or ongoing service agreements exist without the supplier necessarily becoming the contracting party with the customer.
60. BHT’s entitlement to a fixed credit period is also inconsistent with an agency relationship. In circumstances where the contract would be between Unitherm and the customer, there would be no reason why the monies received by the agent would not be passed on immediately to the principal. Any agreement whereby the buyer is expressly or impliedly empowered to use the proceeds of sale for its own use would be inconsistent with such a relationship. Why should BHT be entitled to use Unitherm’s monies for its own benefits within a specific period?
61. While the High Court judge concluded that credit facilities of this nature also serve the purpose of allowing the purchaser to find a buyer before they need to pay the seller, in this instance, according to the evidence, it was the existence of a customer that led BHT to order the goods from Unitherm in the first place. Further, it would have been open to Unitherm to agree that payment by its agent would be deferred until such time as BHT had received the price of the goods from the customer, but that was not the nature of the clause provided. Accordingly, to my mind, the existence of the fixed credit period in the present case is inconsistent with the existence of a fiduciary relationship based upon agency.
62. While there was an obligation on BHT to keep the monies received in respect of the onward sale of Unitherm’s goods in a separate bank account, it never did so and the monies concerned were lodged to its trading account and used in the normal course of its business. Had the standard conditions of sale included a clause that the net proceeds of sale received by BHT had to be placed in a separate bank account and no credit facilities afforded to BHT, then, in the absence of all of the other evidence which points in favour of a normal debtor/creditor relationship, one might perhaps consider the possibility that BHT was acting as agent on behalf of Unitherm. However, the fact of the matter is that Unitherm queried the existence of this account for the first time on 7th March, 2012, in the course of the receivership and over six years after the parties had commenced their trading relationship. Further, over all of that period Unitherm had afforded BHT a sixty day credit period. Taken together, when added to all of the other indicators in favour of a normal debtor/creditor relationship, these facts are, in my view, inconsistent with the existence of an agency agreement.
63. However, even if the bank account had been set up in accordance with the standard conditions of sale, the clause required BHT to put all of the monies received, including its own, – call it commission or profit – into that account. On the face of it, the clause gives Unitherm a right to funds which belong to BHT, and this is inconsistent with the clause being in furtherance of an agency agreement. In Carroll, Murphy J. considered that such an arrangement had the characteristics of a charge made in favour of the seller given that it would be a fund to which it might have recourse for the discharge of the monies outstanding to it, even though it would not be entitled to the entirety of the monies in that fund.
64. Faced with the difficulty, Peart J. stated that he could imply a term into the clause which would confine BHT to the obligation to lodge into a separate account only that portion of the resale proceeds due to Unitherm. Such a term could, however, only be implied into the contract where it was necessary to give effect to the presumed intention of the parties.
65. Clause 11(b)(v) provides that “the proceeds of any such sale shall be held by the buyer on trust for the company”. Would an officious bystander, with knowledge of the business dealings between the parties and sight of the aforementioned clause, if asked about the agreement between the parties, have stated “Oh, of course” it was clear that the parties intended that only that portion of the proceeds of sale as reflected BHT’s liability to Unitherm should be placed in that account. The answer, I believe, is a resounding no. Neither is the imposition of an implied term necessary to give business efficacy to a relationship which, on the standard conditions of sale and the documentation as a whole as well as the manner in which the parties did business, is fully consistent with one of debtor and creditor.
66. The clause which he sought to imply into the standard terms and conditions was one that was in direct conflict with the words of the clause, which specifically provides that all proceeds of sale be lodged into the account. Further, there was no evidence that such a term reflected the true intention the parties, and it was in conflict with Unitherm’s own letter of 7th March, 2012, requiring that any monies collected for goods sold to third parties ought to be set aside for its benefit.
Trustee in possession
67. Rather belatedly in the course of the appeal hearing, having argued in favour of an agency relationship, counsel for the respondent sought to disengage somewhat with that argument in favour of a fiduciary relationship based on an assertion that BHT had sold Unitherm’s goods as trustee in possession, thus allowing Unitherm to claim that the proceeds of sale were held by BHT in trust on its behalf.
68. Critical to an analysis as to whether BHT might be considered to have sold to customers as trustee in possession is the answer to the question as to when and in what manner the title to Unitherm’s goods passed to the ultimate customer.
69. Of course, a seller such as Unitherm may agree with a buyer that it will reserve title or suspend the passing of title until such time as it receives payment for its goods. Title will pass in such circumstances when the parties intended to pass, as is provided for in s.17 of the Sale of Goods Act 1893 which provides as follows:-
“(1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case.”
70. In this case, it is clear from clause 11 of the standard conditions of sale that it was agreed that, while Unitherm’s goods remained in BHT’s possession and at a time when they had not been paid for, the title to those goods remained with Unitherm. It was in these circumstances that Unitherm was paid €13,853.49 in the course of the liquidation as the goods concerned remained in BHT’s possession and for title to pass the purchase price had to be paid.
71. As to when and if title passes to the buyer, it becomes a more complicated question where the buyer is permitted to effect a sub-sale of the goods but the contractual terms maintain that title is nonetheless to remain with the seller. In this case, Unitherm permitted BHT to sell the goods. However, it sought to overcome the risk of non-payment by BHT by the inclusion of clause 11; whereby, it sought to retain title in respect of all goods supplied to BHT while any invoice remained un-discharged as well as a right to ownership of the proceeds of sale received by BHT in respect of the onward sale of the goods. In support of this provision, it also provided that the “proceeds of any such sale” would be held on trust for it by BHT. That it is possible to legally so provide is not in dispute. As Mc William J. stated in Frigoscandia (Contracting) Ltd. v. Continental Irish Meat Ltd. [1982] ILRM 396 at p.398:-
“The parties to a contract can agree to any terms they wish and, amongst others, they can agree that the property in the goods shall not pass to the purchaser until all the instalments of the purchase price have been paid. See McEntire v. Crossely Brothers, [1895)]AC 457 at 463; and s.17 of the Sale of Goods Act, 1893. The court has to decide what was the intention of the parties as shown by the provisions of the whole agreement.”
72. It has to be said that the intention of the parties is more easily determined in cases where, like in Frigoscandia, the Court was only concerned with ascertaining the true relationship between the seller and the buyer and where there has been no onward sale to a third party. However, there is now a significant body of case law in support of the proposition that, if the buyer, as was the position of BHT in the present case, is permitted to resell the goods, it is usual for it to do so on its own account unless there is very clear evidence to the contrary. If the buyer is truly selling on its own account, it has taken the legal and beneficial title in the goods from the seller by agreement. Accordingly, regardless of the use of words such as “trustee” or “fiduciary” in the conditions of sale, no fiduciary duty will be deemed to exist with the parties being considered to be in a relationship of debtor and creditor.
73. In general, most recent authorities have tended to treat “proceeds of sale” clauses as giving rise to charges which require registration and the courts have been reluctant to infer the existence of a fiduciary relationship between parties who, as Murphy J. described in Carroll, appear to be engaged in arms length commercial transactions as vendors and purchasers.
74. Counsel for Unitherm challenged the liquidator’s arguments that BHT had granted Unitherm a charge over the money it received from the sub-sale by reference to the decisions in Hickey, Romalpa and Armour and another v. Thyssen Edelstahlwerke A.G. [1991] B.C.L.C. 28 (“Armour”). I will deal with each of these in turn as I do not believe they provide adequate support sufficient to defeat the liquidator’s submissions.
75. In Hickey, the receiver of the company (the buyer) applied to the High Court for directions concerning the ownership of goods sold and delivered by the respondent to the company but for which it had not been paid. The contract contained a reservation of title clause stating that no property in the goods would pass until full payment had been received. Until then, the buyer was obliged to hold the goods on trust for the respondent in a manner which enabled them to be identified. The buyer was, as was the case with BHT, permitted in the normal course of business to sell the goods to a third party, in which case the proceeds of such sale were to be held by the buyer in trust for the respondent in a manner which enabled them to be identified as such. However, it is of vital significance to note that, at the time of the court application, the goods remained in the buyer’s possession and had not been the subject matter of resale to a third party.
76. The applicant maintained that the words “in trust” in the latter provision indicated that the legal estate in the goods had in fact passed to the buyer and that the only interest retained by the respondent was one by way of charge only.
77. Barron J. rejected that submission stating that he saw no reason why the seller could not impose a contractual term whereby the property in the goods sold would not pass until they had been paid for. In so doing, he referred to the judgment of McWilliam J. in Frigoscandia noted earlier in this judgment
78. He emphasised s.17 of the Sale of Goods Act 1893 and the right of the unpaid seller to protect himself, noting that there was nothing foreign to the law of the sale of goods in the seller seeking to postpone the date of the passing of the property in the goods agreed to be sold. He went on to conclude that there was nothing in the clause under consideration from which it could be inferred that the property had passed to the company and that it had assigned back an equitable interest in the goods by way of charge. The words “no property in any goods shall pass” had to be given their literal meaning.
79. In order for him to conclude that a charge had been created, the applicant would have to have been in a position to prove that all of the property had passed to the company and that it had assigned back to the respondent an equitable interest in the goods by way of charge so that, consequently, the respondent had no more than a charge in respect of the value of the goods supplied. However, this could not be established because the entirety of the property never passed by virtue of the retention of title clause. By way of contrast, in the present case this is what the liquidator alleges occurred, not in the course of the supply contract but at the time of the onward sale of Unitherms’s goods in the normal course of its business.
80. I view the decision in Hickey as of little value because, at the time of the application, the buyer still had the goods and had not sold them on to a third party, unlike in the present case were BHT has sold on the goods in the course of its own business. The Court did not have to concern itself with the nature of the relationship between the buyer and the seller in the context of the onward sale of the goods and the “proceeds of sale” clause. When Barron J. referred to the fact that no charge could be created where legal ownership never passed, he was doing so in the context of the retention of title clause and not the proceeds of sale clause. Accordingly, this judgment is entirely consistent with the position adopted by the liquidator in the present case. In respect of the retention of title clause, it has been accepted that Unitherm retained title over all goods for which it had not been paid whilst they remained in BHT’s possession. The liquidator never sought to make the case made by the receiver in Hickey, hence the payment to Unitherm of the sum of €13,853.49 in respect of such goods which remained in the possession of BHT, which had not been paid for as of the date of the liquidation.
81. As for Unitherm’s reliance upon the decision of the House of Lords in Armour, the same is misplaced as the decision is on all fours as that in Hickey. In that case, a German steel manufacturing company, the appellant, sold steel strips to a Scottish engineering company. The contract contained a standard reservation of title clause to the effect that title would not pass to the buyer until all debts had been paid. The Scottish company went into receivership while in possession of the appellant’s goods and for which goods payment had not been made. The receiver maintained that the company was the owner of the goods as it was entitled to take possession of them and sell them on. The receiver argued that the relevant clause had created a charge in favour of the seller but the property in the goods had passed to the Scottish company. The Court (Lord Keith disagreed on the basis that in order for the Scottish company to have created a security over the goods in favour of the appellant, it would have to have ownership and possession of the goods. However, the contract of sale said that property in goods was not to pass until all debts due had been paid. It was agreed that the company would receive possession but would not acquire the property until those debts were discharged. As the company had not paid for the goods and they were still in its possession, it had no interest of any kind to create a subordinate right in favour of the appellant.
82. This decision is of little import to the present case as at all times the liquidator has accepted that BHT had not acquired title to any of the goods which remained in its possession and which had not been paid for as of the date of liquidation, hence the payment of €13,853.49 discharged in respect of those goods. The decision does not in any way consider the consequences for the relationship between buyer and seller where the contract permits the buyer the right to sell on the goods to its own customers in the normal course of its business whilst providing that the proceeds of any such sale shall be held in trust by the buyer for the seller.
83. In Romalpa, a Dutch company sold aluminium foil to the defendant, an English company. Some of these goods were sold on to third parties. However, the terms and conditions of sale were different to those in the present case. There were two parts to the relevant clause in that case. The first was a straightforward retention of title clause which stated that title in the goods would only pass to the purchaser when it had met all of its outstanding liabilities to the plaintiff and that, until the date of payment, the purchaser would store its goods in such a way that they could be identified as being the property of the plaintiff. The second part of the clause was a complicated one which dealt only with the legal consequences for the parties in the event that the plaintiff’s goods became mixed with other goods and either remained upon the purchaser’s premises or were sold on to third parties. That clause specifically provided that, until the moment of full payment, the purchaser would remain the fiduciary owner of those goods notwithstanding its right to sell them on to third parties. The clause is indeed not unlike that contained at 11(b)(vi) of the standard conditions of sale in this case. Further, that second clause stated that until full payment was received the purchaser would keep the mixed goods in its capacity as fiduciary owner.
84. At the date of liquidation €35,000 was in the receiver’s possession referable to aluminium which had been sold on by the defendant to third parties. These were monies recovered by the receiver which he placed in a separate account. The defendant accepted that the effect of clause 13 was to make it bailee of the material supplied by the plaintiff until all debts were paid; but, once the goods had been resold, the receivers maintained that the relationship between the plaintiff and defendant was purely that of debtor and creditor and that, in the absence of an express constructive trust, the plaintiff was not entitled to avail of the equitable remedy of tracing.
85. Mocatta J., at first instance, held that the relevant clause showed an intention to create a fiduciary relationship between the parties and that the plaintiff was entitled to follow the proceeds of the sub-sale.
86. In dismissing the defendant’s appeal, the English Court of Appeal concluded that the purpose of the clause was to secure the plaintiff, in the event of insolvency, against the risk of non-payment after it had parted with the possession of, but not the legal title to, the material delivered. In order to give effect to that purpose, there had to be implied into the first part of the clause, in addition to the undoubted power to sell to a sub-purchaser, an obligation on the defendant to account in accordance with the normal fiduciary relationship of principal and agent, bailor and bailee, as expressly contemplated in the second part of the clause. Accordingly, the plaintiff was entitled to trace the proceeds of the sub-sales. The reason why such an implied term was introduced was that the clause in question made no mention of the rights of the parties in the event of the purchaser proceeding to resell the plaintiff’s goods in circumstances where they had not become mixed with other goods. Thus, it was decided to imply into the first part of the clause, which was no more than the standard retention of title clause which normally exists between seller and buyer, contractual obligations based upon the stated intention of the parties in the second half of the clause relating to the onward sale and/or control over mixed goods.
87. The decision in Romalpa clearly provides some support for Unitherm’s contention that clauses such as clause 11 of it’s standard conditions of sale can, depending upon the nature of the relationship between the buyer and the seller, contractually achieve a scenario whereby the equitable title to the goods at all times remains with the unpaid seller while the legal title passes to the buyer, who eventually holds the proceeds of onward sale in trust for the seller.
88. It is undoubtedly the case that the decision in Romalpa has not been favoured in recent times, and, certainly in this jurisdiction, it would appear to have been replaced by the remarkably clear and purposeful guidance giving by Murphy J. in Carroll as to how the nature of contractual relations should be determined. However, leaving that decision to one side for the moment, I am in any event convinced that Romalpa can be distinguished on its facts from the present case such that it should not be viewed as a relevant authority to guide the Court in this case.
89. The contractual arrangements between the parties in the two cases are significantly different. In Romalpa, the conditions of sale were entirely silent as to the purchaser’s right to resell goods which had not been mixed with other goods or otherwise engaged in a manufacturing process. There was no equivalent provision to that which is contained a clause 11(b)(v) of the present contract. The Court had to imply a term into the first part of the clause permitting the purchaser to sell the goods to third parties. The Court then had to decide upon the nature of the relationship between the parties at the time of the onward sale of the goods and the rights which flowed as a result of that conclusion. The Court determined the nature of the relationship between the seller and the purchaser at the time of the onward sale by reference to the expressed intention of the parties in relation to the onward sale of mixed goods. Given the ongoing fiduciary duty expressed to exist in respect of those goods in the second part of the clause, this duty was imported into the first part of the clause and as a result the Court concluded that the buyer and seller were in a fiduciary relationship for the purposes of the onward sale of the defendant’s goods. Roskill L.J. concluded that the buyer, when it sold on the plaintiff’s tinfoil, did so with its implied authority, as its agent, and remained fully accountable to it.
90. In stark contrast to those facts, clause 11(b)(v) of Unitherm’s standard conditions of sale specifically provide for the onward sale of non-mixed goods. There is nothing in that clause stating that ownership of the goods remains with the seller notwithstanding the right of BHT to sell them on to its own customers. Further, the clause states that BHT will sell the goods on in the normal course of its own business. Unlike in Romalpa, it does not state that BHT at that point holds the goods or sells them in its capacity as a fiduciary and, in my view, BHT cannot, on the facts of this case, be considered to have been acting as agent for Unitherm for the reasons already referred to earlier in this judgment. I am quite satisfied that this clause was never intended to provide a basis upon which Unitherm might maintain that BHT was selling in a fiduciary capacity either as trustee in possession or as agent on Unitherm’s behalf.
91. The cases are also different insofar as the receiver, in Romalpa, unlike the liquidator in the present case, did not argue in favour of the creation of a charge which was void for want of registration. In my view, it is likely that this argument was not advanced because there was no “proceeds of sale clause” covering the onward sale of non-mixed goods to the defendant’s customers. That being so, there was no clause to construe as one which might potentially be viewed as creating a charge requiring registration.
92. A third point of difference between the two cases is the fact that, in Romalpa, the receiver had placed the proceeds of sale in a separate account such that they had never been mixed with any other monies; whereas, in the present case, the monies received from the sub-sales had been mixed and used by BHT in the normal course of its business, a factor which the liquidator maintains is material to establishing the true nature of the relationship between the parties.
93. As was pointed out by counsel on behalf of the appellant, there have been a great number of decisions since Romalpa which have cast doubt upon the approach taken by the Court in that case, which paid little attention to the manner in which the parties actually conducted their business. The court must look carefully, as was advised by Murphy J. in Carroll, at the particular circumstances of the case to identify the rights intended to be given to the seller, and, when those are examined thoroughly, it is usually clear that the Buyer, in return for the right to sell the goods on to its own customers, has granted to the seller a charge over the monies received in respect of their onward sale.
94. McCann and Courtney, Companies Acts 1963-2009, (Dublin, 2010) in dealing with proceeds of sale clauses in the context of s.99 of the Companies Act 1963 provide the following helpful commentary:
“Proceeds of sale clause: In some cases it has been held that a clause which purports to retain the proceeds of a sub-sale of goods until the purchase price has been paid, will not be regarded as a registerable charge provided that it satisfies all or some of the following criteria:
(a) it expressly creates a fiduciary relationship between the seller and the buyer;
(b) it stipulates that in any sub-sale the buyer is to be regarded as acting for and on behalf of the seller;
(c) it imposes a duty on the buyer to keep the proceeds of any sub-sale separate from the buyer’s other moneys; and
(d) it requires the buyer to account for such proceeds to the seller.”
95. Most recent decisions, as is stated by the aforementioned authors, have leaned against the view that a clause in the above terms is successful in retaining title such as to entitle the seller to trace monies received by the purchaser following the resale of the goods. The greatest indicator in favour of title passing to the purchaser, regardless of the existence of a retention of title clause, is an agreement between the parties that the purchaser may sell on the goods in the course of its own business, an undisputed right of BHT in the present proceedings. If, on the one hand, Unitherm had retained full legal and beneficial title to the goods, the Court could not find that BHT had created a charge on the goods in favour of Unitherm as it is not legally possible for the buyer to charge in favour of the seller a title or interest which the buyer has not got. On the other hand, if on the true construction of the agreement the legal title to the goods has passed from the seller to the buyer, the Court may conclude that the legal consequences of the agreement is that the position of the seller is in fact secured by a charge created in his favour over the goods by the buyer.
96. Accordingly, the fact that BHT was specifically permitted to sell on the goods in the course of its own business is a strong indication that it was not acting as a fiduciary on Unitherm’s behalf.
97. Looking at clause 11(b)(v), can it realistically be argued that BHT sold Unitherm’s goods as trustee in possession? This is not what the clause states. To the contrary, clause 11(b)(v) specifically provides that the buyer is entitled to sell the goods to third parties in the normal course of the “buyer’s business”. These are standard terms and conditions imposed by Unitherm on all of its customers. The condition permits each such “buyer” to sell to its customers in the manner which is normal for it when dealing with its customers. Indeed, the use of the words “buyer” and the “sale of goods to third parties” would tend to support the liquidator’s submission that title to the goods passed to BHT with the seller’s agreement when it effected the sub-sale of those goods to its customers. That this is correct seems to be borne out by the final element of clause 11(b)(v); whereby, BHT, following the sale to the customer, was deemed to have assigned to Unitherm the benefit of any claim which it might have against the customer arising from such sale.
98. Another factor which tends to favour a conclusion that the buyer is providing security to the seller in respect of its unpaid account by way of a charge is a clause which provides that the totality of the monies received from the sub-sale of the goods should be kept in a separate account on an alleged “trust”. This is so because the purchaser is only obliged to account to the seller for the monies in that account to the extent of the sum remaining due to the seller. The only monies that could be held on trust are those that represent the seller’s interest in those goods. It is for this reason that clauses of this type and nature have been deemed to have the characteristics of a charge over the monies placed in such an account; the same having been granted by the buyer in return for the proprietary interest in the goods which, up to the point of re-sale, had remained with the seller. This is precisely the nature of the security which was afforded to Unitherm by BHT under clause 11(b)(v). In my view, the fact that Unitherm required BHT to hold the entirety of the sum received following the resale of the goods is consistent with the liquidator’s submission that the clause created a charge in favour of Unitherm over those monies in respect of the sums then outstanding.
99. A clause similar to that in the present case was considered by Mummery J. in Compaq Computer Ltd v. Abercorn Group Ltd [1993] B.C.L.C. 602. There, the seller required the buyer to account for the full proceeds of the resale of its goods. The Court took the view that the seller was not entitled to retain out of the proceeds more than what was sufficient to discharge the unpaid price of the goods. The seller’s right accordingly amounted to a limited interest in the proceeds by way of security.
100. While it is true to say that in the present case clause 11 requires that the monies received by BHT be placed in a separate account, a feature often considered to support the existence of a fiduciary duty, such an account was never opened. Further, at no stage prior to the receivership had Unitherm sought to establish that any such account existed or that the proceeds received in respect of the resale of its goods were directed to that account. However, even if this account had been established, insofar as it was intended to ring fence 100% of the proceeds recovered on the resale of the goods, the clause would not have been consistent with BHT holding the monies as a fiduciary on Unitherm’s behalf for the reasons just stated. The existence of the clause is not inconsistent with an agreement that Unitherm should have a charge over the monies received to secure repayment of any monies that remain outstanding.
101. Some assistance in this regard is to be found in the decision of Phillips J. in E. Pfeiffer Weinkellerei-Weineinkauf G.m.b.H. & Co. v. Arbuthnot Factors Ltd [1988] 1 W.L.R. 150. There the plaintiff, a German wine exporter, sold wine to an English importer on terms that included a property reservation clause which provided that the goods remained the plaintiff’s property until they had been paid for, but which permitted the importer to sell the goods in the meantime. The conditions of sale were not materially dissimilar to those in the present case in that the rights of the importer arising from the onward sale were to vest in the plaintiff and the monies received from the onward cash sale of the wine, which was stated to become the plaintiff’s money once received, was to be separated from other monies held by the importer. The importer failed to pay the plaintiff for all sums due, and the plaintiff brought an action claiming beneficial ownership of the funds referable to each sub-sale. The importer had entered into a factoring agreement pursuant to which it had assigned to the defendant, absolutely, the debts which it was owed from sub-purchasers and had warranted that “no reservation of title by any third party would apply to all or any part of the goods sold.” The plaintiff, in its action, claimed to be the beneficial owner of the proceeds of each sub-sale that had been entered into by the importer and that the defendant’s title to the debts assigned under the factoring agreement was subordinate to its prior equitable title. It accordingly sought an order that the defendant account to it for the monies received under the assignments made pursuant to the factoring agreement. In its defence, the defendant claimed that any interest which the plaintiff had over the proceeds of the sub-sales was in the nature of a charge on the importer’s property which was void for want of registration against the defendant under the provisions of the Companies Act 1948.
102. In his judgment, Phillips J. stated that, where a buyer was permitted to sell on a suppliers goods in the normal course of his business before paying the seller for them, the normal implication was that he was doing so for his own account and not as a fiduciary who was obliged to account to the seller for all the proceeds of sale; that the “property reservation clause” set out comprehensively the nature of the interest which the plaintiff was to have by way of security in respect of debts created by sub-sales; and that its terms were inconsistent with the existence of such a fiduciary relationship. Further, he held that the clause in question had created an equitable assignment in favour of the plaintiff over the monies owed by the sub-purchaser to the importer up to the amount of any outstanding indebtedness of the importer to the plaintiff and that this constituted a charge requiring registration under s.95 of the Companies Act 1948 (i.e., the equivalent of our s. 99 of the 1963 Act).
103. Another factor which has been deemed to be a strong indicator against the existence of a fiduciary relationship is an agreement whereby the purchaser is provided with a period of credit. Re Andrabell Ltd. [1984] 3 All E.R. 407 is a decision on point. There, the plaintiff supplied travel bags to a company on terms which provided that ownership of the goods would not pass until such time as the total purchase price had been paid to the plaintiff. The buyer was afforded 45 days credit. The bags were sold by the buyer in the normal course of its business, and the proceeds of sale were paid into its general bank account where they became mixed with monies belonging to the company. The buyer went into liquidation, and the plaintiff contended that, since the bags had not been paid for, the Court should conclude that the bags had been delivered to the buyer under a contract of bailment which had an implied term that the buyer was to account to the plaintiff in respect of the proceeds of sale of the bags in accordance with the normal fiduciary relationship of bailor and bailee.
104. While the facts in Andrabell were somewhat different from those in this case, insofar as Unitherm’s standard conditions of sale did specify that the monies received in respect of the onward sale of the goods would be placed in a separate account and that a fiduciary relationship was deemed to exist between the parties, the decision is nonetheless of assistance. In concluding that the parties were not in a fiduciary relationship, the Court emphasised that the company was not selling as agent for the plaintiff or on the plaintiff’s account and it was to be inferred from the fixed 45 day period of credit that the company was free during that period to use the proceeds received from the sale of the bags as it liked and that was not compatible with the plaintiff having an interest in the proceeds of sale.
105. The question I have to ask myself is whether the parties agreed that BHT would be trustee of the proceeds of sale. In that regard, in order for the seller to be entitled to the type of proprietary interest in the proceeds of sale as is contended for by Unitherm, the legal title to the proceeds of sale must vest in the buyer while their beneficial ownership vests in the seller. However, if the buyer is expressly or impliedly empowered to use the proceeds of sale as its own money, then it will not be considered to be a trustee of the proceeds but will be deemed to be in a normal creditor-debtor relationship with the seller.
106. In the present case, a 60 day period of credit was afforded to BHT to discharge its liabilities to Unitherm. That facility was agreed further to a letter of Mr. Declan Kissane dated 9th March, 2007, written on Unitherm’s behalf. It must be inferred from such a facility that Unitherm was content that BHT could use monies received by it in respect of the resale of Unitherm’s goods as it wished during the credit period to support its day-to-day commercial operations. If it were otherwise, how would BHT manage its day-to-day finance? Would it not face an acute cash flow problem?
107. I do, of course, recognise that, in terms of deciding upon the nature of the relationship between BHT and Unitherm, regard can only be had to business efficacy against the backdrop of the contractual provisions agreed to and, where there are obvious competing considerations, the question must be answered in light of what both parties agreed to rather than on a unilateral view taken from the point of view of the buyer. That said, however, for reasons earlier stated in this judgment, I do not believe it can realistically be inferred that the credit period in this case may have been agreed so that BHT could source a customer and conclude a sale after which it would hold the monies received exclusively in trust for Unitherm until the end of the sixty day period. Such an agreement would make no commercial sense. If the monies received from the sub-sale were intended to replace Unitherm’s prior interest in the goods, why did the clause not provide for immediate payment of monies received by BHT in respect of the onward sale of those goods, given that BHT as trustee thereof would not have been entitled to use the money for its own purposes during the remaining period of credit?
108. Accordingly, I am of the view that the terms of credit are completely at odds with Unitherm’s contention that BHT sold its goods as trustee in possession such that it was intended that it would hold the proceeds of sale on trust on its behalf.
Conclusions
109. In conclusion, clause 11 of Unitherm’s standard conditions of sale, that being the foundation stone upon which its claim is based, was clearly designed with the objective of securing its interests, so far as was possible, against the risk of non-payment after it had parted possession with its goods to any of its customers such as BHT.
110. It is accepted that the retention of title clause in the conditions of sale operated between Unitherm and BHT as intended in relation to the supply contract. It is clear from those conditions and from the manner in which the parties traded that while Unitherm’s goods remained in BHT’s possession and payment therefore remained outstanding, title did not pass and was not intended to pass, hence the payment of €13,853.49 to Unitherm in respect of goods which fell into that category in the course of the liquidation.
111. As to the proceeds of sale clause and the relationship between the parties when BHT sold Unitherm’s goods to its customers, I am satisfied that the relationship at that stage was always intended to be one of creditor and debtor. The parties did not intend that BHT would act as fiduciary on behalf of Unitherm either as its agent or as bailee in possession of its goods with a power of sale.
112. As to agency, in my view, the High Court judge was wrong in concluding that the evidence supported a finding that the parties had entered into such a relationship. Such a relationship is not evidenced in the standard conditions of sale, the documentation concerning the supply contract, or the contracts for the resale of the goods, or by the conduct of the parties themselves.
113. As to a fiduciary relationship built upon a relationship of bailment, a relationship not considered by the High Court judge, I can find no evidence to support a conclusion that the parties intended that BHT would sell Unitherm’s goods as bailee in possession. Again, this relationship is not to be found in the terms and conditions of sale, the contractual provisions, the trading documentation, or the manner in which the parties conducted their business.
114. Against such a finding are:-
(i) BHT’s right to sell to it’s customers in the course of its own business;
(ii) credit terms of 60 days;
(iii) the standard conditions of sale which sought to impress the entirety of the purchase monies received, including BHT’s profit margin, with a trust, the latter being monies to which it had no legal or beneficial entitlement;
(iv) the fact that no separate account was ever created for the purchase monies; and
(v) the “all sums due” nature of the retention of title clause.
All of these are characteristics of a charge made in favour of the seller over a fund to which it might have recourse for the discharge of any monies outstanding.
115. Regardless of some differences in the underlying facts between the two cases, I am satisfied that the transaction whereby BHT sold Unitherm’s products to its customers was in substance the same as that with which the Court was concerned in Carroll. In this regard, I differ with respect from the conclusion reached by Peart J. in the High Court. That being so, I am satisfied that in substitution for the right of property which Unitherm had enjoyed in its goods until the point in time when BHT proceeded to resell them, BHT granted to Unitherm a charge in its favour over the proceeds of sale of those goods. That charge was one which required registration under s. 99 of the Companies Act 1963, and in the absence of such registration is invalid and void as against the liquidator.
116. Accordingly, for my part, I would allow the appeal.
Unitherm Heating Systems Ltd -v- Wallace as official liquidator of BHT Group Ltd (In Liquidation) [2015] IECA 191 (29 July 2015)
URL: http://www.bailii.org/ie/cases/IECA/2015/CA191.html
Cite as: [2015] IECA 191 Irvine J
Discussion
37. It is beyond doubt that the leading authority on proceeds of sale clauses at the time of the High Court judgment was that of Murphy J. in Carroll, a case in which the Court concluded that the relevant proceeds of sale clause did not create a fiduciary relationship between the buyer and seller but rather confined the seller to a charge over the funds received in respect of the resale of its goods, which required registration.
38. In reaching a contrary conclusion in the present case, the High Court judge distinguished not only the contractual provisions in both cases but also the manner in which the respective parties had conducted their business and, on that basis, found that the relationship of principal and agent existed.
39. For the purposes of considering the distinction drawn by the High Court judge between the two cases, I will briefly summarise the facts in Carroll.
40. In Carroll, the plaintiff, a well-known tobacco company, had supplied goods to the defendants (“Bourkes”) as retailers. Those companies had gone into liquidation. The contract between the parties contained a reservation of title clause which provided that no property in the goods would pass until all sums due to the plaintiff had been discharged. It also gave the defendants the right to resell the goods to a third party on their own account, but not as agents for the plaintiff. Further, the contract included a proceeds of sale clause which required the defendants to “hold all monies received from such sale or other disposition in trust for the company (“Carrolls”) and undertake to maintain an independent account of all sums so received and on request [to] provide all details of such sums and accounts”. No such account was ever established, a fact that the High Court judge concluded was probably known to Carrolls.
41. In the course of the liquidation an issue arose as to the plaintiff’s rights in respect of the proceeds of sale of the goods sold on by the defendants to third parties. The plaintiff argued that these were impressed with a trust in its favour, thus entitling it as a beneficiary standing in a fiduciary relationship with the defendants to trace such proceeds into any other property acquired therewith by the trustees.
42. Murphy J. set out the basic legal principles as follow ([1990] 1 IR 481, 483):-
“The issue in the present case relates to the right of Carrolls in respect of the proceeds of sale of the goods supplied by it. In this context too the basic legal principles are well established. Where a trustee or other person in a fiduciary position disposes of property the proceeds of sale are impressed with a trust which entitles the beneficiary or other person standing in the fiduciary relationship to trace such proceeds into any other property acquired therewith by the trustee … Whether fiduciary obligations are imposed on one party or another depends in part upon the character in which they contract and partly on the nature of the dealings in which they engage. Obviously one would be slow to infer that a vendor and purchaser engaged in an arms length commercial transaction undertook obligations of a fiduciary nature one to the other. On the other hand if one postulates that in any context one person is selling the goods of another the assumption of fiduciary obligations in relation to the sale and in particular the proceeds thereof might well be appropriate. It seems to me that the question must be asked: how does a party come to sell property of which he is not the owner? Is he selling as a trustee in pursuance of a power of sale? Is he selling as the agent of the true owner? Does the sale constitute a wrongful conversion? If any of those questions were answered in the affirmative it seems to me that the law would impose a trust on the proceeds of sale which would confer on the true owner the right to recover those proceeds from the actual seller or, if the proceeds were no longer in the seller’s hands, to trace them into any other property acquired with them.”
43. Murphy J. concluded that it was clear from the terms of the contract that it was envisaged that the defendants would sell on the goods on their own account and not as an agent for Carrolls. Accordingly, he could see no basis upon which to find a fiduciary duty. If such an obligation was to be found, it had to be established by reference to the actual bargain or in the conditions of sale. He was satisfied that the parties intended that the property would pass to the sub-purchaser who would become the full owner.
44. In coming to that conclusion, Murphy J. considered the following facts to be material. Firstly, the contract anticipated that, on the onward sale, the sub-purchaser would become full owner. Secondly, the clause specifically provided that Bourkes were not selling on as an agent of Carrolls, and this being so, they could not be considered a fiduciary. Thirdly, Bourkes could set their own price for the onward sale of the goods. This meant that, following their sub-sale, they were not necessarily going to be replaced by assets of equal value. Fourthly, while Bourkes were contractually obliged to place the monies received in respect of the onward sale of the goods into a separate account, no such account had been established, a fact which Murphy J. inferred was known to Carrolls. Fifthly, the contract provided for a four week credit period, a facility the purpose of which Murphy J. stated was uncertain if Bourkes were not free to use the proceeds during that period. Murphy J. analysed how that arrangement “properly implemented” would work given that the sums of money credited thereto, assuming that the goods were resold at a marked-up price, would be in excess of the amounts due by Bourkes to Carrolls. That being so, Carrolls, if entitled to have recourse to that account for the purposes of discharging monies due to them, would not be entitled to the entire fund which suggested to Murphy J. that the rights of the seller bore all of the characteristics of a mortgage or charge. The charge so created required registration under s. 99 of the Companies Act 1963 and in the absence of such registration was invalid.
45. In the course of his judgment, Murphy J. stressed the importance of looking beyond the contractual terms themselves and warned that the attachment of labels to the dealings of the parties was not determinative of their legal status. The rights of the parties and the nature of the transaction which they were engaged in had to be determined by reference to a consideration of the document as a whole as well as the obligations and rights which it imposed on the parties. Murphy J. expressed himself satisfied that the true nature of the relationship between the Carrolls and Bourkes was one of debtor/creditor and the fact that the proceeds of sale were dealt with by Bourkes in the ordinary course of their business supported that conclusion.
Judgment of the High Court
46. In the High Court, Peart J. found that the relationship between Unitherm and BHT was that of principal and agent rather than that of creditor and debtor. He did so by distinguishing the facts of the present case from those in Carroll. The factors he relied upon may be summarised as follows: –
(i) The contractual terms were different. In Carroll, the contract expressly provided that in the event of the sale of goods by Bourkes that they should “act on their own account and not as agent for Carrolls”. The clause in Unitherm’s standard conditions of sale, whilst providing that BHT was entitled to sell the goods to third parties “in the normal course of the buyer’s business”, also provided in an earlier clause that, pending the payment of all sums and the passing of property in the said goods, “a fiduciary relationship shall exist between the buyer and the company and the buyer shall hold the said goods as trustee for and on behalf of the company and shall return the same to the company on demand”. The monies so received were also to be placed in a separate account.
(ii) The manner in which Unitherm and BHT traded was very different to the manner in which Carrolls traded with Bourkes. The High Court judge placed emphasis on the following aspects of the dealings between Unitherm and BHT which he felt were indicative of the existence of a principal/agent relationship: –
(a) That the customer’s plans were sent by BHT to Unitherm so that it might provide a quotation.
(b) That Unitherm prepared a quotation for the customer/third party on BHT headed notepaper or alternatively on jointly headed notepaper.
(c) That the price of the goods when sold to the customer was fixed by Unitherm rather than BHT. In Carroll, Bourkes were free to sell on to the customer at whatever price they wished.
(d) That Unitherm’s profit on the onward sale to the customer was fixed by Unitherm at a percentage of the price which it had quoted for the goods.
(e) That in respect of certain categories of goods, Unitherm provided a commissioning service to the customer.
47. Two matters caused the High Court judge some difficulty when considering whether or not the relationship of principal and agent existed. Firstly, BHT had been granted a credit facility of 60 days, a term considered to be a strong indicator against the existence of a trust over the monies received from the onward sale of the goods given that it implies that the buyer is free to use those monies during the currency of that period. However, the High Court judge concluded that such a clause could be equally consistent with an opportunity being afforded to the buyer to obtain a purchaser for the goods before having to pay the seller, and thus the existence of such a term did not necessarily exclude the possibility of a principal and agent relationship. Secondly, there was the fact that the monies that were to be placed in a separate bank account would be in excess of what was due to the seller because of the mark-up on the onward sale. Such circumstances were normally indicative of the seller having a charge over the monies in that account to the extent only of its outstanding liabilities. To overcome such an inference, the High Court judge concluded that it was open to him to imply into the contract a term that the trust would only apply to that portion of the monies received which were due to the seller.
Decision
48. As was stated by Mummery J. in Compaq Computer Ltd v. Abercorn Group Ltd. [1993] B.C.L.C. 602, the seller’s aim in insisting on a retention of title clause or a proceeds of sale clause is to prevent the goods and the proceeds of sale of its goods from becoming part of the assets of an insolvent buyer, available to satisfy the claims of the general body of creditors.
49. However, as was made clear by Murphy J. in Carroll, it does not follow that, just because the seller has such an objective in mind, the protection which it seeks will be achieved. The court must consider the character in which the parties contracted and the nature of the dealings in which they engaged, apart from the contractual provisions themselves, in order to ascertain how the position of the seller was secured. It must also ensure that the substance of the scheme of registration prescribed by s. 99 of the 1963 Act is preserved and that this scheme is not circumvented or manipulated by artificial characterisations of the buyer/seller relationship.
50. What is not in dispute is that Unitherm, as the unpaid seller, must establish a fiduciary relationship between itself and BHT affecting the proceeds of sale by BHT of the goods in question in order to enjoy an equitable right to trace the monies received in respect of the onward sale into a mixed fund.
51. That being so, it is necessary to consider, firstly, whether the High Court judge was correct in finding that Unitherm and BHT traded as principal and agent such as to create such a fiduciary obligation on the part of BHT in respect of the monies received for the said goods from its customers. If not, it is necessary then to consider the alternative submission made in the course of this appeal which is that BHT sold Unitherm’s goods as trustee in possession, thus impressing the monies received in respect of their onward sale with a trust in favour of Unitherm. These questions must be answered in response to the liquidator’s submissions that the extent of Unitherm’s security is a charge on the book debts of BHT which is void for want of registration.
52. Given that the proceedings in the High Court were decided upon the basis of agency, I will firstly consider whether the High Court judge was correct in reaching that conclusion which he did as to the existence of a fiduciary duty arising from a relationship of principal and agent.
Principal and agent
53. Having considered carefully the evidence available on affidavit as to nature of the relationship between Unitherm and BHT, including the contractual obligations deriving from Unitherm’s standard conditions of sale and the 60 day credit agreement with BHT, I regret to say that I am not satisfied that the relationship between Unitherm and BHT was that of principal and agent.
54. Looking firstly to Unitherm’s standard conditions of sale in support of the existence of such a relationship, the language and wording of those conditions, presumably prepared by Unitherm’s legal advisors, is not demonstrative of an intention on the part of Unitherm to trade with BHT as its agent. The words “principal” and “agent” are not to be found anywhere in the document. Unitherm is described as the “seller” and BHT the “buyer”. An agent does not buy goods from its principal but makes a contract for sale which contractually binds its principal and the customer. Further, clause 11(b)(v) of these Standard Conditions permits BHT to sell the goods to third parties “in the normal course of the buyer’s business”. That clause is not consistent with the conclusion that BHT was selling as agent on Unitherm’s behalf and is, in my view, consistent only with BHT selling on its own account.
55. The same clause also provides that BHT, on the sale of Unitherm’s goods to its own customers, is deemed to have assigned to Unitherm the benefit of any claim which it had against a customer. In my view, such a provision is incompatible with BHT selling as an agent on Unitherm’s behalf. If BHT was selling as an agent, it could have no contractual rights against the customer which it might assign to Unitherm. Further, if BHT had sold as agent for Unitherm, Unitherm would be the contracting party and could sue the customer on its own behalf without the need for any such assignment.
56. Not only are the standard conditions of sale inconsistent with the existence of a fiduciary duty based upon a relationship of principal and agent but the conditions are devoid of the type of obligations that a court might expect to see if an agency relationship had existed between the parties. For example, there is no term which prohibits BHT competing with its principal, Unitherm, or one requiring BHT to comply fully with its directions.
57. Given that an agent acts as an intermediary to conclude a contract between the principal and the customer, if such an agency relationship existed, that should have been apparent from the documentation referable to the trading arrangement between Unitherm, BHT and the customer. Samples of the relevant documentation were exhibited in these proceedings. These demonstrate that BHT raised purchase orders from Unitherm and, consistent with that, Unitherm invoiced BHT/Heat Merchants as its customer. While quotations in respect of the price of goods required by customers were sent to the customer in the name of BHT, and sometimes on notepaper bearing the joint names of Unitherm and BHT, the fact of the matter is that it was BHT, solely, that invoiced the customer in respect of the supply of those goods, and it did so on its own behalf. None of the documentation exhibited is consistent with BHT and Unitherm being in anything other than an arms length vendor and purchaser or creditor and debtor relationship insofar as the onward sale of the goods by BHT was concerned.
58. Neither am I satisfied that the features identified by Peart J. concerning the manner in which Unitherm and BHT conducted their business were necessarily indicative of an agency relationship. For my part, all of those features which he identified in the course of his judgment are equally characteristic of ordinary commercial practice in the industry in question. For example, it does not necessarily follow that just because the supplier insists on fixing the retail price for the onward sale of its goods, and thereby fixes the retailer’s profit margin, the relationship between the parties should be considered to be one of principal and agent. That type of condition, I suspect, is likely based on market considerations such as the price at which the seller believes it will sell the maximum amount of product. If the mark-up is left to the discretion of the retailer, then that could adversely affect the supplier’s sales opportunities and is, in reality, simply a form of resale price maintenance. While clauses of this kind can sometimes give rise to legitimate competition law concerns, it has nonetheless been recognised that a seller has a legitimate interest in prescribing or controlling the price at which the product will ultimately be sold on to the consumer. It does not on that account make the buyer an agent of the seller.
59. Further, supplier warranties and/or commissioning or ongoing service agreements exist without the supplier necessarily becoming the contracting party with the customer.
60. BHT’s entitlement to a fixed credit period is also inconsistent with an agency relationship. In circumstances where the contract would be between Unitherm and the customer, there would be no reason why the monies received by the agent would not be passed on immediately to the principal. Any agreement whereby the buyer is expressly or impliedly empowered to use the proceeds of sale for its own use would be inconsistent with such a relationship. Why should BHT be entitled to use Unitherm’s monies for its own benefits within a specific period?
61. While the High Court judge concluded that credit facilities of this nature also serve the purpose of allowing the purchaser to find a buyer before they need to pay the seller, in this instance, according to the evidence, it was the existence of a customer that led BHT to order the goods from Unitherm in the first place. Further, it would have been open to Unitherm to agree that payment by its agent would be deferred until such time as BHT had received the price of the goods from the customer, but that was not the nature of the clause provided. Accordingly, to my mind, the existence of the fixed credit period in the present case is inconsistent with the existence of a fiduciary relationship based upon agency.
62. While there was an obligation on BHT to keep the monies received in respect of the onward sale of Unitherm’s goods in a separate bank account, it never did so and the monies concerned were lodged to its trading account and used in the normal course of its business. Had the standard conditions of sale included a clause that the net proceeds of sale received by BHT had to be placed in a separate bank account and no credit facilities afforded to BHT, then, in the absence of all of the other evidence which points in favour of a normal debtor/creditor relationship, one might perhaps consider the possibility that BHT was acting as agent on behalf of Unitherm. However, the fact of the matter is that Unitherm queried the existence of this account for the first time on 7th March, 2012, in the course of the receivership and over six years after the parties had commenced their trading relationship. Further, over all of that period Unitherm had afforded BHT a sixty day credit period. Taken together, when added to all of the other indicators in favour of a normal debtor/creditor relationship, these facts are, in my view, inconsistent with the existence of an agency agreement.
63. However, even if the bank account had been set up in accordance with the standard conditions of sale, the clause required BHT to put all of the monies received, including its own, – call it commission or profit – into that account. On the face of it, the clause gives Unitherm a right to funds which belong to BHT, and this is inconsistent with the clause being in furtherance of an agency agreement. In Carroll, Murphy J. considered that such an arrangement had the characteristics of a charge made in favour of the seller given that it would be a fund to which it might have recourse for the discharge of the monies outstanding to it, even though it would not be entitled to the entirety of the monies in that fund.
64. Faced with the difficulty, Peart J. stated that he could imply a term into the clause which would confine BHT to the obligation to lodge into a separate account only that portion of the resale proceeds due to Unitherm. Such a term could, however, only be implied into the contract where it was necessary to give effect to the presumed intention of the parties.
65. Clause 11(b)(v) provides that “the proceeds of any such sale shall be held by the buyer on trust for the company”. Would an officious bystander, with knowledge of the business dealings between the parties and sight of the aforementioned clause, if asked about the agreement between the parties, have stated “Oh, of course” it was clear that the parties intended that only that portion of the proceeds of sale as reflected BHT’s liability to Unitherm should be placed in that account. The answer, I believe, is a resounding no. Neither is the imposition of an implied term necessary to give business efficacy to a relationship which, on the standard conditions of sale and the documentation as a whole as well as the manner in which the parties did business, is fully consistent with one of debtor and creditor.
66. The clause which he sought to imply into the standard terms and conditions was one that was in direct conflict with the words of the clause, which specifically provides that all proceeds of sale be lodged into the account. Further, there was no evidence that such a term reflected the true intention the parties, and it was in conflict with Unitherm’s own letter of 7th March, 2012, requiring that any monies collected for goods sold to third parties ought to be set aside for its benefit.
Trustee in possession
67. Rather belatedly in the course of the appeal hearing, having argued in favour of an agency relationship, counsel for the respondent sought to disengage somewhat with that argument in favour of a fiduciary relationship based on an assertion that BHT had sold Unitherm’s goods as trustee in possession, thus allowing Unitherm to claim that the proceeds of sale were held by BHT in trust on its behalf.
68. Critical to an analysis as to whether BHT might be considered to have sold to customers as trustee in possession is the answer to the question as to when and in what manner the title to Unitherm’s goods passed to the ultimate customer.
69. Of course, a seller such as Unitherm may agree with a buyer that it will reserve title or suspend the passing of title until such time as it receives payment for its goods. Title will pass in such circumstances when the parties intended to pass, as is provided for in s.17 of the Sale of Goods Act 1893 which provides as follows:-
“(1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case.”
70. In this case, it is clear from clause 11 of the standard conditions of sale that it was agreed that, while Unitherm’s goods remained in BHT’s possession and at a time when they had not been paid for, the title to those goods remained with Unitherm. It was in these circumstances that Unitherm was paid €13,853.49 in the course of the liquidation as the goods concerned remained in BHT’s possession and for title to pass the purchase price had to be paid.
71. As to when and if title passes to the buyer, it becomes a more complicated question where the buyer is permitted to effect a sub-sale of the goods but the contractual terms maintain that title is nonetheless to remain with the seller. In this case, Unitherm permitted BHT to sell the goods. However, it sought to overcome the risk of non-payment by BHT by the inclusion of clause 11; whereby, it sought to retain title in respect of all goods supplied to BHT while any invoice remained un-discharged as well as a right to ownership of the proceeds of sale received by BHT in respect of the onward sale of the goods. In support of this provision, it also provided that the “proceeds of any such sale” would be held on trust for it by BHT. That it is possible to legally so provide is not in dispute. As Mc William J. stated in Frigoscandia (Contracting) Ltd. v. Continental Irish Meat Ltd. [1982] ILRM 396 at p.398:-
“The parties to a contract can agree to any terms they wish and, amongst others, they can agree that the property in the goods shall not pass to the purchaser until all the instalments of the purchase price have been paid. See McEntire v. Crossely Brothers, [1895)]AC 457 at 463; and s.17 of the Sale of Goods Act, 1893. The court has to decide what was the intention of the parties as shown by the provisions of the whole agreement.”
72. It has to be said that the intention of the parties is more easily determined in cases where, like in Frigoscandia, the Court was only concerned with ascertaining the true relationship between the seller and the buyer and where there has been no onward sale to a third party. However, there is now a significant body of case law in support of the proposition that, if the buyer, as was the position of BHT in the present case, is permitted to resell the goods, it is usual for it to do so on its own account unless there is very clear evidence to the contrary. If the buyer is truly selling on its own account, it has taken the legal and beneficial title in the goods from the seller by agreement. Accordingly, regardless of the use of words such as “trustee” or “fiduciary” in the conditions of sale, no fiduciary duty will be deemed to exist with the parties being considered to be in a relationship of debtor and creditor.
73. In general, most recent authorities have tended to treat “proceeds of sale” clauses as giving rise to charges which require registration and the courts have been reluctant to infer the existence of a fiduciary relationship between parties who, as Murphy J. described in Carroll, appear to be engaged in arms length commercial transactions as vendors and purchasers.
74. Counsel for Unitherm challenged the liquidator’s arguments that BHT had granted Unitherm a charge over the money it received from the sub-sale by reference to the decisions in Hickey, Romalpa and Armour and another v. Thyssen Edelstahlwerke A.G. [1991] B.C.L.C. 28 (“Armour”). I will deal with each of these in turn as I do not believe they provide adequate support sufficient to defeat the liquidator’s submissions.
75. In Hickey, the receiver of the company (the buyer) applied to the High Court for directions concerning the ownership of goods sold and delivered by the respondent to the company but for which it had not been paid. The contract contained a reservation of title clause stating that no property in the goods would pass until full payment had been received. Until then, the buyer was obliged to hold the goods on trust for the respondent in a manner which enabled them to be identified. The buyer was, as was the case with BHT, permitted in the normal course of business to sell the goods to a third party, in which case the proceeds of such sale were to be held by the buyer in trust for the respondent in a manner which enabled them to be identified as such. However, it is of vital significance to note that, at the time of the court application, the goods remained in the buyer’s possession and had not been the subject matter of resale to a third party.
76. The applicant maintained that the words “in trust” in the latter provision indicated that the legal estate in the goods had in fact passed to the buyer and that the only interest retained by the respondent was one by way of charge only.
77. Barron J. rejected that submission stating that he saw no reason why the seller could not impose a contractual term whereby the property in the goods sold would not pass until they had been paid for. In so doing, he referred to the judgment of McWilliam J. in Frigoscandia noted earlier in this judgment
78. He emphasised s.17 of the Sale of Goods Act 1893 and the right of the unpaid seller to protect himself, noting that there was nothing foreign to the law of the sale of goods in the seller seeking to postpone the date of the passing of the property in the goods agreed to be sold. He went on to conclude that there was nothing in the clause under consideration from which it could be inferred that the property had passed to the company and that it had assigned back an equitable interest in the goods by way of charge. The words “no property in any goods shall pass” had to be given their literal meaning.
79. In order for him to conclude that a charge had been created, the applicant would have to have been in a position to prove that all of the property had passed to the company and that it had assigned back to the respondent an equitable interest in the goods by way of charge so that, consequently, the respondent had no more than a charge in respect of the value of the goods supplied. However, this could not be established because the entirety of the property never passed by virtue of the retention of title clause. By way of contrast, in the present case this is what the liquidator alleges occurred, not in the course of the supply contract but at the time of the onward sale of Unitherms’s goods in the normal course of its business.
80. I view the decision in Hickey as of little value because, at the time of the application, the buyer still had the goods and had not sold them on to a third party, unlike in the present case were BHT has sold on the goods in the course of its own business. The Court did not have to concern itself with the nature of the relationship between the buyer and the seller in the context of the onward sale of the goods and the “proceeds of sale” clause. When Barron J. referred to the fact that no charge could be created where legal ownership never passed, he was doing so in the context of the retention of title clause and not the proceeds of sale clause. Accordingly, this judgment is entirely consistent with the position adopted by the liquidator in the present case. In respect of the retention of title clause, it has been accepted that Unitherm retained title over all goods for which it had not been paid whilst they remained in BHT’s possession. The liquidator never sought to make the case made by the receiver in Hickey, hence the payment to Unitherm of the sum of €13,853.49 in respect of such goods which remained in the possession of BHT, which had not been paid for as of the date of the liquidation.
81. As for Unitherm’s reliance upon the decision of the House of Lords in Armour, the same is misplaced as the decision is on all fours as that in Hickey. In that case, a German steel manufacturing company, the appellant, sold steel strips to a Scottish engineering company. The contract contained a standard reservation of title clause to the effect that title would not pass to the buyer until all debts had been paid. The Scottish company went into receivership while in possession of the appellant’s goods and for which goods payment had not been made. The receiver maintained that the company was the owner of the goods as it was entitled to take possession of them and sell them on. The receiver argued that the relevant clause had created a charge in favour of the seller but the property in the goods had passed to the Scottish company. The Court (Lord Keith disagreed on the basis that in order for the Scottish company to have created a security over the goods in favour of the appellant, it would have to have ownership and possession of the goods. However, the contract of sale said that property in goods was not to pass until all debts due had been paid. It was agreed that the company would receive possession but would not acquire the property until those debts were discharged. As the company had not paid for the goods and they were still in its possession, it had no interest of any kind to create a subordinate right in favour of the appellant.
82. This decision is of little import to the present case as at all times the liquidator has accepted that BHT had not acquired title to any of the goods which remained in its possession and which had not been paid for as of the date of liquidation, hence the payment of €13,853.49 discharged in respect of those goods. The decision does not in any way consider the consequences for the relationship between buyer and seller where the contract permits the buyer the right to sell on the goods to its own customers in the normal course of its business whilst providing that the proceeds of any such sale shall be held in trust by the buyer for the seller.
83. In Romalpa, a Dutch company sold aluminium foil to the defendant, an English company. Some of these goods were sold on to third parties. However, the terms and conditions of sale were different to those in the present case. There were two parts to the relevant clause in that case. The first was a straightforward retention of title clause which stated that title in the goods would only pass to the purchaser when it had met all of its outstanding liabilities to the plaintiff and that, until the date of payment, the purchaser would store its goods in such a way that they could be identified as being the property of the plaintiff. The second part of the clause was a complicated one which dealt only with the legal consequences for the parties in the event that the plaintiff’s goods became mixed with other goods and either remained upon the purchaser’s premises or were sold on to third parties. That clause specifically provided that, until the moment of full payment, the purchaser would remain the fiduciary owner of those goods notwithstanding its right to sell them on to third parties. The clause is indeed not unlike that contained at 11(b)(vi) of the standard conditions of sale in this case. Further, that second clause stated that until full payment was received the purchaser would keep the mixed goods in its capacity as fiduciary owner.
84. At the date of liquidation €35,000 was in the receiver’s possession referable to aluminium which had been sold on by the defendant to third parties. These were monies recovered by the receiver which he placed in a separate account. The defendant accepted that the effect of clause 13 was to make it bailee of the material supplied by the plaintiff until all debts were paid; but, once the goods had been resold, the receivers maintained that the relationship between the plaintiff and defendant was purely that of debtor and creditor and that, in the absence of an express constructive trust, the plaintiff was not entitled to avail of the equitable remedy of tracing.
85. Mocatta J., at first instance, held that the relevant clause showed an intention to create a fiduciary relationship between the parties and that the plaintiff was entitled to follow the proceeds of the sub-sale.
86. In dismissing the defendant’s appeal, the English Court of Appeal concluded that the purpose of the clause was to secure the plaintiff, in the event of insolvency, against the risk of non-payment after it had parted with the possession of, but not the legal title to, the material delivered. In order to give effect to that purpose, there had to be implied into the first part of the clause, in addition to the undoubted power to sell to a sub-purchaser, an obligation on the defendant to account in accordance with the normal fiduciary relationship of principal and agent, bailor and bailee, as expressly contemplated in the second part of the clause. Accordingly, the plaintiff was entitled to trace the proceeds of the sub-sales. The reason why such an implied term was introduced was that the clause in question made no mention of the rights of the parties in the event of the purchaser proceeding to resell the plaintiff’s goods in circumstances where they had not become mixed with other goods. Thus, it was decided to imply into the first part of the clause, which was no more than the standard retention of title clause which normally exists between seller and buyer, contractual obligations based upon the stated intention of the parties in the second half of the clause relating to the onward sale and/or control over mixed goods.
87. The decision in Romalpa clearly provides some support for Unitherm’s contention that clauses such as clause 11 of it’s standard conditions of sale can, depending upon the nature of the relationship between the buyer and the seller, contractually achieve a scenario whereby the equitable title to the goods at all times remains with the unpaid seller while the legal title passes to the buyer, who eventually holds the proceeds of onward sale in trust for the seller.
88. It is undoubtedly the case that the decision in Romalpa has not been favoured in recent times, and, certainly in this jurisdiction, it would appear to have been replaced by the remarkably clear and purposeful guidance giving by Murphy J. in Carroll as to how the nature of contractual relations should be determined. However, leaving that decision to one side for the moment, I am in any event convinced that Romalpa can be distinguished on its facts from the present case such that it should not be viewed as a relevant authority to guide the Court in this case.
89. The contractual arrangements between the parties in the two cases are significantly different. In Romalpa, the conditions of sale were entirely silent as to the purchaser’s right to resell goods which had not been mixed with other goods or otherwise engaged in a manufacturing process. There was no equivalent provision to that which is contained a clause 11(b)(v) of the present contract. The Court had to imply a term into the first part of the clause permitting the purchaser to sell the goods to third parties. The Court then had to decide upon the nature of the relationship between the parties at the time of the onward sale of the goods and the rights which flowed as a result of that conclusion. The Court determined the nature of the relationship between the seller and the purchaser at the time of the onward sale by reference to the expressed intention of the parties in relation to the onward sale of mixed goods. Given the ongoing fiduciary duty expressed to exist in respect of those goods in the second part of the clause, this duty was imported into the first part of the clause and as a result the Court concluded that the buyer and seller were in a fiduciary relationship for the purposes of the onward sale of the defendant’s goods. Roskill L.J. concluded that the buyer, when it sold on the plaintiff’s tinfoil, did so with its implied authority, as its agent, and remained fully accountable to it.
90. In stark contrast to those facts, clause 11(b)(v) of Unitherm’s standard conditions of sale specifically provide for the onward sale of non-mixed goods. There is nothing in that clause stating that ownership of the goods remains with the seller notwithstanding the right of BHT to sell them on to its own customers. Further, the clause states that BHT will sell the goods on in the normal course of its own business. Unlike in Romalpa, it does not state that BHT at that point holds the goods or sells them in its capacity as a fiduciary and, in my view, BHT cannot, on the facts of this case, be considered to have been acting as agent for Unitherm for the reasons already referred to earlier in this judgment. I am quite satisfied that this clause was never intended to provide a basis upon which Unitherm might maintain that BHT was selling in a fiduciary capacity either as trustee in possession or as agent on Unitherm’s behalf.
91. The cases are also different insofar as the receiver, in Romalpa, unlike the liquidator in the present case, did not argue in favour of the creation of a charge which was void for want of registration. In my view, it is likely that this argument was not advanced because there was no “proceeds of sale clause” covering the onward sale of non-mixed goods to the defendant’s customers. That being so, there was no clause to construe as one which might potentially be viewed as creating a charge requiring registration.
92. A third point of difference between the two cases is the fact that, in Romalpa, the receiver had placed the proceeds of sale in a separate account such that they had never been mixed with any other monies; whereas, in the present case, the monies received from the sub-sales had been mixed and used by BHT in the normal course of its business, a factor which the liquidator maintains is material to establishing the true nature of the relationship between the parties.
93. As was pointed out by counsel on behalf of the appellant, there have been a great number of decisions since Romalpa which have cast doubt upon the approach taken by the Court in that case, which paid little attention to the manner in which the parties actually conducted their business. The court must look carefully, as was advised by Murphy J. in Carroll, at the particular circumstances of the case to identify the rights intended to be given to the seller, and, when those are examined thoroughly, it is usually clear that the Buyer, in return for the right to sell the goods on to its own customers, has granted to the seller a charge over the monies received in respect of their onward sale.
94. McCann and Courtney, Companies Acts 1963-2009, (Dublin, 2010) in dealing with proceeds of sale clauses in the context of s.99 of the Companies Act 1963 provide the following helpful commentary:
“Proceeds of sale clause: In some cases it has been held that a clause which purports to retain the proceeds of a sub-sale of goods until the purchase price has been paid, will not be regarded as a registerable charge provided that it satisfies all or some of the following criteria:
(a) it expressly creates a fiduciary relationship between the seller and the buyer;
(b) it stipulates that in any sub-sale the buyer is to be regarded as acting for and on behalf of the seller;
(c) it imposes a duty on the buyer to keep the proceeds of any sub-sale separate from the buyer’s other moneys; and
(d) it requires the buyer to account for such proceeds to the seller.”
95. Most recent decisions, as is stated by the aforementioned authors, have leaned against the view that a clause in the above terms is successful in retaining title such as to entitle the seller to trace monies received by the purchaser following the resale of the goods. The greatest indicator in favour of title passing to the purchaser, regardless of the existence of a retention of title clause, is an agreement between the parties that the purchaser may sell on the goods in the course of its own business, an undisputed right of BHT in the present proceedings. If, on the one hand, Unitherm had retained full legal and beneficial title to the goods, the Court could not find that BHT had created a charge on the goods in favour of Unitherm as it is not legally possible for the buyer to charge in favour of the seller a title or interest which the buyer has not got. On the other hand, if on the true construction of the agreement the legal title to the goods has passed from the seller to the buyer, the Court may conclude that the legal consequences of the agreement is that the position of the seller is in fact secured by a charge created in his favour over the goods by the buyer.
96. Accordingly, the fact that BHT was specifically permitted to sell on the goods in the course of its own business is a strong indication that it was not acting as a fiduciary on Unitherm’s behalf.
97. Looking at clause 11(b)(v), can it realistically be argued that BHT sold Unitherm’s goods as trustee in possession? This is not what the clause states. To the contrary, clause 11(b)(v) specifically provides that the buyer is entitled to sell the goods to third parties in the normal course of the “buyer’s business”. These are standard terms and conditions imposed by Unitherm on all of its customers. The condition permits each such “buyer” to sell to its customers in the manner which is normal for it when dealing with its customers. Indeed, the use of the words “buyer” and the “sale of goods to third parties” would tend to support the liquidator’s submission that title to the goods passed to BHT with the seller’s agreement when it effected the sub-sale of those goods to its customers. That this is correct seems to be borne out by the final element of clause 11(b)(v); whereby, BHT, following the sale to the customer, was deemed to have assigned to Unitherm the benefit of any claim which it might have against the customer arising from such sale.
98. Another factor which tends to favour a conclusion that the buyer is providing security to the seller in respect of its unpaid account by way of a charge is a clause which provides that the totality of the monies received from the sub-sale of the goods should be kept in a separate account on an alleged “trust”. This is so because the purchaser is only obliged to account to the seller for the monies in that account to the extent of the sum remaining due to the seller. The only monies that could be held on trust are those that represent the seller’s interest in those goods. It is for this reason that clauses of this type and nature have been deemed to have the characteristics of a charge over the monies placed in such an account; the same having been granted by the buyer in return for the proprietary interest in the goods which, up to the point of re-sale, had remained with the seller. This is precisely the nature of the security which was afforded to Unitherm by BHT under clause 11(b)(v). In my view, the fact that Unitherm required BHT to hold the entirety of the sum received following the resale of the goods is consistent with the liquidator’s submission that the clause created a charge in favour of Unitherm over those monies in respect of the sums then outstanding.
99. A clause similar to that in the present case was considered by Mummery J. in Compaq Computer Ltd v. Abercorn Group Ltd [1993] B.C.L.C. 602. There, the seller required the buyer to account for the full proceeds of the resale of its goods. The Court took the view that the seller was not entitled to retain out of the proceeds more than what was sufficient to discharge the unpaid price of the goods. The seller’s right accordingly amounted to a limited interest in the proceeds by way of security.
100. While it is true to say that in the present case clause 11 requires that the monies received by BHT be placed in a separate account, a feature often considered to support the existence of a fiduciary duty, such an account was never opened. Further, at no stage prior to the receivership had Unitherm sought to establish that any such account existed or that the proceeds received in respect of the resale of its goods were directed to that account. However, even if this account had been established, insofar as it was intended to ring fence 100% of the proceeds recovered on the resale of the goods, the clause would not have been consistent with BHT holding the monies as a fiduciary on Unitherm’s behalf for the reasons just stated. The existence of the clause is not inconsistent with an agreement that Unitherm should have a charge over the monies received to secure repayment of any monies that remain outstanding.
101. Some assistance in this regard is to be found in the decision of Phillips J. in E. Pfeiffer Weinkellerei-Weineinkauf G.m.b.H. & Co. v. Arbuthnot Factors Ltd [1988] 1 W.L.R. 150. There the plaintiff, a German wine exporter, sold wine to an English importer on terms that included a property reservation clause which provided that the goods remained the plaintiff’s property until they had been paid for, but which permitted the importer to sell the goods in the meantime. The conditions of sale were not materially dissimilar to those in the present case in that the rights of the importer arising from the onward sale were to vest in the plaintiff and the monies received from the onward cash sale of the wine, which was stated to become the plaintiff’s money once received, was to be separated from other monies held by the importer. The importer failed to pay the plaintiff for all sums due, and the plaintiff brought an action claiming beneficial ownership of the funds referable to each sub-sale. The importer had entered into a factoring agreement pursuant to which it had assigned to the defendant, absolutely, the debts which it was owed from sub-purchasers and had warranted that “no reservation of title by any third party would apply to all or any part of the goods sold.” The plaintiff, in its action, claimed to be the beneficial owner of the proceeds of each sub-sale that had been entered into by the importer and that the defendant’s title to the debts assigned under the factoring agreement was subordinate to its prior equitable title. It accordingly sought an order that the defendant account to it for the monies received under the assignments made pursuant to the factoring agreement. In its defence, the defendant claimed that any interest which the plaintiff had over the proceeds of the sub-sales was in the nature of a charge on the importer’s property which was void for want of registration against the defendant under the provisions of the Companies Act 1948.
102. In his judgment, Phillips J. stated that, where a buyer was permitted to sell on a suppliers goods in the normal course of his business before paying the seller for them, the normal implication was that he was doing so for his own account and not as a fiduciary who was obliged to account to the seller for all the proceeds of sale; that the “property reservation clause” set out comprehensively the nature of the interest which the plaintiff was to have by way of security in respect of debts created by sub-sales; and that its terms were inconsistent with the existence of such a fiduciary relationship. Further, he held that the clause in question had created an equitable assignment in favour of the plaintiff over the monies owed by the sub-purchaser to the importer up to the amount of any outstanding indebtedness of the importer to the plaintiff and that this constituted a charge requiring registration under s.95 of the Companies Act 1948 (i.e., the equivalent of our s. 99 of the 1963 Act).
103. Another factor which has been deemed to be a strong indicator against the existence of a fiduciary relationship is an agreement whereby the purchaser is provided with a period of credit. Re Andrabell Ltd. [1984] 3 All E.R. 407 is a decision on point. There, the plaintiff supplied travel bags to a company on terms which provided that ownership of the goods would not pass until such time as the total purchase price had been paid to the plaintiff. The buyer was afforded 45 days credit. The bags were sold by the buyer in the normal course of its business, and the proceeds of sale were paid into its general bank account where they became mixed with monies belonging to the company. The buyer went into liquidation, and the plaintiff contended that, since the bags had not been paid for, the Court should conclude that the bags had been delivered to the buyer under a contract of bailment which had an implied term that the buyer was to account to the plaintiff in respect of the proceeds of sale of the bags in accordance with the normal fiduciary relationship of bailor and bailee.
104. While the facts in Andrabell were somewhat different from those in this case, insofar as Unitherm’s standard conditions of sale did specify that the monies received in respect of the onward sale of the goods would be placed in a separate account and that a fiduciary relationship was deemed to exist between the parties, the decision is nonetheless of assistance. In concluding that the parties were not in a fiduciary relationship, the Court emphasised that the company was not selling as agent for the plaintiff or on the plaintiff’s account and it was to be inferred from the fixed 45 day period of credit that the company was free during that period to use the proceeds received from the sale of the bags as it liked and that was not compatible with the plaintiff having an interest in the proceeds of sale.
105. The question I have to ask myself is whether the parties agreed that BHT would be trustee of the proceeds of sale. In that regard, in order for the seller to be entitled to the type of proprietary interest in the proceeds of sale as is contended for by Unitherm, the legal title to the proceeds of sale must vest in the buyer while their beneficial ownership vests in the seller. However, if the buyer is expressly or impliedly empowered to use the proceeds of sale as its own money, then it will not be considered to be a trustee of the proceeds but will be deemed to be in a normal creditor-debtor relationship with the seller.
106. In the present case, a 60 day period of credit was afforded to BHT to discharge its liabilities to Unitherm. That facility was agreed further to a letter of Mr. Declan Kissane dated 9th March, 2007, written on Unitherm’s behalf. It must be inferred from such a facility that Unitherm was content that BHT could use monies received by it in respect of the resale of Unitherm’s goods as it wished during the credit period to support its day-to-day commercial operations. If it were otherwise, how would BHT manage its day-to-day finance? Would it not face an acute cash flow problem?
107. I do, of course, recognise that, in terms of deciding upon the nature of the relationship between BHT and Unitherm, regard can only be had to business efficacy against the backdrop of the contractual provisions agreed to and, where there are obvious competing considerations, the question must be answered in light of what both parties agreed to rather than on a unilateral view taken from the point of view of the buyer. That said, however, for reasons earlier stated in this judgment, I do not believe it can realistically be inferred that the credit period in this case may have been agreed so that BHT could source a customer and conclude a sale after which it would hold the monies received exclusively in trust for Unitherm until the end of the sixty day period. Such an agreement would make no commercial sense. If the monies received from the sub-sale were intended to replace Unitherm’s prior interest in the goods, why did the clause not provide for immediate payment of monies received by BHT in respect of the onward sale of those goods, given that BHT as trustee thereof would not have been entitled to use the money for its own purposes during the remaining period of credit?
108. Accordingly, I am of the view that the terms of credit are completely at odds with Unitherm’s contention that BHT sold its goods as trustee in possession such that it was intended that it would hold the proceeds of sale on trust on its behalf.
Conclusions
109. In conclusion, clause 11 of Unitherm’s standard conditions of sale, that being the foundation stone upon which its claim is based, was clearly designed with the objective of securing its interests, so far as was possible, against the risk of non-payment after it had parted possession with its goods to any of its customers such as BHT.
110. It is accepted that the retention of title clause in the conditions of sale operated between Unitherm and BHT as intended in relation to the supply contract. It is clear from those conditions and from the manner in which the parties traded that while Unitherm’s goods remained in BHT’s possession and payment therefore remained outstanding, title did not pass and was not intended to pass, hence the payment of €13,853.49 to Unitherm in respect of goods which fell into that category in the course of the liquidation.
111. As to the proceeds of sale clause and the relationship between the parties when BHT sold Unitherm’s goods to its customers, I am satisfied that the relationship at that stage was always intended to be one of creditor and debtor. The parties did not intend that BHT would act as fiduciary on behalf of Unitherm either as its agent or as bailee in possession of its goods with a power of sale.
112. As to agency, in my view, the High Court judge was wrong in concluding that the evidence supported a finding that the parties had entered into such a relationship. Such a relationship is not evidenced in the standard conditions of sale, the documentation concerning the supply contract, or the contracts for the resale of the goods, or by the conduct of the parties themselves.
113. As to a fiduciary relationship built upon a relationship of bailment, a relationship not considered by the High Court judge, I can find no evidence to support a conclusion that the parties intended that BHT would sell Unitherm’s goods as bailee in possession. Again, this relationship is not to be found in the terms and conditions of sale, the contractual provisions, the trading documentation, or the manner in which the parties conducted their business.
114. Against such a finding are:-
(i) BHT’s right to sell to it’s customers in the course of its own business;
(ii) credit terms of 60 days;
(iii) the standard conditions of sale which sought to impress the entirety of the purchase monies received, including BHT’s profit margin, with a trust, the latter being monies to which it had no legal or beneficial entitlement;
(iv) the fact that no separate account was ever created for the purchase monies; and
(v) the “all sums due” nature of the retention of title clause.
All of these are characteristics of a charge made in favour of the seller over a fund to which it might have recourse for the discharge of any monies outstanding.
115. Regardless of some differences in the underlying facts between the two cases, I am satisfied that the transaction whereby BHT sold Unitherm’s products to its customers was in substance the same as that with which the Court was concerned in Carroll. In this regard, I differ with respect from the conclusion reached by Peart J. in the High Court. That being so, I am satisfied that in substitution for the right of property which Unitherm had enjoyed in its goods until the point in time when BHT proceeded to resell them, BHT granted to Unitherm a charge in its favour over the proceeds of sale of those goods. That charge was one which required registration under s. 99 of the Companies Act 1963, and in the absence of such registration is invalid and void as against the liquidator.
116. Accordingly, for my part, I would allow the appeal.
Marlan Holmes Ltd v Walsh & anor
[2012] IESC 23 (30 March 2012)
Judgment delivered on the 30th day of March, 2012 by McKechnie J.
1. The issues on this appeal arise out of a dispute between the parties regarding the provision of mortgage facilities over certain lands situated at Kilmore Road, Artane in the City of Dublin. These lands were the subject matter of an agreement in writing dated the 23rd November, 2006 (the “November Agreement”), made between the defendants/appellants (“the appellants”) of the one part and the plaintiff/respondent (“Marlan Homes”) of the other part. As of the date of its execution the appellants and Dublin City Council (“DCC”) were in a state of advanced negotiation with regard to a certain portion of such lands, which was in the ownership of the council. An agreement in respect thereof was reached between these parties and committed to writing on the 20th December, 2006 (the “December Agreement”). Although evidently not concluded at the time of the November Agreement, there is, as will be seen, a close relationship between both such Agreements. It is by reference to these documents that the respective rights and obligations of the parties must be determined. In essence the disputed issue is one of contractual interpretation.
2. The High Court, as part of its resolution of this matter, was asked to determine two preliminary questions. It did so by way of order dated the 27th March, 2009, which reflected a judgment previously given by Clarke J. on the 20th March, 2009 [2009] IEHC 135. The appellants have served a notice of appeal in respect of this judgment and order.
3. Following upon such decision and in light of it, the High Court then proceeded to deal with the substantive issues between the parties. By judgment dated the 20th December, 2009 [2009] IEHC 576, Clarke J. held that, the appellants were in fundamental breach of the November Agreement and in the circumstances as found by him, further held that Marlan Homes were entitled to have that Agreement rescinded. Certain consequential orders were made as a result. Again, the appellants have served a notice of appeal arising out of this judgment. Both appeals were heard together and it is in respect thereof that this judgment is now being delivered.
4. The lands in question are Land Registry lands and are contained in three different folios. The appellants, prior to any engagement either with Marlan Homes or DCC, were registered owners with absolute title of the lands in two of those folios namely, Folio 929F and Folio 35060F County Dublin. The third parcel of land, comprising 1,390 sq metres or thereabouts, is part of Folio 4021, County Dublin, which has DCC as its registered owner. It is situated immediately contiguous to the lands first mentioned. For the purposes of a construction project, the appellants intended to assemble all such lands as a single unit, on which a residential development, authorised by Planning Permission (No. 4625) dated the 14th September, 2005, could be carried out. DCC consented to have its lands included, within the “development lands”, for the purposes of the planning application. Evidently therefore, contact had existed between these parties for some considerable time before the agreement of November, 2006 was entered into.
5. Under the December Agreement the appellants obtained, (i) the right to enter on the lands of DCC within eight weeks of the issue of the planning permission and to remain thereon for a period of eighteen months, for the purposes of constructing the development (“the approved development”) authorised by the said planning permission, and (ii) the right, when building works were completed to wall plate level and finished to a standard acceptable to DCC, and on payment of any balance due under its provisions, to obtain a lease of the land for a term of 999 years subject to an annual rent of €50 (Clause 12); the form of such lease being scheduled to this Agreement.
These entitlements were subject inter alia to the payment of €710,000, 15% of which was payable, and paid on the date of execution with the balance being payable on the date of entry. Apparently a cheque for €603,500 to represent this sum was sent to DCC on the 20th July 2007 but to date the cheque remains uncashed.
6. In addition, Clause 14 of the December Agreement provided:
“The agreement is an agreement for lease and shall not operate as a lease and shall not be transferable save in the case of a financial institution which has entered into a mortgage with the proposed lessee, details of which mortgage will be provided to the Council in writing and must have been entered into specifically for the purposes of financing the proposed lessee to enable it undertake the approved development on the site the subject matter of this agreement”.
As can be seen the December Agreement between the appellants and DCC was an agreement for lease and not a lease and by virtue of this clause there was a restriction on alienation, save for the specific purpose as outlined. As will become clear in a moment, this provision has a significant bearing in determining what obligations the appellants and Marlan Homes undertook, with regard to mortgage procurement, under the November Agreement.
7. In broad terms the November Agreement conferred an exclusive licence and authority on Marlan Homes to enter, what was described as the “subject lands”, for the purpose of carrying out the approved development. That development consisted of 48 dwelling units including an allocation of social and affordable housing and had a completion period of eighteen months from the date of the agreement. No estate or interest in the lands passed, by virtue of such agreement: this by the express acknowledgement of the parties. In consideration, Marlan Homes was to pay, and in fact did pay, on the execution of the agreement, the sum of €4.825 million, which was referred to as “the advanced payment” and which, according to Clause 4(b)(i) of the agreement, was non-refundable. A further sum of €100,000 was intended to be “washed out” over the sale period of the units. The entire sum, therefore, was €4.925 million and was characterised as “The Total Site Fine”.
8. This agreement was structured in such a way that, when called upon to do so, the appellants were obliged to execute an assurance of each individual unit, when constructed, in favour of Marlan Homes, or as in practice intended, in favour of their nominee, the ultimate purchaser. This process of title transfer, rather than the more conventional way of Marlan Homes in the first instance obtaining legal title, was undertaken, as it resulted in a saving of a sum in excess of €400,000 in stamp duty that would be payable if Marlan Homes purchased the land and subsequently sold (together with a completed house) to the ultimate purchasers. Such a scheme has certain inherent risks which ought to be guarded against. Fundamentally a purchaser is paying an amount of money equivalent to the purchase price of the property but is only acquiring a licence to enter the site for a limited period of time and for the purpose of constructing houses. If for whatever reason it is not possible to construct and sell the houses within the time the licence may expire without any provision for recovery of any portion of the price paid. Here however the situation was complicated, and the risks multiplied, by the fact that only two of the three portions of land involved were owned by the appellants.
9. As will be recalled the overall site for which planning permission was granted included lands in all three folios. It is therefore not surprising that the phrase, the “subject lands”, was described in the November Agreement, as including all such lands. Further, Recital A of that Agreement makes it clear that whilst the appellants were the registered owners, with absolute title, of the lands in Folio 929F and 35060F County Dublin, they were not in that position with regard to (part) Folio 4021F County Dublin. In that regard they were described in such recital as:
“… … the persons entitled to be registered with a Leasehold Interest … … on foot of an Agreement for Lease dated [BLANK] day of [BLANK] 2006 Dublin City Council of the one part … … and the Licensors of the other part.”
This description, although intended to reflect the December Agreement, was incomplete, as such an entitlement was contingent only.
10. There are several references in the November Agreement to what later became the December Agreement:
* Recital A, as above described;
* Clause 1 defines, (i) the “Agreement for Lease” as meaning “the Agreement for Lease dated [BLANK] day of [BLANK] 2006” between Dublin City Council and the Appellants and (ii) “The Lease” as meaning the “Lease dated [BLANK] day of [BLANK] 2006” between the same parties;
* Clause 7(c)(i) and (ii): by which Marlan Homes covenants with the appellants that henceforth they will observe and perform the relevant obligations, covenants and conditions on the part of the Licensee (the appellants) contained in the Agreement for Lease and the Lease itself; and,
* The Schedule: in which the Agreement for Lease and the Lease is offered as part of the title documents.
11. Moreover, several of the covenants and conditions contained in the December Agreement were reproduced in the November Agreement, including Clause 14 which has been transcribed verbatim at Clause 7(k) thereof. It seems therefore clear from this, as it is from the evidence given at the hearing and from the trial judge’s findings in that regard, that the parties entered into the November Agreement in the belief, that the then intended agreement between the appellants and DCC would be finalised and with full knowledge of its terms. As it happened it was executed in the form in which it then existed.
12. Of central importance to the issues in this case are the provisions of Clause 6 of the November Agreement, which has as its heading “Restrictions on Alienation”. The pertinent sub-clause is that at subparagraph (c), which reads as follows:-
“The licensor shall at the request of the licensee execute a mortgage/charge limited in recourse to the subject lands in a form which is acceptable to the licensor in favour of any bank or lending institution providing loan facilities to the licensee to enable the licensee to fund the works on the subject lands or any part thereof and the payments of the sums covenanted to be paid by the licensee to the several parties under this agreement”.
Essentially this case turns on the correct interpretation of this provision and that contained in Clause 14 of the December Agreement and set out at paragraph 6 above.
13. The two questions which were tried as preliminary issues were:-
A. Are the defendants (appellants) required to compel Dublin City Council to consent to a mortgage in respect of the lands owned by Dublin City Council comprising approximately 1,345 sq metres situate at Kilmore Road, Artane, in the City of Dublin; and
B. Having regard to the fact that the defendants executed a limited recourse mortgage in favour of AIB plc in respect of Folios 929F and 35060F County Dublin, which same was expressly accepted by the plaintiff, its servants or agents, by letter dated the 14th June, 2007, from the plaintiff’s then solicitors, Messrs Callan & Company, are the defendants required to execute a further limited recourse mortgage?
14. Clarke J., in analysing Question A in his judgment of the 20th March, 2009, proceeded by noting:-
(i) that the issue between the parties was one of contractual interpretation, being one focused on the appellants’ obligations in respect of assisting with the mortgage arrangements designed to enable Marlan Homes to obtain financial facilities regarding the construction project;
(ii) that the appropriate legal principles were not in dispute and were to be found in cases such as Kramer v. Arnold [1997] 3 I.R. 43 at 55 and Ryanair Limited v. An Bord Pleanála [2008] IEHC 1 (unreported, Clarke J., 11th January, 2008);
(iii) that by defining the “subject lands” (by reference to Recital A and Clause 1 of the November Agreement) in the manner in which this was done, the same included the relevant lands in all three folios above mentioned;
(iv) that Clause 6(c) of the November Agreement contemplated a mortgage being entered into by Marlan Homes in order to secure borrowings so as to fund the construction of the development works as well as the total site fee payable under the November Agreement;
(v) that Clause 14 of the December Agreement also contemplated some form of mortgage being entered into by Marlan Homes, apparently limited to funding for the approved development and not, as with Clause 6(c) of the November Agreement extending to the contractual payments under such agreement;
(vi) that insofar as the lands in Folios 929F and 35060F County Dublin were concerned, no difficulty could arise in that regard as the appellants were registered as full owners with absolute title;
(vii) that, contrary to the views of Marlan Homes, Clause 6(c) did not confer an entitlement to have a mortgage over the lands, as such, of Dublin City Council; accordingly the appellants had no contractual obligation to achieve this end; instead the correct interpretation of the Clause was to the effect that the appellants were obliged to procure that a mortgage over their interest in these lands, (such interest being that contained in the December Agreement) be made available as security in respect of the indebtedness of Marlan Homes.
In other words the contemplated mortgage was to extend over “the entirety” of the appellants’ interest in the “subject lands” as so described;
(viii) that the said mortgage facilities, as envisaged under Clause 6(c), cover both the construction costs and the costs of acquisition: as such this interpretation prevails over the wording contained in Clause 14 of the December Agreement, which restricts the purposes of the mortgage to development funding;
(ix) that this conclusion is arrived at on the basis that any term of the December Agreement which is inconsistent with the November Agreement cannot be said to be imported into that agreement;
(x) that the appellants were required to procure the consent of DCC to such arrangements so that an “effectual security” may be offered by Marlan Homes to its financial lenders; and
(xi) that the question as to whether the appellants have a right to enforce, as against Dublin City Council, the mortgage facilitation as herein declared in respect of the council’s lands, is not of relevance to the interpretative issue; frequently, parties undertake an obligation, which at the time of its acceptance, they may not be capable of delivering but which at the time of performance they expect or anticipate being in a position to do so.
15. As a result of the foregoing Question A was answered as follows:
“The [appellants] are required to seek to procure that Dublin City Council consent to a mortgage in respect of the interest of the [appellants], on foot of the December Agreement, in the lands owned by Dublin City Council comprising approximately 1,345 square metres situated at Kilmore Road in the City of Dublin.”
16. Question B, or the second question, was answered in such a way that the appellants are required to execute a further limited recourse mortgage notwithstanding that they have already executed one such mortgage in favour of AIB plc in respect of Folios 929F and 35060F County Dublin. This finding has been accepted by the appellants and is not the subject matter of any appeal.
17. The substantive hearing proceeded by reference to the Court’s answers to the two questions previously determined by its judgment of the 20th March, 2009. There were five issues considered which conveniently can be divided into two groups; those which relate to whether the appellants were in breach of contract and if so, in which way and to what extent, and if decided in favour of Marlan Homes, those which relate to what remedy that company may be entitled to. The first set of issues depended in part, on contractual interpretation but also in part on the facts of the case, with particular reference, (i) to how and when the appellants were asked to discharge the contractual obligations as previously found to exist and (ii) the fact that Marlan Homes made direct contact with DCC in mid-2007. This contact gave rise to an argument, relevant to all issues, that such contact, (a) prejudiced the obtaining of DCC’s consent to the creation of the mortgage facilitation as sought, (b) disentitled Marlan Homes to any relief and (c) amounted to contributory negligence, with direct consequences for the remedies which otherwise might be available. The second group of issues ultimately refined themselves into the question as to whether, if breach was established, Marlan Homes were entitled to rescission or damages, with the primary relief sought in the statement of claim, namely specific performance, being no longer pursued.
18. A brief summary of the more salient events is required so as to understand the judgment of the trial judge. In this context a number of factors, which from time to time overlapped, must be noted.
19. In the first instance it is important to recall the timelines to which the parties were obliged to adhere to. The November Agreement provided for a construction period of eighteen months from the date of its execution. The dates given in the December Agreement were different, in that entry was permitted within eight weeks of the issue of the grant of planning permission, which of course, had been obtained as far back as September, 2005. It was further provided that works were to commence within three months from the date of the agreement and be completed within eighteen months from the date of entry. The High Court proceeded on the basis that the completion date was May 2008, being eighteen months from the date of the November Agreement. No objection has been taken to this approach.
20. Almost immediately difficulties were encountered with obtaining a fire safety certificate, which was a pre-requisite to the commencement of any work. The first application, dated the 27th October, 2006, as later amended, was rejected by the fire authority on the 1st March, 2007. A revised application was not made until August, 2007 with the required certificate ultimately issuing on the 6th November, 2007.
21. On the 31st July, 2007 a revised planning application was submitted by Marlan Homes to the planning authority which sought changes to the external finishes of the apartment block. While some correspondence was exchanged regarding what would have been a much more elaborate alteration of the plans, this was not pursued. As events transpired nothing turns on the application as made, even if it was expressly forbidden by Clause 10.2 of the November Agreement.
22. Marlan Homes first sought funding from AIB bank. At its request the appellants executed a limited recourse mortgage in the bank’s favour on the 22nd January, 2007. This however, related solely to a facility to cover the VAT payment on the November Agreement. When construction funding was sought it was not possible to satisfy the security requirements of the bank, which included the giving of an indemnity by the appellants which they were unwilling to furnish. By July, 2007 Marlan Homes decided to seek facilities elsewhere.
23. Bank of Scotland Ireland (BOSI), which engaged with the project some time in mid 2007, initially sought to have a non-recourse guarantee executed by the appellants and an indemnity furnished by them, as part of the security for the proposed loan to Marlan Homes. This was unacceptable to the appellants. Eventually however, BOSI offered to provide a facility of €1.4 million on the 22nd November, 2007. Solicitors on behalf of Marlan Homes wrote to the appellants on the 7th December 2007, notifying them of the bank’s requirement for DCC to consent to the mortgage over DCC’s lands. This was the first occasion upon which the appellants were requested, in writing, to obtain the consent of DCC. The actual form of consent required was subsequently furnished. On the 11th December, 2007 the appellants notified Marlan Homes that they were in a position only to offer their interest under the December Agreement, being that of an agreement for lease, and not their interest under the lease, as of course that had not been granted at that time. On the 17th December, 2007 BOSI, as a security requirement, sought an assignment of the December Agreement in favour of Marlan Homes and the consent of DCC to same. On the 2nd January, 2008 the appellants wrote to DCC seeking the required consent.
24. For a number of reasons, one of which only related to finance, there were no works of any type, however preparatory, carried out in 2007. This state of affairs was becoming increasingly of concern to all involved. By letter dated 6th February, 2008 the appellants warned of the danger that Marlan Homes could be in breach of the November Agreement by not having commenced works up to that point in time. The correspondence from Marlan Homes, in the first part of 2008, indicated a growing unease on their part, at the absence of the required consent from DCC, as without it, an essential term of the mortgage facility could not be met. On the 9th July, 2008 Marlan Homes reiterated to the appellants that BOSI would refuse to sanction drawdown without such consent. On the 16th July the appellants wrote to DCC once again expressing concern about the delay in the issuance of this consent. As events transpired that consent was never forthcoming and the drawdown never activated.
25. In July 2007, the second named appellant, Mr. Wedick, made contact with Mr. Sean Quinn, who was the father of the directors of Marlan Homes, but who was not himself an officer of that company. The High Court was not satisfied that Mr. Wedick asked Mr. Quinn to contact DCC: however, he did so. In or about this time DCC wrote a letter to the appellants, reaffirming that the December Agreement was not assignable and that they were in breach of its provisions by failing to commence development works on the project. Further it would appear that the DCC was under the impression that Marlan Homes intended to enter the site merely as contractors, having been nominated for that purpose by the appellants. In circumstances where time pressure was mounting, where the fire safety certificate had still not been obtained and where DCC did not recognise Marlan Homes as a party to the transaction, it was not in the least surprising that direct contact was made between Marlan Homes and DCC. Nothing of substance however, turned on this contact: the appellants led no evidence to suggest that such had any real effect on DCC’s attitude. The most that could have emerged was that DCC became aware of Marlan Homes’ real interest in the project, which Mr. Sean Quinn could not reasonably have been expected to believe would come as news to it.
26. The trial judge having outlined these events, first considered what actions were required of the appellants so as to satisfy their contractual obligations, of making available their interest in the lands of DCC to a lender of Marlan Homes. Any matter extraneous to this requirement, whether demanded by Marlan Homes or their lenders, were not within this contractual remit and therefore were of no concern to the appellants. The seeking of a guarantee/indemnity fell into this category and could be ignored. What was central however, to this issue was the call by BOSI to obtain DCC’s consent. The question which therefore had to be asked was whether such consent was reasonably necessary so that an “effectual mortgage/charge” could be obtained in respect of the appellants’ interest in the lands of DCC?
27. Recalling the rationale behind the first judgment, it was clear according to the learned judge, that Marlan Homes would require financial facilities and that for such purpose, security would have to be offered over the “subject lands”. With regard to (part) Folio 4102F, that could not be in the form of a legal mortgage but rather had to be confined to a charge over the appellants’ interest in the December Agreement, for there was no other type of charge available over DCC’s land at that time. For such “effective security” to be created, it would have to be of a type where if the borrower defaulted, the mortgagee could realise by disposing of the assets as pledged. The lands in Folios 929F and 35060F County Dublin presented no difficulty in this regard. However, the position with regard to (part) Folio 4021F was quite distinct. How could a lender sell Marlan Homes’ interest in such lands? By virtue of the provisions of Clause 14, the December Agreement was not transferable, save for the purposes of a mortgage transaction: therefore the parties to it must have understood that the Agreement could be assigned for the purpose of giving security for the intended funding. That being so the creation of such a realisable charge, would have required the consent of DCC. Consequently there was an obligation on the appellants to procure that consent.
28. Whilst the appellants made efforts to obtain such consent, the same was never in fact forthcoming. It would appear therefore, that they had committed themselves to an obligation, which as events unfolded, they were unable to deliver on. The consequences of this were for themselves to bear.
29. A number of factors were then considered by the judge, so as to assess whether any one or more of them, might disentitle Marlan Homes from relying upon the presumptive finding, already made, namely that the appellants were in breach of contract. The inter-meddling issue was considered and dismissed. There was nothing improper in Marlan Homes (through Mr. Sean Quinn) making contact directly with DCC, as the only probable effect was that news of their involvement became known to the Council. Marlan Homes could not have anticipated this. They had a belief, based on a letter from the appellants’ solicitors dated the 22nd November, 2006, that their existence was known to DCC as and from that date. Such a belief was reasonable. Therefore any contact which they had could be disregarded.
30. There was one further reason offered by the trial judge to justify his conclusion on this point. It appears, and the trial judge so found, that the appellants and their advisers did not want DCC to know of their arrangements with Marlan Homes. The judge comments that “the relevant correspondence bears no other construction”. If therefore, difficulties arose in obtaining DCC’s consent by virtue of its discovery of the involvement of Marlan Homes, then that difficulty can be exclusively traced to the appellants, who must take responsibility for the consequences.
31. Another potential disabling factor was the delay on the part of Marlan Homes in first requesting the appellants, to obtain the consent of DCC. It will be recalled that such a demand was only made late in 2007; at a time, when despite whatever rights it may have had, DCC as a matter of fact, had taken no steps to terminate the December Agreement. Being of the view, provisionally arrived at, in light of the fact that it was not a party to the litigation, that DCC in any event, may have had difficulty in terminating the December Agreement, the trial judge concluded that had consent been forthcoming in the early part of 2008, the same would have enabled Marlan Homes to obtain the required finance and in such circumstances the project would have proceeded to finality. Accordingly, the failure of the project stemmed from the appellants’ breach of contract in the manner described.
32. The learned trial judge then considered what legal principles should apply to the claim advanced on behalf of Marlan Homes, that the November Agreement should be rescinded. In this regard he referred to a number of authorities and text book sources; in particular he relied on the decision of the Supreme Court in Northern Bank Finance Corporation v. Charlton [1979] I.R. 149. On applying these principles to the facts as found by him, the judge concluded that, as the appellants were and remained in fundamental breach of contract in failing to procure the consent of DCC to the mortgage transaction negotiated by Marlan Homes with BOSI, the appropriate relief in the circumstances was an order for rescission.
33. It was submitted on behalf of the appellants that in determining the preliminary question under appeal, the learned trial judge committed what were described as “key errors”, leading to an erroneous analysis of the issue and to an incorrect conclusion on the answers. In this regard he failed to recognise the fact that essential features of the December Agreement, were by way of incorporation, contained in the November Agreement and secondly that the interpretation so placed by him on Clause 6(c) of the November Agreement was one that was not reasonably open on the application of the accepted canons of construction.
34. On the first issue it was said that the judge failed to give proper effect to the fact that Clause 14 of the December Agreement was included, in the November Agreement, having been transcribed verbatim into Clause 7(k) thereof. In this regard, to hold that it should be disregarded, merely because its provisions were inconsistent with other terms of the November Agreement, was in error. What the appellants acquired under the December Agreement was the right to enter on the lands of DCC, to carry out the approved development within a confined period and subject to certain conditions being met, to obtain a lease in accordance with the provisions of Clause 12. Having had express knowledge of the terms of the December Agreement as far back as September 2006, it was both the fact and the intention of all parties that the appellants were not granting to Marlan Homes any rights which they themselves did not acquire under the latter agreement.
35. The error of law involved in the interpretation of Clause 6(c) of the November Agreement, principally results from the judge’s view that such provisions had to be construed in such a way, as to provide Marlan Homes with effective security. The November Agreement could not properly be read as conferring a contractual right on Marlan Homes to obtain a non-recourse mortgage sufficient to fund its obligations. To do so would involve the appellants in having undertaken to abide by any requirement of a lender, whether within its reach or not and irrespective as to how arbitrary or unreasonable that might be. What the appellants undertook was to execute a mortgage or charge which was within its power to deliver, and which was in a form acceptable to them. The adequacy or efficacy of such a mortgage was purely a matter for Marlan Homes. If therefore, the clause was insufficient to achieve an end, intended by Marlan Homes, that was not the responsibility of the appellants.
36. The appellants accepts that the appropriate principles of interpretation are to be found in cases such as Analog Devices BV v. Zurich Insurance Company [2002] I.R. 272 where Fennelly J. said at p. 294 that “[i]nsofar as Irish law is concerned, a contract is to be interpreted objectively in accordance with the meaning of the words the parties have used.” The opinion of Lord Hoffman, in Investors’ Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896 is to the same effect. In applying such principles the appellants were required only to execute a security document in a form acceptable to them and not otherwise. The learned trial judge in essence over-subscribed to an approach focussed on giving the relevant provisions of the November Agreement commercial efficacy. A number of cases including, Torvald Klaveness A/S v. Arni Maritime Corporation [1994] W.L.R. 1465 and Charter Reinsurance v. Fagan [1997] AC 313 have cautioned against such an approach. Therefore the answer which the trial judge gave to Question A in the preliminary ruling was incorrect.
37. The error by the trial judge in his interpretation of Clause 6(c) of the November Agreement, as obliging the appellants to provide an effective mortgage, was carried through into the final judgment of the 21st December, 2009. This can be seen from the analysis appearing at para. 8.5 of that judgment where the judge stated that, if repayment obligations were defaulted upon, a lender would have to be in a position to sell Marlan Homes’ interest in the “subject lands”, so as to realise its security. Such would have involved DCC itself in granting a mortgage over its lands, or in entering into some form of agreement whereby the lender could step into the shoes of the appellants, if their client defaulted. Neither type of agreement was ever envisaged by the said clause.
38. A further example is illustrated by the repeated references in the judgment to the obligation on the appellants, to provide security in respect of any type of mortgage contemplated by Clause 6(c) of the November Agreement, and if that created a problem, it stemmed from the fact that they entered into an agreement with Marlan Homes, which was “significantly different” in its scope, from the agreement which they entered into with DCC. This assessment, it is suggested, disregards the incorporation of Clause 14 into the November Agreement, as it does the principal focus of that provision, which is one of prohibiting alienation, save in the most limited circumstances. Moreover, the judge was influenced by the difference in wording between Clause 6(c) and Clause 14 of the December Agreement in that whereas the latter referred only to funding for construction works, the former also referred to the purchase price. As the entire payment due under the November Agreement was discharged at the date of its execution, this distinction has no practical effect.
39. The November Agreement did not have the effect of transferring to Marlan Homes the appellants’ interest thereunder: what was acquired was a licence to enter and build. At all times Marlan Homes were aware of what was permissible under the December Agreement. They proceeded on that basis and cannot now insist upon the appellants producing a better title for their lenders, than Marlan Homes were themselves entitled to receive.
40. Further in this context insufficient weight was given to the commercial risk assumed by Marlan Homes when entering into the agreement.
41. Finally, for the several reasons outlined in the submissions, it was claimed that to have ordered rescission of the November Agreement, in the circumstances as outlined and as deducible from the evidence, was unjust.
42. Marlan Homes support both the preliminary and final judgments of the learned trial judge and the reasoning which he applied to both such judgments. In particular they have submitted that the correct approach to the interpretive question, where conflicting provisions arise, is one of harmony, so as to give “business efficacy” to the intention of the contracting parties. (Aga Khan v. Firestone [1992] ILRM 31: Lac Minerals Ltd v. Chevron Mineral Corporation, (unreported, High Court, 6th August, 1993): and Investors’ Compensation Scheme v. West Bromwich Building Society [1998] 1 AER 98 at 115 of the report.
43. It is said that in applying these principles it clearly could not have been the intention of the parties that a mortgage, within Clause 6(c) of the November Agreement could be “unworkable, or useless or ineffectual”: if so it could not have met the criteria of enabling Marlan Homes to obtain facilities to fund both the development and acquisition costs. Any other suggestion is contrary to both common sense and commercial reason. Therefore the conclusions of the trial judge, expressed at paragraph 7.7 of the preliminary judgment of 20th March, 2009 were correct.
44. The learned judge was also correct in identifying what Marlan Homes obtained under the November Agreement, which was not merely the right to enter and build but also the right, which was always within the parties’ contemplation, to have their funding secured over the appellants’ interest in the lands comprised in all three Land Registry folios. Unless this was so, the works could never have been carried out by Marlan Homes. If such circumstances should be the contractual result, it would mean that the appellants will have the benefit of almost €4.9 million for a consideration that has wholly failed.
45. In support of the general position, Marlan Homes suggest that they could have received no benefit under the November Agreement without being in a position to execute the works, which could not be done without financial support. In turn security was critical to this end. The mere fact that the word “effectual” was not recited in Clause 6(c) of that Agreement, does not affect this position. Any contrary proposition clearly points to absurdity which could not be allowed to exist.
46. The appellants argument that, they did not and did not purport to transfer their interest in the DCC’s lands to Marlan Homes, disregards the saver in Clause 14 of the December Agreement which expressly permits alienation so as to underpin the obtaining of mortgage facilities. Moreover whilst Clause 14 may have been incorporated in the November Agreement, its provisions cannot be used to nullify those of Clause 6(c) of the same Agreement. Both should and can be read together and when approached in this way leads to the conclusion arrived at by the learned trial judge. Consequently, Marlan Homes fully support the position adopted by the High Court.
47. Finally, by reference to the decision in Northern Bank Finance Corporation v. Charlton [1979] I.R. 149 and to para. 716 of Keane Equity and the Law of Trust in the Republic of Ireland (Butterworths, 1988), the only and most effective remedy which could be granted in the circumstances was that as ordered by the judge. Therefore they fully support the ultimate conclusion of the High Court.
48. The central issue which first must be determined is whether or not the appellants are in breach of their contractual arrangements with Marlan Homes: if they are not, the remaining issues do not arise.
49. This issue, which is one of interpretation falls to be decided by reference to the appropriate principles which are not in dispute and which were put concisely by Keane J. in Kramer v. Arnold [1997] 3 I.R. 43 at p. 55, where the learned judge held:
“In this case, as in any case where the parties are in disagreement as to what a particular provision of a contract means, the task of the court is to decide what the intention of the parties was having regard to the language used in the contract itself and the surrounding circumstances.”
The correct approach therefore is to have regard to the nature of the document in question and to consider the words used, by reference to the context in which they are set.
50. The type of document has a clear relevance in a specific sense but also in a general sense for, as has been pointed out in many judgments, courts will not “easily accept that parties have made linguistic mistakes, particularly in formal documents.” This was stated by Geoghegan J. in Analog Devices B.V. & ors. v. Zurich Insurance Company & ors. [2005] I.R. 274, where she adopted the five principles set out by Lord Hoffman in Investors’ Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896. One may obviously add that documents prepared with the benefit of professional assistance, including, but not limited to legal advice, increases such formality. The words in question must be given their ordinary and natural meaning, in a sense as would be understood by a reasonable person having an interest in or knowledge of the material circumstances.
51. It is important however to note that where the parties have committed their responsibilities to written form, in a particular manner, it must be assumed that they have intended to give effect to their obligations in that way. Such must be recognised as their right, both commercially and under contract law. Accordingly it is important that, when faced with a construction issue, a court should focus its mind on the language adopted by the parties being that which they have chosen to best reflect their intentions. It is not for the court, either by means of giving business or commercial efficacy or otherwise, to import into such arrangement a meaning, that might also be available from an understanding of the more general context in which the document came to exist, but is one not deducible by the use of the interpretive rules as mentioned.
52. The boundary between what is permissible and not in this context is captured by the following quotation from Charter Reinsurance v. Fagan [1997] AC 313 where at p. 388 Lord Mustill stated:-
“There comes a point at which the court should remind itself that the task is to discover what the parties meant from what they have said, and that to force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes could better have been made. This is an illegitimate role for a court. Particularly in the field of commerce, where the parties need to know what they must do and what they can insist on not doing, it is essential for them to be confident that they can rely on the court to enforce their contract according to its terms.”
I would respectfully agree with this passage.
53. This was by any stretch of normality an extraordinary transaction, a reflection of the insatiable belief that whatever the costs and shortcomings of a deal may be, once land was involved, upon which houses could be built, and disposed of with a frenzy of marketing activity, money could be made. Proper, even basic practices, commercial assessment, legal appraisal and risk evaluation, were stood down. Whatever its legal construction and consequences might be, which I will come to in a moment, the essence of the November Agreement was that Marlan Homes was paying close to €5 million, up front, to enter a site for eighteen months. In fact I overstate the situation. At all times the availability of the lands of DCC was crucial: such was an integral component of the overall site and of the only planning permission which existed, for the development project as a whole. Yet, as of November 2006 the appellants had no interest, whatsoever, whether of a proprietary nature or otherwise, in a critical portion of the development lands, without which, even if no other difficulty existed, no works could take place. Whilst the parties may have had confidence that the December Agreement would come to pass, as it did, there was no legal guarantee of such outcome as of that time.
54. Moreover, according to Marlan Homes it was essential to the carrying out of the works, and thus to the success of the project, that funding would be obtained and that effective security, over all of the lands, was essential to this end. Yet when this substantial sum of money was paid, in a non-refundable context, no steps seem to have been taken in that regard and the precarious nature of the lands of DCC, seem to have mattered little.
55. Furthermore, it was also said by Marlan Homes that funding was required not only for the works but also for site acquisition. As previously noted there is a clear difference between the November Agreement and the December Agreement in this regard. The former refers to costings under both headings, whereas the latter is confined to development costs. Once more, whilst nothing turns on the point in the current circumstances, it is disbelieving to see how such confusion could have been allowed to exist.
56. From the outset it was clear that unless all aspects of the project were in place and proceeded simultaneously on the critical construction path, there would be huge pressure on time. The November Agreement allowed a total period of eighteen months. The December Agreement permitted entry within eight weeks from the date of the planning permission and the right to remain for a total of eighteen months “therefrom”. Whilst nothing turns on this point, a strict reading of the relevant clause therefore, had a start date as of September 2005, which of course, was meaningless but nonetheless was signed up to. In another section of the Agreement (Clause 6) construction was to commence within three months and be completed within a total of eighteen months. It could not have been too demanding to have clarity about this simple but highly important point.
57. Of more significance was the absolute necessity that works should commence as soon as possible given the time constraints. Yet once more, obtaining the essential fire safety certificate was not achieved until November 2007. The first requirement for DCC’s consent was December 2007. Whilst it is not relevant to the central issue on this appeal, but if it was, I would not be at all confident that the trial judge was correct in assuming that if the required consent and assignment was forthcoming in early 2008, the project could have proceeded to a successful conclusion thereafter.
58. Another most curious feature of the transaction, as initiated and as progressed, was the absolute reluctance of the appellants to disclose to DCC the fact of the arrangement which they had with Marlan Homes, or the details of it. As the trial judge noted the correspondence bears no other construction. Why Marlan Homes did not pursue their requirement, to obtain on closing confirmation that DCC was aware of the proposed arrangement, is not readily apparent but nonetheless they did not do so. They were of course obtaining a tax saving and were not in a position themselves to deal directly with DCC as the lands in Folio 929F and 35060F County Dublin were also necessary. It is not difficult however, to explain the approach of the appellants in this regard. Without the lands of DCC, the project could not proceed. They were paying a little over €700,000 for such lands. Yet they were receiving almost €5 million for the entire site of which these lands formed a sizeable part. One can readily infer, without much speculation, what the DCC reaction would likely have been if it had knowledge of this rather enterprising scheme.
59. As is readily apparent therefore, there were several aspects of the parties’ relationship which were not tied down as well as perhaps they could have been. It may be that the parties were so advised and were satisfied to assume the risk of their commitments: in any event such therefore is the context in which their respective obligations must be determined.
60. It is interesting to look at the starkness of the case made by Marlan Homes in this regard in its submissions to the High Court. At page 6 they state:
“The provisions of Clause 6(c) of the (November Agreement) and also Clause 14 of the (December Agreement), provide that the defendants (appellants) are to obtain a mortgage over all of the subject lands (i.e. the defendants’ lands and the Dublin City Council lands adjoining same) to provide loan facilities to the plaintiffs to fund the completion of the works to be carried out on the lands… … i.e. the defendants are to execute a mortgage and draw down the funds and provide same to the plaintiff to fund the relevant building work. The Dublin City Council agreement excludes alienation of the Dublin City Council lands to be leased to the defendants, save for the purpose of effecting a mortgage to provide funds for the completion of the building works under the said planning permission.
The defendants are in breach of their obligations in failing to provide the required mortgage over all of the relevant lands, and are required to compel Dublin City Council to take all necessary steps to facilitate the effecting of the required mortgage.”
This submission, in effect, seeks to impose an obligation on the appellants, arising out of the November Agreement, which in essence is one of guarantor, insofar as the required funding facilities are concerned. Whilst in their presentation to this Court, Marlan Homes did not put the matter as such, nonetheless they continue to infer such an obligation, but apparently are now satisfied to phrase the requirement in a less rigid manner.
61. In real terms the obligation which Marlan Homes called on the appellants to perform was to satisfy the security requirements sought by BOSI in December 2007, to the effect that the December Agreement should be assigned to the borrowers with DCC consenting to same. This is what the High Court held that the appellants were bound to do. As already noted no difficulty existed in this regard in respect of the lands in Folio 929F and 35060F County Dublin. Therefore the issue must be determined by reference to the lands of DCC in (part) Folio 4021F County Dublin.
62. Disregarding the precise relationship between the November Agreement and the December Agreement for a moment, it is to state the obvious that if Marlan Homes acquired any greater right or entitlement than what the appellants possessed under the December Agreement, such must be derived from the November Agreement, as at all times the appellants were prepared to facilitate Marlan Homes insofar as they legally could, in respect of their interest under the December Agreement. In other words, as the trial judge found, the appellants had committed themselves to Marlan Homes to an extent greater than Dublin City Council had committed itself to them. What they should have done, according to the judge, was to coordinate their rights under the December Agreement with their obligations under the November Agreement: as they had failed to do so they must carry the consequences in respect thereof.
63. A good deal of debate took place in the High Court and some in this Court, as to how both agreements should be interrelated as a matter of law. Difficulties in this regard could only arise where conflicting provisions exist. This point became acute with regards to whether acquisition costs were to be included within the mortgage facilitation, whatever that might be. Having given precedence to Clause 6(c) of the November Agreement over Clause 14 of the December Agreement in that particular regard, the High Court then held that any term of the later agreement, which was inconsistent with a provision of the earlier one, should be disregarded. It is not quite clear if this had any consequences of note. If it had however, I would be concerned with it. It is quite clear that several provisions of the December Agreement, were by express statement incorporated into the November Agreement. It is therefore difficult to see that where called upon, these should not be given a meaning like any other term of the Agreement. In particular Clause 14 of the December Agreement, as we have seen, is expressly part of the November Agreement (Clause 7(k)), and from its terms it is clear that, it must be read in conjunction with Clause 6(c), when the obligations of the appellant are being considered in the context of mortgage provision.
64. As previously outlined, under the November Agreement Marlan Homes were granted a licence, exclusive to themselves, to enter what was described as the “subject lands” for the purposes of completing the “approved development” within an eighteen month period. They obtained no estate or interest in these lands. What they received therefore, was a bare licence for a specific purpose. Clause 2 of the Agreement cannot have any other meaning. In return they were obliged to make the payments above mentioned and bound themselves to perform and observe the covenants and conditions on the part of the appellants as contained in what were referred to as the “agreement for lease” and the “lease”. In addition to the provisions dealing with or touching upon mortgage facilities, there were other obligations undertaken which are not necessary to dwell on.
65. At the date on which this Agreement was signed, a draft of the December Agreement was available to both parties. That draft became the final Agreement when executed some weeks later. It conferred a right to enter and work on the lands for a specified period. It granted a right to a lease in respect of the lands, contingent on significant works being completed and on certain conditions being met. The terms of that lease were scheduled to the document. It is clear that such agreement was an agreement for lease and not a lease. It is clear that it was personal to the appellants and in principle non transferable (Clause 14). It is further clear that when called upon to do so the appellants could not create a mortgage or charge over the lands of DCC. They could do so only at a time when the works were completed to wall plate level and other terms satisfied. At such a point DCC was obliged to grant a lease, which when available could in the usual way be offered as land security. It was not possible to do that before then, at least in the sense demanded by the bank.
66. Furthermore, with full knowledge of this situation and presumably of its legal consequences which, at the very least were of considerable uncertainty, Marlan Homes nonetheless committed themselves to a very substantial outlay, in terms not solely confined to acquisition costs but also with regard to the necessary funding, required so as to complete the development project which they had contractually committed themselves to do. They must have known that construction to wall plate level was crucial: such was the key to success in obtaining a lease. At that point the attitude of DCC would be irrelevant. Simply put, they would have been removed from the picture. However, if construction did not proceed, evidently the contingency could not be satisfied: in such circumstances, no compulsion could exist over DCC.
67. Under Clause 6(c) of the November Agreement the appellants were obliged to execute a non-recourse mortgage over the “subject lands”, in a form which is “acceptable to the licensor” in favour of any bank or lending institution providing loan facilities to the licensee, “to enable” the licensee to fund the works and to pay the sums covenanted to be paid to the several parties under the agreement.
68. A number of observations can be made about the following aspects of this clause: firstly, as the subject lands include the lands of DCC, the December Agreement also applies to such lands; secondly, the phrase “in a form acceptable to the licensor”, cannot be read in a manner which restricts an obligation otherwise imposed on the appellants by virtue of this provision. I would read the phrase as being form directed rather substance based. Thirdly, the verb “to enable” means “to facilitate”; in its immediate context it means that Marlan Homes could call upon the appellants to execute a mortgage or charge so that they, Marlan Homes, can seek lending facilities. It could not in my view under any manner of interpretation be read, as imposing an obligation on the appellants themselves, to acquire such funding in favour of Marlan Homes, so that the financial obligations of the latter, are covered. This in essence is the construction which Marlan Homes suggests in their submissions referred to at para. 60 supra. I cannot identify any basis to support this contention.
69. As can be seen the clause is silent as to the nature of the interest which must be made available as part of such facility. It is agreed however, that it is intended to capture the interest of the appellants, as registered in Folios 929F and 35060F County Dublin. In other words, whatever title they have in these lands must be offered. It is suggested by the appellants that the same approach should be adopted in respect of the lands of DCC. By reference to the December Agreement it is clear what their interest in such lands was. On the other hand, Marlan Homes supports the High Court judge on this point.
70. With respect I cannot agree with the submission of Marlan Homes in this regard. As will be recalled the trial judge interpreted the relevant contractual provisions as obliging the appellants to provide, what he variously described as a “effective charge” or an “effective security” over, inter alia, the lands of DCC so that if a mortgagee was obliged to realise that security he could do so by way of sale or other disposal. I cannot see how Clause 6(c) and/or Clause 14 can be read in this manner, without doing what Lord Mustill cautioned the court against doing in Fagan (para. 52 supra), which was in substituting its own views of the bargain for those actually contracted for, by the parties.
71. The relevant provisions of both the November and December Agreements do not mention the giving of an “effective security” or any security with like effect. The obligation of the appellants does not extend to the value, quality or efficacy of the security: these are matters entirely for Marlan Homes. If it was intended otherwise, with regards to the lands of DCC, then an express provision to that effect would have to. Quite evidently, as is acknowledged by all concerned, the December Agreement did not confer such an entitlement or power in that regard on the appellants. This situation was or was capable of being fully known to Marlan Homes at all times. Therefore, as stated earlier, if such a requirement existed it would have to be found in the November Agreement. It cannot, in my view, be deduced from any of the relevant provisions of such agreement.
72. In fact when Clause 14 of the December Agreement is considered, in conjunction with the covenants which Marlan Homes entered into with regard to the appellants’ obligations under that agreement, it is clear that such a requirement does not exist. Whether it was ever specifically adverted to is not known. If it was, its legal standing was not established in a contractual setting. The reasons why the parties proceeded as they did, remains a matter for them.
73. In my view, it would be quite incorrect to say that, in the absence of such type security being available in respect of the lands of DCC, the consideration paid under the November Agreement has wholly failed. Title was available, at all times, to the lands in Folios 929F and 35060F County Dublin. Moreover, there existed a right to enter, build and complete the development project, with the benefit of the planning permission which existed therefor. What Marlan Homes seems to have lost sight of, is the fact that they were obliged to secure the funding to enable this development to take place. That obligation was not on the appellants. Marlan Homes were the investors and as such, they had the responsibility of funding that investment. Whilst they may have intended to use the subject lands as security for such funding, there was clearly no obligation on them to so do. The project could have been funded otherwise than by sole reliance on these lands. A combination of the lands in Folios 929F and 35060F and other potential sources do not appear to have been considered as a means of funding the building to wall plate level, which was the crucial point. Such however, was a matter for the investor. It is not now possible to seek to exploit the terms of an agreement which simply do not exist.
74. Consequently, I am of the opinion that the appellants are not in breach of any obligation undertaken by them to Marlan Homes. Therefore the appeal will be allowed and the orders made in the High Court set aside.
75. The end result is and can be considered as unattractive, when one considers the respective positions of the parties following this judgment. However such are the inevitable and inescapable consequences, of this court having to apply the appropriate legal principles, to the structure of the arrangement put in place by the parties to regulate their affairs.
Danske Bank A/S trading as National Irish Bank -v- Durkan New Homes & Ors
[2011] IEHC 325 (29 July 2011)
JUDGMENT of Mr. Justice Brian J. McGovern delivered on the 29th day of July, 2011
1. In the first set of proceedings [2009 No. 915 S], the plaintiff seeks judgment against the first, second and third named defendants, in the sum of €30,065,891.81 and as against the fourth named defendant in the sum of €7,668,243.45, pursuant to separate but related Loan Agreements. In the second set of proceedings [2009 No. 1501 S], the Bank seeks judgment against the first, second and third named defendants in the sum of €7,716,352.39, and as against the fourth named defendant in the sum of €30,251,042.05 pursuant to separate but related guarantees.
2. By letter of loan offer dated 22nd February, 2006, the plaintiff offered the first, second and third named defendants a facility, namely, €29,460,000, to assist with the refinancing of existing loans on land, the purchase of additional houses and/or sites at Beech Park, Cabinteely, County Dublin, and the costs incurred in connection with a proposed planning application, subject to the terms and conditions set out in the said Letter of Loan offer. Under the terms of the said loan offer, following a two-year and six-month moratorium from the date of first drawdown, capital repayment was to be effected by what was described as a “bullet repayment” on that date.
3. By separate letter of loan offer dated 22nd February, 2006, the plaintiff offered the fourth named defendant the sum of €7,640,000 on terms which were substantially, and in all material respects, the same.
4. The issue which arises in these proceedings is whether or not the Bank, in the circumstances that have arisen, is entitled to full recourse against the defendants, or whether the Bank’s recourse is limited to the interests of the Borrowers in the property set out at paragraph 6 of the Facility Letter of 22nd February, 2006 (“the Facility Letter”). Paragraph 11 of the Facility Letter provides as follows:-
“11. RECOURSE
The Bank has agreed with the Borrowers that provided the Borrowers comply with their obligations as set out at paragraph 10(b) hereof and pay all interest due to the Bank pursuant to this Facility Letter the Bank’s recourse will be limited to the respective interests in the properties detailed in paragraph 6 hereof. Accordingly:-
(a) Notwithstanding any other provision of this Facility Letter or any of the Security Documents and save as expressly provided in sub clauses (b) and (c) hereof of this paragraph, the Bank’s recourse to the Borrowers in respect of the Borrowers’ obligations hereunder and under the Security Documents and/or any judgment arising therefrom shall be limited to the respective interests in the properties detailed in paragraph 6 hereof and the Bank shall not otherwise take or pursue any judicial or other steps or proceedings or exercise any other right or remedy that it may have against the Borrowers for the discharge of any outstanding indebtedness in respect of the Loan or otherwise under this Facility Letter or the Security Documents and no action, proceedings, claim, levy, judgment or other process shall be taken or levied against the Borrowers save to the extent reasonably required by the Bank in connection with any enforcement or realisation of the security given pursuant to this Facility Letter.
(b) The Borrowers shall be jointly and severally liable to make payments to the Bank in respect of all interest due to the Bank pursuant to the Facility Letter.
(c) In addition, the Borrowers shall be jointly and severally liable to the Bank for all the indebtedness of the Borrower to the Bank pursuant to this Facility Letter and if and so often as there is a breach of the covenant set out at paragraph 10(a) hereof, unless the Borrowers have complied with their obligations as set out at paragraph 10(b) hereof.
(d) . . .”
5. Paragraph 10 of the Facility Letter provides as follows:
“10. FINANCIAL COVENANTS
(a) Throughout the term of the loan, the Borrowers’ indebtedness to the Bank pursuant to this Facility Letter together with the indebtedness of Tullycross Developments Limited pursuant to the Company Facility Letter shall not exceed 70% of the combined value of the properties (“the Specified Percentage”) detailed at paragraph 6 thereof.
(b) In the event that there is a breach of the Bank’s requirements as set out at subclause (a) hereof, the Borrowers shall either:-
(i) Within four weeks of being called upon by the Bank to do so pay (or procure payment) to the Bank such amount as would result in the total of such indebtedness not exceeding the Specified Percentage or
(ii) Furnish to the Bank as soon as possible after they are requested to do so but in any event no later than 4 weeks from the date of such request such additional security acceptable to the Bank and its Solicitors (acting reasonably) as may be required by the Bank to ensure that the total amount of such indebtedness does not exceed the Specified Percentage.
(iii) The Borrowers further agree to provide evidence of title to the Bank which is satisfactory to the Bank’s Solicitors (acting reasonably) in relation to such additional security.
(c) For the avoidance of any doubt the Borrowers acknowledge that the Bank will be entitled to call for valuations of the said properties at any time throughout the term of this loan as often as it may choose for the purposes of determining whether or not there has been a breach of the Bank’s requirements as set out at sub clause (a) hereof. The Bank shall be entitled to call for not more than four such valuations to be carried out at the Bank’s expense. Each such valuation shall be carried out by a reputable valuer who shall in default of agreement between the Bank and the Borrowers be nominated by the Borrowers from a list of at least three reputable valuers to be furnished by the Bank to the Borrowers for such purpose. The written valuation of such valuer shall (save in the case of manifest error) be conclusive and binding on both the Bank and the Borrowers.”
6. In May 2008, the defendants requested a meeting with the Bank with a view to having discussions regarding the renewal of the loan facility. The Bank wanted an updated valuation on the properties which had been offered as security, and Mr. John Noonan, on behalf of the defendants, requested CBRE to prepare a valuation. The evidence establishes that throughout the summer of 2008, CBRE were in touch with Mr. James Donagh of the Bank with a view to finalising the report. Throughout that period, the valuation being put on the site varied between €30m and €45m, depending on whether it was being assessed on the assumption of an absence of bank funding or what was called a “Standard Format basis”. Finally, on 24th September, 2008, CBRE advised the first named defendant that it had reached agreement with the Bank that the site would be valued at €45m and a copy of this final Valuation Report was sent to the defendants by letter of 26th September, 2008. This valuation had implications for the maintenance of the Loan to Value (“LTV”) covenant.
7. The Bank was concerned that its exposure on the LTV had extended beyond 30%, but it is clear from the witnesses who gave evidence on behalf of the plaintiff that the Irish division of the plaintiff Bank were trying to reach some agreement with the defendants on this issue. However, it is equally clear from the evidence of Mr. James Donagh that by the time he had returned from his annual holidays on 20th July, 2008, the Credit Committee of the Bank had decided to exit the relationship between the plaintiff and the defendants. It seems that the Bank’s headquarters in Copenhagen were taking a harder line than Dublin on the continuing relationship. They were worried about the falling value in the property market in Ireland and that they might be caught in a situation where only limited recourse was available to the Bank.
8. A meeting took place between the parties on 28th August, 2008. The Bank indicated that it was willing to provide 50% LTV finance for eighteen months. Mr. James Donagh acknowledged to the representatives of the defendants that this offer might be perceived as insulting and make it difficult for them to do business in the future. In the course of the hearing, it appeared that this was merely a reflection of the tensions between the Dublin and Copenhagen offices as to how the future relationship between the parties should progress. Mr. John Noonan for the defendants informed the Bank that in that case, they would finance the project elsewhere and asked for an extension of their loan agreements up to December 2008. The defendants heard nothing further from the Bank on that proposal.
9. The repayment date under the terms of the Loan Agreements was 30th September, 2008. As no agreement had been reached between the parties as to the review of the arrangements, the defendants considered that it would not be in their best interests to agree the Bank’s offer of a new facility of €22.5m, but decided they should act on foot of the conditions attached to the Facility Letter of 22nd February, 2006. Accordingly, on 30th September, 2008, the defendants discharged all interest due up to and including that date, and by letter of the same date, informed the Bank that the provisions of clause 11 applied and that the Bank’s right of recourse was limited to the property specified in para. 6 of the Facility Letter. In other words, the defendants informed the Bank that, having discharged all interest due up to and including that date, the Bank’s recourse was limited. In closing submissions for the Bank, Mr. Hennessy S.C. said that the Bank accepted that interest was paid up to the end of September. The letter was sent by courier and Mr. James Donagh accepted that it was received between 4.30pm and 5.00pm on that date. Mr. Donagh and Mr. David O’Doherty of the Bank were very surprised at the content of the letter and gave evidence that up until that time they had no indication from the defendants that this was the course they proposed to take.
10. At that point, Mr. Donagh and Mr. O’Doherty were concerned with protecting the Bank’s position and they prepared letters for the defendants, calling upon them to rectify the breach of the LTV covenant, noting that repayment of the facilities was due on 30th September, 2008. These letters were emailed to Mr. Neil Durkan and Mr. Don Casey shortly after 7.00pm on 30th September, 2008. Some time around 7.45pm, Mr. David O’Doherty hand delivered the letters to the offices of the first named defendant in Ranelagh, Dublin 6. The text of the letter reads as follows:-
“Dear Sirs,
We refer to Facility Letter dated 22nd February, 2006, and in particular, clause 10. As you are aware from recent discussions with the Bank, a valuation of the property held as security under clause 6 has been undertaken on our behalf by CB Richard Ellis dated 2nd July, 2008. The final Valuation Report was received by the Bank yesterday and dated 26th September, 2008.
This valuation gives a market of Euro 45 million and in accordance with clause 10 of the Facility Letter, we formally request the Borrowers to reduce the current aggregate indebtedness of Tullycross Developments Limited and the Borrowers to Euro 31,500.000.
In addition, we further advise that the facility is due for repayment in full under clause 4 on 30th September, 2008.
You are, however, aware, that the Bank has provided the Borrower with revised Facility Letters dated 29th September, 2008, offering aggregated facilities to Tullycross Developments Limited and the Borrowers to Euro 22,500.000. Please note as of today’s date, we do not appear to have received accepted Facility Letters.
We are aware that you had to cancel at short notice the scheduled meeting of September 29th which has now been rearranged for Thursday 2nd October. We can discuss the content of this letter at this meeting if you wish.”
It appears from the evidence that this letter was delivered after the defendants’ normal business hours. The relevance of this assumed some importance in the course of the trial.
Issues
11. The principal issue to be determined in these proceedings is whether, having discharged all interest due on the Loan Agreements up to and including the repayment date, the defendants are entitled to rely on the provisions of para. 11 of the Loan Agreements so that the Bank’s recourse is limited to the specified properties referred to in para. 6 of the Loan Agreements.
12. The plaintiff accepts that on 30th September, 2008, the defendants discharged the interest due under the Loan Agreements up to and including the repayment date, but states that they failed to make the “bullet repayment” of capital due under each of the Loan Agreements.
13. In letters dated 30th September, 2008, addressed to the defendants, the Bank notified them that, according to a Valuation Report received by the Bank on 26th September, 2008, their indebtedness to the Bank exceeded 70% of the combined value of the properties detailed at para. 6 of each of the Loan Agreements. The Bank requested the defendants to repair the LTV covenant by reducing their indebtedness by an amount necessary to restore compliance with the specified percentage of 70%. The plaintiff claims that the defendants have failed to comply with this request.
14. On 1st October, 2008, the plaintiff wrote to the defendants in the following terms:-
“We note that the Repayment Date has (sic) defined in clause 5 above has now expired and request the bullet repayment of Euro 29,436,746.06 plus all interest thereon from 30th September, 2008, that is now due and owing under the Facility Letter.
We reserve the right to make further demand or demands upon you in respect of any other money or liabilities which are now or may become owing by you to the Bank.
We also refer to your letter of 30 September. Please note that, in accordance with clause 11 of the Facility Letter, National Irish Bank has agreed with the Borrowers (as defined therein) that provided the Borrowers comply with their obligations as set out at paragraph 10(b) of the Facility Letter and also pay all interest due to National Irish Bank pursuant to the Facility Letter, the Bank’s recourse under the Facility Letter will be limited in the manner therein described. In our letter of 30 September, we noted that the Borrowers were in breach of the financial covenants established in clause 10 and have requested rectification of same pursuant to, and in accordance with, clause 10(b).”
15. The plaintiff’s claim that even after service of the demand, the defendants did not, within a period of four weeks, pay down the loan or provide further security as required by clause 10(b) of the Agreement. The plaintiff argues that it is an essential precondition to the triggering of the limited recourse provisions of para. 11 of the Loan Agreements that the defendants meet two specific obligations. In the first place, they must comply with their obligations as set out in para. 10(b) and, secondly, they must pay all interest due to the Bank under the terms of the Facility Letter. If one or other or both of these conditions are not met, the Bank is entitled to pursue the defendants for the full amount of the relevant loans. The Bank contends that the defendants failed to comply with both of these obligations.
16. In the first place, the repayment date of 30th September, 2008, passed without the defendants having made the “bullet payment” of capital provided for under the Loan Agreements. Furthermore, as of that date, the Loan to Value percentage specified by para. 10(a) had been breached.
17. The defendants argue that the repayment date, under the terms of the Loan Agreements, was 30th September, 2008. On that date, prior to the close of business, and during normal banking hours, the defendants discharged all interest falling due, up to and including the repayment date. They informed the Bank in writing that they were entitled to rely on the limited recourse provisions of para. 11 of the Loan Agreements. They say that the plaintiff’s letter to them dated 30th September, 2008, was delivered after close of business and that the letters of 1st October, 2008, sent from the Bank to the defendants, demanded repayment, unlike the letters of the previous day.
18. It is the defendants’ case that in order to revoke the limited recourse provisions, there had to be in existence:
(a) A written report from a reputable valuer (clause 10(c)) showing a breach of the Loan to Value covenant (clause 10(a)), and
(b) a notice given to the defendants by the Bank informing them as to the method the Bank required for the breach to be rectified and giving the defendants thirty days in which to do so (clause 10(b)).
Rules of Construction of Contract
19. There is agreement between the parties as to the rules of construction of the contract in this case. The business commonsense approach adopted in Antaois Compania Naviera S.A. v. Salen Rederierna A.B. [1985] 1 A.C. 191, as approved by the Supreme Court in Analog Devices v. Zurich Insurance [2005] 2 ILRM 131, and by Clarke J. in BNY Trust Company (Ireland) Ltd. and Ark Life Assurance Company Ltd. v. Treasury Holdings (Unreported, 5th July, 2007), represents the law in this jurisdiction. The factual matrix or surrounding circumstances have to be considered and taken into account. See Reardon Smith Line Ltd. v. Yngevar Hansen-Tangen [1976] 1 W.L.R. 989. The principles set out in these cases have been quoted at length in many recent judgments and it is unnecessary to repeat them here.
20. In the Loan Agreements, the phrase “term of the loan” was not defined. It seems to me that, having regard to the matrix of facts and surrounding circumstances in this case, the “term of the loan” means the period of two years and six months ending on 30th September, 2008. Clause 4 of the Loan Agreement stated that:
“Following a 2 year and 6 months moratorium from the date of first drawdown, capital repayment will be effected by a bullet repayment on that date (the ‘Repayment Date’).”
Frequently, a term loan will involve a loan repayable over a number of years by periodic payments. In this case, however, the payment was to be made in one lump sum referred to as a “bullet repayment” on a fixed date, namely, two years and six months from the date of first drawdown. It did not cease to be a term loan merely because it was to be repaid in one lump sum. The plaintiff argues that the term continued until the loan was discharged. I do not accept that submission. Obviously, when the “bullet repayment” was not made by 30th September, 2008, the sum (together with interest accruing) remained due and owing.
Banking Hours
21. In para. 10 of this judgment, I referred to the fact that letters were sent by the Bank to the defendants calling on them to rectify the breach of the LTV covenant and that these letters were emailed to Mr. Neil Durkan and Mr. Don Casey shortly after 7.00pm on 30th September, 2008. Some time around 7.45pm on that date, Mr. David O’Doherty of the Bank hand-delivered the letters to the offices of the first named defendant in Ranelagh, Dublin 6.
22. The defendants place great importance on the time at which these letters were delivered. The letters, in effect, amounted to the giving of the notice contemplated in para. 10(b) of the Loan Agreements and the defendants maintain that these notices were not delivered until after close of business on 30th September, 2008, thereby being outside the “term of the loan”. Accordingly, the defendants argue that the Bank’s right of repayment of the loans under the Loan Agreements was, in accordance with para. 11 of the Loan Agreements, limited to the property specified in para. 6 thereof. They say that the operation at para. 10(b) which limited the application of the recourse provisions in para. 11 was expressly stated to be subject to para. 10(a). Furthermore, the operation at para. 10(a) was conditional upon the obtaining of a written valuation. This appears to be acknowledged by the Bank in its letters of 30th September, 2008, which clearly link the obtaining of a valuation with a determination of a breach of para. 10(a) of the Loan Agreements.
23. In the course of his evidence, Mr. James Donagh (for the Bank) stated that up until 12.00 midnight on 30th September, 2008, the Bank had limited recourse against the Borrowers. If the Bank failed to serve notice on the defendants within the term of the loan, that is to say, by 30th September, 2008, the plaintiff maintains that the Bank’s recourse is limited to the properties referred to in para. 6. It is necessary, therefore, to determine whether or not the notices served on 30th September, 2008, were served within the term of the loan and whether the question of banking hours can assist in determining this issue.
24. Expert evidence was given on this matter by Mr. Conor Holmes and Mr. Vincent Fennelly who are both retired senior bankers. Mr. Holmes expressed the view that banking hours are the same as opening hours, namely, 9.30am to 4.30pm, when branches are open to the public. He said that the business day could stretch to midnight if circumstances demanded. He made reference to the Consumer Credit Act 1995, which precludes lending institutions from making contact with customers between the hours of 9.00pm and 9.00am the following day. But he said that the loans in this case do not come within the scope of the Act. Payment late in the day by either cheque or draft would be accepted in discharge of a debt subject to further discussion on the issue of an additional day’s interest. In his view, the Borrowers had until midnight on 30th September, 2008, to repay the loans. He said the Bank’s letters dated 30th September, 2008, were delivered within the business day.
25. Mr. Vincent Fennelly stated that if payment was received between close of banking hours and before midnight it must be considered received. The Bank letter of 30th September, 2008, calls on the defendants to cure the breach of the LTV covenant but does not, as provided for under the terms of the facility, seek, in the alternative, the provision of additional security to bridge LTV gap.
26. Mr. Fennelly stated as his opinion that the intent of the facility was that in the event of the defendants not repaying the loans by 30th September, 2008, recourse would be limited only to the properties held as security, subject only to the requirement to maintain the LTV relationship between the value of the security and the loan. The onus was on the Bank to take action to maintain this LTV relationship through obtaining valuations on the properties held as security. Failure to maintain this LTV relationship within four weeks of the Bank calling on the defendants to do so would negate the limitation of recourse to the properties held only. He expressed the view that it was not reasonable for the Bank to call on the defendants to make good the LTV shortfall identified in the CBRE valuation, on the evening of 30th September, 2008, where the term of the loan expired on that date and the Agreement allowed four weeks for this to be done. As the “bullet repayment” had not been made on that date by normal close of business, the terms of the Facility Letter meant that the Bank’s only remedy was to rely on the security held. The only circumstance in which recourse extended beyond the property offered was in the event of the defendants failing to rectify the relationship between the loan and the value of the property held as security within four weeks of having been called on to do so. The defendants maintain that that notice would have to be served within the period of the term of the loan.
27. It seems to me that the intent of the Loan Agreements entered into between the parties was that the security being offered by the defendants was a limited recourse to the property set out at para. 6 of the Facility Letter. That was the default position. The Loan Agreement provided a mechanism whereby the Bank could override the limited recourse facility in the event of default by the Borrowers. Any move by the Bank to move beyond the limited resource provisions has the most serious consequences for the directors of the defendant companies. This requires a strict interpretation of the terms of the Loan Agreement. In the Bankruptcy jurisdiction, there is well-established jurisprudence which requires strict adherence to the letter of the Bankruptcy rules and statutory provisions because the effects of Bankruptcy on an individual are penal in nature (see Minister for Communications v. M.W. [2010] 3 IR 1). It seems to me that a somewhat similar situation arises in this case where the Bank is seeking orders which would have the effect of precluding the defendants from relying on a limited recourse provision.
28. Approaching the matter from this perspective, I prefer the evidence of Mr. Vincent Fennelly. The letters from the Bank dated 30th September, 2008, were not delivered during normal business hours and were not received by the defendants until the following day. That was after the term of the loan had expired. The plaintiff was aware of the necessity to serve notice on the defendants in accordance with clause 10(b) of the Facility Letter. When the Bank received the letters from the defendants on 30th September, 2008, stating that all interest on the facilities had been paid to date, Mr. O’Doherty and Mr. Donagh of the Bank were immediately aware of the necessity to serve notice during the term of the loan. That is why the Bank’s letters of 30th September, 2008, were emailed and later hand delivered by Mr. O’Doherty to the offices of the first named defendant.
29. So what was the position at the close of normal business hours on 30th September, 2008? The interest on the loans had been discharged by the defendants but they had not made the “bullet repayment” required to be made by that date. The defendants maintain that the only way that they can lose their limited recourse status is if notice is served by the plaintiff in accordance with clause 10(b) of the Facility Letter and that this must be done during the term of the loan. It is the Bank that is obliged to take the first step, and if it does so within the term of the loan, the defendants have a four-week period within which to remedy the breach. The obligations under para. 10(b) are in respect of steps to be taken by the Borrower when called upon to do so by the Bank. The defendants state that there was no default because no notice was ever served under clause 10(b) during the term of the loan.
30. Mr. Donagh accepted that if notice had been served in July or August 2008 (at the time when exiting the relationship was the preferred option for the Copenhagen headquarters), this would have allowed the defendants to repair the covenant and the Bank would not achieve their objective. He seemed to agree that if the Bank had served a notice in July 2008, the defendants would have been able to pay the €5.6m required to repair the LTV covenant and that payment, together with the payment of interest, would have left the Bank in a situation where they would have limited recourse. This would have frustrated the Bank in its objective to exit the relationship with the defendants in a way which would have been most beneficial to it.
31. In the course of his evidence, Mr. Neil Durkan on behalf of the defendants said that if the defendants had been offered an acceptable new facility by the Bank they would have repaired the covenant. I accept that evidence. His evidence is supported by the testimony of Mr. Donagh on the second day of the trial. While discussing the negotiations for a new facility, he referred to the Bank’s proposal that the LTV be changed to 50%. That proposal would have involved extending the facility up until the end of December 2008. Mr. Donagh said that he believed the defendants were going to accept the facilities. He had no basis for believing this and I believe he was wrong in that view. When asked how he expected the difference between the LTV of 70% and 50% to be provided for, he said that he had no doubt about the ability of the defendants to pay this sum and that he had received audited accounts that established that they had that ability. He said that in late August 2008, he had a telephone conversation from Mr. Neil Durkan where he said that the defendants had the €14.6m necessary to pay down the facility. Mr. Donagh said that he was aware that they had the funds from information provided by both Mr. Neil Durkan and Mr. John Noonan. In the course of his evidence, Mr. Durkan said that in August 2008, Durkan New Homes was in a position to pay €5.6m if it was called upon to do so, or indeed, €14.6m which would have achieved a 50% LTV. He said that the company had the cash available. This was confirmed by Mr. John Noonan in his evidence. When asked if he had any doubt over the company’s ability to pay €5.6m to repair the covenant if a call had been made on the defendants at any time during the summer of 2008, he replied, “No”.
32. I accept the evidence of Mr. Durkan and Mr. Noonan on this point.
33. I found the evidence of Mr. David O’Doherty for the Bank unreliable. I do not accept his evidence that he never thought, even casually, about the possibility of serving an Enforcement Notice on the defendants between June and the end of September 2008. He prepared a note in relation to a meeting of 25th July, 2008, which was dated 9th May, 2008, and his explanation for the wrong date being on the note was entirely unconvincing. It seems probable that the note was created at a later time in order to bolster the Bank’s position.
34. Mr. O’Doherty also told Mr. Yde, one of his superiors in the Bank, that the directors of the borrowing companies had a personal liability on the facility when this was not so. Furthermore, he provided inaccurate information leading to errors that occurred in the pleadings which had to be amended. He gave the Credit Committee the impression that Mr. John Noonan had agreed to a net worth covenant at 1.5 times the combined loan balance being included in any new facility, when it appears that this was not the case. I found Mr. O’Doherty’s evidence to be quite unreliable.
Conclusion
35. The defendants paid the interest due on foot of the loan up to 30th September, 2008. I am satisfied that if, during the term of the loan, they had been called upon to do so, the defendants would have been in a position to remedy the breach of the LTV covenant. They were not called upon to do so within the term of the loan. Therefore, while the amount of the loan remained outstanding, the plaintiff’s security for that sum is confined to the properties and other matters referred to in clause 6 of the Agreement. The defendants have not contested the plaintiff’s claims for the sums due. The issues argued before the court concerned whether or not the defendants were entitled to the benefit of the limited recourse provisions in the loan. I have concluded that they are entitled to the benefit of limited recourse by the Bank and I will hear counsel on the form the Order should take.
Danke Bank trading as National Irish Bank -v- Feeley & Anor
[2011] IEHC 456 (09 December 2011)
JUDGMENT of Mr. Justice Ryan delivered the 9th day of December 2011
The Facts
1. Pursuant to a facility letter dated the 14th November 2007 the plaintiff bank agreed to give the defendants a €5 million loan facility. The defendants drew down the money on the 23rd November 2007. The loan was for two years during which the defendants were only required to pay interest on the capital sum. A fund was set up out of the loan to cover interest payments as they fell due. The agreement was that when the loan expired it was to be restructured onto a mutually agreed amortisation term or refinanced or repaid in full, “subject to approval”. The bank says that following the expiration of the two-year term of the loan, it engaged in negotiations with the defendants in regard to restructuring and/or refinancing but it proved impossible to reach agreement on a satisfactory arrangement. On 7th June 2011 the bank demanded payment of the principal and interest then due under the facility. At the time of the demand letter the interest fund was sufficient to service the loan until December 2012. That account was also due to be credited by more than €40,000 because reductions in interest rates between 2007 and 2009 had not been reflected in the Standing Order from the interest account. The defendants did not pay on foot of the demand letter and the bank now seeks judgment in the sum of €4,861,204.37 plus continuing interest.
2. The matter comes before me as an application by the bank for summary judgment. The defendants submit that they have a defence to the claim and that the case should be remitted for plenary hearing. They make three points. First, they argue that the loan is non-recourse as against the defendants personally and the bank is limited to whatever it can recover out of the lands whose development was the purpose of the facility. Second, the bank by its conduct led the defendants to suppose that it would not demand repayment of the principal as long as they continued to service the interest payments. When the demand letters were issued, the defendants had enough money on deposit to service interest on the loan until December, 2012. Third, the bank wrongfully withdrew money from the interest fund and collected excessive interest. The issue for the Court is whether the defendants have made out sufficient grounds of defence to defeat the bank’s claim to summary judgment.
3. As to the first line of defence, the defendant Mr Halpin, whose affidavit was filed on behalf of both defendants, acknowledges that the conditions attached to the facility letter did not restrict recourse to the lands in Rathdrum that the defendants intended to develop. He says that the defendants assumed that the loan was non-recourse and that there would be no question of the bank pursuing them over and above what might be realised out of the proposed development lands. The contention is contradicted by the affidavit filed by the bank in reply. Mr Halpin concedes that he has been advised that his understanding of the facility does not accord with its express terms, “which I am advised provides for the joint and several liability of the defendants”.
4. The second point that Mr. Halpin relies on is that the Bank agreed that it would not seek payment of the capital sum as long as the defendants kept up the interest payments. Mr Halpin says that he and his co-defendant deduced from the fact that the bank continued to take interest payments out of the fund after the expiration of the loan term in November 2009 that the bank would not enforce any rights that they had to demand repayment of the money. He says that this assumption was confirmed at a meeting with Mr Drew Corry of the bank that took place at the Rathdrum property on the 4th February 2010. Mr Halpin says that he and Mr Corry had a discussion of the facility and that the latter
“made it clear to your deponent that the plaintiff had not called in the loan so long as the defendants continued to service interest on the loan. I was not surprised at all by this, as the plaintiff’s actions in continuing to take interest from cur deposit account since the expiry of the facility in November 2009 was consistent with this position.”
5. It is not in doubt that there was a meeting with Mr. Corry when he visited the land in Rathdrum but Mr. Corry denies the alleged agreement and says that he would not have agreed to any such alteration of terms and that he did not even have authority to do so.
6. Mr Halpin says that the main purpose of the meeting on the 4th February 2010 was to discuss the possibility of financing the purchase of an adjoining development whose developer had gone bankrupt.
“I further say that Mr. Corry not only unambiguously represented that the facility would not be called in so long as interest was serviced, he went on to express the opinion that a repayment of the loan should be frozen for four or five years on the basis that the property market was severely depressed and that myself and the first named defendant did not have the personal assets to discharge the outstanding loan to the plaintiff.”
7. The Bank’s answer to this is, first, an affidavit from Mr. Corry which rejects this version of events. The bank goes further, however. The argument that Mr. Abrahamson B.L. puts forward is that the conduct of the defendants in the aftermath of the alleged agreement of the 4th February, 2010 was wholly inconsistent with there being any agreement such as Mr. Halpin sets up in his affidavit. If the Bank had indeed agreed as Mr. Halpin claims, then there would have been some subsequent reference to this by Mr. Feeley or Mr. Halpin. Their immediate reaction to any threat by the Bank to call in the loan –and certainly at the time when the Bank actually called in the loan in June 2011 — would have been to point out that the Bank had agreed through Mr. Corry to continue with the facility as long as there was sufficient money on deposit to cover interest payments. It is clear that there was such a fund that was good until December 2012.
8. The correspondence that followed the meeting of 4th February 2010 begins with the bank seeking details of the defendants’ financial affairs, which were furnished over a period. In a letter dated 25th May 2010 seeking further information, the bank stated that the loan had expired in November 2009 and that the loan was in breach of the terms of the facility letter. A note of a meeting on the 9th June 2010 between Mr Halpin and Mr Lorenzen of the bank recorded that the customer had been advised that the bank “has a short term strategy which contradicts customer’s long term strategy.” The memorandum went on:
“Further, the servicing of interest is not sufficient for the Bank. A sustainable strategy has to be agreed. Current Facility has not been formally extended. When information re Martin Feeley accounts have been received by the Bank (in 3-4 weeks), the Bank will assess the case again.”
9. On the 28th July 2010 the bank wrote that the facility had not been extended and that renegotiation had to take place as soon as possible. Another meeting on the 7th October 2010 attended by Messrs Lorenzen, Halpin and Feeley was minuted by the bank in which it was noted inter alia that the defendants “were surprised of bank’s position, since interest cover for at least 18 months is evident” and that the defendants “acknowledged a security shortfall and understood (at least) why the Bank had to act.” The minutes recorded that Mr Lorenzen said that the bank would not defer a decision for another year and that a sustainable proposal had to be provided by the customers within weeks.
10. Solicitors acting for the defendants began to correspond with the bank on the 29th November 2010 seeking security documents, including in particular a guarantee by Mr Halpin. Any such security has not been raised by way of defence on this motion. On the 14th February 2011, the bank threatened to demand full repayment under the facility if the defendants did not make satisfactory proposals. The solicitors continued to refer to “a non-recourse guarantee” executed by Mr Halpin. The bank insisted that the facility letter on which the loan was advanced did not incorporate a guarantee.
11. On the 21st April 2011, the bank again called on the defendants to put forward satisfactory proposals as to security and interest servicing. It referred to its right to require full repayment but said that it would defer a decision for 28 days. The bank issued its letters of demand to the defendants on the 7th June 2011.
The Law
12. The fundamental principle is that a party should not be excluded from making any reasonably maintainable defence. In Aer Rianta v Ryanair [2001] 4 IR 607, Hardiman J cited Sheppards and Co. v. Wilkinson and Jarvis (1889) 6 T.L.R. 13, where Lord Esher said that the summary jurisdiction to enter final judgment must be used with great care. “A defendant ought not to be shut out from defending unless it was very clear indeed that he had no case in the action under discussion.” The Supreme Court endorsed two tests from the English jurisprudence that that Court had previously adopted in First National Commercial Bank v. Anglin [1996] 1 IR 75. These might be called respectively [and respectfully] the Ackner and Lloyd tests, after their learned progenitors.
(i) whether the defendants or either of them have satisfied the court that there is a fair or reasonable probability of their having a real or bona fide defence.
(ii) Is what the defendant says credible?
13. The Supreme Court in Aer Rianta took the nature and context of the dispute into account. Hardiman J referred to the facts of the cases in the authorities cited and observed that in First National Commercial Bank v. Anglin [1996] 1 IR 75, “the indisputable documentation of a commercial transaction rendered the alternative chronology proposed by the defendant quite untenable.”
14. It appears therefore that while the circumstances do not dictate the nature of the test by which the defence is judged, they influence the application of the criteria. Some points of differentiation of contractual claims may be identified: Is it a commercial transaction? Is the contract a familiar one or does it have unusual terms? Is there documentary evidence to counterpose the case advanced by the defendant? 15. In Harrisrange Ltd v Duncan [2003] 4 IR 1, McKechnie J summarised the Courts’ approach to summary judgment in 12 propositions, of which the following are applicable in this case:
“(iii) the court should assess not only the defendant’s response, but also in the context of that response, the cogency of the evidence adduced on behalf of the plaintiff, being mindful at all times of the unavoidable limitations which are inherent on any conflicting affidavit evidence;”
“(xi) leave should not be granted where the only relevant averment in the totality of the evidence, is a mere assertion of a given situation which is to form the basis of a defence;”
“(xii) the overriding determinative factor, bearing in mind the constitutional basis of a person’s right of access to justice either to assert or respond to litigation, is the achievement of a just result whether that be liberty to enter judgment or leave to defend, as the case may be.”
16. The Court’s task is not simply to examine the affidavits and exhibits to discover whether there is a conflict of fact on a decisive point. Neither is it to weigh conflicting depositions in the balance to decide which is more probable. The court’s function is to apply the above credibility tests to the proposed defence. That is what the Courts did in First National Commercial Bank v. Anglin, Aer Rianta v Ryanair and the other Irish and English authorities.
Submissions
17. When the case was called on for hearing, Mr. Cormac Ó Dúlacháin S.C. said that he appeared for the first named defendant, Mr. Feeley, although his solicitors had not yet entered an appearance. Counsel for Mr. Halpin was Mr. Nathan Reilly B.L., who had previously acted for both defendants. Mr. William Abrahamson B.L. appeared for the Bank.
18. Mr. Ó Dúlacháin sought an adjournment. He explained that he had only come into the case late in the previous week and there had not been time to file an affidavit on Mr. Feeley’s behalf. Mr. Ó Dúlacháin was vague as to what was different about the case as compared with the one deposed to by Mr. Halpin on his own and Mr. Feeley’s behalf. He referred to pre-existing liabilities that were extinguished by the loan of November 2007 and the different proportionate interests in those loans and in the proposed development partnership by the two defendants. I did not accede to Mr. Ó Dúlacháin’s application. It seemed to me that nothing had come to light in the recent past that would justify postponing the proceedings. Neither had Counsel put forward any argument to explain why the application was made at this late stage by Mr. Feeley. He had known that the case had been accepted into the Commercial Court, appearances had been made on his behalf at the different stages of the Court process and he knew or had means of knowing that the case was coming on for hearing and the date. There had not been any late change of circumstances or discovery of information. The application for an adjournment was unmeritorious in my opinion.
19. Mr. Ó Dúlacháin’s client was not in fact at any disadvantage. He was able to make arguments on the interpretation of the documents in the case. Mr Reilly, for Mr Halpin, argued the issues raised in his client’s affidavit. If either approach succeeded, it would inure for the benefit of both.
20. Mr Ó Dúlacháin made submissions as to the nature of the agreement and the relevant documents and the inferences that might be drawn from them. He submitted that it was maintainable, if tenuously, that the contract documents provided only for recourse to the lands of Rathdrum that were intended to be developed. It was more arguable that the Bank was obliged to have first recourse to that land and then to look for the remaining balance due on the loan. The Bank had decided not to pursue that course. Mr. O Dúlacháin was referring to a provision of the facility under the heading Covenants at item 9, as follows:
“If loan remains outstanding at the two year anniversary of loan term, lands sufficient to clear our debt to be placed on the open market by the borrowers”.
21. This is not a security provision that entitles the Bank to step in and sell the land and then sue the defendants for the balance. I do not think it affords support to Mr. Ó Dúlacháin for the proposition that there is a defence to the action available because of this provision. It is a demand the bank can make on the borrowers but not a restriction to that option only.
22. He argued that the purposes of the loan set out in the facility letter revealed the several nature of the transaction as opposed to a joint venture and that there was an issue accordingly as to the nature and extent of Mr. Feeley’s proportionate interest in the partnership with Mr. Halpin and his liability for the full amount of the debt. Mr. Ó Dúlacháin also submitted that the post expiration negotiations broke down because there was no agreement in respect of security requirements but there was no provision for that situation and a stalemate came about, wherein interest was not chargeable. It does not seem to me that there is any substance in these arguments. There is no basis for suggesting that the Bank is prevented from proceeding against the borrowers until it has first exhausted the sale of the land. The loan was given to the defendants jointly and severally according to the terms of the facility letter. I also think it is obvious that continuing interest applies following the expiration of the term and that there is no basis for suggesting otherwise.
23. Mr. Nathan Reilly for Mr. Halpin relied on the points of the defence raised by his client in his affidavit. He emphasised the factual issues that arose from the meeting of the 4th February, 2010 between Mr. Halpin and Mr. Drew Corry of the Bank. The result, he said, was that the facility was not due and owing at present and this claim was premature. Mr. Reilly also expanded on the third point raised by Mr. Halpin, which is the allegedly wrongful withdrawal and misapplication by the Bank of the funds in the interest account. He also adopted the submissions made by Mr. O Dúlacháin as to the meaning and effect of the facility letter and its terms. I discuss the Halpin issues below.
Application to the Proposed Defences
24. On Mr. Halpin’s case, as contained in his affidavit sworn on behalf of both defendants, the three points that arise are – (a) non-recourse, (b) Mr. Corry agreed that payment of the capital sum would not be demanded as long as sufficient funds were deposited to cover interest payments (c) the Bank wrongfully withdrew money from the interest fund and collected excessive interest.
25. The first point raised by Mr Halpin does not constitute a sufficient basis of defence on any interpretation of the legal tests to justify refusal of judgment. This was a commercial loan and there is nothing in the documentation to suggest any restriction on recourse by the bank. The fact is as the deponent acknowledges that there is simply nothing to suggest that it was a non-recourse loan.
26. In respect of point (b) the argument focussed on the conversation of the 4th February 2010 and the alleged alteration of the terms of the loan. Is there such a conflict of fact about this matter that the case must be referred to plenary hearing? It is clearly not something that can be resolved by considering the affidavits – in the sense that one cannot decide as between one deponent and the other as to where the truth lies. However, the bank makes the case that there is no substance whatsoever in this proposition. It says that it is inherently improbable that any bank official would agree to such a radical alteration of a term in a loan of this kind. It also argues that the defendants conducted themselves after the 4th February, 2010 in a manner that was completely inconsistent with the proposition now being advanced. In a word, if such an agreement had in fact been reached or if the defendants had ever believed that such an agreement had been reached, they would have made it clear in the aftermath of the meeting of February 2010 that the bank was bound by this accord. In fact, the bank contends, the defendants behaved in an entirely different way and continued to seek the indulgence of the bank and to provide new and improved security in the hope of meeting the bank’s requirements.
27. The correspondence does not support the alleged accord. It is inconceivable that if the defendants believed that the bank had agreed that the loan would continue on an interest only basis that would not have even been mentioned in correspondence from the defendants or their solicitors or at meetings with the bank. I do not think there is credibility in the defence that the bank agreed through Mr Corry not to claim the principal for as long as the interest was paid. It does not make sense that the bank would agree to the continuation indefinitely into the future of a special, favourable and temporary regime that existed for the first two years. I accept the bank’s argument on this issue.
28. There is a written record of the 4th February meeting but I discount it as a reliable contemporaneous note because it was made some 10 days later.
29. Mr. Halpin also complains in his affidavit of the actions of the Bank in withdrawing the sum deposited in the interest fund and applying it against the amount claimed to be due and owing on foot of the facility and interest. Additionally, he complains about the amount that was collected by way of excessive interest payments. This final point does not amount to a defence to the Bank’s claim. On any view, even if it is assumed that the Bank behaved wholly unjustifiably, it merely means that it acted prematurely. Alternatively, it could be argued that the Bank was in the wrong and that some part of this money ought to be credited by way of set-off but that is actually what happened. In all the circumstances, I cannot see that this really arises even if the Bank is considered to have been somewhat high handed or to have not been entitled to behave as it did in relation to the interest deposit account.
30. The loan in this case was a commercial transaction involving a substantial commitment. It was effected by a formal document signed by the borrowers in which the bank advised the defendants to obtain legal advice.
Conclusion
31. Applying the criteria laid down by the Courts, it is clear in the factual circumstances of the case that the defendants do not have a defence to the plaintiff s claim. There will accordingly be judgment for the plaintiff on foot of its claim in the Summary Summons.
Western Meats Ltd v National Ice and Cold Storage Co Ltd and Nordic Cold Storage Ltd
1978 No. 2782P
High Court
2 June 1981
[1982] I.L.R.M. 99
BARRINGTON J
delivered his judgment on 2 June 1981 saying: The plaintiffs are a limited liability company with a registered office at Bridge Street, Longford. They operate meat factories at Dromond, County Leitrim and at Charleville, County Cork.
The defendants are two limited liability companies associated together and jointly trading under the name Frigoscandia. Among their activities they maintain a cold storage freezing plant and depot at Midleton, Co. Cork.
In 1969 the plaintiffs had recently taken over a meat factory at Charleville, County Cork and had embarked on a policy which was greatly to expand the turnover and the work force in that factory. They were approached by the defendants who solicited their business, and offered them the facilities of the cold storage plant which the defendants operated at Midleton, County Cork. *100 In September 1969 the defendants representatives met with Mr William Lyons, who is a director of the plaintiff company, and followed up this meeting with a letter dated 22 September 1969 in which they stated:
Our group are the largest operators of public cold stores in Europe and from their years of experience have worked out the most efficient and economical way to store customers products. We operate a total of 7 million cubic feet of controlled temperature storage in England, with stores at Stratford, London and Kings Lynn, Norfolk. Our store at Stratford, being adjacent to the Smithfield Market, handles a high tonnage of carcase meat, boneless beef and offals. The Midleton store, which is the most modern cold store in Ireland, can offer you
The letter then proceeds to describe the facilities which the Midleton store can provide.
These facilities appeared to the plaintiffs to meet their business requirements and a mutually satisfactory business relationship commenced between the parties and continued for many years. On 21 December 1973 the defendants Mr W. S. Stephen wrote a letter to the plaintiffs which concluded in the following terms: Finally, I would like to take this opportunity of thanking you for your co-operation and the good business relationships that existed between our two companies in 1973. I look forward to these conditions continuing during 1974.
Unfortunately, the difficulties which gave rise to the present action arose during the year 1974. Among the meats which the plaintiff deposited with the defendants for cold storage were various forms of pig meat including ham, bacon, pork and offals. The plaintiffs, in the course of the year, sold various forms of pig meat in the home market, and, through the Pigs and Bacon Commission, in the export market. They stored their surplus produce with the defendants in the confident expectation that they could withdraw this as and when required, and in particular for the Christmas trade. Coming up to Christmas 1974 I am satisfied that the plaintiffs had stored with the defendants very considerable quantities of gammons and other forms of pig meat and that they attempted to withdraw these to meet the Christmas demand, but were unable to do so.
I am satisfied that the reason why the plaintiffs were unable to withdraw their meat from cold storage was that the defendants, during the year 1974, had accepted into cold storage more meat than they could cope with or keep track of. I am satisfied also, that in the weeks coming up to Christmas in 1974, the plaintiffs sought to withdraw all their meat from cold storage to meet the Christmas demand but they were unable to do so simply because the defendants could not locate it and deliver it to them. The situation was so chaotic that the plaintiffs, instead of stipulating various quantities of meat which they wished to withdraw, had to resort to the device of sending their lorry to the defendants store and giving the lorry driver a blank order book and authorising him to give a receipt for such meat as he could obtain from the defendants. I am satisfied also that the plaintiffs, being unable to withdraw their meat from cold storage, were forced in an effort to meet their customers demands, to buy in, and slaughter, pigs in order to make available to their customers, for the Christmas trade, gammons which were in fact in cold storage and ought to have been readily *101 available to the plaintiffs. I am quite satisfied that the reason why they were not so available, and could not be found, was that the defendants, during the year 1974, had taken into cold storage more meat than they could efficiently cope with or trace.
Under these circumstances it appears to me that, prima facie, the defendants, as bailees for reward, are liable for their failures to produce the plaintiffs meat on demand and are also liable for consequential loss which befell the plaintiffs as a result of this failure.
To the plaintiffs claim the defendants have two principal defences. The first is based on their standard conditions of trade and the second is based on the defendants assertion that the plaintiffs were negligent in labelling, depositing, and withdrawing their goods and are consequently, at least in part, the authors of their own misfortune.
The conditions of trade, if part of the contract between the parties, appear to me to be a complete answer to the plaintiffs claim.
Clause I of the conditions of storage provides that all goods are stored at the owners risk. Clause 11 provides that the company will not be answerable for any delay, loss or damage arising (inter alia) from maintaining too high or too low a temperature in the stores, failure of machinery or plant, negligence, thefts, including theft by the companys servants, or any other cause whatsoever.
There is no doubt that it was competent for the parties to include such clauses in their contract if they wished to do so. We are not here dealing with a monopoly providing a necessary service for an ignorant and unwary public. We are dealing with two commercial concerns one of which is providing a specialist service for the other and each of which is competent to protect its own interests. So far as this aspect of the case is concerned the relevant principles would appear to be those laid down in the House of Lords in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827.
But the primary question is whether the plaintiffs were given reasonable notice of these conditions. Mr William Lyons says he was not aware of them and there is no evidence that they were ever expressly brought to his attention.
In later years these conditions appeared on the back of the defendants note-paper and also on the back of many of their storage documents. We only have a photostat copy of the original letter passing between the parties dated 22 September 1969. The conditions do not appear on the back of this copy though they may have been on the back of the original.
However, in the text of the letter itself there is no reference to the conditions, though certain terms are set out in the letter. I am satisfied that the terms were never expressly brought to Mr Lyons attention and I accept his word that he was not aware of them. I am satisfied that he is a man who carries on business by personal contact and on the telephone and that he relies greatly on his assessment of the men he is dealing with. Indeed, in the present case, even the defendants managers do not appear to have been particularly conscious of the standard conditions. When disputes arose between the parties over the years, prior to the present dispute, these were resolved as between businessmen and, even in the present case, there was no reference to the standard conditions *102 until the matter reached the hands of the lawyers.
It appears to me to be important that this is a case in which the defendants initially solicited the plaintiffs business. Had they, the initial negotiators, expressly drawn to Mr Lyons attention not only the excellence of their services but also the fact that they accepted no responsibility whatsoever for the manner in which they would handle his goods, Mr Lyons decision of whether to retain them might well have been different. In all the circumstances of this case it appears to me that the defendants did not give the plaintiffs reasonable notice of the contents of the standard conditions. It appears to me also that a businessman, offering a specialist service, but accepting no responsibility for it, must bring home clearly to the party dealing with him that he accepts no such responsibility. In all the circumstances I think, that in the present case, the defendants were guilty of negligence and breach of contract.
With regard to the alleged negligence of the plaintiffs I am satisfied that the plaintiffs, in depositing meat for storage, clearly identified the meat as having come from their factory and also clearly distinguished, by different kinds of labels, pork from bacon.
The records of both parties, however, as to the precise amount of meat held by the defendants for the plaintiffs at various times appear to be unreliable. The fairest course to both parties is to assume that the defendants, at Christmas 1974, held for the plaintiffs only the quantity of meat which the plaintiffs received back in summer of 1975. This quantity was as follows:
(a) 131 bags 665/GR gammons 10,254 lbs. 52p per lb. Total 5,332.08p
(b) 66 bags 330/GR middle 13,240 lbs 40p per lb. Total 5,296.00p
(c) 23 bags 113 pork loins 2,760 lbs 50p per lb. Total 1,380.00p
(d) 31 bags 155 pork fores 2,480 lbs 20p per lb. Total 496.00p
(e) 103 bags 515 pork backs 8,240 lbs 50p per lb. Total 4,120.00
Total value of meats:
16,624.08
It has been proved conclusively that all the meat was defective and unfit for human consumption in August of 1975. Some of it was sold as pet food for the sum of 400 and the balance was reduced to bone meal or otherwise disposed of in a manner which scarcely paid for the cost of reduction or disposal.
Under these circumstances it appears to me that the onus of proof rests on the defendants to establish that the meat, even if delivered to the plaintiffs at Christmas 1974 would have been unfit for human consumption. It appears to me that they have succeeded in this in relation to items (c) and (d) above, i.e. the pork loins and pork fores, as they have shown that the plaintiffs left these items for so long in cold storage that they would have deteriorated even by Christmas 1974.
In these circumstances I am satisfied that the plaintiffs loss on this score is confined to items (a), (b) and (e) which collectively total the sum of 14,748.08. In addition I am satisfied that the plaintiffs, when they could not get their meat out of cold storage at Christmas in order to satisfy their customers, purchased and slaughtered an extra 400 pigs at a premium of 2.50 per pig making a total of 1,000.
*103
The plaintiffs did not need all of these pig carcases for the purposes of the Christmas trade and converted the balance of the carcases into salted bacon and it is suggested that they sustained a further loss on this. I am not satisfied however, in relation to this loss and feel I should not allow it. Portion of the meat was sold as pet food for the sum of 400 and the defendants are entitled to a credit for this. No credit is due in respect of the bone meal.
The defendants have a counter-claim for storage charges in respect of the period after Christmas 1974. As these charges would not have arisen if the defendants had returned the plaintiffs meat on demand I dismiss the counterclaim.
British Leyland Exports Ltd v Brittain Group Sales Ltd and The Brittain Group Ltd
1976 No. 168
1976 No 169
1976 No. 5102
High Court
23 June 1981
[1982] I.L.R.M. 359
(OHanlon J)
OHANLON J
having recited the facts of the case delivered his judgment on 23 June 1981 saying: The obligations of Brittains under the 1966 agreements can be ascertained readily enough, but it is more difficult to determine what were the obligations of British Leyland under the said agreements. With regard to the number of vehicles which was to be supplied in any one year, reference is made to clauses 9 and 25 of the 1966 agreements. Under clause 9 the distributor was required to promote the sale of vehicles and the companys reputation within the territory both with the public and in the trade to the companys satisfaction. Under clause 25 (a) the distributor agreed to purchase from the company and the company agreed to sell to the distributor during each sales year such quantity of vehicles as may by agreement between the company and the distributor from time to time be deemed necessary for the implementation of the distributors undertaking in clause 9(a) of the agreement to promote adequately the sales of vehicles and the companys reputation within the territory.
The combined effect of these two clauses appears to place it within the jurisdiction of the manufacturer to decide from year to year what number of vehicles should be made available for sale within the territory referred to in the agreement. There was no firm commitment on the part of the manufacturer to supply any particular number of vehicles in any particular year, but rather an agreement to reach an agreement of a type which is notoriously difficult to enforce in a court of law. The manufacturer also reserved the right in clause 30 of the agreement at any time to discontinue the sale of any type of vehicle, to refuse any orders and to cancel any orders previously accepted.
The agreement can fairly be described as a draconian contract, so far as the distributor was concerned. All its terms, virtually without exception, are heavily loaded in favour of the manufacturer and against the distributor, but in the absence of legislation similar to the Unfair Contract Terms Act, 1977, which was enacted by the United Kingdom Parliament, the fairness or unfairness of the contract is not a matter with which the court should concern itself unless it impinges on the question of the proper construction of the terms of the contract.
The real benefit accruing to the distributor under the agreement and the major commitment undertaken by the manufacturer, was the appointment of the distributor as sole distributor to the trade in the Republic of Ireland of the companys vehicles. While the company by clause 5 reserved to itself the right *362 to sell to retail customers within the territory, the only outlet it possessed for sales to the motor trade during the currency of the agreement was through the appointed distributor.
In construing the contracts made between the parties I adopt the following passage from the speech of Wilberforce LJ in the case of Prenn v Simmonds, [1971] 3 All ER 237 at 239 i:
The time has long passed when agreements, even under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. There is no need to appeal here to any modern anti-literal tendencies, for Lord Blackburns well-known judgment in River Wear Comrs v Adamson provides ample warrant for a liberal approach. We must, as he said, enquire beyond the language and see what the circumstances were with reference to which the words, were used, and the object appearing from those circumstances, which the person using them had in view.
Applying this principle of construction to the present case I have regard to the circumstances as they existed in 1966 when the agreements were made, and which were relevant, and known to both parties to the agreements. The 1966 agreements merely continued in operation a long-standing business relationship between the parties under which Morris and Austin motor vehicles had been distributed and sold with a notable measure of success for many years in the Republic of Ireland. From the mid-thirties onwards all such vehicles save those in the top price brackets had to be assembled in Ireland, and this was still the situation when the latest in the series of distributor agreements were concluded in 1966. Accordingly it was apparent to the U.K. manufacturers that they were committing themselves to a single distributor, on the basis that their vehicles would have to come in as CKD kits and be assembled by that distributor otherwise they could not come in at all. If the manufacturers were to retain their share of the Irish market, which at that time was very sizeable and important in their eyes, they had no option but to keep up supplies of CKD kits in good order to the nominated distributor-assembler. All parties must also have been conscious of the very considerable capital investment of the Irish distributors in plant and equipment, and the dependence on them for a livelihood of a large, trained work-force which had carried out assembly work for them in the past.
Once an order had been placed by Brittains and accepted by British Leyland, there was, prima facie, an obligation on British Leyland to deliver a complete CKD kit to Dublin within a reasonable time to enable the vehicle which had been ordered to be assembled and sold. This general obligation would arise under the terms of clause 25 (a) of the 1966 agreement. Delivery of incomplete kits on a scale such as undoubtedly took place in the 197173 period resulting in total disruption of the distributor-assemblers business, and giving rise to heavy financial loss, would, in my opinion, amount to a clear breach of the contractual obligations of the manufacturer, giving rise to a valid claim for damages unless such claim were defeated by the special provisions of clause 25(b). The next question which arises for decision is whether clause 25(b) is effective as a defence to the present claim.
Mr Sutherland for British Leyland argued that clause 25(b) provided a complete answer to the present claim as made by Britains. Mr Lardner for Brittains relied on the modern decisions in cases involving fundamental breach, from which he drew the principle that the contract should be construed in such a manner as to give it business efficacy, and not in a manner which would turn it into a unilateral contract leaving one of the contracting parties completely at the mercy of the other with no redress even in the case of total failure of performance by the other.
The relevant agreements in the present case have to be construed according to English law (see, for example, clause 20(a) of the 1966 agreement). As no great divergence was perceptible in this branch of the law of contract, as applied in Ireland and in England prior to the enactment of the unfair Contract Terms Act, 1977, by the United Kingdom Parliament, the parties in the present case agreed to dispense with the conventional assistance of an English lawyer and to argue the case by reference to the recent statements of the law in England as it stood prior to the coming into operation of the Act of 1977.
One of the clearest and most recent expositions of this branch of the law is to be found in the speech of Wilberforce LJ in Photo Production Ltd v Securicor [1980] 1 All ER 556, in which he elucidates what was said by the House of Lords in another leading case, Suisse Atlantique v NV Rotterdamsche [1967] 1 AC 361, and expressly disapproves of the manner in which the Court of Appeal purported to apply the Suisse Atlantique decision in the later case of Harbutts Plasticine Ltd v Wayne Tank and Pump Co Ltd [1970] 1 All ER 225. I refer, in particular, to the following passages of his speech:
I have no second thoughts as to the main proposition that the question whether, and to what extent, and exclusion clause is to be applied to a fundamental breach, or a breach of a fundamental term, or indeed to any breach of contract, is a matter of construction of the contract. (p. 561e)
At the judicial stage there is still more to be said for leaving cases to be decided straightforwardly on what the parties have bargained for rather than on analysis, which becomes progressively more refined, of decisions in other cases leading to inevitable appeals. The learned judge was able to decide this case on normal principles of contractual law with minimal citation of authority. I am sure that most commercial judges have wished to be able to do the same (cf The Angelia, Trade and Transport Inc v Iino Kaiun Kaisha Ltd, per Kerr J). In my opinion they can and should (at 563d).
Wilberforce LJ went on to say that, in addition to Harbutts Case, there must be overruled Waithes (Western) Ltd v Austins (Menswear) Ltd which sought to apply the doctrine of fundamental breach to a case where, by election of the innocent party, the contract had not been terminated, an impossible acrobatic, yet necessarily engendered by the doctrine.
I refer also to the speech of Diplock LJ in the same case. At p. 565, in rejecting the rule of law theory which he said the Court of Appeal had adopted in the last decade to defeat exclusion clauses, he concluded as follows:
Even the superficial logic of the reasoning is shattered when it is applied, as it was in Waithes (Western) Ltd v Austins Ltd, to cases where, despite the fundamental breach, the party not in default elects to maintain the contract in being.
Applying the principles which are then enunciated by Diplock LJ in the following pages, pp. 566/567, I would be prepared to hold in the present case that there was an implied primary obligation (if not an express one) imposed on British Leyland by the 1966 Agreements to deliver complete and satisfactory CKD kits to Brittains in satisfaction of orders which they received and accepted, or to make good without delay any shortage appearing in such kits (which should not, in any event be so numerous as to be disruptive of the assemblers business); that the course of dealing in the 19711973 period disclosed repeated breaches by British Leyland of this primary obligation, amounting to breaches of contract on their part; that these breaches were of such frequency and such gravity as in all probability to entitle Brittains to claim that they had the effect of depriving them ( pro tem. at least) of substantially the whole benefit which it was the intention of the parties that they should obtain from the contract, and entitling them to treat the contract as having been repudiated by Leylands, and themselves as discharged from all primary obligations on their part remaining unperformed.
In the event, however, Brittains did not elect to take this course, and it remains to consider what effect clause 25(c) of the 1966 agreement has in relation to the secondary obligations of the contract-breaker (again using Diplock LJs terminology).
The secondary obligation in case of breach of a primary obligation would normally be to pay monetary compensation to the other party for the loss sustained by him in consequence of the breach.
Diplock LJ recognises, however, that even a primary obligation as well as a secondary one may be excluded or modified by an exclusion clause.
Parties are free to agree to whatever exclusion or modification of all three types of obligation they please within the limits that the agreement must retain the legal characteristics of a contract and must not offend against the equitable rule against penalties Since the presumption is that the parties by entering into the contract intended to accept the implied obligations, exclusion clauses are to be construed strictly and the degree of strictness appropriate to be applied to their construction may properly depend on the extent to which they involve departure from the implied obligations. Since the obligations implied by law in a commercial contract are those which by judicial consensus over the years or by Parliament in passing a statute, have been regarded as obligations which a reasonable businessman would realise that he was accepting when he entered into a contract of a particular kind, the courts view of the reasonableness of any departure from the implied obligations which would be involved in construing the express words of an exclusion clause in one sense that they are capable of bearing rather than another is a relevant consideration in deciding what meaning the words were intended by the parties to bear. But this does not entitle the court to reject the exclusion clause, however unreasonable the court itself may think it is, if the words are clear and fairly susceptible of one meaning only. (at 567 g).
I would construe the exclusion clause in the present case clause 25 (b) of the 1966 agreement as insufficient to exclude the primary obligation to supply vehicles once orders had been placed and accepted, but as sufficient to exclude liability for what Diplock LJ calls the general secondary obligation to pay compensation (damages) for non-performance of such primary obligation.
It appears to me that British Leyland were saying, in effect, when entering into this agreement: We are agreeing to supply you with CKD vehicles for the entire Irish market, but having regard to the fact that our ability to do so may be affected by many different causes from time to time industrial disputes difficulties in obtaining materials, disruption of our own production schedules, and the like we are ruling out ab initio any claim for damages for non-performance of this primary obligation on out part, from whatever cause arising.
If this is the correct construction of the contract then it was undoubtedly a very unattractive proposition from Brittains point of view. Possibly they could have insured against the consequences of non-delivery by the manufacturers in accordance with their obligations, as has been suggested in other cases involving the construction of exclusion clauses. In any event it has be to borne in mind that the only security offered to Brittains for the very substantial capital investment they had made in their assembly premises and plant over the years was a contract terminable at any time on one years notice. This suggests to me that they were prepared to enter into an agreement on terms very much dictated by the manufacturers, while relying on the good faith of the manufacturers to carry out their side of the bargain. There was also the circumstances that the assemblers were in a very strong position as having capacity in terms of plant, premises and work-force to cope with many thousand vehicles per year, which would all be difficult to replace if the manufacturers brought about a termination of the contract, or made life impossible for the other contracting party.
For these reasons I am of opinion that notwithstanding the one-sided appearance of the contract, it had built into it a number of constraints on the manufacturers as well as on the assemblers to carry out in a diligent manner their obligations under its terms. I do not consider that the manner in which I have construed the exclusion clause, in its application to the circumstances which have actually arisen between the contracting parties, is one which prevents the agreement from retaining the legal characteristics of a contract. The situation had some features in common with that described by Wilberforce LJ in Prenn v Simmonds, (already cited) at 241:
Even the argument that Mr Prenns interpretation (of the agreement) would put Dr Simmonds in his hands, although apparently attractive, I find to be dangerous; a man in Dr Simmonds position a professional man entering into relations with the source of finance and benefits to come, might decide, in his own interests that if he could not get all the protection he wanted, the risk of partial protection was one to accept; that Mr Prenn had to be trusted to act fairly. To say that the clause had this result is not to say that it was futile or frustratory; it is to say that a better clause could, with hindsight, in Dr Simmondss interest have been drawn. But the court cannot construct such a clause out of the material given.
Having regard to the manner in which I have construed the provisions of clause 25(a) of the 1966 agreement, I am of opinion that it excludes the claim made by Brittains for damages for the breaches of contract alleged against British Leyland in respect of the 19711973 period whether arising by reason of delivery of CKD vehicle kits affected by serious shortages throughout the entire period, *366 or by reason of constriction on deliveries of vehicles generally in response to orders placed by Brittains.
What I have said in relation to the claim brought under the provisions of the 1966 agreements applies with equal force to the set-off and counterclaim which are based on alleged breaches of the 1973 Agreements insofar as such breaches or alleged breaches were concerned with a continuing situation of delivery of CKD vehicle kits affected by large numbers of known and unknown shortages, and restriction on supplies of vehicles released by British Leyland for the Irish market during the currency of the 1973 Agreements.
I reserve for further consideration, however, the other claims which are still outstanding in the three sets of proceedings referred to at the outset of this judgment, and I would refer, in particular, to
(1) The British Leyland claim for money due in respect of various bills of exchange which are detailed in their pleadings;
(2) The British Leyland claim for money due for goods sold and delivered to Brittains during the currency of the 1973 agreements;
(3) The claim made by Brittains that British Leyland were in breach of contract in serving notice of termination of the 1973 agreements before the three-year period referred to therein had come to an end, and the claim for damages grounded upon such alleged breach of contract;
(4) The claim made by Brittains that British Leyland were not entitled to claim payment for CKD kits delivered in an incomplete condition, until the shortage had been made good, and that the claim made for interest on such payment should be modified accordingly. This is not a separate claim but falls to be considered in relation to the other outstanding claims which have already been mentioned.
Analog Devices BV & Ors v Zurich Insurance Company & Anor
[2005] IESC 12 (16 March 2005)
Composition of Court: Denham J., Hardiman J., Geoghegan J.
Judgment by: Geoghegan J.
Status of Judgment: Approved
Judgments by
Result
Concurring
Dissenting
Geoghegan J.
Appeal dismissed – affirm High Court Order
Denham J., Hardiman J.
Outcome: Dismiss
JUDGMENT of Mr. Justice Geoghegan delivered the 16th day of March 2005
Introductory
This is an appeal from an order of the High Court (Kelly J.) declaring that the above-named appellants are jointly and severally liable on foot of respective policies of insurance issued by them to indemnify the above-named respondents in respect of the losses sustained by them as a consequence of a certain calamitous incident which will be elaborated upon in this judgment. The two policies were apparently referred to throughout the hearing in the High Court as “the local policy” and “the global policy” and this nomenclature was adopted by the learned trial judge in his reserved judgment. I will similarly adopt it in this judgment. The two policies are not identical but are broadly similar and they are what is known in the insurance business as “all risk policies”.
Factual background to claim
Between them, the respondent companies were at all material times engaged in the manufacture, research and design of high performance linear mix signal and digital integrated circuits that address a wide range of real world signal processing applications and for the purposes of this claim the relevant business was carried on at Raheen Industrial Estate in County Limerick. It is not disputed, and the learned High Court judge found as a fact, that twice a year the plaintiffs’ normal manufacturing operation is closed down so as to enable plant maintenance to take place. This usually occurs at Christmas and in the summer. In 1999, such a close down occurred over the August Bank Holiday weekend and required maintenance was then carried out. The maintenance work was carried out by employees of the respondents. During that August Bank Holiday weekend one such employee while carrying out the maintenance fitted an incorrect filter to a machine. Unfortunately, that had catastrophic effects in the manufacturing process and the losses which resulted have given rise to this insurance claim.
On the 17th August, 1999 the respondents, through their brokers, notified the appellants of the claim. The notice described the loss as follows:
“A technician inserted an incorrect filter in the processing unit resulting in the destruction of wafers.”
Because of the error on the part of the maintenance man, hydrochloric acid (“HCL”) contaminated with carbon particles was deposited on raw silicon wafers. As a consequence, a large number of wafers had to be scrapped leading to an interruption of approximately ten days in the manufacturing operation.
It was claimed by the appellants that the losses sought to be recovered under the policies were excluded by the local and/or global policies and accordingly, liability was repudiated. The appellants, in the High Court, relied upon exclusions contained in section III clause F(4), F(5) and F(13) of the local policy and exclusions 10(c), 10(d) and Endorsement No. 1 in the global policy and continue to so rely in the appeal before this court.
The exclusions
The text of the three exclusions in the local policy reads as follows:
“(F) Perils excluded
This policy does not ensure against loss or damage caused by or resulting from:
(4) Errors or defects in design or specification, faulty workmanship or faulty materials, unless a loss by a peril not otherwise excluded ensues, and then only for such ensuing loss;
(5) Errors in processing or manufacturing resulting in damaged property being worked upon, unless a loss by a peril not otherwise excluded ensues, and then only for such ensuing loss.
(13) Against loss or damage caused by, resulting from, contributed to or made worse by actual or threatened release, discharge, escape or dispersal of contaminance or pollutants, or whether direct or indirect, proximate or remote or in whole or in part caused by, contributing to or aggravated by any physical damage insured by this policy, unless loss or damage from a peril insured herein ensues and then this policy shall cover such ensuing damage. This exclusion shall not apply where loss or damage is directly caused by a peril insured against under this contract to property covered.
Contaminants or pollutants means any material which after its release can cause or threaten damage to human health, welfare or causes or threatens damage deterioration, loss of value, marketability or loss of use to property insured hereunder, including, but not limited to, bacteria, fungi, virus or hazardous substance.”
Two of the three exclusions under the global policy are contained in section 10 of the policy and they are in clause (c) and clause (d) respectively. Clause (c) reads as follows:
“This policy does not insure against the cost of making good defective design or specifications, faulty material or faulty workmanship; however, this exclusion shall not apply to loss or damage resulting from such defects, design or specification, faulty material or faulty workmanship.”
Clause 10(d) reads as follows:
“This policy does not insure against errors in processing or manufacture of the insured’s product unless loss or damage not otherwise excluded ensues and then this policy shall cover for such ensuing loss or damage.”
The third exclusion in the global policy is contained in “Endorsement No. 1” and that reads as follows:
“The following provisions are hereby attached to and made part of this policy:
Seepage And/Or Pollution And/Or Contamination Exclusion; Debris, Removal and Cost of Cleanup Extension; Authorities Exclusion.
1. Seepage and/or pollution and/or contamination exclusion
Notwithstanding any provisions of the policy to which this endorsement is attached, this policy does not ensure against loss, damage, costs or expenses in connection with any kind or description of seepage and/or pollution and/or contamination, direct or indirect, arising from any cause whatsoever.
Nevertheless if a peril not excluded from this policy arises directly or indirectly from seepage and/or pollution and/or contamination, any loss or damage insured under this policy arising directly from that peril, shall (subject to the terms, conditions and limitations of the policy) be covered.
However, if the insured’s property the subject of direct physical loss or damage for which this company has paid or agreed to pay, then this policy (subject to its terms and conditions and limitations) insures against direct physical loss or damage to the property insured hereunder caused by or resulting in seepage and/or pollution and/or contamination.”
The learned trial judge held that none of the above exclusion clauses applied and went on to hold that even if any of those exclusion clauses did apply the ensuing damage provisions in the “faulty workmanship” and “error in processing” exclusions, meant that the losses claimed or most of them were in fact covered under the policies.
Principles of interpretation
The interpretation of the local policy is governed by Irish law. The interpretation of the global policy is governed by the law of the Commonwealth of Massachusetts. I propose first to deal with the general principles of interpretation applicable under Irish law and I will comment later on whether and to what extent those principles apply equally in the law of Massachusetts.
In general “all risks” policies of insurance cover all perils unless they have been unambiguously and clearly excluded. In Rohan Construction Limited v. Insurance Corporation of Ireland Limited [1988] ILMR 373 at 377 Griffin J. in a judgment with which Finlay C.J. and Hederman J. concurred said the following:
“It is well settled that in construing the terms of a policy the cardinal rule is that the intention of the parties must prevail, but the intention is to be looked for on the face of the policy, including any documents incorporated therewith, in the words in which the parties have themselves chosen to express their meaning. The Court must not speculate as to their intention, apart from their words, but may, if necessary, interpret the words by reference to the surrounding circumstances. The whole of the policy must be looked at, and not merely a particular clause.”
As is pointed out in the written submissions of the respondent, Griffin J. goes on to expand on the meaning of “surrounding circumstances” and he refers with approval to a passage from the speech of Lord Wilberforce in Reardon Smith Line Ltd v. Yngvar Hansen-Tongen, [1976] 3 All ER 570 at 574/5:
“…When one speaks of the intention of the parties to the contract, one is speaking objectively – the parties cannot themselves give direct evidence of what their intention was – and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly, when one is speaking of the aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have had in mind in the situation of the parties … what the Court must do must be to place itself in thought in the same factual matrix as that in which the parties were”.
In modern times these principles have received further expansion from the House of Lords. Lord Hoffman in Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896 considered that quite a radical change had come about the result of which “subject to one important exception” was to assimilate the way in which such documents are interpreted by judges to the commonsense principles by which any serious utterance would be interpreted in ordinary life. He then set out the modern principles as he saw them and which I would accept.
“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’ but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammar; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must for whatever reason, have used the wrong words or syntax; see Mannai Investments Co. Ltd. V. Eagle Star Life Assurance Co. Ltd. [1997] AC 749.
(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Anntaios Compania Naviera S.A. v. Salen Rederierna A.V. [1985] A.C. 191, 201:
‘If details semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense’.”
I am inclined to the view that applying those ordinary principles, the learned trial judge’s findings can be supported. But even if I was wrong about that, I have absolutely no doubt that those findings are correct having regard to the further principles which I am about to explain.
A fundamental principle which appears to be particularly relevant to this case is the principle of contra proferentem. Clark in the 4th edition of Contract Law in Ireland at p. 149 sets out the general principle as follows:
“If the exempting provision is ambiguous and capable of more than one interpretation then the courts will read the clause against the party seeking to rely on it.”
The application of the principle to insurance contracts is treated in the same work at p. 273. The author points out that two Irish cases provide clear guidance on the position to be adopted in the interpretation and construction of insurance contracts. The following passage from Rohan Construction Limited v. Insurance Corporation of Ireland Limited [1986] I.L.R.M. 419 from a High Court judgment of Keane J. (as he then was). The passage reads as follows:
“It is clear that policies of insurance, such as those under consideration in the present case, are to be construed like other written instruments. In the present case, the primary task of the court is to ascertain their meaning by adopting the ordinary rules of construction. It is also clear that, if there is any ambiguity in the language used, it is to be construed more strongly against the party who prepared it, i.e. in most cases against the insurer. It is also clear that the words used must not be construed with extreme literalism, but with reasonable latitude, keeping always in view the principal object of the contract of insurance.”
In Cheshire Fifoot and Furmston’s Law of Contract 13th edition the rule is defined as meaning that if there is any doubt as to the meaning and scope of the excluding or limiting term, the ambiguity should be resolved against the party who inserted it and seeks to rely on it.
The second Irish case referred to by Clark is In re Sweeney and Kennedy’s Arbitration [1950] I.R. 85 where Kingsmill Moore J. in his judgment in the High Court on a special case stated on a question of law arising from the award of an arbitrator said at pp 98-99 of the report the following:
“But, even if I am wrong in my conclusion that the interpretation is reasonably free from doubt, the case must be decided against the underwriters if the words are ambiguous. The wording of the proposal form and the policy was chosen by the underwriters who knew, or must be deemed to have known, what matters were material to the risk and what information they desire to obtain. They were at liberty to adopt any phraseology which they desired. They could have provided clearly and expressly that no driver should be employed who was under twenty one years of age or had less than twelve months experience, and they could have done this by means of a special condition or by an addition to the final proviso under the heading ‘description of drivers’ in the policy. Indeed they could have secured their object (if it was their object) with perfect clarity in half a dozen ways. If, then, they choose to adopt ambiguous words it seems to be good sense, as well as established law, that those words should be interpreted in the sense which is adverse to the persons who chose and introduced them: Anderson v. Fitzgerald (1), per Lord St. Leonards, at p. 507; Fowkes v. Manchester and London Life Assurance and Loan Association (2), per Cockburn CJ at p. 925 and per Blackburn J., at p. 929; Fitton v. Accidental Death Insurance Co. (3), per Willes J., at p. 135.
Assuming, then, that the interpretation is not so clear as I think it is, and that Mr. Doyle’s interpretation of the words may be as feasible as Mr. Kenny’s, I must still decide against the underwriters who chose words raising such ambiguity. I would like to associate myself with the opinion of Lord Greene M.R. in Woolfall & Rimmer, Ltd. v. Moyle (4), at p. 73, where he said:- ‘…if underwriters wish to limit by some qualification a risk which, prima facie, they are undertaking in plain terms, they should make it perfectly clear what that qualification is. They should, with the aid of competent advice, make up their minds as to the qualifications they wish to impose and should express their intention in language appropriate for achieving the result desired. There is no justification for underwriters, who are carrying on a widespread business and making use of printed forms either failing to make up their minds what they mean, or, if they have made up their minds what they mean, failing to express it in suitable language. Any competent draughtsman could carry out the intention which [counsel] imputes to this document, and, if that was really intended, it ought to have been done’.”
Kingsmill Moore J. went on to observe that what Lord Greene had to say was “but the latest expression of a sentiment which judge after judge has uttered for nearly a century” and he goes on to cite other passages which indicate that an insurance policy ought to be framed in such a way that it can be clearly understood. The principle of contra proferentem need only be resorted to of course if there is an ambiguity. I will be considering that question in due course. The second important general principle in relation to exclusions is that the onus is on the insurer to establish the application of the exclusion or exemption. Counsel for the respondents cite in their written submissions to this court a passage from the judgment of Hanna J. in General Omnibus Company Limited v. London General Insurance Company Limited [1936] I.R. 596 which is in the following terms.
“The first defence depends upon the interpretation and construction of the exclusions or exceptions as stated in exemption (e). The policy starts by giving an indemnity in general terms and then imposing exceptions. The law is that the insurance company must bring their case clearly and unambiguously within the exception under which they claim benefit, and, if there is any ambiguity, it must be given against them on the principle of contra proferentes.”
On appeal the Supreme Court took a different view on the interpretation of the policy but it was not suggested that the general principle stated by Hanna J. was incorrect. In the same written submissions there is a passage from the standard work Ivamy General Principles of Insurance Law 6th ed. 1993 which is worth quoting and it reads as follows:
“Since exceptions are inserted in the policy mainly for the purpose of exempting the insurers from liability for a loss which, but for the exception, would be covered by the policy, they are construed against the insurers with the utmost strictness. It is the duty of the insurers to except their liability in clear and unambiguous terms.”
Errors in Processing or Manufacturing
I turn now to the actual exclusion clauses in these policies. Starting with the local policy, the appellants rely in the first instance on the exclusion in relation to errors in processing or manufacturing resulting in damaged property being worked upon. They argue, indeed they suggest that it is indisputable, that when the contaminated acid was used to clean the silicon wafers this constituted an error in process or manufacture. In this regard they relied particularly on the evidence of a Mr. Zuck called on behalf of the appellants who, when asked what the effect of the particles from the filter membrane would have had on the HCL replied:
“The HCL itself had the corrosive for the chemical attack on the membrane material. The effect then would be that we would have carbon debris of different sizes flowing to the wafer. It probably had very little effect as to changing its Ph or changing its HCL nature. Where it had the effect was when it was called upon to clean off a wafer, it did the opposite and made the wafer more dirty. In other words the HCL which was designed to clean the wafers in fact damaged them and made them unusable.”
This, of course, begs the questions of what is an error and when was it made. I find myself in complete agreement with the learned trial judge that there was one single error which caused the problems and that was the error referred to above at the time of the maintenance work. The fault in manufacture and processing was then automatic and was not in itself an “error” rather, it was the consequence of the one and only error. I would also agree with the trial judge that there was no manufacturing or processing being carried on at the time of the maintenance error. In my opinion, the position becomes quite clear if one asks oneself a few simple questions. Was there manufacturing going on in the August Bank Holiday of 1999? Answer: No, the machines were closed down for maintenance. Did something go wrong during the maintenance operation? Answer: Yes. Was that the sole cause of everything that went wrong afterwards? Answer: Yes. I cannot see that the evidence of Mr. Zuck makes the slightest difference to that obvious interpretation.
However, I must now deal with a different argument put forward by the appellants. They say that the actual maintenance is part of the processing or manufacturing. In making this argument they particularly rely on the evidence of Mr. Tony O’Keeffe, consulting engineer. Mr. O’Keeffe made it clear in his evidence that the maintenance work was essential and that the manufacturing process could not be done without it. Running right through the submissions both in writing and orally of the appellants is their insistence on the necessity of the maintenance arrangements but in my view, and clearly in the view of the trial judge that does not have the effect of rendering the maintenance part of the processing or manufacturing. They are two different activities (or three different activities if one accepts the submission by the appellants that processing is somewhat wider than manufacturing). The man who made the unfortunate error when replacing the filters was a Mr. Gaffrey who was a “facilities technician” with the appellants. He was part of a group of five employees. He had nothing to do with and no role to play in the day to day processing and manufacturing. There was nothing particularly unique about the necessity for the maintenance twice a year in relation to this manufacture and process but maintenance it remained. It would seem to me that as a matter of plain English it cannot be regarded as part of the actual manufacturing or processing. Even if I were wrong about this, at the very least, there is an ambiguity and for the reasons which I have already given, that ambiguity would have to be resolved against the appellants.
Faulty workmanship
I turn now to the “faulty workmanship” exclusion. The trial judge held that in the context of the policies the expression “faulty workmanship” applied only to the manufacturing process and not to a fault in maintenance work and that, accordingly, the loss resulting from Mr. Gaffrey’s error was not excluded. On the meaning of the expression “faulty workmanship” the learned trial judge referred to cases decided in the courts of England, Australia, British Colombia and the United States of America and went on to observe that the term does not appear to have been considered by an Irish court. The trial judge then said the following at p. 40 of his unreported judgment:
“Having touched upon a number of the authorities which were relied upon I must not lose sight of the essential purpose of my attempting to construe these policies and their exclusion clauses namely to try and ascertain what the mind of the parties was when they were negotiated. In that regard I am entitled to take into account the general background which existed.
I have come to the conclusion that in the context in which these policies were negotiated and given the state of knowledge in particular of the defendants both as to the operations which were in place at the plaintiffs’ premises with its biannual close down for maintenance and the existence of a species of exclusion clause which dealt with precisely that situation the defendants did not exclude liability for the undoubtedly negligent act of Mr. Gaffrey in the course of carrying out the maintenance work.”
The trial judge was entitled to arrive at that view, but I think it appropriate to comment upon the arguments to the contrary put forward by the appellants. It is argued on behalf of the appellants that neither the clause in the local policy or its equivalent in the global policy suggest that only faulty workmanship during the course of manufacturing is excluded. This would seem to me to beg the question of what is really meant by “faulty workmanship”. It is clearly the opposite to good workmanship. If a furniture maker makes a chest of drawers and the drawers subsequently work well and handles do not fall off it would be perfectly normal English to observe that he applied “good workmanship”. If, on the other hand, a house owner has a regular contract for maintenance of his central heating system and that is done with efficiency in the sense that it does not break down, I do not think that one would ever use the expression “good workmanship”. Essentially, that expression relates to the making of something or the building of something rather than the maintaining or repairing of something. But that is simply a layman’s approach though not an irrelevant approach. The learned trial judge quite rightly sought assistance from case law.
The second complaint of the appellants is that the learned trial judge had regard to evidence that insurance companies had available to them standard exclusion clauses relating to maintenance work and the trial judge felt entitled to draw inferences from the absence of such a clause. In my opinion, the learned trial judge was correct on both counts.
In relation to the meaning of “faulty workmanship”, the learned High Court judge first referred to the English High Court case of Kier Construction Limited v. Royal Insurance (U.K.) Limited [1992] 30 Con LR 45 where Judge Bowsher QC sitting as an official referee said the following.
“Workmanship is the skill required to convert a designed plan and specification into an object: in modern engineering projects it is usually the skill of a team rather than the skill solely of an individual.”
The trial judge next referred to the Australian case of Queensland Railways v. Manufacturers Mutual Insurance [1969] 1 Lloyds Rep. 214 where Windeyer J. in the High Court of Australia said the following:
“Faulty workmanship I take to be a reference to the manner in which something was done, to fault on the part of the workman or workmen”.
But Kelly J. points out that in making that observation the learned judge was drawing a distinction between faulty workmanship and faulty design.
Thirdly, the learned High Court judge referred to All State Insurance v. Smith [1999] fdd 447 a decision of the United States Court of Appeals (Ninth Circuit). The court in that case was concerned with the exclusion for faulty workmanship in an all risk policy. The learned High Court judge, however, accepted the expert evidence of a Massachusetts lawyer that that case having been decided in California did not represent good law and certainly, did not represent the law of the Commonwealth of Massachusetts for the purpose of the global policy.
Fourthly, the judge referred to a decision of the Court of Appeals of Indiana in Schultz v. Erie Insurance Group 754 NE 2 d 971. The court in considering what was meant by “faulty workmanship” in an insurance policy reiterated the well known doctrine that courts construe ambiguous terms in an insurance policy in favour of the insured where there is an exclusion clause involved.
The learned trial judge’s analysis of these cases has been criticised in the written submissions of the appellants. However, it does not seem to me that on any interpretation of them they particularly assist on the key question of whether “faulty workmanship” in the policies the subject of this appeal included errors in maintenance. For the reasons which I have already indicated, I believe that they did not and that was clearly the view of the learned High Court judge independently of any of the case law which he cited.
As I have already indicated I accept the entitlement of the learned trial judge to have regard to the evidence that in the area of the insurance market in which these policies would have issued, the companies had available to them standard exclusion clauses relating to maintenance work. In particular, the judge was entitled to draw inferences from the absence of such a clause. The appellants criticise him for doing this on the basis that the judge was required by law to ascertain the parties’ intention by reference to the words used by the parties. In this context and in the written submissions the appellants referred to Igote v. Badsey [2001] I.R. 511 in the following passage from the judgment of Murphy J.
“At the end of the day the rule as to construction and the context in which it is to be achieved is most succinctly expressed in the judgment of Keane J. (as he then was) in Kramer v. Arnold [1997] 3 I.R. 43 at p. 55 when he said:-
‘In this case, as in any case where the parties are in disagreement as to what a particular provision of a contract means, the task of the court is to decide what the intention of the parties was, having regard to the language used in the contract itself and the surrounding circumstances’.”
The learned trial judge in having regard to the existence of certain standard clauses which were not in these policies was fully complying with the principles there laid down by Keane J. He was merely carrying out the task of interpretation in the light of “the surrounding circumstances”. To put it another way he regarded those matters as “the relevant factual matrix”. It is worthwhile at this point citing the trial judge’s own explanation of what he did:
“Having touched upon a number of the authorities which were relied upon I must not lose sight of the essential purpose of my attempting to construe these policies and their exclusion clauses namely to try and ascertain what the mind of the parties was when they were negotiated. In that regard I am entitled to take into account the general background which existed.
I have come to the conclusion that the context in which these policies were negotiated and given the state of knowledge in particular of the defendants both as to the operations which were in place at the plaintiffs’ premises with its biannual close down for maintenance and the existence of a species of exclusion clause which dealt with precisely that situation, the defendants did not exclude liability for the undoubtedly negligent act of Mr. Gaffrey in the course of carrying out the maintenance work.
Had they wished to exclude liability for maintenance it was, on the state of knowledge available to them, perfectly open to them to do so. In my view in the context of these policies of insurance the term ‘faulty workmanship’ did not exclude liability for defective work which was not done in the manufacturing process…”.
Contamination/pollution exclusion
Even though in this instance the wordings of the two exclusions coming broadly under this heading in the local and global policies respectively is rather different, the same fundamental question of interpretation must first be asked. Were these clauses intended to exclude liability for environmental contamination or pollution external to the actual manufacturing process. It is of limited assistance only to have recourse to case law on this question because every policy considered by the courts has had different wording and has not necessarily the same purpose. The case law, however, can be helpful and the learned trial judge made good use of some American authorities. His own overall view is summed up in the following passage at p. 50 of his unreported judgment:
“Even apart from these American authorities it seems to me on a fair view of the exclusion, it was directed towards a situation where a toxic substance would escape from its place of containment into the environment giving rise to damage as a result. I do not think that on a fair reading of it it can be said to have any application to the present situation where there was no escape or release or discharge of the hydrochloric acid. Neither did the hydrochloric acid go anywhere where it ought not to have been and it certainly did not pollute or contaminate the environment.”
The learned trial judge found particularly helpful the decision of the Supreme Judicial Court of Massachusetts in Western Alliance Insurance Company v. Gill 426 Mass. 115. Delivering the judgment of that court, Greaney J. held that a somewhat similar exclusion was intended to deal with “environmental pollution” and not to exclude for “ordinary business activities”. The judge went on to say the following:
“… the terms used in the pollution exclusion, such as ‘discharge’, ‘dispersal’, ‘release’, and ‘escape’, are terms of art in environmental law which generally are used with reference to damage or injury caused by improper disposal or contaminant of hazardous waste … The exclusion should not reflexedly be applied to accidents arising during the course of normal business activities simply because they involve a ‘discharge, dispersal, release or escape’ of an ‘irritant or contaminant’… the history of the pollution exclusion indicates that the provision was drafted to avoid enormous expense of environmental litigation.”
The learned trial judge goes on to point out that this view of the Supreme Judicial Court of Massachusetts was subsequently approved by the United States Court of Appeals for the Sixth Circuit in Meridian Mutual Insurance Company v. Kelman 197F 3d 1178. The relevant passage in the judgment of that court reads as follows:
“State and Federal Courts are split on the issue of whether an insurance policy’s total pollution exclusion bars coverage for all injuries caused by contaminants, or whether the exclusion applies only to injuries caused by traditional environmental pollution. Many courts including the Sixth Circuit, have held that a pollution exclusion clause in a CGL insurance policy applies only to injuries caused by traditional environmental pollution…
The Seventh Circuit has explained the reasoning behind limiting the application of pollution exclusion clauses only to injuries caused by traditional environmental pollution as follows:
‘Without some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to absurd results. To take but two simple examples, reading the clause broadly would bar coverage for bodily injuries suffered by one who slips and falls on the split contents of a bottle of Drano, and for bodily injury caused by an allergic reaction to chlorine in the public pool. Although Drano and chlorine are both irritants or contaminants that cause, under certain conditions, bodily injury or property damage, one would not ordinarily characterise these events as pollution. To redress this problem courts have taken a common sense approach when determining the scope of pollution exclusion clauses … A reasonable policy holder, these courts apparently believed, would not characterise such routine instance as pollution’.”
I would repeat that without the assistance of any of this case law (and it is very helpful) I would take the view that on a natural interpretation of the respective clauses in the local policy and the global policy only environmental damage was intended to be excluded. However, in relation to the global policy, I would particularly have regard to the cases cited given that the law of the Commonwealth of Massachusetts applies.
Massachusetts Law
The views which I have expressed in relation to the exclusions in the local policy would seem to apply equally to the global policy. The learned trial judge seems to have found and, in my view, on the evidence of the legal experts was entitled to find that there was no material difference between the general principles of insurance law in Massachusetts and the general principles applicable in this jurisdiction. In the written submissions of the appellants before this court there is an attempt to rubbish the qualifications of the legal expert in relation to Massachusetts law called on behalf of the respondents and there is also a criticism that the learned trial judge, to some extent at least, interpreted the American case law himself and decided the issues arising on the global policy based on his own opinion rather than the opinion of Massachusetts legal experts. Both of these criticisms are ill-founded.
The legal expert called on behalf of the respondent was a Mr. Dolan, a former District Court judge. There is nothing in the tenor of his evidence to support the view that he was not competent to give it. Nor is that suggestion in any way made by Professor Baker, the expert called on behalf of the appellant. Reading Mr. Baker’s evidence, one is left with the impression that although he did not agree with Mr. Dolan on everything he regarded him with equal respect. The main if not the only area of disagreement of any importance between Mr. Baker and Mr. Dolan was that Mr. Baker took the view that policies are differently interpreted depending on whether it is what he called “the consumer mass market type of insurance” or whether it was, as it were, a custom made insurance policy with a big undertaking. Mr. Dolan did not, in the main, accept the validity of this distinction. Even in the evidence of Mr. Baker the distinction was not firmly established. To a large extent Mr. Baker was speculating on how the Supreme Court in Massachusetts would react in given situations. The learned trial judge was perfectly entitled to prefer the view of Mr. Dolan on this matter to the view of Mr. Baker.
In relation to the criticism of the trial judge for applying his own mind to Massachusetts law there is an interesting and relevant piece of dialogue between Mr. Gallagher, S.C., counsel for the appellant and Mr. Baker. It reads as follows:
“Q. Mr. Gallagher: Are there any other matters, apart from
those cases and the principles you have decided that would inform the Massachusetts courts approach to the error in processing clause?
A. Let me look at my report here and see if I
noted anything else. Other than what I
have mentioned given that they are the
paucity of authority it is really going to
be up to Your Lordship to look at what
the words say and decide how they apply
to the facts in the case.”
The learned trial judge can hardly be criticised if he did just that.
It seems clear from the evidence of Professor Baker that before coming to Ireland to give evidence he had not applied his mind at all to the important issue of there being a standard type of exclusion in respect of maintenance and to the fact that that exclusion was not included in the global policy. In cross-examination of Professor Baker, Mr. Denis McDonald, S.C., counsel for the respondent, referred the professor to a leading case known as the Palmer case decided in the Supreme Court of Massachusetts. Professor Baker conceded that that that case which was quite an old authority laid down the principle that ambiguities are to be construed against the insurer and exclusions from coverage are to be strictly construed. Through the same witness, Mr. McDonald established that the reason for the principle was that it promoted the policy’s basic purpose of indemnity and, indeed, that that had been stated in the case of Schultz v. Erie Insurance Group the case decided by the Court of Appeal of Indiana. The purpose of this line of cross-examination was to destroy the credibility of Professor Baker’s claim to distinction between general consumer policies and custom made policies.
Mr. Dolan, in his evidence, expressly referred to the Western Alliance case and described it as “the controlling case here”. He said that Greaney J. had there interpreted the pollution provision as applying to environmental issues matters that would pollute or contaminate damage soil or water supply. He said that that continued to be “the binding law in Massachusetts but the reference in that policy in Western Alliance to pollution referred only to environmental catastrophe, hazardous waste”. He referred to some other case law also in support of the same proposition. On foot of the evidence of Mr. Dolan and Professor Baker, the learned trial judge was entitled to take the view which he did in relation to the interpretation of the global policy on both the error in processing and the faulty workmanship exclusion. Even if there was an ambiguity, that ambiguity under the law of the Commonwealth of Massachusetts would have had to be resolved in favour of the insured.
Since I take the view that the learned High Court judge was correct in his interpretation of all six exclusion clauses between the two policies, it is not necessary for me to consider the rather more difficult questions relating to the meaning of “ensuing loss”. If an exclusion does not apply then the question of whether something is an exception to the exclusion does not arise.
At this point, I want to make it clear that I am not in any way disregarding the evidence of Mr. Bergin and others as to the broad factual matrix that all risks policies are not intended to guarantee a manufacturer’s product or to cover what he and other witnesses called the “efficacy risks”. It would be extraordinary if a manufacturer who used say, the wrong men or the wrong machines to make his product with the result that the product was defective could turn to his insurance company on foot of an all risk policy. No doubt conceptually there could be such a policy but it would be highly improbable and, as I understand the evidence, neither appellant nor respondent were at any stage suggesting that these policies would have that effect. But as found by the learned High Court judge (and in my view correctly found) this was not an error in processing or manufacturing nor could it be described as faulty workmanship. Rather it was an error in a quite independent activity, that is to say, maintenance. I would regard as wholly fallacious the submission that because maintenance was essential for the processing and manufacturing it somehow or other became part of the processing or manufacturing. That seems to me to be a complete non-sequitur and obviously this was also the view of the learned High Court judge.
For all these reasons, I would dismiss the appeal.
Smith -v- Meade & Ors
[2009] IEHC 99 (05 February 2009)
Judgment delivered by Mr. Justice Michael Peart delivered on the 5th day of February 2009.
The plaintiff was injured on the 19th June 1999 when the car in which he was a passenger, which was owned by the second defendant, and being driven by the first defendant, was in collision with another vehicle due, it is alleged, to the negligence of the first named defendant.
The part of this vehicle where the plaintiff was when this accident occurred had not been designed and constructed with seating accommodation for passengers.
There was in existence a compulsory insurance policy in respect of this vehicle which the second named defendant had taken out with the third named defendant “FBD”, whereby that body was required to provide an indemnity in respect of loss and damage sustained by third parties as a consequence of any negligence, breach of duty and breach of statutory duty by the second named defendant and any persons driving the vehicle with his consent and authority.
FBD has declined to provide an indemnity to the second named defendant in respect of the plaintiff’s injuries, on the basis that the policy in question does not cover liability in respect of personal injuries to persons being carried as a passenger in a part of the vehicle which was not designed and constructed with seating accommodation for passengers.
In its Defence FBD has pleaded that the policy of insurance taken out by the second named defendant does not cover the plaintiff’s loss because the vehicle in question was a van and that the plaintiff was travelling as a passenger in the rear of the van where there were no seats for passengers. It pleads also that at all material times FBD complied with its obligations under the Road Traffic Acts and under S.I. 346 and 347 of 1992. It relies upon the provisions of s.65 (1) (a) of the Road Traffic Act, 1961, as amended by Article 7 of S.I. 347of 1992. Section 65 of the Act provides a definition of “excepted person” i.e. persons whose injuries are not required to be covered in a policy of insurance. That amended section provides:
“65. – (1) (a) Any person claiming injury to himself sustained while he was in or on a mechanically propelled vehicle (or a vehicle drawn thereby) to which the relevant document relates, other than a mechanically propelled vehicle, or a drawn vehicle, or vehicles forming a combination of vehicles, of a class specified for the purposes of this paragraph by regulations made by the Minister, provided that such regulations shall not extend compulsory insurance in respect of civil liability to passengers to –
(i) any part of a mechanically propelled vehicle, other than a large public service vehicle, unless that part is designed and constructed with seating accommodation for passengers, or
(ii) a passenger seated in a caravan attached to a mechanically propelled vehicle while such a combination of vehicles is moving in a public place.”
FBD submits that the plaintiff is therefore an excepted person, and one in respect of whose injury while a passenger it was not required by law to cover the liability of the first and second named defendants.
The policy of insurance taken out by the second named defendant provided, inter alia, that “passenger cover only operates for one passenger seated on a fixed seat in the front of the vehicle”.
The preliminary issue for decision at this point ahead of the hearing of the plaintiff’s claim for damages for his injuries is whether or not the clause in the policy upon which FBD seek to rely in order to decline an indemnity to the first and second defendants in respect of any liability they may be found to have to the plaintiff is in fact void, having regard to certain EU Directives and certain judgments of the European Court of Justice. I will come to those in due course. In the event that the Court concludes that this clause is not void, certain other issues arise such as whether the plaintiff has a claim against the fourth named defendant arising from what is submitted would have been a failure, neglect or refusal to transpose these Directives into Irish law as of the date of the collision in which the plaintiff was injured, the 31st December 1998 being the date by which the fourth named defendant was required to have transposed same into Irish law.
The plaintiff’s legal submissions:
Anthony Collins SC for the plaintiff refers to the relevant articles of the EU Directives relevant to this issue, and he has helpfully set out the relevant provisions upon which he relies in his written submissions, as follows:
Article 3 (1) of Council Directive of 24th April 1972 (72/166/EEC) (hereinafter referred to as “the First Directive”) on the approximation of the laws of the Member States relating to insurance against civil liability in respect of the use of motor vehicles, and to the enforcement of he obligation to insure against liability:
“Each Member State shall, subject to Article 4, take all appropriate measures to ensure that civil liability in respect of the use of vehicles normally based in its territory is covered by insurance. The extent of the liability covered and the terms and conditions of the cover shall be determined on the basis of these measures.”
Recitals 7 and 9 of Council Directive of 30th December 1983 (84/5/EEC) (hereinafter referred to as “the Second Directive”) on the approximation of the laws of the Member States relating to insurance against civil liability in respect of the use of motor vehicles:
“Whereas it is in the interest of victims that the effects of certain exclusion clauses be limited to the relationship between the insurer and the person responsible for the accident; …”
“Whereas the members of the family of the insured person, driver or any other person liable should be afforded protection comparable to that of other third parties, in any event in respect of their personal injuries.”
Article 2 (1) of the Second Directive:
“Each Member State shall take the necessary measures to ensure that any statutory provision or any contractual clause contained in an insurance policy issued in accordance with Article 3 (1) of Directive 72/166/EEC, which excludes from insurance the use or driving of vehicles by:
– persons who do not have express or implied authorization thereto, or
– persons who do not hold a licence permitting them to drive the vehicle concerned, or
– persons who are in breach of the statutory technical requirements concerning the condition and safety of the vehicle concerned, shall, for the purposes of Article 3 (1) of Directive 72/166/EEC be deemed to be void in respect of claims by third parties who have been victims of an accident.
However, the provision or clause referred to in the first indent may be invoked against persons who voluntarily entered the vehicle which caused the damage or injury, when the insurer can prove that they knew the vehicle was stolen.” (my emphasis)
Article 1 of Council Directive of 14th May 1990 (90/232/EEC) (hereinafter referred to as “the Third Directive”):
“Without prejudice to the second subparagraph of Article 2 (1) of Directive 84/5/EEC, the insurance referred to in Article 3 (1) of Directive 72/166/EEC shall cover liability for personal injuries to all passengers, other than the driver, arising out of the use of a vehicle.” (my emphasis)
In addition to Article 1 thereof, Mr Collins has referred to certain recitals in the Third Directive which state that motor accident victims should be guaranteed comparable treatment irrespective of where in the European Community accidents occur, and note that there are gaps in the compulsory insurance cover of motor vehicle passengers in certain Member States and that, in order to protect “this particularly vulnerable category of potential victims” such gaps should be filled. Other recitals therein state that the first and second directives should be supplemented in a uniform manner, and that such an addition which leads to greater protection for the parties insured and for the victims of accidents, will facilitate still further the crossing of internal Community frontiers and hence the establishment and functioning of the internal market.
Mr Collins has referred to the fact that in its judgment in Ruiz Bernáldez [1996] E.C.R.I-1829 at paragraphs 16 and 18 the Court of Justice has observed:
“16. In order to reduce the disparities which continued to exist between the laws of the Member States with respect to the extent of the obligation of insurance cover (third recital in the preamble to the Second Directive), Article 1 of the Second Directive required compulsory cover, as regards civil liability, for both damage to property and personal injuries, up to specified sums. Article 1 of the third Directive extended that obligation to cover for personal injuries to passengers other than the driver.
18. In view of the aim of ensuring protection, stated repeatedly in the directives, Article 3 (1) of the First Directive, as developed and supplemented by the Second and Third Directives, must be interpreted as meaning that compulsory motor insurance must enable third party victims of accidents caused by vehicles to be compensated for all the damage to property and personal injuries sustained by them, up to amounts fixed in Article 1 (2) of the Second Directive.”
Mr Collins has referred to the fact that the Road Traffic (Compulsory Insurance) (Amendment) Regulations 1992 (S.I. No. 346 of 1992) and the European Communities (Road Traffic) (Compulsory Insurance) (Amendment) Regulations 1992 (S.I. 347 of 1992), which purported to transpose the Third Directive into Irish law, expressly excluded passengers in the rear of vehicles not generally designed or constructed to carry passengers from the scope of compulsory third party motor insurance.
By way of submission that the Third Directive has not been properly transposed into Irish law, and also that the exclusion clause at issue in these proceedings is void, has referred to the judgment of the Court of Justice in Farrell v. Whitty [2007] ECR I-3067 arising from a reference for a preliminary ruling under Article 234 EC by the High Court here concerning the interpretation of Article 1 of the Third Directive. The plaintiff in that case had been travelling in a van which was not designed and constructed for the carriage of passengers in the rear of the vehicle. She had been seated on the floor of the van behind the front seats thereof. The driver was not insured, but the MIBI had refused to compensate her since she was travelling in that way, and that her injuries were not therefore a liability for which insurance was compulsory under the Road Traffic Act, 1961. Firstly it was pointed out that Article 1 provides that compulsory insurance is to cover liability for personal injuries to “all passengers, other than the driver”. Secondly it was stated that it would be contrary to the objectives of the Community legislation to exclude from the concept of ‘passenger’ and thus from insurance persons such as the plaintiff in that case, and therefore the plaintiff in the present proceedings, and that such an interpretation had been confirmed by the case-law of the Court. The Court stated that “Article 1 of the Third Directive is to be interpreted as precluding national legislation whereby compulsory motor vehicle liability insurance does not cover liability in respect of personal injuries to persons travelling in a part of a motor vehicle which has not been designed and constructed with seating accommodation for passengers”. The Court went on to state that Article 1 of the Third Directive has direct effect, the criteria of unconditionality and sufficient precision being satisfied.
Mr Collins submits that FBD cannot rely on the exclusion clause in the policy of insurance in this case, and thereby refuse to indemnify the first and second named defendants in respect of the plaintiff’s injuries, and in support refers to the judgment of the Court of Justice in Ruiz Bernáldez [supra]. That case is factually different to the present case in so far as the exclusion clause sought to be relied upon so as to absolve the insurance company in question was one that excluded damage to property caused where the driver of the vehicle was intoxicated. Nevertheless, the questions asked by the national court and the Court’s judgment speak to the issue in the present proceedings. The judgment of the Court states:
“By Questions 1 to 4, which may be considered together, the national court seeks to ascertain whether Article 3 (1) of the First Directive is to be interpreted as meaning that, without prejudice to the provisions of Article 2 (1) of the Second Directive, a compulsory insurance contract may provide that in certain cases, in particular where the driver of the vehicle was intoxicated, the insurer is not obliged to pay compensation for the personal injuries and damage to property caused to third parties by the insured vehicle, or whether in such cases the compulsory insurance contract may provide only that the insurer is to have a right of recovery against the insured.”
I have already set out what the Court stated at paragraphs 16 and 18 of its judgment, and at paragraph 24 of its judgment, the Court concluded as follows:
“The answer to Questions 1 to 4 must therefore be that Article 3 (1) of the First Directive is to be interpreted as meaning that, without prejudice to the provisions of Article 2 (1) of the Second Directive, a compulsory insurance contract may not provide that in certain cases, in particular where the driver of the vehicle was intoxicated, the insurer is not obliged to pay compensation for the damage to property and personal injuries caused to third parties by the insured vehicle. It may on the other hand provide that in such cases the insurer is to have the right of recover against the insured.”
Mr Collins in addition has referred to passages from the Opinion of Advocate General Lenz in the same case delivered on the 25th January 1996. I do not feel it necessary to set these out in my judgment.
FBD’s legal submissions:
The Court has received very helpful submissions on behalf of the Third named defendant from both Patrick Connolly SC and Anthony Kidney SC. They have highlighted the fact that the Third Directive was not transposed into Irish law by the date limited for such transposition, namely 31st December 1995, and that FBD in issuing the policy of insurance to the second named defendant, it did so in accordance with the statutory regime in place here as of the date of issue, and in compliance therefore with S.I. 346 of 1992 and S.I. 347 of 1992. In such circumstances, it is submitted, FBD was not required to provide insurance cover in respect of injuries caused to any passenger travelling “in any part of a mechanically propelled vehicle … unless that part is designed and constructed with seating accommodation for passengers”, and in these proceedings are entitled to rely upon that exclusion clause in order to decline an indemnity to the first and second named defendants in respect of the plaintiff’s injuries.
It is submitted on behalf of FBD that since it had operated in accordance with the statutory regime in place when it issued this policy to the second named defendant, the plaintiff’s remedy is against the fourth named defendant on the basis of a failure to transpose the Third Directive into Irish law by the required date, in accordance with so-called Frankovich principles. It is submitted also that in so far as this Third Directive may have direct effect, it does so against the State and any emanation of the State only, and not against FBD which, it is accepted, is not an emanation of the State. Having referred to judgments of the Court of Justice in cases Marshall v. Southampton & South-West Hampshire Area Health Authority (Case 152/84) [1986] ECR 723, and Faccini Dori v. Receb Srl (Case C-91/92) [1994] ECR I-3325, Mr Connolly has referred to the judgment of the Court of Justice in Whitty v. Farrell [supra] and to what is stated at paragraph thereof in relation to Question 2 in the preliminary reference submitted to the Court by the High Court as to whether individuals may rely directly upon Article 1 of the Third Directive before the national courts. In that regard the Court of Justice stated at paras. 37 – 40 of its judgment:
“37. ……… it should be pointed out that it has consistently been held that a provision in a directive has direct effect if it appears, as far as its subject-matter is concerned, to be unconditional and sufficiently precise …….. .
38. It must be held in the present case that, as the Commission argues, those criteria are satisfied by Article 1 of the Third Directive. That article allows both the obligation of the Member State and the beneficiaries to be identified, and its provisions are unconditional and precise. Article 1 of the Third Directive may accordingly be relied upon in order to set aside provisions of national law which exclude from the benefit of the guarantee provided by compulsory insurance cove persons travelling in any part of a vehicle which is not designed and constructed with seating accommodation for passengers.
39. The question remains whether that provision may be relied on against a body such as the MIBI.
40. A directive cannot be relied on against individuals, whereas it may be relied upon as against the State, regardless of the capacity in which the latter is acting, that is to say, whether as employer or as public authority. The entities against which the provisions of a directive that are capable of having direct effect may be relied upon include a body, whatever its legal form, which has been made responsible, pursuant to a measure adopted by the State, for providing a public service under the control of the State and has for that purpose special powers beyond those which result from the normal rules applicable in relations between individuals…….” (my emphasis)
It is paragraph 40 above upon which Mr Connolly has placed particular reliance.
In these circumstances Mr Connolly has submitted that the consequence of the State’s failure to transpose the Third Directive is not one which can be visited upon FBD, that entity not being an emanation of the State, and that the appropriate remedy, given the direct effect nature of the Directive, is one against the State only, since all FBD has done is issue a policy of insurance permitted under the laws of the State at the time that the policy issued to the second named defendant.
In further submissions on behalf of FBD, Anthony Kidney SC referred the Court to a judgment of the Court of Justice delivered on 24th July 2003 in Viegas v. Companhia de Seguras Zurich SA (Case C-166/02) where at paragraph 23 the Court stated:
“The Court has consistently held that the obligation of national courts to disapply national legislation contrary to a directive does not have the effect of enabling it to impose on an individual an obligation laid down by a directive which has not been transposed …”.
Mr Kidney relies on this passage in support of the submission by FBD that where the State has failed to transpose the Third Directive by the time limited for so doing, any consequence resulting to the plaintiff by reason of the first and second named defendants being denied an indemnity by FBD in respect of the plaintiff’s injuries, cannot be visited upon FBD, but must result in a claim against the State for failure to so transpose the Directive.
In response to these submissions, Mr Collins has submitted that the question of direct effect is not the real issue in this case. He accepts that if direct effect was the beginning and end of the question to be determined, the plaintiff would have no case to make against FBD. He submits that quite apart from any question of direct effect, it is a principle of community law that individuals are entitled to rely upon community law rights in national courts in certain circumstances against private individuals on the basis of the principle of the primacy of community law.
In that regard he has referred to the judgment of the Court of Justice in Marleasing SA v. La Comercial Internacionle de Alimentacion SA (Case C-106/89) [1990] ECR I-4135, [1990] 1 CMLR 305. That case involved a private dispute between two commercial entities, where in the national court the plaintiff sought a declaration that the founders’ contract establishing the defendant company was void on the grounds that “the establishment of the company lacked cause, was a sham transaction and was carried out in order to defraud the creditors of Barviesa SA, a co-founder of the defendant company”. As appears from the judgment, the defendant contended that the action should be dismissed on the ground that Article 11 of Directive 68/151 “which exhaustively the cases in which the nullity of a company may be ordered, does not include lack of cause amongst them”. By the date on which this reference was made to the Court of Justice that Directive had not been transposed into Spanish law. The national court referred the following question to the Court of Justice:
“Is Article 11 of Council Directive 68/151/EEC of 9 March 1968, which has not been implemented in national law, directly applicable so as to preclude a declaration of nullity of a public limited company on a ground other than those set out in the said article?”
In answering that question, the Court stated:
“With regard to the question whether an individual may rely on the directive against a national law, it should be observed that, as the Court has consistently held, a directive may not of itself impose obligations on an individual and, consequently a provision of a directive may not be relied upon as such against such a person …… .
However, it is apparent from the documents before the Court that the national court seeks in substance to ascertain whether a national court hearing a case which falls within the scope of Directive 68/151 is required to interpret its national law in the light of the wording and the purpose of that directive in order to preclude a declaration of nullity of a public limited company on a ground other than those listed in Article 11 of the directive.
In order to reply to that question, it should be observed that, as the Court pointed out in its judgment in Case 14/83 Von Colson and Kamann v. Land Nordhein – Westfalen [19844] ECR 1891, paragraph 26, the Member States’ obligation arising from a directive to achieve the result envisaged by the directive and their duty under Article 5 of the Treaty to take all appropriate measures, whether general or particular, to ensure the fulfilment of that obligation, is binding on all the authorities of Member States including, for matters within their jurisdiction, the courts. It follows that, in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, as far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter and thereby with the third paragraph of Article 189 of the Treaty.
It follows that the requirement that national law must be interpreted in conformity with Article 11 of Directive 68/151 precludes the interpretation of provisions of national law relating to public limited companies in such a manner that the nullity of a public limited company may be ordered on grounds other than those exhaustively listed in Article 11 of the directive in question.”
Mr Collins submits that accordingly this Court must, on the basis of primacy of community law, and the case-law of the Court of Justice to which he has referred, give to the plaintiff the benefit of the Directives in play in this case as against FBD, even though they do not enjoy direct effect, by holding that the clause sought to be relied upon as excluding an indemnity is void in the light of the wording and purpose of the Directives, and particularly the Third Directive.
I should say that on behalf of the first and second named defendants, Charles Meenan SC has supported the submissions made by Mr Collins on behalf of the plaintiff. He has of course made his own submissions in that regard, but it is unnecessary for me to set them out in any detail.
Hugh Mohan SC also supports the plaintiff’s submissions in addition to making other submissions relating, inter alia, the entitlement of the plaintiff to seek redress against the State in the event that he cannot recover against FBD, and whether FBD are entitled to any indemnity from the State in the event of it being found liable to the plaintiff. I do not need to set out these submissions in detail, and I intend no disrespect to any of these submissions by not doing so. Eileen Barrington BL has also made submissions on behalf of the fourth and fifth submissions which largely support the submissions of Mr Collins in relation to harmonious interpretation and the judgment of the Court of Justice in Marleasing.
Conclusions:
The relevant facts in this case are not in dispute. There is no doubt that the policy of insurance taken out by the second named defendant with FBD excluded any indemnity in respect of this plaintiff’s injuries as he was seated in the rear part of this vehicle which was not fitted with a seat. FBD has by letter dated 13th August 2001 invoked that clause and has denied to provide such indemnity.
There is no dispute either that at the date of this accident, 19th June 1999, the Third Directive had not been transposed into Irish law, and that the time by which such transposition was to have taken place had by then passed.
It is also clear from the case-law of the Court of Justice to which I have been referred that the Third Directive has direct effect, but in that regard direct effect does not provide a remedy as against an individual such as FBD, but rather against the State or any emanation of the State. That is accepted by the plaintiff. Some submissions have been made as to the possibility that the plaintiff could pursue a remedy against FBD on the basis of a horizontal direct effect or indirect effect, but it is in my view unnecessary to reach a conclusion in that regard.
In my view the conclusion to the issue for determination in this case is reached by the route of harmonious interpretation and the primacy of community law, as submitted by Mr Collins and Ms. Barrington, and in that regard the position seems clear. When one reads the three directives, including the recitals thereto, which are in play in this case, the objectives sought to be achieved is very clear. Those objectives have been explained in the cases to which the Court has also been referred and I have set out certain of the passages to which I have been referred.
All passengers being carried in vehicles and who are injured as a result are intended to be guaranteed equal treatment throughout the European Community regardless of in which Member State the injury is caused. The Second Directive required each member state to take necessary measures to ensure that any statutory provision or any contractual clause contained in an insurance policy which excludes from insurance persons, inter alia, such as this plaintiff shall for the purpose of Article 3 (1) of the First Directive be void. I should perhaps note that this obligation is one imposed upon Member States i.e. to put measures in place to so ensure. The Directive does not itself state that such a clause is void. Nevertheless the objective is clear. The amendment to s. 65 of the Road Traffic Act, 1961 which I have set forth above is clearly in conflict with these objectives, and the failure to transpose the Third Directive by the date required has meant that on the date of the accident in which the plaintiff received his injuries, the law of this State was out of line with what was required by community law.
I have set out the relevant passage from the Court of Justice’s judgment in Marleasing. It requires a national court, when applying national law, to do so as far as possible in the light of the wording and purpose of the directive in order to pursue the result sought to be pursued by the directive. It seems inescapable that in the present case this Court is required to read s. 65 of the Act as amended by S.I. 346 and 347 of 1992 by overlooking or ignoring the exclusion permitted therein in respect of liability for injuries caused to persons such as the plaintiff in this case. It seems to follow inevitably from this that the Court must conclude that the clause to that effect contained in the policy of insurance by the second named defendant must be regarded as void, therefore disentitling FBD from relying upon it in order to refuse to indemnify the first and second named defendants in respect of the plaintiff’s claim for damages for his injuries and loss, in the event that he is found at hearing to have so suffered as a result of the negligence of the first named defendant. I so find.
ESL Consulting Ltd trading as VoIP Ireland -v- Verizon (Ireland) Ltd & Anor
[2008] IEHC 369 (27 November 2008)
JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 27th day of November 2008
Preliminary
1. The plaintiff is a limited liability company incorporated in the State and at the material time as to these proceedings carried on the business of providing telecommunications services to business and consumer customers.
2. The first named defendant is a limited liability company incorporated in the State, and the second named defendant one incorporated in England. The defendants form part of a group of companies which, in 2006, acquired a group of companies known as MCI WorldCom. The defendants carry on the business of the supply of telecommunications and internet services on a wholesale basis.
3. By agreements entered into in October 2003, MCI WorldCom agreed to provide the plaintiff with services which included internet connectivity, wholesale carrier pre-select services and worldwide termination services for voice traffic and co-location services which included the rental of rack space in its data centre and office accommodation at Clonshaugh, Dublin. It is common case between the parties that the applicable contractual arrangements between the plaintiff and the defendants to the matters in dispute herein are, primarily, two agreements entered into between the plaintiff and MCI WorldCom (Ireland) Ltd., in October 2003, being the Wholesale International Master Services Agreement, and the WorldCom Network Colocation Agreement (“the Agreements”).
4. The plaintiff contends that in breach of the terms of the Agreements, the defendants suspended its services to the plaintiff on 17th and 20th November, 2006, and on 9th January, 2007. The plaintiff claims damages in excess of €4 million by reason of such alleged breaches of contract. Whilst the plaintiff had pleaded that a number of technical outages were in breach of contract this was not ultimately pursued but it was contended that the effect of the November 2006 and January 2007 alleged breaches must be considered in the context of the earlier outages. The defendants deny the claim and counterclaim for monies allegedly due for services provided to the plaintiff pursuant to the Agreements and certain service agreements made thereunder. That amount was agreed in the course of the proceedings at €252,000. The defendants make a claim for interest on that amount which has to be determined by the Court.
Issues
5. The issues which have to be determined by the Court in these proceedings appear to be:
(i) Were the defendants in breach of contract in suspending services to the plaintiff in November 2006;
(ii) Were the defendants in breach of contract in suspending services to the plaintiff in January 2007;
(iii) If the defendants were in breach of contract on either, or both, of those dates, what is their liability, if any, to the plaintiff, for damages in respect of such breaches? This issue gives rise to a number of sub-issues including:
(a) The loss and damage suffered by the plaintiff by reason of any breaches of contract by the defendants so found;
(b) Is the defendants’ liability for damages excluded or limited by the agreements between the plaintiff and the defendants?
(iv) The defendants’ entitlement to interest on the amount of the counterclaim and, if so, from what date?
Background facts
6. The plaintiff was incorporated in 2001 and initially offered consulting services, particularly in the engineering and procurement field. By 2003, it commenced telecommunications services. Part of this was what was described, in evidence, as an established technology, namely, Carrier Pre-Select Services (CPS). The other part of the services was a business class Voice over Internet Protocol (VoIP) to commercial and residential customers. Essentially, this allows telephone data to be transmitted over the internet. The customer is unaware, when using the telephone, that such transmission takes place. Important to the technology is a “soft switch” which connects the telephone technology to the internet. The plaintiff considers this business class service to be using cutting-edge technology.
7. Essential to the provision of such services and, in particular, VoIP, is the provision of internet and other telecommunications services worldwide. The plaintiff was not providing these. It had to enter into arrangements with a wholesale provider such as MCI WorldCom or the defendants.
8. In the plaintiff’s business model for the services it intended to provide, the successful delivery of its services to its customers was entirely dependent upon the plaintiff having available to it the wholesale and internet services on an uninterrupted basis. The relationship between the plaintiff and its wholesale provider was therefore crucial to the plaintiff’s business model.
9. The plaintiff also developed, between 2003 and 2006, a wireless broadband network which could support its VoIP services and established a first such network in Cork. The development of such networks formed part of the plaintiff’s intended business development and roll out of VoIP services.
10. The evidence on behalf of the plaintiff was that it enjoyed a good relationship with MCI WorldCom and was provided by it with a good quality wholesale internet service. However, it contends that the service provided by the defendants, subsequent to the takeover, deteriorated in a number of respects. First, the plaintiff received, in early 2006, invoices for services alleged to have been provided since 2004 and for which it had not previously been invoiced. This forms part of the background to the dispute in relation to allegedly outstanding invoices, both in respect of internet services and co-location charges. Secondly, the plaintiff contends that the technical services provided reduced in quality and that there was, throughout 2006, a significant number of outages when its service went down for technical reasons, which outages, on occasions, were not remedied by the defendants within a reasonable timescale. The plaintiff contends that it is against such a background that the Court must consider the alleged breaches of contract by the defendants in November 2006 and January 2007.
11. Simply put, the plaintiff’s claim in relation to November 2006, is that two suspension notices were served on 9th November, 2006, which referred to two allegedly overdue amounts on specified invoices. The plaintiff contends that both those amounts were then in dispute, and had been in dispute, since prior to April 2006. As bona fide disputes existed in relation to the amounts claimed on those invoices, the plaintiff submits that they are not invoices on which payment was due and, as such, the defendants had no right to suspend the provision of services to it in accordance with the Agreements. Similarly, in relation to January 2007, it contends that all relevant payments were in dispute.
12. The defendants do not accept that the Agreements, properly construed, mean that when the plaintiff disputes the payment claimed on an invoice, such payment is no longer due within the meaning of the Agreements. They contend that the existence of such a dispute does not therefore preclude the suspension of the service under the Agreements. They deny that a dispute existed between the plaintiff and the defendants in relation to the payments claimed on each of the invoices to which the November suspension notices related. They deny that the greater part of the overdue payments in January 2007, was disputed by the plaintiff.
Contractual terms for payment, dispute and suspension
13. It is common case that the internet services provided by the defendants for the plaintiff, and the terms thereof, were governed by the Wholesale International Master Services Agreement between the plaintiff and MCI WorldCom (Ireland) Ltd., signed on 22nd October, 2003. The co-location services were governed by the co-location Agreement entered into at the same time. One of the invoices upon which suspension in November 2006 was based was for internet services and the other for co-location services. Whilst there are small differences in wording between the two Agreements, counsel for neither party suggested that there was any substantive difference in the meaning of the terms of the two Agreements in relation to payment, dispute and suspension. I therefore propose referring to the terms of the Wholesale International Master Services Agreement (WIMS Agreement) in considering the relevant contractual terms between the parties.
14. Clause 4.7 of the WIMS Agreement provides:
“Any Invoice for Charges shall be due on issue of the Invoice and shall be paid by the Customer within thirty (30) days of the date of the Invoice.”
15. Clause 17.2 under the heading of Dispute Resolution provides:
“If the Customer wishes to dispute any Invoice or part of an Invoice falling due in accordance with Clause 4.7, the Customer shall, before the Invoice is due, deliver a notice in writing to [Verizon] setting out the nature of its dispute, including:
(i) date and number of disputed Invoice;
(ii) amount in dispute
(iii) reason for dispute; and
(iv) supporting documentation, as appropriate.
Any undisputed part of a disputed Invoice shall be paid by the Customer in accordance with Clause 4.7.”
16. Clauses 6.1 and 6.1.5 in relation to suspension provide:
“6.1 [Verizon] may, at its sole discretion and without prejudice to any right which it might have to terminate a Service and/or this Agreement, elect to immediately suspend the provision of a Service (or part thereof) if:
6.1.5 [Verizon] has reasonable grounds to consider that the Customer will not or is unable to make any payment which is due or is to fall due to [Verizon] hereunder”.
17. The suspension notices relied upon by the defendants contended that the relevant payments were then overdue. Accordingly, the only part of clause 6.1.5 capable of being relied upon by the defendants is that part which refers to the defendants having reasonable grounds to consider that the Customer will not make a payment which is due. The issue on the construction of the WIMS Agreement is if the payments on the invoices were disputed by the plaintiffs, should they be considered as payments then due?
18. I have formed the view that construing clauses 4.7, 17.2 and 6.15, in a manner which makes them consistent with each other, that if a Customer delivers a notice setting out a dispute to an invoice of a type contemplated by clause 17 which complies, in substance, with the provisions of clause 17.2, then so much of the payment on the invoice, as is disputed by the Customer, is not considered as a payment then due for so long as the dispute continues. I have formed that view, as whilst clause 4.7 states that an invoice “shall be due on issue of the invoice”, it clearly refers to payment being made by the Customer thirty days from the date of the invoice. Accordingly, the payment is only due thirty days from the date of the invoice. Clause 17.2, in its final sentence, makes clear that any undisputed part of a disputed invoice must be paid by the Customer within the thirty days specified in clause 4.7. It appears to me that it must follow by clear implication that the Customer is not obliged to pay the disputed part of the invoice in accordance with clause 4.7. Clause 17 does not set out any time limit during which a dispute can be considered to continue, nor when it should be regarded as at an end. Clause 17.3 simply provides “the parties shall use all reasonable endeavours to resolve such payment disputes as soon as is reasonably practicable”.
19. Accordingly, if, on the facts herein, the plaintiff did dispute the invoice or part of the allegedly overdue payments on the invoices to which the suspension notice related, in accordance with clause 17.2, then payment was not due on such invoice in accordance with the WIMS Agreement until the resolution of the dispute.
20. If the relevant payments were not due by the plaintiff, then it follows that the circumstances which permit the defendants to suspend a service under clauses 6.1 and 6.1.5 of the WIMS Agreement, do not exist.
21. The next issue which must therefore be considered is whether the allegedly overdue payments on the two invoices upon which the November suspension notices were based, were properly disputed by the plaintiff, and continued to be in dispute at the time of the suspension of the co-location and internet services such that the payments were not then due?
Suspension of services 17th and 20th November, 2006
22. The suspension of services effected by the defendants on 17th and 20th November, 2006, were pursuant to two suspension notices dated 9th November, 2006. One related to account reference E10101203. That notice referred to a statement of account showing a balance of €36,510.77 of which €32,396.77 was alleged to be overdue. It was stated that the sum of €32,396.77 must be received prior to 16th November, 2006, to prevent suspension of the services supplied.
23. The statement enclosed with the notice indicates that the sum of €32,396.77 is in respect of an invoice number 1800000398, dated 20th March, 2006. I have concluded that the amount claimed on this invoice was an amount in dispute between the plaintiff and the defendants since, at latest, April 2006, and remained in dispute up to and including 20th November, 2006, for the following reasons.
24. The invoice issued on 20th March, 2006, for €32,396.77 was what was termed a “back bill” or legacy charge for co-location and office rental charges. The plaintiff disputed this in writing on the basis that it understood, from the original arrangements it believed it had entered into with the defendants, that these services were free of charge. This dispute formed part of the matters discussed between the plaintiff and the defendants at a meeting held in Dublin in April 2006 between Ms. Hand and Mr. Madigan of the plaintiff, and Mr. Mageean and Mr. Kelly of the defendants, at which those present proposed resolving the dispute by the plaintiff paying 50% of the amount invoiced. Those present agreed to recommend such settlement to their respective principals or senior management.
25. The internal documentation of the defendants subsequent to that date, put in evidence, supports, and is consistent with, such dispute and proposal for settlement. For example, an email of 22nd June, 2006, from Mr. Tanda, the credit controller of the defendants, to Mr. Mageean, encloses a “settlement plan form” for completion and submission for approval to senior management. That records, with specific references and amount, the invoice, and under a heading, “Details of Customer’s Claim”, records it as “ESL were invoiced for co-location and office space rental. Customer advises that they thought the co-location and office space rental was free of charge. Have offered to make payment for 50% of the invoices”. The form then records the value for payment being requested by the customer at €16,198.50 i.e. 50% of the amount of the invoice.
26. I find that the amount of €32,396.77 claimed by the defendants on invoice number 1800000398 remained in dispute between the parties, up to and including 17th November, 2006. No decision was made on the proposal for settlement by senior management of the defendants prior to 9th November, 2006. The evidence of the witnesses for the defendants, which I accept, is that a decision was made on 17th November, 2006, by senior management rejecting the settlement and such rejection was communicated orally to Irish based employees approximately one hour in advance of the suspension being effected by the lock out of the plaintiff’s employees from the premises.
27. The fact that senior management of the defendants had rejected the settlement does not, in my view, mean that the amount of €32,396.77 was no longer in dispute between the parties. I am satisfied that the plaintiff had, prior to April 2006, disputed on a specific ground relating to the charge made, its liability to pay the amount claimed on this invoice. The plaintiff had not in any way withdrawn that dispute. The fact that the defendants had rejected the terms upon which the dispute might have been resolved does not alter the existence and continuation of the dispute.
28. The second suspension notice of 9th November, 2006, related to an account reference E10101100 in which it was stated that there was an amount of €26,638.58 overdue which must be received by 16th November, 2006, to prevent suspension of services supplied. This was identified in the enclosed statement as being in respect of an invoice number 1800001363 of 24th July, 2006. I am also satisfied that this is an amount which was in dispute between the parties on 9th November, 2006, and remained in dispute up to and including 20th November, 2006, for the following reasons.
29. Whilst the invoice is dated 24th July, 2006, this amount formed part of invoices on account number E10101100 which were in dispute prior to, and discussed at, the meeting already referred to in April 2006. The dispute related to the delay in raising invoices. In respect of this account, the proposed settlement at the meeting was that the plaintiff would pay part of the amount claimed in full, and in respect of the balance of €26,638.58, the plaintiff should pay 50% thereof. Further, the amount agreed to be paid in full by the plaintiff was to be paid in instalments in accordance with a payment plan. Pursuant to that proposal, a payment plan which is dated 25th August, 2006, but which was signed on behalf of the plaintiff on 18th September, 2006, and on behalf of the defendants on 15th November, 2006, was agreed. This set out six dates between 1st September, 2006, and 1st February, 2007, on each of which a sum in excess of €3,000 was to be paid by the plaintiff to discharge the amount agreed to be paid. The same payment plan, signed on behalf of the defendants on 15th November, 2006, provides at clause 4 thereof:
“For the avoidance of doubt, the following invoice(s) are currently in dispute between Verizon Business and the Customer in accordance with Clause 17 of the Agreement and are excluded from the Outstanding Amount. On resolution of such invoice dispute, the Parties shall determine how the invoice(s) will be settled, which may require an amendment to this Payment Plan.”
The payment plan then identifies the invoice in question as Invoice 1800001363 and the amount as €26,638.58.
30. I find that the proposal that the defendants accept a payment of 50% of this amount was also rejected by senior management of the defendants on 17th November, 2006. Nevertheless, for the same reasons as set out above, I am satisfied that the amount of this invoice, which had been acknowledged by the defendants to be in dispute in an agreement signed on their behalf as recently as 15th November, 2006, remained in dispute. The fact that the defendants rejected the proposed 50% payment to settle the dispute does not mean that the amount did not remain in dispute when internet services were suspended on 20th November, 2006.
31. Accordingly, I find as a matter of fact, that each of the amounts referred to in the two suspension notices of 9th November, 2006, as being overdue for payment by the plaintiff, were amounts which were then in dispute between the plaintiff and the defendants for the purposes of the Agreements, and that such amounts remained in dispute between the plaintiff and the defendants up to and including 17th and 20th November, 2006, respectively. It follows from this conclusion that on none of the dates of 9th, 17th or 20th November, 2006, circumstances existed which permitted the defendants to suspend services to the plaintiff, pursuant to clauses 6.1 and 6.15 of the WIMS Agreement or clauses 9.1 and 9.1.5 of the co-location Agreement. Hence, the defendants were in breach of contract in suspending services to the plaintiff on 17th and 20th November, 2006.
Nature and impact of lock out and suspension, November 2006
32. The suspensions effected by the defendants in November 2006, were in two parts. On Friday 17th November, 2006, the defendants effectively locked the plaintiff out of the premises it rented from the defendants, at Clonshaugh, pursuant to the co-location Agreement. Graphic evidence was given by Mr. Powell and Ms. Hand, on behalf of the plaintiff, both of whom were in the offices at the time, of the manner in which this was effected. Ms. Hand received a phone call from Mr. Mageean of the defendants at approximately 4.55 p.m., to state that he had been told that UK management had directed that security in Clonshaugh should immediately deactivate the computer access cards of the plaintiff’s employees. The cards were deactivated at 5.00 p.m.
33. A series of phone calls then took place between Mr. Powell, on the one hand, and Mr. Kelly, Mr. Mageean, and UK management of the defendants, on the other, as a consequence of which a decision was made, by approximately 6.30 p.m., that the suspension should be rescinded.
34. Whilst the lockout from the premises was of short duration, I accept the evidence of the witnesses for the plaintiff that the fact that the defendants were prepared to effect a lockout by reason of the alleged non-payment of the two legacy debts, both of which had been acknowledged to be the subject of a dispute and a proposal for settlement, in circumstances where no notification was given of the rejection of the settlement and without an opportunity for the plaintiff to consider its position in advance of the lockout, created very significant disturbance amongst the employees of the plaintiff in relation to their continuing business relationship with the defendants. Accordingly, whilst the lockout was short in duration, and does not appear to have impacted directly on customers of the plaintiff, I am satisfied it did impact significantly on the employees of the plaintiff.
35. Having been informed that the suspension had been rescinded on the evening of Friday 17th November, 2006, the plaintiff’s employees turned up for work, as normal, on Monday 20th November, 2006. However, immediately, they started receiving complaints from customers that the VoIP service was down and they then ascertained that the defendants’ internet connection to the plaintiff’s soft switch had been deactivated, which meant that its entire VoIP network was down. This impacted immediately, directly, and seriously on the customers of the plaintiff in its VoIP service and its wireless network in Cork. I am satisfied that, as a matter of probability, this did cause serious damage to the plaintiff’s credibility and reputation with its customers, in relation to the VoIP and wireless network service it appeared capable of delivery. Further, that the impact of this disconnection was exacerbated by the fact that it followed shortly on two prior outages on 2nd November, 2006, and 13th November, 2006, when the VoIP system was completely shut down for several hours due to a technical problem on the defendants’ network.
36. Discussions took place during Monday 20th November, 2006, and a conference call was held between relevant employees of the plaintiff and the defendants. As a consequence, an instruction to reconnect the plaintiff was given in the late afternoon on 20th November, 2006, and the reconnection took place thereafter. The plaintiff was unable to provide the VoIP or wireless broadband service to its customers for a full business day, on 20th November, 2006. This damaged the plaintiff’s standing and reputation with its customers.
37. The internet disconnection on 20th November, 2006, coming immediately after the lockout on 17th November, 2006, and in circumstances where the plaintiff had been informed that the suspension had been rescinded on the evening of 17th November, 2006, also created further significant disquiet amongst the employees of the plaintiff and fractured further the continuing business relationship between the plaintiff and the defendants. I am satisfied that the senior employees of the plaintiff, at this time, believed that the defendants had acted in breach of contract in the lockout and disconnection of internet services, believed that serious damage had been done to the business and reputation of the plaintiff, and had a strong sense of grievance that they had been treated in this way by the defendants.
Suspension on 9th January, 2007
38. The defendants again closed down internet services to the plaintiff, including its own office access to the internet, on the morning of 9th January, 2007. The plaintiff contends that such suspension was in breach of the WIMS Agreement. The defendants contend that they were not in breach of the WIMS Agreement in suspending the internet services on 9th January, 2007, as there was then a sum in excess of €180,000 due and owing to the defendants, by the plaintiff, which was then due and which the plaintiff had indicated it was not willing to pay.
39. These competing claims must be considered in the context of what occurred after the restoration of internet services, on 20th November, 2006. Notwithstanding that services were restored, each of the parties continued to maintain their prior position i.e. the defendants maintained the position that they were entitled to suspend services on 17th and 20th November, 2006, and the plaintiff contended that they were in breach of contract in so doing, and that the plaintiff had suffered very serious damage as a consequence of such breach.
40. The plaintiff, through its solicitors, William Fry, wrote a formal letter of claim dated 23rd November, 2006, in which it called upon the defendants to agree to compensate the plaintiff for all losses flowing from the allegedly improper actions of the defendants, on 17th and 20th November, 2006, sought an undertaking not to interrupt the plaintiff’s services again, without just cause, and sought discharge of legal costs. Proceedings were threatened in default of an agreement to that effect. No such agreement was forthcoming.
41. Subsequent to 20th November, 2006, upon receipt of invoices for current services provided by the defendants to the plaintiff, both in respect of co-location and internet services, Ms. Hand, on behalf of the plaintiff, sent emails disputing all invoices received. The first such email was sent on 23rd November, 2006, in which Ms. Hand stated that she wished to “formally raise a dispute process regarding the following invoices”. She then listed a number of invoices and their amounts, and then stated:
“We have instructed William Fry Solicitors in Dublin to issue proceedings against MCI/Verizon arising out of the improper action and breach of contract of MCI/Verizon Business which has caused direct and substantial damage to our company. William Fry have already been in correspondence with your solicitor, Kahl Oozeerally regarding this matter.
The above invoices should all be regarded as being in dispute as part of this process and I await a Bits ticket number from you regarding this.
No other action should be taken by MCI/Verizon Business on foot of these invoices without reference to our solicitors, William Fry. In the event that any such action is taken, we put you on notice that we will be taking any and all legal remedies necessary against your company, and shall be holding you liable for the costs of same.”
42. The “Bits ticket” system was the procedure then in place with the defendants where a customer raised a dispute in relation to an invoice. It identified the dispute with a number and it was then separately identified in statements of account. The defendants did not issue Bits tickets in relation to any of the invoices disputed in the above manner by Ms. Hand in November 2006. Similar type disputes were raised by Ms. Hand, on behalf of the plaintiff, on receipt of further current invoices and, similarly, no Bits tickets were issued.
43. In the meantime, there were some further exchanges in relation to the two disputed invoices which had formed the basis of the November suspensions. There were also a limited number of invoices in respect of which there were specific disputes raised in relation to the charges on the invoice. One suspension notice was sent in December in relation to a small amount of just in excess of €400, and withdrawn on the basis that it had been an automated suspension notice, and an undertaking was given that no further such automated notices would occur.
44. In this period, the only payments made by the plaintiff to the defendants were in accordance with two payment plans of 25th August, 2006. On 2nd January, 2007, one such payment of €11,289 was made. This payment appears to have elicited a query from Mr. Mageean, for the defendants, as to why current payments (other than those disputed) were not being made. Ms. Hand immediately responded, making clear that pending satisfaction from the defendants of the claim for compensation in respect of the allegedly unlawful suspensions on 17th and 20th November, 2006, all current invoices were being treated by the plaintiff as being in dispute and by implication were not being paid.
45. On 4th January, 2007, Mr. Oozeerally, the in-house solicitor of the defendants, sent what was described as a “demand for payment, notice of suspension and termination”. In that lengthy communication, he asserted that the amount due to be paid immediately was €286,102.02, and identified certain small disputed amounts aggregating €23,849.97. It was also alleged that the plaintiff was in breach of the terms of the payment plans and that the total balance outstanding was due thereunder.
46. There were further exchanges between William Fry and Mr. Oozeerally which focused, in particular, upon amounts aggregating €186,489.38 invoiced since 20th November, 2006, and whether those amounts were in dispute such that payment was not due thereon. The plaintiff’s position was that dispute notices had been raised in respect of each of the invoices, and simply ignored by the defendants. The basis of the dispute was repeated as being the compensation to which the plaintiff was entitled by reason of the alleged illegal suspensions of 17th and 20th November, 2006. The defendants’ position was, simply put, that such invoices were not the subject of any valid dispute between the parties and that the amounts claimed were due. On 8th January, 2007, the defendants indicated that they were prepared to accept 50% of the amounts which were in dispute prior to November 2006, i.e. what had been proposed in April 2006.This did not affect the current invoices aggregating €186,489.38 referred to above.
47. The plaintiff did not agree to make any payments, and ultimately the defendants disconnected internet services on the morning of 9th January, 2007. The plaintiff immediately sought, and obtained, an interim injunction and services were restored later that day. The subsequent interlocutory application was compromised on the basis inter alia that the defendants would continue to provide services on certain terms to a date which ultimately became June 2007 when the Agreements would terminate.
48. At the hearing before me, the submissions of the parties in relation to the defendants’ entitlement, or otherwise, to suspend services on 9th January, 2007, centred on the issue as to whether the invoices in relation to amounts invoiced since November 2006, i.e. €186,489.38, were amounts due as at 9th January, 2007, within the meaning of the WIMS Agreement, having regard to the disputes raised by Ms. Hand on behalf of the plaintiff in respect of such invoices, and repeated in substance by the plaintiff’s solicitor, on its behalf.
49. I have concluded that the plaintiff has not established that, as a matter of probability, the defendants were in breach of contract in suspending internet services on 9th January, 2007, for the following reasons. As already concluded, clause 17.2 of the WIMS Agreement expressly permits a Customer to dispute any invoice, or part of an invoice, and provides that such Customer must, before the invoice is due, deliver a notice in writing, setting out the nature of the dispute, including: (i) the date and number of the disputed invoice, (ii) the amount in dispute, (iii) the reason for dispute and (iv) supporting documentation, as appropriate. Where this is done, for the reasons already explained, I have concluded that the Customer’s obligation is only to pay an undisputed part of a disputed invoice, or where the entire invoice is disputed, the Customer is not under an obligation to pay until that dispute is resolved.
50. The issue is what type of disputes fall within clause 17.2. Prima facie the notices served by Ms. Hand in December 2006, complied with clause 17.2 insofar as it gave details of the disputed invoices, the amounts and the reason. The reason given, however, did not relate to the service provided to which the invoice related, nor the amount charged on the invoice, nor any issue relating to the manner in which the invoice had been raised. The invoice, as such, was not being disputed by Ms. Hand, rather, she was contending that by reason of the obligation of the defendants to compensate the plaintiff for losses it suffered by reason of the alleged illegal acts on 17th and 20th November, 2006, the plaintiff was not liable to pay the defendants the amounts on the invoices. To put it another way, what was disputed by the plaintiff was its liability to make a payment to the defendants in respect of amounts stated on invoices by reason of the plaintiff’s alleged entitlement to set off against such sums an alleged liability of the defendants to it. However, the amounts on the invoices were not disputed as being inappropriate amounts to charge the plaintiff for the service, nor was there any dispute in relation to the service to which the charge related or timing of, or way in which, invoices were raised.
51. I have concluded that in December 2006 and early January 2007, the plaintiff was not disputing (with limited exceptions which are not relevant to the general issue) the current invoices issued since 20th November, 2006, within the meaning of clause 17.2 of the WIMS Agreement. It was, rather, disputing its liability to make payments on those invoices by reason of an implied entitlement to offset against those payments, sums which it contended the defendants were liable to pay to it to compensate for damages suffered by reason of the events of 17th and 20th November, 2006.
52. I have reached this conclusion, not by reason of a literal interpretation of clause 17.2, which undoubtedly refers to disputing an invoice (as distinct from a liability to pay the amount of the invoice), but rather, by construing the substance of what is intended by clause 17.2. I have also taken into account the contra proferentem principle insofar as this appears to be a standard form agreement and therefore in the case of ambiguity, should be construed against the defendants. It does not, however, appear to me ambiguous. Clause 17.2 appears, clearly, to be directed at, and only at, disputes which may be raised by a Customer in relation to the amount of the payment sought on an invoice in respect of the services to which the invoice allegedly relates. A dispute to come within clause 17.2 must be fact specific to the potential liability of the Customer to the defendants for the amount stated on the invoice as the payment due for the service referred to therein. Such disputes may be of many kinds and would include, for example, disputes in relation to the quality of the service provided, the quantification of the amount claimed, the fact that the same service had already been included in another invoice and paid, the absence of liability for the invoice because of a failure to furnish the invoice in a timely manner, and other matters, but all of which relate to the question as to whether or not the invoice correctly sets out an amount potentially payable by the Customer to the defendants in respect of the services referred to in the invoice. Clause 17.2, having regard to its express terms, does not include the type of dispute between the parties to these proceedings in January 2007, in relation to the current invoices aggregating €186,489.38. That dispute, in essence, was whether or not the plaintiff was then obliged to pay this amount to the defendants by reason of its claim to be entitled to set off against its undisputed liability to the defendants for the amounts on the invoices the damages it alleged the defendants were liable to pay to it by reason of the alleged breaches of the Agreement in November 2006. It was a dispute relating to the plaintiff’s right to set off against an undisputed liability on the invoices a debt alleged due from the defendants to it, as distinct from a dispute as to its liability to the defendants for the amount specified in the invoices.
53. Accordingly, I have concluded that in January 2007, there was due by the plaintiff to the defendants a sum of €186,489.38 on current invoices which payment was due and which the plaintiff had indicated it was not willing to pay. Hence, the defendants were not in breach of the WIMS Agreement on 9th January, 2007, in suspending the internet services to the plaintiff. They were permitted to terminate or suspend the service pursuant to clauses 6.1 and 6.15.
54. For completeness, I should add that whilst notice of the proposed suspension was only given on 4th January, 2007, no point was taken in my view, correctly by the plaintiff that a longer notice period was required by the Agreements. The battle lines had been clearly drawn. The plaintiff had indicated a definitive unwillingness to pay the current invoices until compensated for the November lock out and suspension.
The plaintiff’s loss and damage
55. The plaintiff’s claim for damages in respect of the loss and damage allegedly suffered by it, by reason of the breach of contract of the defendants, was made in respect of the breaches alleged to have occurred, both in November 2006, and January 2007. Nevertheless, in evidence, the plaintiff’s witnesses did seek to identify the damage which they allege occurred by reason of the breaches of contract in November 2006, separate from that which occurred after the alleged breaches in January 2007. By reason of the findings made above, any assessment of the plaintiff’s claim to damages is confined to loss and damage alleged to have occurred by reason of the breaches of contract now found in November 2006.
56. The basis of the plaintiff’s claim for damages, as pleaded and pursued was essentially as follows. In the summer of 2006, the plaintiff, for the purposes of a potential investor, had been valued at €4.5 million. It is alleged that the breach of contract in November 2006, led directly to the loss of key employees of the plaintiff and the loss of confidence in its customers and the marketplace, as a consequence of which the plaintiff was unable to continue in business. It is alleged that it was obliged to sell the component parts of its business to mitigate its loss and realised, therefor, only approximately €290,000. The plaintiff claimed, on this basis, that it was at a loss of in excess of €4 million by reason of the defendants’ breaches of contract in November 2006.
57. There are multiple difficulties with this claim. The manner in which it is put forward fails to recognise the essential difference between the plaintiff, as a legal person, and its shareholders. Whilst there was some recognition of this difficulty in the closing submissions made on behalf of the plaintiff, there was no other evidence adduced by the plaintiff which sought to quantify the loss and damage allegedly suffered by the plaintiff by reason of the breaches of contract in November 2006. I will return to the impact of this on the plaintiff’s claim for damages.
58. The defendants have been found to be in breach of contract and the plaintiff undoubtedly has a potential entitlement to be awarded damages for the loss and damage, if suffered, by reason of the breaches of contract. However, each of the relevant Agreements contain clauses which seek to limit the liability of the defendants to the plaintiff inter alia for any breach of contract committed by the defendants in the performance of the Agreements or the provision of services thereunder.
59. The plaintiff contends that such limitation clauses do not apply to the plaintiff’s claim for damages by reason of the application of the doctrine of “fundamental breach” or “breach of fundamental obligation” as applied in this jurisdiction by the Supreme Court in Clayton Love & Sons (Dublin) Ltd. v. The British and Irish Steam Packet Company Ltd. [1970] 104 I.L.T.R. 157. The defendants contend that the limitation clauses in the Agreements do apply and the Court should not disapply them in reliance upon the so-called doctrine of fundamental breach for a number of reasons. First, they contend that the breach which occurred in November 2006, was not a “fundamental breach” within the meaning of the case law relied upon in Clayton Love. Secondly, the application by the Supreme Court of the doctrine of fundamental breach to the appeal in Clayton Love, was obiter as it was not in issue before it and therefore this Court is not bound by that decision to apply the doctrine of fundamental breach. Thirdly, assuming that this Court is free to determine the issue, even if it were to conclude that the breach which occurred was a fundamental breach, or breach of a fundamental obligation, that it should follow the approach of the House of Lords in Photo Production Ltd. v. Securicor Transport Ltd. [1980] 2 W.L.R. 283, to this dispute. It is submitted that the Agreements at issue are agreements negotiated between two commercial entities and that the distribution of liability provided for in the Agreements should be upheld and applied by the Court.
60. Clayton Love concerned a failure to load last and transport quick frozen scampi in a refrigerated hold at certain temperatures. In the High Court, Davitt P. concluded that such terms were fundamental and on the facts (which were that the cargo was not so carried and defrosted ), “[t]he service which the plaintiffs got under their contract was . . . something radically different from the service for which they had contracted”. The Supreme Court held that the fact that the defendant had been in breach of a fundamental term was not in issue.
61. The plaintiff submits on the facts herein that the provision of an uninterrupted internet service and access to the offices under the Agreements were fundamental terms of each Agreement. Further that the suspensions effected in breach of contract were in breach of such fundamental terms. I do not accept that this is the correct characterisation for the purpose of the doctrine of fundamental breach.
62. The provision of internet services under the WIMS Agreement and access under the co-location Agreement were fundamental terms of each of the Agreements. However, the uninterrupted provision of such services or access must be regarded as subject to the suspension provisions in each of the Agreements. The defendants, under the terms of the Agreement, were given an express right to suspend those services in certain circumstances. It follows that there must be an implied term that the defendants would not deliberately suspend services, save in accordance with the provisions of the Agreements which permitted them to suspend services.
63. The suspensions which occurred in November 2006, were suspensions effected by the defendants in purported application of the suspension provisions in the two Agreements. For the reasons already set out, the suspensions were not, in fact, permitted by the terms of the Agreement. It does not appear to me that the temporary suspension of services or temporary exclusion of access under the co-location Agreement in purported exercise of a contractual right to suspend, notwithstanding that, in fact, there was no such contractual right at the relevant time, amounts to what the Courts have considered to be a “fundamental breach” or “breach of a fundamental obligation” for the purposes of the doctrine of fundamental breach. In the words of Davitt P., considering the performance of the defendants under the Agreements over the period of the Agreements, the service provided was not so “radically different” from that contracted for by reason of the temporary suspensions and exclusion in November 2006, to justify a conclusion of fundamental breach.
64. Having regard to this conclusion, it is not strictly necessary for me to consider the further submissions of the defendants on fundamental breach. However, in case it were to become relevant, I have formed the view that I cannot consider the judgment of the Supreme Court in Clayton Love as being only obiter on the application of the doctrine of fundamental breach and therefore not binding on me. It appears to me that Ó Dálaigh C.J., with whom the other members of the Court agreed, approved of the application of the doctrine (albeit that it was not in dispute between the parties) and applied it to the one issue in dispute. At p. 170, he stated:
“In my opinion the basis on which this doctrine rests requires that a party, who like the defendants, has been held to be in breach of a fundamental obligation cannot rely on a time bar in the contract to defeat a claim for damages. Equally with other exempting provisions such a time clause cannot be prayed in aid.”
I would add, that if I was free to decide the issue in the light of subsequent judgments in other jurisdictions, as has been observed already by a number of my colleagues in the High Court, there appear to be strong arguments in favour of the reconsideration of the application of the so-called doctrine of fundamental breach to agreements between two commercial entities for the reasons outlined by the House of Lords in Photo Production Ltd. v. Securicor Transport Ltd. [1980] 2 W.L.R. 283.
65. Accordingly, as I have concluded that the defendants were not in fundamental breach of the Agreements it follows that the clauses which limit the liability of the defendants to the plaintiff for breach of contract in each of the WIMS and co-location Agreements apply to the determination of the plaintiff’s claim for damages herein. The relevant clauses are clause 9 of the WIMS Agreement and clause 13 of the co-location Agreement. Insofar as relevant, these provide:
WIMS Agreement
“9. Liability
9.1 Subject to Clause 9.5 but otherwise notwithstanding anything else in this Agreement, each Party’s total liability to the other . . . in contract, tort . . . or otherwise arising in connection with this Agreement, except in respect of any liability arising pursuant to the Customer’s obligation set out in Clauses 4 and 8.5, shall be limited to:
9.1.1 €1,000,000 (one million Euro) per event or series of connected events, and
9.1.2 notwithstanding Claus 9.1.1, a maximum of €2,000,000 (two million Euro) in aggregate in any twelve (12) month period.
For the avoidance of doubt, for the purposes of this Clause 9.1, the limits on liability expressed above are cumulative and apply across all Services.
9.2 Subject to Clause 9.5 but otherwise notwithstanding anything else in this Agreement, neither Party shall in any event be liable to the other for indirect or consequential losses or otherwise for harm to business, loss of revenues, loss of anticipated savings or lost profits, whether or not reasonably foreseeable at the time when the Agreement was entered into . . .
9.5 Nothing in this Agreement shall serve to limit either Party’s liability in respect of death or personal injury caused by or arising from its negligence.”
The co-location Agreement
“13. Liability
13.1 Subject to Clause 13.3 but otherwise notwithstanding anything else in this Agreement, each Party’s liability to the other in contract, tort (including negligence, misrepresentation or breach of statutory duty) or otherwise arising in connection with this Agreement, save in respect of any liability arising pursuant to the payment obligations set out in Clause 5, shall be limited to:
13.1.1 €1,000,000 (one million Euros) per event or series of connected events, and
13.1.2 notwithstanding sub-clause 13.1.1, a maximum of €2,000,000 (two million Euros) in aggregate in any twelve (12) month period.
13.2 Subject to Clause 13.3 but otherwise notwithstanding anything else in this Agreement, neither Party shall in any event be liable to the other for indirect or consequential losses including, but not limited to, harm to business, loss of revenues, loss of anticipated savings or lost profits.
13.3 Nothing in this Agreement shall serve to limit either Party’s liability in respect of death or personal injury caused by or arising from that Party’s negligence.”
66. The parties were in agreement that the exclusion of “indirect or consequential losses” does not operate to exclude “direct losses”. As will appear from the conclusions reached below, the only relevant issue in dispute on the construction of clauses 9 of the WIMS Agreement and 13 of the co-location Agreement, is whether these clauses exclude direct losses of the plaintiff where such loss is in the nature of loss of revenue or loss of profits or harm to business.
67. Clause 13 of the co-location Agreement is clear. In my view, having regard to the words used, only liability for indirect or consequential losses are excluded from liability. Direct losses are not excluded by the express terms of clause 13.2, even if they are in the form of loss of revenue, harm to business, etc.
68. The wording of clause 9.2 of the WIMS Agreement is less clear. Insofar as it is ambiguous, it must be construed against the defendants. The express primary exclusion is for “indirect or consequential losses”. Notwithstanding the words “or otherwise for harm to business . . .” it appears to me that such wording is not clear enough to exclude liability for direct losses which might come within this category. The opening words of the sub clause appear to me to intend a distinction between direct and indirect losses and only to exclude the latter.
69. Accordingly, I have concluded that both Agreements should be construed as not excluding the liability of the defendants for any direct losses suffered by the plaintiff by reason of breach of contract, even if such direct losses are in the form of loss of revenue, harm to business or loss of profits. What is actually permitted or excluded by clauses such as clauses 9 and 13 of the Agreements, is primarily a matter of construction in the context of the subject matter of the contract and the nature of the breach which occurred. Nevertheless, it is possible to deduce a general approach of the Courts to such contractual distinctions between direct and consequential losses. Counsel for the defendants drew attention to what is considered as a general approach of the English Courts to consider contractual provisions referring to “direct loss and/damage” or some similar phrase as intending to refer to those damages which could be claimed under the first of the two limbs in Hadley v. Baxendale (1854) 9 Exch 341 i.e. loss foreseeable to any reasonable person in the defendants’ position. He also drew attention to criticism of this approach by the Court of Appeal of Victoria in Environmental Systems Pty. Ltd. v. Peerless Holdings Pty. Ltd. [2008 VSCA 26].
70. On the facts of this case, it appears to me unnecessary to consider in any detail what counsel has correctly submitted to be the general approach of the English Courts and its criticisms by Nettle JA in the above decision from Victoria. It is sufficient to say that I would agree with Nettle JA that certain losses which might come within the first of the two limbs in Hadley v. Baxendale may be “consequential losses” rather than “direct losses” where that distinction is made in a commercial contract. In Environmental Systems Pty. Ltd., Nettle JA was concerned with the meaning of “consequential loss” and for the purposes of the agreement at issue in those proceedings, stated at par. 93, “in my view, ordinary reasonable business persons would naturally conceive of ‘consequential loss’ in contract, as everything beyond the normal measure of damages, such as profits lost or expenses incurred through breach”. Whilst I think any general definition presents certain difficulties, I think the formulation for what he terms the “normal measure of damages” is a useful expression for what comes within direct loss where the plaintiff is an entity carrying on business and the potential damage is to the business. There must be a direct causative link between the breach and the profits lost or expenses incurred. I propose applying this to the facts of this case.
71. As already stated the primary loss claimed by the plaintiff is the loss it suffered on the sale of its business assets as compared with a valuation of the plaintiff for the purposes of investment in it. Apart from any other problems with such claim, I am not satisfied that any loss suffered by the plaintiff on the sale of its business assets, following the decision to cease carrying on the VoIP, CPS and Cork broadband businesses, even if such decision was caused by loss of valuable employees whose departure, in turn, was caused by the defendants’ breach of contract in November 2006, would be a ‘direct loss’ within the meaning of the Agreements.
72. The potential direct damage and losses claimed of which some factual evidence was given were:
• damage to the plaintiff or loss suffered by it by reason of the level of upset and disquiet caused to employees in general by the lock out on 17th November, 2006, followed by the suspension of internet services on 20th November, 2006, and, in particular, the loss of two valuable employees, namely, Mr Kernan and Ms Mangan; and
• damage to the plaintiff by reason of damage to its reputation and to customer confidence in its ability to provide a reliable service, which manifested itself in loss of revenue by reason of a combination of loss of customers, reduced trafficking by customers and a failure by customers to pay by reason of the quality of service.
73. The defendants submit that, as the plaintiff has not adduced evidence which quantifies such alleged damage and losses, the Court should only award nominal damages even if satisfied, as a matter of probability, that such direct damage or loss occurred. They also dispute the fact of such alleged direct damage or loss.
74. A plaintiff must always adduce evidence which establishes, as a matter of probability, the fact that damage occurred by reason of the alleged wrongful act. However, there may be circumstances in which, notwithstanding that a plaintiff fails to adduce evidence which quantifies the amount of the damage, such evidential failure may not preclude a Court from measuring, in more than a nominal amount, the amount of the award which should be made to compensate the plaintiff for the damage the fact of which has been proved. The plaintiff drew attention to the following statement in Chitty on Contracts (28th edition), volume 1, para. 27-006, which sets out the principle, as applied by the Courts in this jurisdiction:
“The fact that damages are difficult to assess does not disentitle the plaintiff to compensation for loss resulting from the defendant’s breach of contract. Where it is clear that the claimant has suffered substantial loss, but the evidence does not enable it to be precisely quantified, the court will assess damages as best it can on the available evidence. Similarly, the fact that the amount of that loss cannot be precisely ascertained, as, for example, where it depends on a contingency, does not deprive the claimant of a remedy. Where, if the defendant had fully performed his undertaking, there was only a chance that the claimant would acquire a benefit or make a profit; the court will discount the damages to reflect the likelihood that the benefit or profit would have been received. The loss of profit suffered by a claimant as a result of the defendant’s breach of contract frequently depends on many speculative factors, but the courts will always attempt to assess the amount of the loss.”
75. The plaintiff relies upon the decision in Chaplin v. Hicks [1911] 2 K.B. 786, referred to by O’Flaherty J. in the Supreme Court in Callinan and Others v. The Voluntary Health Insurance Board (Unreported, Supreme Court, 28th July, 1994), where he stated at page 8:
“The fact that the actual figure to which they [the plaintiffs] may be entitled may not have been presented to the satisfaction of the judge does not mean that the plaintiff should not get any damages at all under this heading.”
I am satisfied that the failure by a plaintiff to adduce evidence to demonstrate, as a matter of probability, the amount of the loss in financial terms to a plaintiff in respect of damage, the fact of which has been established in evidence, will not necessarily deprive the plaintiff of an award of damages. I agree with the view expressed by Finlay P. in Grafton Court Limited v. Wadson Sales Limited (Unreported, High Court, 17th February, 1975) at p. 21 of the transcript:
“Having regard to the decision of the Court of Appeal in Chaplin v. Hicks reported in 1911 2 Kings Bench division 786 and in particular to the judgments of Lord Justice Vaughan Williams and Lord Justice Fletcher Mouton in that case, I am satisfied that the true underlying principle is firstly that the Court must be alert, energetic and if necessary ingenious to assess damages where it is satisfied that a significant injury has flowed from a breach of contract. Secondly, the principle, as I understand it, is that whereas there are definite rules for the assessment of damages in a great number of cases of breach of contract, there are cases and category of cases to which these rules are clearly not applicable but that does not absolve the party who has committed the breach from the responsibility to pay compensation.”
76. It follows from the above, that it remains a matter for the plaintiff to establish, as a matter of probability, the fact of the damage or loss suffered by the plaintiff, but, having done so, the Court may, in appropriate circumstances, assess the amount of the damages to be awarded in respect of that damage without necessarily evidence having been given which seeks to quantify in financial terms the loss caused by the damage. Whether it is appropriate to do so in any one case, will, of course, depend upon the relevant facts. On the facts herein, I have determined that the plaintiff is entitled to an award which is more than nominal by reason of proof of some probable damage and loss, albeit not quantified.
77. Relevant to the subsequent conclusions on the award of damages I have concluded, on the evidence adduced, that there were difficulties in relation to the plaintiff’s business by late October which were known, inter alia, to senior employees and which must affect the measure of damages to be awarded. These include the following:
• outside investment had been sought from a number of sources during 2006 and for varying reasons not achieved;
• the existing shareholders (or certain of them) had already advanced an additional €300,000.00 during 2006;
• whilst VoIP customer numbers had increased significantly from January to September 2006 they had levelled in October 2006 and revenue from VoIP was then approximately €10,000 per month;
• whilst the Cork broadband network was a technical success market penetration had not been achieved and it was costing the plaintiff approx €35,000 per month and attempts had been made to sell it. It had originally been flagged as the first of a number of similar networks intended, in part, to support;
• the plaintiff was in need of cash;
• there was increasing concern about the vulnerability of the plaintiff by reason of its total dependency on the defendants and the perceived deterioration in the quality of the services being provided by them.
78. The plaintiff has established, by the evidence of Ms. Hand and Mr. Powell in particular, that the events of 17th and 20th November, 2006, did cause serious disquiet and upset amongst employees and a lowering of morale which, as a matter of probability damaged the plaintiff. No evidence of financial loss caused to the plaintiff thereby was given. However, as a matter of common sense, employees who are upset in the manner described and have to deal with irate customers are distracted from their normal work such that the plaintiff must have been at some added expense or loss of the benefit of work which might otherwise have been done for it by those employees. However in absence of evidence of financial loss have concluded that the damage whilst real was not great.
79. The plaintiff has also established that both Mr. Kernan and Ms. Mangan were very valuable employees to the plaintiff with special skills and knowledge relevant to the VoIP and broadband network elements of the plaintiff’s business. Having carefully reconsidered, in particular, both their witness statements and their oral evidence, which I fully accept, I cannot be satisfied that the plaintiff has established, as a matter of probability, that either of them left the employment of the plaintiff by reason of the defendants’ breaches of contract in November 2006. In the case of Ms. Mangan, I have concluded, as a matter of probability, that she had already considered seeking alternative employment prior to 17th November, 2006, by reason of her uncertainty as to the future of the plaintiff and the fact that both she and her spouse were both employed by the plaintiff. I have concluded that, as a matter of probability, she would have left even if the breaches had not occurred and that they did not significantly alter the timescale of her leaving.
80. In the case of Mr. Kernan, I have concluded that prior to 17th November, 2006, he was becoming increasingly concerned about the vulnerability of the plaintiff by reason of its total dependency on the defendants for the provision of its VoIP service and what he perceived to be a continuing deterioration in the quality of the service being provided by the defendants. Two serious outages in early November for technical reasons appear to have been of particular concern. The lock out and suspension of internet services in breach of contract probably heightened Mr. Kernan’s already existing concern about the vulnerability of the plaintiff by reason of its total dependency on the defendants in its chosen VoIP business model. I have concluded that the defendants’ breaches of contract in November as a matter of probability caused Mr. Kernan to leave the employment of the plaintiff earlier than he might otherwise have done, but were not the cause of his leaving. Having regard to the importance of Mr. Kernan to the business of the plaintiff, I am satisfied that the plaintiff was, as a matter of probability, damaged by even such earlier leaving but, in the award, whilst more than nominal, also should not be great.
81. I have decided to allow €15,000 in respect of the direct loss suffered by the plaintiff by reason of the upset to employees in general and early departure of Mr. Kernan.
82. The plaintiff offered no evidence of the amount of the loss loss of revenue alleged to have been suffered by reason of the impact of the break in service on 20th November, 2006, to its VoIP and broadband customers. Mr. Powell, the managing director of the plaintiff, who is a very successful and experienced businessman, admitted in cross-examination that no calculation had ever been done as to what the damage which the plaintiff alleged occurred in November had cost it in financial terms. Also, whilst both Ms. Hand and Mr. Madigan, the chief financial officer, gave some evidence of reduction in minutes trafficked in December 2006, loss of customers (principally CPS not directly affected by the break in internet service) and Mr. Madigan gave evidence of some customers being unwilling to pay for services received because of poor service, no attempt was made to quantify these alleged losses in evidence. Further, Mr. Powell agreed in cross-examination that the plaintiff continued to trade after November 2006 at “roughly” the same levels at which it previously traded. For a start-up company, this fact would not preclude the plaintiff establishing a loss if evidence established that as a matter of probability prior or anticipated increases ceased by reason of the breach of contract but no such evidence was given herein.
83. Accordingly, whilst I am satisfied, as a matter of probability, on the evidence adduced that the plaintiff did suffer direct damage and loss in terms of damage to its reputation and loss of confidence by customers, which manifested itself in some loss of revenue by reason of the limited loss of customers and customers’ unwillingness to pay, I have also concluded, as a matter of probability, that such losses in financial terms were relatively small. Some of these probable losses are of a type which it is not difficult to quantify, albeit others are. The failure of the plaintiff to quantify those which should have been capable of quantification appears to support the conclusion that they were relatively small.
84. The additional amount of damages to which I have determined that the plaintiff is entitled, having regard to the above conclusions, the level of business in November 2006, and the fact that it only continued in business for approximately a further six months, is €10,000.
85. It follows that the total damages to which the plaintiff is entitled to compensate it for the direct loss and damage suffered by reason of the defendants’ breaches of contract in November 2006, is €25,000.
Defendants’ counterclaim
86. It is agreed that the defendants are entitled to recover €252,000 from the plaintiff on their counterclaim. This must now be reduced by the award of €25,000 to €227,000. The defendants claim interest on the balance, pursuant to the Courts Acts.
87. The Court has a discretion to grant interest from the date upon which the cause of action accrued and very often will exercise that discretion to award interest to a plaintiff from the date of commencement of the proceedings. The defendants are, of course, the counterclaimants in these proceedings. I have concluded that the defendants should be allowed interest, pursuant to s. 22 of the Courts Act, 1981 from the date of commencement of the proceedings i.e. 10th January, 2007. The primary reason for which I have so concluded is that the plaintiff was aware, from early January 2007, that it owed the defendants a sum which it computed to be approximately €221,000 (Mr. Madigan gave evidence to this effect) but denied its liability to pay by reason of its claim for damages which it perceived to be significantly in excess of this amount. I am satisfied that the defendants did not delay in their dealing with these proceedings and in such circumstances it appear to me that they must now be entitled to interest, pursuant to the Courts (Supplemental Provisions) Acts, 1961 to 2007, on the sum of €227,000 from 10th January, 2007.
Relief
Throughout the proceedings, no distinction was made between the defendants and no issue taken by either side as to their individual relationship with the plaintiff. I will hear counsel as to which of the defendants is entitled to judgment against the plaintiff in accordance with the above conclusions.
McCaughey v Irish Bank Resolution Corp Ltd & anor
[2013] IESC 17 (13 March 2013)
Court: Supreme Court
Composition of Court: Hardiman J., O’Donnell J., Clarke J.
Judgment by: Hardiman J.
Status of Judgment: Approved
Judgments by
Link to Judgment
Result
Concurring
Hardiman J.
Link
O’Donnell J., Clarke J.
JUDGMENT of Mr. Justice Hardiman delivered the
13th day of March, 2013,
This is the appeal of the plaintiff from the judgment of the High Court (Mr. Justice Birmingham) delivered the 27th day of July 2011 and from the associated order dated the 9th day of December, 2011 whereby the plaintiff’s claims against the defendant were dismissed.
The parties.
The plaintiff, Mr. McCaughey, is a successful Irish businessman and formerly the moving spirit behind Century Homes, which he sold in 2005. The first-defendant is the statutory successor to Anglo-Irish Bank Corporation Limited, a bank which has become notorious. The second-named defendant is a Delaware Corporation with limited liability which was incorporated by the Bank as a vehicle for participation in a property fund known as the Anglo-Irish New York Hotel Fund.
The plaintiff, in or about September 2006, accepted an invitation to participate in the Fund when this was proposed to him by the Bank. He agreed to invest the sum of US$1m and, apparently also at the suggestion of the Bank, agreed to borrow US$620,000 of this from the Bank.
The plaintiff had been a customer of the Bank and of its “Private Banking” arm. He was not alone in being solicited to invest in the Fund mentioned above: about forty-nine other people, customers of the Bank and of its Private Banking arm, also invested in response to such solicitations. The plaintiff’s action has been described as a “pathfinder” for twenty-two other sets of proceedings.
Background to the investment.
Although the investment was made via a complicated corporate and partnership structure, devised by the Bank, the underlying proposition was quite simple. At the time the investors were solicited (September, 2006) the Bank, had itself agreed to purchase two long established hotels in the City of New York, being the Beekman Tower Hotel and the Eastgate Tower Hotel. Well before it solicited any investment from other parties the Bank, in or about May 2006, had agreed to purchase these hotels for over US$150m and was contractually bound to do so. If it failed to do so it was liable to forfeit a deposit in an amount exceeding US$11m and would presumably have been subject to proceedings in the nature of specific performance at the option of the vendors. The background to how the Bank became involved in this transaction is set out in the very detailed judgment of the learned trial judge, but is not immediately relevant to the issues raised on this appeal. The purchase of the two hotels on foot of the Bank’s contract was closed in or about the month of October 2006. The plaintiffs and the other investors were solicited by the Bank to invest in the course of the preceding month, September 2006. It appears from the evidence that the Bank had decided to solicit investors from amongst its “best customers” – persons known to it to have a net worth of at least €5m and/or incomes exceeding €500,000. It may be inferred that such persons were not likely to be innocents abroad, or persons under any kind of disadvantage: certainly the plaintiff was not in either of those categories.
For reasons not fully explained, the fact that at the time of solicitation the Bank was itself contractually bound to buy the hotels, and would have to do so out of its own resources if it could not find third party funds, was not explained to the plaintiff or, it appears, to any of the investors. Many would consider this a relevant factor in assessing what the Bank had to say about the project.
There were elaborate plans for the two hotels, which were well established but aging structures. These plans involved not merely the purchase of the hotels but the refurbishment of them at a price calculated on the basis of so much per “key”, a term used in the American hotel industry to mean room. The plans have not proceeded as was intended and the investors have lost their entire investment, though the Bank retains a substantial asset. The learned trial judge found, and it appears to be the case, that “the project has not proceeded as intended, principally because the cost of the planned renovation was far greater than had been contemplated originally”. The learned trial judge also found, what is undoubtedly true, that “the plaintiff is deeply aggrieved by what has transpired as are a number of other investors, and is firmly of the belief that he has been seriously ill served by the Bank”. This sense of bitter grievance arises from what he and others had thought their relationship with the Bank to be.
Motion to admit additional evidence.
On the hearing of this appeal the Court had before it a Notice of Motion dated the 17th October, 2012 supported by three affidavits sworn between the 16th October, 2012 and 19th January, 2013. This motion was to admit additional evidence regarding a memorandum dated the 17th August, 2012 from a New York City Assistant Commissioner to the Borough Commissioner of Manhattan to a letter from the same person dated on the same day. These documents relate to matters coming into being some years after the principal document whose rescission is sought in these proceedings. The views of the author of the 2012 document, insofar as admissible, could have been adduced before the High Court. The proposed additional evidence does not appear to bear on any issue properly before the Court on this appeal.
Private Banking.
It may be desirable at this stage to discuss the term “Private Banking”. At the trial in the High Court it was the subject of considerable cross-examination by Mr. Martin Hayden S.C., counsel for the plaintiff/appellant, of Mr. Paul Brophy who was a director and executive (Vice-President/Head of New York lending) at Anglo in New York.
Mr. Brophy agreed that the hotel Fund was being sold “to forty or fifty of Anglo’s best customers”. Asked what the concept behind Private Banking was, he answered that it was:
“To find opportunities for them to invest their resources and bring products to them… one of the things they did was to look at real estate investments where the bank would, sought out an investment property or an opportunity and then would bring that opportunity to a select number of clients where the equity would subsequently be syndicated and the bank would remain in as the senior lender on the transaction, would provide the senior debt.”
He agreed that:
“… the bank would source a project, prepare the project and then introduce it… to their best customers.”
He agreed that, in relation to the investment in question in this case:
“… Anglo would go about getting all the relevant information regarding the investment… then set a structure in place in relation to this project that involved a durable power of attorney being executed on behalf of, or by the investor…”.
He agreed that:
“… that particular structure effectively in this instance meant that the investor fundamentally had no independent power of action relative to the investment.”
And that:
“… Anglo picked the project, presented the project and was going to run the project”.
Mr. Hayden S.C. then put to Mr. Brophy:
“And that was the way it was designed from the outset. It was a question whereby the best customers, who had their other businesses to be getting on with, didn’t have to worry, because Anglo would mind them?”
Mr. Brophy agreed that this was so. That phrase, “Anglo would mind them”, is said by the plaintiff to be at the heart of the Private Banking relationship as he understood it to be and as he said it was presented to him by Anglo. If this is so, it must be said that the terms of the Investors’ Commitment Agreement, which appear to exempt Anglo from liability for anything short of fraud or fraudulent misrepresentation, are gravely at variance with it. “You’re on your own” would be a more apt colloquial summary of certain provisions of this document, set out below, than “Anglo would mind them”.
It was next put to Mr. Brophy that Anglo had sold the investment to its customers on the basis that “we will look after your interests”.
Mr. Brophy replied to this:
“I don’t know how it was specifically sold by the relationship managers but the general thesis of what you are saying seems accurate, yes.”
Mr. Hayden then further pushed his point asking:
“So: ‘Trust me. We are the professionals, we know what we are doing. You don’t have to be troubling yourself about it, we will look after you.’’ Isn’t that it?”
Mr. Brophy replied:
“I can’t say that all those words were used but I think the general premise is that, you know, people were brought an investment opportunity by the bank, it was explained to them fairly diligently and clearly what they were getting themselves involved in, they would have been made aware of the risks and pitfalls and the opportunities and ultimately it was up to those individuals themselves to make a decision, you know: ‘This is a high risk investment. Is this an investment I want to make?’.”
In response to this Mr. Hayden pointed out that it was not an answer to the question he had asked and pressed Mr. Brophy as follows:
“Can you tell us was it Anglo’s business model effectively to present these projects to people who they know, their best customers, who are very busy in other spheres of life and that Anglo would look after the difficulties and problems for them in the context of that investment?”
Mr. Brophy replied:
“Yes, I think that is fair”.
Mr. Hayden next inquired:
“So therefore, is it fair – would you have understood people, their best customers, to trust Anglo when it comes to bringing the information to them?”
Mr. Brophy answered:
“I think that people would have trust that whatever information Anglo had brought them, that they had brought them that information on the basis that that information was to the best of their knowledge, yes.”
The phrases emphasised: “Anglo would mind them”; “we will look after your interests”; “we are the professionals, we know what we are doing. You don’t have to be troubling yourself about it, we will look after you”; “… Anglo would look after the difficulties and problems for them in the context of that investment” – are said by the plaintiff to sum up the nature of the Private Banking relationship which they claim to be one which placed a fiduciary duty on the Bank. The Bank said the relationship was not fiduciary and was wholly governed by the terms of the commitment agreement. This, as we shall see, excluded liability for anything but fraud or fraudulent concealment, and sought to exclude even a duty to take care in the making of any representations.
The proceedings.
The plaintiff issued proceedings on the 7th October, 2009 and delivered a Statement of Claim on the 4th November, 2009 which has subsequently gone through a number of amended forms. The principal relief claimed is a rescission of what was referred to as “the Commitment Agreement”. This is a document entered into between the plaintiff and the Bank on 27th September 2006 whereby the plaintiff irrevocably committed to pay the sum of US$1m and was thus admitted into the partnership as a Class B limited partner to the extent of his investment. He was also required to execute a Limited Durable Power of Attorney appointing the partnership, the manager of the partnership and a number of persons designated by the partnership to act alone as his attorney-in-fact in his name.
In addition to the rescission of this agreement the plaintiff claims, amongst other things, the return of his investment, the rescission, separately, of the loan agreement whereby he borrowed over US$600,000 for the purpose of the investment; damages for fraudulent and/reckless concealment; damages for fraudulent misrepresentations; damages for negligence misstatement and/or misrepresentation; damages for negligence and breach of duty including breach of fiduciary or statutory duty; damages for conspiracy; damages for intentional interference with the plaintiff’s economic interests; damages for unjust enrichment; damages for intentional interference with the plaintiff’s economic interests; aggravated or special damage.
The defendants by their defence delivered the 11th January, 2010 take two preliminary objections: that the plaintiff should not be permitted to rely on a document which is extensively pleaded in his proceedings, described by him as the “black brochure” and by the defendants as the “Fund brochure” because they see it as a promotional document which does not give rise to any legal representation. There was also pleaded at that time that the proceedings were premature since the investment had been one which it was clear no funds could be recovered (assuming there were funds to recover) for a period of at least five years which had not then elapsed.
The defendant denied that it provided “tailored property funds”, as the plaintiffs had alleged; it specifically denied that the Bank owed any fiduciary duty to the plaintiff; indeed it denied that the Bank owed any duty of care to the plaintiff at all.
The defendant stoutly denied any misrepresentation or concealment which, as will be seen, was a substantial part of the detail of the plaintiff’s claim. It denied that any representations were made on which the plaintiff was entitled to rely; it specifically pleaded that it was not liable for its passing on of figures contained in “external reports or the information contained therein”. It was also specifically pleaded by the defendants that they did not know that the plaintiff would rely on their acts, conduct or misrepresentation (which were themselves denied) or that he would be induced thereby to enter into the commitment agreement and pay the monies mentioned. The Bank expressly denied that they were under a duty to take care in the making of any representations. The Bank then specifically denied (and this transpired to be an important pleading) that the plaintiff acted on the foot of any such representations. In other words, the Bank says, apart from anything else, that the plaintiff did not rely on any representations or other material communicated to him.
Apart from a general denial of liability, the Bank in fact counterclaimed against the plaintiff on the basis that his proceedings represent a breach of the commitment agreement and of the obligations which he undertook thereunder. The Bank seeks against the plaintiff damages for breach of agreement, warranty representation or acknowledgement.
Outline of issues.
The plaintiff complained that he was misled, actively or by concealment, in relation to four particular issues. These are:
“(1) The zoning issue, also sometimes referred to as the Certificate of Occupancy issue.
(2) The cost of renovation issue.
(3) The presence of sitting tenants issue.
(4) The interest rates strategy issue.
The learned trial judge remarked that, on the trial at the High Court (which included extensive cross-examination) most attention had focussed on the first and second of these issues and indeed the arguments on the last issue was not pushed to a conclusion. At the hearing of this appeal the argument focussed exclusively on the first issue.
The reason for this exclusive focus requires to be stated because it may not be apparent to those who have not had the transcript of the High Court hearing. It appears to me that the issue relating to the cost of renovations was in the foreground in the appellant’s case there, and that the case they put forward substantially depended on the evidence of Mr. Haskin, who is a long time prominent player in the New York hotel business. Mr. Haskin had originally been a promoter of the Fund with Anglo but subsequently fell out with them. It appears from my understanding of the High Court proceedings that Mr. Haskin’s evidence fell considerably short of what the plaintiff required to prove his case on the renovations cost issue. Accordingly, emphasis shifted before the end of the High Court case and on this appeal to the zoning issue.
It was alleged by the plaintiff that the zoning issue, or even the fact that there was a zoning issue, was never disclosed or explained to him; that it was thereby concealed from him either fraudulently or negligently. In order to understand this issue certain terms must be explained.
It appears that in New York, and in particular in Manhattan where these hotels are situated, certain terms are used in the hotel industry which have no immediate corresponding term in the Irish hotel business. Most relevant are the concepts of a “transient hotel” which seems to resemble a hotel as it is conceived of in Ireland that is a building in which is carried on the business of offering accommodation food and drink to all comers for agreed periods which are usually short and may be as short as a single night. The term “residential hotel” is used in New York in contradistinction to “transient hotel” and appears to mean a hotel which offers accommodation to “residential” customers for periods of at least one month. Sometimes, indeed, occupation by such customers goes on for years. The units so rented include kitchen facilities and the tenants may cook for themselves, or use the restaurant facilities in the hotel, or simply eat out. A resident may acquire rights against his Landlord and become a sitting tenant.
The distinction between these two types of hotel business is rigidly observed in New York usage. A further complicating factor, and one that applies in the case of each of the hotels in question here, is that the actual user of an individual hotel building may be partly transient and partly resident or wholly one or the other. This will be specified on the hotels “Certificate of Occupancy”, a document issued by the local authority and which is, it was said, required to be produced before any building permit can issue. A “residential hotel” is sometimes referred to as “an apartment hotel”, and in that sense means an apartment in a block or group of apartments which is in, or connected to, a building which also has bar, restaurant, meeting rooms and fitness centre services.
In the present case, the Eastgate Tower Hotels Certificate of Occupancy was for a transient hotel up to Floor 7 and for a residential hotel from Floors 8 to 25. The “Certificate of Occupancy” for the Beekman Tower was for a residential hotel throughout. Notwithstanding this, it was said, each hotel operated as a transient hotel throughout, and had done so for many years. Obviously, an ability to use premises as a transient hotel is more financially attractive to its owner.
This, then, is the “Certificate of Occupancy” issue which arose in March and April 2006. Both premises were owned by the Denihan family, a family long established in the hotel business in New York. At a certain stage, apparently on or about the 3rd April 2006, after the Bank had made a non-binding “best and final offer”, a sort of pre-contractual indicative bid. The vendors, who had done a good deal of “due diligence” made it clear that no further due diligence in relation to the condition of the properties would be permitted and they declined, by imposing an appropriate condition to permit any contact by the would-be purchasers with the New York City Building Department, inquiring about zoning compliance issues.
The purchase agreements were signed on the 19th May, 2006, one for each hotel, by Paul Brophy on behalf of the Bank and also on behalf of the second-named defendant, the Bank’s newly formed and wholly owned subsidiary for the purpose of this transaction.
These purchase agreements or contracts provided for a closing date on either the 28th September, 2006 or the 3rd October, 2006 depending on the date of the completion of the financial due diligence. But the effect of the contracts was that, subject only to the financial diligence the contracts were “hard”, which means that the deposits which totalled US$11.15m were now non-refundable
Eight days before these agreements were signed the final issues between the parties were resolved at a face to face meeting between Mr. Lawrence Denihan of the vendors and Mr. Brophy of the Bank. According to the evidence of one of the witnesses, a Mr. Haskin, eminent in New York hotel circles and a promoter of the Fund, it was hoped to secure a reduction of US$4m per property in respect of the zoning/Certificate of Occupancy issues and of the Bank effectively buying the zoning risk. But in the end the Bank agreed a reduction of only US$1m in total, less than 1% of the purchase price, which was US$151.75m for the two properties.
As happened in the High Court, the plaintiff/appellant put considerable emphasis on the signature of the purchase agreements and the consequent rendering of the deposits of over US$11m non-refundable. He said that that meant there was enormous pressure on the Bank to proceed with the transaction and an incentive to cut corners and to distract attention from any difficulties that might arise in an effort to get other investors on board before the closing date. If the other investors could not be provided before the closing date then the Bank would have to complete the transaction in its own and therefore incur an unnecessary second set of transaction costs if third parties investors were subsequently introduced since such investors would certainly require a proprietary interest, direct or indirect, in return for their money.
Documents.
Two documents played a central role in the arguments in this case. The first of these was referred to as the “black brochure” and it featured largest in the plaintiff/appellant’s submission. It is a high gloss brochure with many illustrations and is designed to be an eye catching and attractive document. From the plaintiff’s point of view it is the most important document in the case and the evidence showed that, although it was finalised in circumstances of considerable pressure, its contents were the subject of many and detailed exchanges between the Bank at a senior level, its employees in New York and its legal and other advisers there. By the time this document was produced the zoning/Certificate of Occupancy issue had clearly emerged and the Bank had taken the view that it was “manageable”. A good deal of discussion had taken place about whether it was necessary to include any reference to this issue in the brochure and it was established in evidence that an eminent zoning lawyer advising the Bank and Mr. Haskin, a Mr. Sillerman, had advised that such a reference should be made and had drafted a form of words for this purpose. This will be considered below. The Bank did not take Mr. Sillerman’s advice. But on the hearing of this Appeal, the plaintiff agreed that his proposed wording would have discharged the Bank’s obligation to disclose the zoning issue.
From the plaintiff’s point of view, the salient feature of the black brochure was what it did not say. It did not make any reference at all to the zoning/Certificate of Occupancy issue. This is agreed by the Bank, one of whose witnesses, Mr. Byrne, stated that he feared that such a reference would be misunderstood. He recalled that Autumn, 2006, was the time when the Tribunal of Inquiry into Certain Planning Matters and Payments was ongoing in Ireland and said that mention of the zoning issue might have suggested that it was something “which, in fact, it was not” and might have an off putting effect. Besides, the Bank was genuinely of the view that the issue was manageable. A similar issue had in fact been “managed” in the case of another New York hotel whose purchase the Bank had funded (though without taking any beneficial interest itself), the Mark.
The Bank’s fundamental position in relation to this brochure was that it was not a document intended to have any legal effect at all. As we have already seen, the pleadings by the Bank commenced with an objection to any reliance being placed on this document. Apart from this preliminary issue, the Bank relied on the multiple notes of caution and exclusion contained in the document and the manifest urging that a customer would take his own legal, financial, and taxation advice.
The black brochure.
The brochure consists of thirty-seven pages of text and/or illustration. It is impressively got up with a full colour title page on a black background, featuring photographs of various famous official and commercial buildings in Manhattan. The Bank’s name and logo is at the top with the words “Private Banking” underneath. The document is entitled “The Anglo Irish New York Hotel Fund”. There are further photographs of attractive street scenes in New York before the Table of Contents. After this is a glossy street map locating both hotels about ten blocks apart, not far from the UN building near the East river in Manhattan. This page features a box containing the words:
“The hotel market in New York is currently strong due to the increased demand for hotel rooms and a shrinkage of room supply owing to the recent trend of converting hotel rooms to condominiums.”
The first portion of the brochure requiring close attention is the executive summary on p.5. The project is introduced as follows:
“Anglo Irish Bank Private Bankers (“Anglo”) are seeking a limited number of investors who wish to avail of an opportunity to participate in the Anglo Irish New York Hotel Fund (the “Fund”).”
The basic business plan was outlined as follows:
“The Fund will acquire the freehold interest in two hotels in prime locations in Midtown Manhattan New York, the Beekman Tower Hotel and the Eastgate Tower Hotel.”
The brochure then announced that “the hotels have been sourced, negotiated and secured by Peninsula Real Estate Fund (the promoter).” This form of words of course avoids or downplays the direct beneficial interest of Anglo itself in the hotels.
The structure of the investment is described as follows:
“The hotels are being purchased for US$151.2m. Acquisition costs amount to US$10.5m. In addition a further c. US$24.8m is being provided to facilitate the planned renovations of the hotels and US$7.9m is being provided for management fees and interest costs for years one and two.”
The investment is described as follows:
“This fund provides investors with an opportunity to invest in prime hotel assets significantly below replacement costs in the financial capital of the world.
Non-recourse bank borrowings of US$145.8m are being provided by Anglo to the Fund.
The minimum investment is US$1,000,000, although Anglo reserves the right to allow an investment of a lower amount.”
High Risk.
Most importantly, from the defendant’s point of view there is the following statement:
“This investment is high risk – please refer to the section entitled “Risk Factors”. Prospective investors should review this brochure carefully and in its entirety and consult with their legal, tax and financial advisers in relation to the legal tax financial and other consequences of investing in the Partnership.” (Emphasis added)
The partnership itself had already been described as follows:
“The Fund is a US Limited Partnership named ‘The Peninsula Real Estate Fund’… and investors will hold 98.5% of the capital of the Partnership as Limited Partners. The remaining capital will be held by the Promoter.”
At the end of this executive summary, in italics, are the following words:
“N.B.: All figures and statistics in this brochure are reproduced from external reports addressed to Anglo. Reasonable efforts have been taken to ensure that all such information has been accurately been reproduced. However, Anglo cannot accept responsibility for any errors in the reports themselves or the information on which they were based.”
The effect of this, read literally, is that Anglo is no more than a post box for information of the sort to which the paragraph relates.
Throughout the rest of the document there are generally upbeat boxed statements such as, on p.19 over a colour photograph of an exciting New York streetscape at night:
“This Fund provides investors with an opportunity to invest in prime hotel assets significantly below replacement cost in the financial capital of the world.”
However at p.26 of the brochure under the heading “Exit Strategy”, potential investors are told:
“The Fund has a target investment period of five years. Investors should be aware that this is not a liquid investment and should be prepared to invest for a longer period. The partnership agreement runs for a period of eight years with a possibility of two one year extensions at the discretion of the Investment Committee. In general therefore it will not be possible for an investor to exit the Fund before the hotels are sold and the Fund is liquidated”.
Part of this statement is reproduced in a box on the following page.
Risk Factors.
At p.28 there is a section entitled “Risk Factors”. This is very heavily relied upon by the defendants. The first three paragraphs require citation in full:
“A geared investment is considered to be high risk and the following considers the types of risk associated with an investment of this kind. This brochure does not constitute investment advice and prospective investors should consult their own legal, financial or tax advisers in relation to their participation in the investment. All projections, forecasts and estimates contained in this brochure are prepared on the basis of current information, legislation and tax practice in Ireland and U.S. This brochure includes information obtained from external sources, and we have taken reasonable endeavours to accurately reproduce such information. Anglo does not accept any responsibility for its accuracy or completeness. (Emphasis added)
Prospective investors should consider the following risks amongst others”
There then follows a list of ten different types of risk with a short discussion of each. No zoning risk is mentioned.
The tight timescale for available for an investor to consider whether or not to invest has already been mentioned. This has a particular relevance in relation to the zoning risk because to take advice on it, as the investors were urged to do, would have involved sourcing and instructing a highly specialised lawyer in New York, and inducing him or her to advise in just a few days.
Finally, at p.35 of the document there is a section entitled “Investment Steps”. This says; so far as relevant:-
“The following are the steps to be followed once a decision has been made to invest (Emphasis added).
(1) The investor should complete the following document
– Subscription document,
– W – 8 tax form,
– Power of Attorney in order to facilitate the operation of the partnership,
– Professional Investor Declaration.
This latter is a declaration that the investor wishes to be treated as a professional investor and not a consumer and therefore excludes him from the benefit of certain laws and practices for the protection of consumers.
Zoning warning.
The role of Mr. Sillerman, a New York Attorney specialising in planning, has already been mentioned. He and his firm, together with other lawyers were involved in advising Anglo as to whether or not the zoning issues required to be disclosed. In an email of the 31st August, 2006 Mr. Garrett Thelander of Anglo had suggested to him by Mr. Sillerman the following words for zoning disclosure i.e. a form of words suggested for use in what became the “black brochure”.
This was as follows:
“Zoning
The Company intends to continue operating the Eastgate and the Beekman as transient hotels. It should be noted that the Certificates of Occupancy for the hotels permit only partial transient hotel use for the Eastgate and only residential hotel use for the Beekman. Both hotels are in an area of Manhattan in which the construction of a new building for use as a transient hotel (as opposed to use as a residential hotel) is not permitted on an as-of-right basis. However, zoning regulations permit the continuation of a use where prior non-conforming use is demonstrated.
Zoning Counsel has advised the Fund that other hotels in circumstances similar to those of the Eastgate and the Beekman have been traditionally granted changes to their Certificates of Occupancy to permit transient use. However, Zoning Council has also advised the Fund that it cannot be completely assured of that outcome. If the use of the hotels for transient purposes were to be challenged, the Fund would either apply to obtain the changes, which could take time, or operate both hotels as residential to the extent required”.
This is a relatively anodyne form of words, but one which clearly indicates the nature of the problem that had arisen. It omits to offer any opinion as to the probability of the change that might be sought for the Certificates of Occupancy being granted. It also omits to advise on the length of time or the cost involved to procure such alteration. I consider that this form of words would alert a prudent potential investor to the need to form some view on these topics, presumably by taking specialist New York advice, if he or she were seriously interested, but concerned about zoning. I also consider that if such a prudent investor were also aware that Anglo, for a discount of just US$1m on a consideration exceeding US$150m had agreed to buy, not merely the hotels, but the zoning risk that went with them from the Denihans, such a person would look more closely at Anglo’s own involvement in the transaction, and in the risk, and inquire what advice it had taken and what the purport of that advice was.
But the “prudent investor”, like the “reasonable man” is a legal fiction, a construct, an abstraction, whose putative thoughts and actions may on occasion bear little or no resemblance to how real people actually operate.
The Commitment Agreement.
This document was signed by the plaintiff on the 27th September 2006 and is the principal document or agreement of which the plaintiff seeks rescission. Clause 3 of the document is extensively relied upon in the defendant’s defence, referred to above. Particular emphasis is placed on the “Representation and Warranties of the Investor” set out there:
“Representations and Warranties of the Investor. “To induce Mainland to accept this subscription, the investor represents and warrants as follows:-
…
(e) “To the full satisfaction of the Investor, the Investor has been furnished any materials the Investor has requested relating to the Partnership and the offering of the Interests and the Investor has been afforded the opportunity to ask questions of representatives of the Partnership and Mainland concerning the terms and conditions of the offering of Interests and to obtain any additional information necessary to verify the accuracy of any information provided to such Investor and to make an informed investment decision with respect to an investment in the Partnership,
(f) other than as set forth herein, the Partnership Agreement and any separate agreement in writing with the Partnership executed in conjunction with the Investor’s subscription for Interests, the Investor is not relying, and will not rely, with respect to its Interests, upon any other information (including, without limitation, any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, and any seminars or meetings whose attendees have been invited by any general solicitation or advertising), any representation or warranty by the Partnership, the General Partner, Mainland, any Affiliate of any of the foregoing or any of their respective directors, officers, employees, partners, shareholders, advisers, attorneys in fact, representatives or agents, written or otherwise in determining to invest in the Partnership, and indirectly the real property located at 3 Mitchell Place, New York, New York USA and 222 East 29th Street, New York, New York USA (the “Properties”) and expressly acknowledges that none of the Partnership, the General Partner, Mainland, their respective Affiliates, nor any of their respective directors, officers, employees, partners, shareholders, advisors, attorneys-in-fact, representatives or agents makes any representations or warranties to it in connection therewith. The Investor has consulted to the extent deemed appropriate by the Investor with the Investor’s own advisers as to the financial, tax, legal and related matters concerning an investment in interest and on that basis believes that an investment in the Partnership, and indirectly the Properties is suitable and appropriate for the Investor.
(j) The Investor has, independently and without reliance upon the Partnership, Mainland, their respective Affiliates, nor any of their respective directors, officers, employees, partners, shareholders, advisors, attorneys in fact, representatives or agents, and based on such documents and information as it had deemed appropriate, made his or her own appraisal of and investigation into the business, operations, property, financial and other condition, credit worthiness and merits and consequences of investing in the Partnership and, indirectly the Property, and has made his or her own investment decision with respect to the investment represented by his or her Interests and his or her participation in the Partnership and, indirectly, the Properties,
(k) The Investor has, based on his or her own investigation of the interests, the Properties and the Partnership, made his or her own independent analysis of the likelihood of its success and such investor acknowledges and agrees that the information regarding the Interests, the Partnership and the Properties (including financial, operational and performance data and projections) and the economic and market information contained in any materials provided (whether by Mainland or others) to such Investors in connection therewith would have been obtained or derived from sources prepared by other parties and that none of the Partnership, Mainland, their respective Affiliates, nor any of their respective directors, officers, employees, partners, shareholders, advisors, attorneys-in-fact, representatives or agents, assumes any responsibility for the adequacy, accuracy, completeness or reliability of such material or such information, the Investor acknowledges that past performance is no indication of future results, and that actual results may differ materially from projected, estimated or targeted results.
(i) The Investor acknowledges and agrees that (i) any materials provided (whether by Mainland or others) in connection with such Investors’ investment in the Partnership and indirectly, the Properties, do not purport to be comprehensive or complete or to contain all information or to describe the risks and potential conflicts of interest that such Investor may consider material in making a decision to invest in the Partnership and, indirectly, the Properties. (ii) such Investor must perform his or her own independent due diligence and independent analysis of the merits and the legal, tax, regulatory, financial and other risks of an investment in the Partnership (and any series of Interest therein) and, indirectly, the Properties prior to subscribing for Interest, and (iii) none of Mainland, its respective Affiliates, nor any of their respective directors, officers, employees, partners, shareholders, advisors, attorneys in fact, representatives or agents assume any responsibility for, and shall have no liability in respect of the materials referred to in Clause (i) above,
(m) The Investor acknowledges and agrees that the Partnership, the general partner, Mainland, the respective Affiliates, and their respective directors, officers, employees, partners, shareholders, advisors, attorneys in fact, representatives or agents may have confidential information relating to the Partnership, the General Partner, the interests and the Properties that has not been disclosed to such Investor, and that notwithstanding such non-disclosure, such Investor has received information deemed by him or her to be sufficient to allow him or her to make an independent and informed decision with respect to his or her investment in the Partnership, and, indirectly, the Properties.”
It is true, and the learned trial judge acknowledged it, that these clauses referred to “the partnership, the general partner, Mainland, their respective affiliates and their respective directors, officers, employees, partners, shareholders, advisers, attorneys-in-fact, representatives or agents” do not refer specifically to the Bank. But it was the learned trial judge’s view that:
“However, it seems to me given the nature of the relationship between Anglo and Mainland and the circumstances in which Mainland came into existence, that it is impossible to argue that Anglo and Mainland are not Affiliates of each other.”
Indeed, if the Bank, for the purpose of defeating the plaintiff’s claim, or any other purpose, claimed not to be party to the Commitment Agreement, that contention would be manifestly ridiculous.
These “representations and warranties” are said to have been made by the plaintiff but were in reality drafted by the Bank, presented to Mr. McCaughey and signed by him. In my view they are in terms which are breathtakingly broad. They involve him stating that he has all the material that he wants, that he is not relying on any representations and that he has made his decision on the basis of his own appraisal, and that he recognises that he may not have been given complete information but wishes to proceed all the same. This assessment is substantially that of the learned trial judge. I agree with it and would further say that the object of the clauses just quoted is to exempt the Bank from liability for anything except direct lies and actual fraud or fraudulent concealment.
The Resolution in the High Court.
The resolution of this action in the High Court very largely influences the approach that must be taken on this appeal. The learned trial judge, having set out the causes of action which the plaintiff urged found at p.42 as follows:
“I have concluded that the effect of the provisions of the Commitment Agreement is that the plaintiff is precluded from pursuing claims other than those based on fraud. In so far as the plaintiff has formulated a claim in tort, under various heads of claim, it must be recognised that this is a case where the parties have ordered their relationship on the basis of detailed, precise and elaborate contractual provisions. The effect of this is that the defendant’s obligations in tort cannot be more extensive than what the parties have by contract determined should be the position. This much is clear from the judgment of the Supreme Court in Kennedy v. A.I.B. [1998] 2 I.R. There, Hamilton C.J. referred with approval to the Court of Appeal decision in the case of National Bank of Greece SA v. Pinios Shipping Company, (No. 3) [1998] 2 Lloyds REP 126…
With reference to that case Hamilton C.J. observed that it clearly established that when parties are in a contractual relationship, their mutual obligations arise from their contract and are to be found expressly or by necessary implication in the terms thereof and that obligations in tort which may arise from such contractual relationships cannot be greater than those found expressly or by necessary implication in their contract.
While the exemption clauses are very comprehensive indeed it is, nonetheless, not in dispute that the plaintiff is not in any way prohibited from pursuing the claim that he wishes to in fraud, resulting if successful in an order for rescission. The law does not permit a contracting party to exclude liability for his own fraud in inducing the making of the contract, a long established principal that was restated relatively recently by the House of Lords in H.H. Casualty and General Insurances Limited v. Chase Manhattan Bank [2003] 1 CLC 358.
If the plaintiff is to succeed therefore, he must establish fraud.”
_______________________________________________________
The significance of what was held in the passage just cited is momentous in terms of the resolution of this Appeal. As we have seen, the learned trial judge cited the clauses in the Commitment Agreement relied upon by the defendant in its defence, whose effect is summarised above and whose text has been set out earlier. I do not at all dissent from the learned trial judge’s summary of the effect of these clauses: indeed, I would put it still more directly and say that the Bank has exempted itself from liability for anything short of direct lies or fraudulent concealment. A Bank will rarely need to have to have recourse to direct lies in order to achieve a desired result. I would also point out that the relationship brought about by the Commitment Agreement is absolutely at variance with the relationship of customer and “Private Banker” as described and acknowledged by Mr. Brophy, but this latter found no reflection in the legal documents put forward by the Bank and signed by the plaintiff, whatever impression may have been generated in less formal language and more relaxed circumstances.
The plaintiff says that terms by way of exemption or exclusion of liability as drastic as those found in this case are “particularly onerous or unusual”. The Court of Appeal in England held in the case of Inter-photo Picture Library Limited v. Stiletto Visual Programme Limited [1989] 1 QB 433 that clauses which fall within this category must be shown by the parties seeking to rely on them to have been “brought fairly and reasonably to the attention of the other party”. The plaintiff relies on the words of Bingham LJ (as he then was) at p. 445:
“The defendants are not to be relieved of their liability because they did not read the condition, although doubtless they did not, but in my judgment they are to be relieved because the plaintiffs did not do what was necessary to draw this ‘unreasonable and extortionate’ clause fairly to their attention”.
The learned High Court judge distinguished this case on its facts holding, at p.37 that:
“Here, in contrast, the plaintiff called to the defendant’s premises specifically for the purpose of executing documentation. The documentation was obviously of a legal character and the plaintiff accepts that he was aware that the document contained legal terms. That a contract would seek to regulate the relationship between plaintiff and defendant is not at all unusual, on the contrary, it is to be expected. Neither is there anything unusual in a pre-printed contract containing provisions seeking to safeguard and strengthen the position of the party that prepared it, indeed quite the contrary. How broad the terms of any exclusions or how specific any recommendations will be, can be expected to vary considerably but that very fact means that it is incumbent on a party who is signing a document that he knows contains contractual terms to satisfy himself that these are appropriate to his situation.”
I fully acknowledge that the circumstances in which the plaintiff signed the Commitment Agreement, and the nature and indeed appearance of the Agreement itself, would make anyone aware that the document contained legal terms. However, having regard to the principles set out in the passage just cited from Bingham LJ, and having regard in particular to the breathtaking scope of the clauses quoted, I do not necessarily agree that the matters referred to in the citation above from p.37 of the judgment of the High Court are necessarily sufficient to bring the actual nature and content of the clauses fairly to the attention of a person in the plaintiff’s position. It may be, having regard to the scope of the clauses, and to their variance with the nature of the previous relationship between the parties, that such a persons attention should be drawn in absolutely express terms to their enormous scope and to the total exclusion of liability which they attempt. But this question does not appear to me to be necessary to be resolved in the present case having regard to the subsequent findings of the learned trial judge on the non-fraud issues.
The learned trial judge held (p.41) that the present was a case of contractual estoppel “whereby the parties have expressly and specifically agreed that irrespective of whether a representation was made or not, or whether there has been any non-disclosure, that the plaintiff would not rely on that”. He was thus confined to relying on a cause of action in fraud and nothing else.
The learned trial judge then went on to consider what was required in order to establish fraud. He followed the decision of Shanley J. in Forshall v. Walsh and Bank of Ireland (High Court, unreported 18th June, 1997). This case listed the elements which a plaintiff seeking to establish fraud or deceit must show:
“(i) The making of a representation as to a past or existing fact by the defendant,
(ii) That the representation was made knowingly or without belief in its truth, or recklessly, careless of whether it is true or false,
(iii) That it was intended by the defendant that the representation should be acted upon by the plaintiff,
(iv) That the plaintiff did act on foot of the representation and
(v) That the plaintiff suffered loss as a result.”
These elements of actionable deceit have been well established in the case law for well over a century. Since that line of authority is aptly epitomised in a modern Irish case, there is no need to review the authorities generally. But the present case is based very largely on concealment, and it is obvious that to suppress a material fact may give a false impression even though no positive falsehood is spoken or written.
This state of affairs has been recognised by the law for centuries. It was strikingly expressed almost one hundred and fifty years ago in another case to do with a company seeking investors,
Oakes v. Turquand and Harding [1867] LR 2 HL 325 when Lord Chelmsford said:
“It is said that everything which is stated in the prospectus is literally true, and so it is, but the objection to it is not that it does not state the truth as far as it goes, but that it conceals most material facts with which the public ought have to been made acquainted, the very concealment of which gives to the truth which is told the character of falsehood”.
The fourth and fifth constituents of a claim for fraud and deceit, as set out by Shanley J., must be read in a slightly altered way when applied to a fraud or misrepresentation by concealment. The plaintiff cannot have acted on what was concealed, although he may be said to have acted on the balance of the representation which (unknown to him) is qualified or falsified in its effect by the omission. Furthermore, to show that he has “suffered damage as a result” of the omission seems necessarily to involve the negative proposition that he would not have acted in the manner that resulted in the loss, absent the omission.
The High Court’s dismissal of the fraud allegations.
The High Court dismissed fraud allegations in relation to each of the matters mentioned above as forming the subject of dispute. The High Court also dismissed the non-fraud allegations, for example those of negligence, largely on the basis of a finding that the disclosure of the zoning issue would not have made any difference to the plaintiff: he would have proceeded with the investment regardless. In doing so, it held (p.47) that:
“… it must be said that some of the issues which appear to have the potential to be of the greatest significance in fact turned out to be balls of smoke”.
Later, at p.88 the learned trial judge expressed the view:
“… I do believe that this conflict between the parties has brought to centre stage risks that otherwise would be regarded as remote or theoretical…”.
In the particular context of the zoning issue, the learned trial judge first essayed, it seems to me with great success, a “thumbnail sketch of the zoning law in New York” at p.70 ff. He then offers a detailed relevant history of the hotels in question from a zoning point of view before turning to the question of zoning as it appeared in the context of the Bank’s contract to purchase the hotels (March – May 2006) and again, five or six months later, in the days prior to the finalisation of the text of the black brochure (last days of August and into September, 2006). It should be said that the learned trial judge acknowledged the distinction made by the plaintiff between the zoning issue and the other issues in that the zoning issue gave rise to very serious discussion between Anglo, their American partners and the lawyers representing various participants as to whether or not disclosure of the zoning issue should be made whereas the other issues did not cause any such anxiety. This discussion is analysed in great detail between pages 74 and 89 of the learned trial judge’s judgment. He concluded that:
“I do not believe that there was information available either in the Spring or Autumn of 2006 to indicate that there was cause for particular concern in relation to either hotel.” (p.84)
On the following page he says:
“It seems to me that all involved with the two hotels in 2006 were entitled to be confident that the issues related to zoning and Certificates of Occupancy could and would be regularised. Whether the Certificates of Occupancy would be permitted to be amended was primarily an issue of fact.”
The learned trial judge placed particular emphasis on the fact that the hotels are still operating “to this day other than in accordance with their Certificates of Occupancy”.
He also acknowledged that there was no absolute certainty that the zoning issue could be resolved but observed, at p.86;
“There must be few successful applications in any area of the law where it is not possible to consider in retrospect, and say ‘could it have gone wrong?’. However, trying to view matters in the round and attempting to put myself in the position of someone giving consideration to the issue in August 2006, it seems to me that it would have been very reasonable to expect with real confidence that the building department would acknowledge the reality of the existence of lawful non-conforming uses. Both hotels gave a clear impression of having lawful uses that were deeply entrenched and this, more than anything else, is what would have occurred to anyone considering the situation.”
The learned trial judge considered in detail the evidence of Mr. Sillerman, who gave evidence for the plaintiff. He fully acknowledged the various risks attested to by Mr. Sillerman. He was, however, impressed by the contents of Mr. Sillerman’s own application to Commissioner Santulli, Manhattan Borough Commissioner, Department of Buildings, in 2007. Mr. Sillerman had then pointed out, in factual statements made in a specific and unequivocal manner, that the case for continued total transient use (and if necessary amendment of the Certificate of Occupation) was very strong. Accordingly, the learned trial judge was able to conclude, at p.92:
“I am of the view that any risk facing the hotels in 2006 was very small. While a satisfactory resolution might not have been completely assured it was certainly to be expected and indeed confidently expected. There was, I am satisfied, a clear belief on the part of the Anglo personnel that the issue was one that was capable of ready resolution and that belief was an honest one and a reasonable one and indeed one that was later proved to be correct and quickly proved to be correct.”
I would add that the very small discount accepted by Anglo in return for assuming the zoning risks seems to fortify that finding.
Finding on non-fraud issues.
The learned trial judge next connected the fraud and non-fraud issues with his finding on p.93:
“Accordingly, I do not believe that there is any substance in the suggestion that Anglo acted fraudulently in publishing and distributing a brochure that did not contain a reference to the zoning issue, nor am I of the view that the publication of the brochure was in this regard negligent.” (Emphasis added)
Immediately after this finding the learned trial judge made a number of other findings of great significance. Firstly, he dismissed Mr. McCaughey’s evidence that he would not have invested in the Fund had the brochure contained any reference to zoning. He did so in the following language, at p.94:
“I do not lose sight of the fact that the plaintiff has given very firm evidence that he would not have invested in the Fund had the brochure contained any reference to zoning. He has described his evidence in that regard as ‘categorical’ and has referred to the fact that he has in the past declined to become involved in investment opportunities in Ipswich and Sheffield which appeared to raise zoning issues.”
He elaborated on this finding as follows:
“I do not, at all, believe that Mr. McCaughey has been intentionally untruthful in making the statement that he has, but I do believe [that] that statement is the product of hindsight and indeed of wishful thinking. This statement is undermined by the fact that Mr. McCaughey has also said that had he known about the interest rate strategy and about the long term tenants, and the status of the renovation budget that he would not have invested. Indeed, it must be said the phrase ‘I would not have invested’ became something of a mantra. In my view no reasonable prudent investor who found the proposed investment otherwise attractive, is likely to have been dissuaded from investing by being told about the reality of the zoning issue.”
The learned trial judge then went on, at p.95 to reiterate his dismissal of the fraud based causes of action. He then observed that:
“Having regard to the view that I have formed about the effectiveness of the exemption clauses contained in the commitment agreement, that would be sufficient to dispose of the case. However, I should add that the plaintiff has also failed to establish the evidence and entitlement to succeed on any one of the non-fraud elements of the claim.”
The explicit finding on the basis of which the learned trial judge dismissed the plaintiff’s non-fraud claims is his finding that the plaintiff would not have been dissuaded from investing by being told the reality of the zoning situation.
In the course of the hearing of this appeal Mr. Hayden S.C. for the plaintiff/appellant specifically conceded that the wording suggested by Mr. Sillerman, and set out above, would have been sufficient, in the plaintiff’s view, to meet the Bank’s disclosure obligations. Referring to this form of words, the learned trial judge found:
“The language suggested for inclusion by Mr. Haskin, which he had obtained from his lawyers, was itself quite comforting. If it were felt that an Irish readership would benefit from greater elaboration of the situation relating to zoning/Certificates of Occupancy, then that could have been provided and would have offered additional comfort”.
Status of the foregoing findings.
The above findings have been made by the learned trial judge in the course of a meticulous judgment and after a hearing in which both the plaintiff and witnesses on his behalf, including expert witnesses on New York Law, gave evidence and were cross-examined. Similarly most of those involved on the side of the Bank and their advisers, including each sides expert on New York Zoning Law gave evidence and were cross-examined. The content of foreign law requires to be proved as a fact in this jurisdiction and in most Common Law jurisdictions. I am therefore of the view that the findings set out above, both as to the significance of the zoning issue and as to the state of mind of Mr. McCaughey, are findings of fact made by the judge of the High Court after hearing appropriate evidence to allow him to make them.
I am also of the opinion that they are findings of primary fact being “determinations of fact depending on the assessment by the judge of the credibility and quality of the witnesses. It is for the determination of those facts that a viva voce hearing takes place”.
The foregoing quotation is from the judgment of Henchy J. in
M. v. An Bord Uchtála [1987] IR 510 at 523.
In such circumstances, as Henchy J. puts it:
“Because those facts depend on the oral evidence given and accepted in the High Court, this Court on appeal will not normally reverse such findings. Even if it deems different findings to be more appropriate, or even if the findings made seem to it to be incorrect, this Court will not normally interfere with them. This is because it has not had the advantage of seeing and hearing the witnesses as they gave their evidence. It is only when findings of primary fact cannot in all reason be held to be supported by the evidence that this Court will reject them – see Northern Bank Finance v. Charlton [1979] IR 149.”
The conclusions of the learned trial judge at the end of his judgment, summarised at pages 93 – 95, appear to me to depend on certain earlier findings:
(i) “… all involved in the two hotels in 2006 were entitled to be confident that the issues relating to zoning and Certificates of Occupancy could and would be regularised. Whether the Certificates of Occupancy would be permitted to be amended was primarily an issue of fact.”
(ii) “… I do not believe that the brochure misrepresented the situation as of the date of publication.”
(iii) The judge heard conflicting evidence from “two distinguished members of the New York Land Use Bar, Mr. Sillerman and Mr. Masyr”. With the result that, as he said “I am now left with the unenviable task of choosing between the correctness of their views when they find themselves in disagreement”. He preferred the defendant’s experts evidence.
(iv) The learned trial judge withheld belief from the plaintiff’s assertion that “he would not have invested in the Fund had the brochure contained any reference to zoning”. The judge held that the phrase “I would not have invested” itself “became something of a mantra”, and gave reasons for that conclusion.
(v) “In my view no reasonable prudent investor who found the proposed investment otherwise attractive is likely to have been dissuaded from investing by being told about the reality of the zoning issue”.
The plaintiff/appellant criticised those findings and others like them on the grounds that they attached too much importance to what a “reasonable person” or a “prudent investor” would have thought about the reality of the zoning issue and how such a hypothetical person would have acted. This, counsel said, was to impose an objective standard whereas the plaintiff was entitled to have the effect of the omission to mention zoning assessed in terms of its subjective impact upon him.
I do not accept that this is a proper ground of criticism of the judgment. When one is assessing a statement of a person as to what he would have done, or not done, had matters developed differently to the way they actually developed, it is reasonable to consider, as a starting point, whether his claimed reaction would have been reasonable. It would quite wrong, of course, to proceed on the basis that only a reasonable reaction was open to him because the Courts very often see instances where people react to particular developments in ways which are irrational, exaggerated, unduly bellicose or unduly timid, or otherwise improbable. But the learned trial judge’s finding here made every allowance for the capacity for odd reactions for subjective reasons and found that, though he did not accept Mr. McCaughey’s evidence that “I would not have invested”, that this reaction was subjectively genuine and “the product of hindsight and wishful thinking”, not of deliberate falsehood.
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The dictum of Henchy J. on the status of judicial findings of fact is consistent with the long established jurisprudence in this country and in the neighbouring jurisdiction from The S.S. Gairloch, Aberdeen Glenline Steamship Company v. Macken [1899] 2 IR 1, Minister for Justice v. S.M.R. [2008] 2 IR 242.
In the former case, Holmes LJ said:
“When a judge after trying a case upon viva voce evidence comes to a conclusion regarding a specific and definite matter of fact, his finding ought not to be reversed by a court that has not the same opportunity of seeing and hearing the witnesses unless it is so clearly against the weight of the testimony as to amount to a manifest defeat of justice.”
To practically the same effect is the well known dictum of McCarthy J. in Hay v. O’Grady [1992] 1 IR 210 at 217:
“An appellate court does not enjoy the opportunity of seeing and hearing the witnesses as does the trial judge who hears the substance of the evidence but, also, observes the manner in which it is given and the demeanour of those giving it. The arid pages of a transcript seldom reflect the atmosphere of a trial.
If the findings of fact made by the trial judge are supported by credible evidence, this Court is bound by those findings, however voluminous and apparently weighty the testimony against them. The truth is not the monopoly of any majority.”
I do not consider that the relevant findings in this case are findings which rely on inference rather than being findings of primary fact. In every case where the credibility of a witness is at stake – credibility in the sense of whether or not the witness is giving a credible account, not necessarily whether he is lying – are of necessity issues of fact.
The finding as to Mr. McCaughey’s intending to invest in the Fund regardless of what he was told about the zoning issue is a finding as to his state of mind. This, on the authority of Bowen LJ’s well known dictum in Edgington v. Fitzmaurice (1885) 29 Ch D 459, is a matter of fact.
Edgington is another case where an investor was gravely disappointed and considered that the terms of a prospectus on the faith of which he had invested money were fraudulent both in what they said and what they omitted to say. He was upheld in these beliefs by both the High Court and the Court of Appeal in England. One of the points which those concerned in the management of the Company took in answer to his claim was that certain statements in the prospectus were not statements of fact, as is required to constitute actionable fraud, but merely statements of intention. In a memorable passage, at p.483 of the Report Bowen LJ found as follows:
“A mere suggestion of possible purposes to which a portion of the money might be applied would not have formed a basis for an action of deceit. There must be a misstatement of an existing fact: but the state of a man’s mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but if it can be ascertained it is as much a fact as anything else.”
This finding arose in the context of a defendant’s attempt to distinguish a statement of intention from a statement of fact but I am satisfied that it has the necessary corollary that the finding, quoted above, as to Mr. McCaughey’s state of mind at the time he agreed to make the investment is a “determination of fact depending on the assessment by the judge of the credibility and quality of the witness”.
In my view, it cannot be said that the learned trial judge’s findings in this regard is not “supported by credible evidence” and the findings certainly cannot be said to be “so clearly against the weight of the testimony as to amount to a manifest defeat of justice”. I therefore consider this Court to be bound by that finding. The finding itself is fatal to the non-fraud causes of action because it destroys the causal link between the tort, however framed, and the deleterious result. The learned trial judge’s conclusions on the fraud based causes of action are themselves based on findings of fact from which there is no scope for departing, some of which are set out below.
Conclusion.
I would dismiss the appeal and uphold the order of the learned trial judge.