CPL Industrial Services Holdings Ltd v R & L Freeman & Sons (A Firm)

J U D G M E N T

1. LORD JUSTICE THOMAS: There is before the court an appeal from the decision of His Honour Judge Cracknell, sitting as a judge of the High Court in Sheffield, refusing the defendants' application to set aside a judgment, that judgment being entered against them by the claimants because of the defendants' failure to comply with a final order to serve their witness statements. They failed to comply by about half an hour.

2. It is first convenient to set out the issues that gave rise to the litigation and the factual background.

3. It appears that the defendants operate a sand and gravel extraction business at their farm near Peterborough in East Anglia. It appears that they are a small family firm with one or two companies through which the business is carried on.

4. On 30th November 1999 they entered into a written agreement with the claimants, who are part of a small group of companies, that they would supply them with sand and gravel products. It appears that the claimants were entering into the agreement on the basis that they hoped to establish a business of selling of the sand and gravel to others.

5. Under the terms of the written agreement, which was a carefully drafted document produced by the claimants' solicitors, the claimants were to order sand and gravel from the defendants, at fixed prices annexed and scheduled to the agreement, for an amount not exceeding a thousand tonnes a day. There was no minimum quantity. The agreement was by its terms to continue until terminated by not less than six months' written notice. The first notice could not be given before a specified date of 1st February 2000. The agreement contained the usual type of clause, that no variation would be effective unless in writing. The agreement also contained two important provisions for sums to be paid each month by the claimants and the amount thereafter to be adjusted. Clause 3.6 of the contract provided:

"To the extent that in any month the value of products supplied is less than the advance the balance of the advance for that month should be retained in the account to be set off against sales of products in subsequent months."

The carefully drafted agreement also provided by clause 6.3:

"Following the expiry or termination of this agreement for any reason whatever, the supplier [the defendants] shall supply to the customer [the claimants] an amount of product equal in value to the accrued account balance if this account is in credit."

6. It was the evidence of both parties that the contract became uneconomic for the claimants. It appears that they had not been able to on sell the product in the quantity that they had anticipated, but had been obliged to continue to pay the amount per month of £45,000 for which the agreement provided. It is not necessary for me to set out the reasons for that, although it is covered extensively in the witness statements. It was inevitable in those commercial circumstances that cash flow difficulties would be caused to the claimants.

7. In the light of those, it appears that the defendants agreed with the claimants towards the end of 2000 or the early part of 2001 that the amount of the monthly payment would be reduced to £25,000. Despite that, the balance that the defendants held, because the product had not been purchased, continued to grow. It appears that in the early part of 2001 the claimants contacted the defendants and told them that they wished to terminate the contract. There were further discussions.

8. These came to a head at a meeting which it is agreed took place on 29th March 2001. The claimants were principally represented at the meeting by Mr Beaumont, and the defendants by Mr Andrew Freeman. At the time of the hearing before the judge he had the witness statements from Mr Beaumont, Mr Gwyn Williams and Mr Andrew Freeman, with a short confirming statement from his brother. It is clear from the evidence that they had agreed what I will neutrally describe as "a deal", which businessmen often do when they reach either a concluded agreement, or, an agreement in principle, subject to that agreement being reduced to more detailed terms. In my experience it is common for people to speak of "a deal" in either of those two meanings.

9. What was agreed by way of "a deal" covered a number of matters: repayment of £170,000, the delivery by the defendants to the claimants of £12,500 tonnes of sand and gravel free of charge, that the defendants would keep a haulage contract known as the Cottam to Ketton contract for a period of a year, and that the main agreement would be terminated.

10. The evidence of the defendants was that after the meeting Mr Beaumont made a telephone call which confirmed that the claimants were prepared to approve the agreement, but they would write and confirm it with a proper variation agreement. It appears that from the commercial point of view the claimants thought that this was a good deal for them, and for the defendants, as appears from the evidence, they attributed great importance to the Cottam to Ketton haulage contract which they regarded as lucrative. On 30th March 2001 the claimants wrote to the defendants a letter which set out the following:

"We can confirm our agreement with you as follows:-

1. The Supply agreement between our two companies is cancelled as at 30th March 2001 by mutual agreement.

2. No further monies to be paid by CPL to R & L Freeman in relation to the above contract.

3. R & L Freeman to repay a total of £170,000 to CPL Hargreaves at £7,500 per month.

4. R & L Freeman to allow CPL Hargreaves to take 12,500 tonnes of sand over the next 6 months Free of Charge.

5. Our Company Secretary will arrange for the necessary paperwork to be drafted and sent to you within the next few days.

6. After the 12,5000 tonnes has been exhausted CPL Hargreaves will still be able to purchase sand and gravel as they so wish, on normal trading terms."

The letter is important in that it did not refer to two matters. There was no mention in the letter whatsoever of the Cottam to Ketton haulage contract despite its obvious commercial importance to both parties and, secondly, the sum of £170,000 was referred to without it being clear whether it was inclusive or exclusive of VAT, which was another matter the defendants considered important.

11. It is the evidence of the defendants that Mr Freeman telephoned Mr Beaumont and they had a discussion about those two points, Mr Beaumont asking him to put the points in a letter; his evidence was that without the haulage contract there was no deal. It was also clear that in that conversation the claimants no longer wished to take delivery of the sand and gravel in the quantity referred to at the meeting of 29th March and in the subsequent letter; the defendants offered to pay £35,000 instead. On 10th April the defendants wrote setting out those terms; the letter concluded by stating:

"If you are agreeable to my proposals would you please ask your company secretary to draft out the relevant paperwork so we may pass a copy to our solicitor for his approval."

The defendants' evidence was that Mr Beaumont on behalf of the claimants rang to say that they had accepted the alternative to the sand, and on acquiring the paperwork Mr Beaumont told them that it would be sent. The first draft of the agreement was sent on 18th July but it did not deal at all with the haulage contract. There was no term in it about that and that there was no term in it that dealt satisfactorily, to the defendants' viewpoint, with VAT. It was the defendants' evidence that they pressed for the points to be concluded over the coming months. Although it may be that the point as to VAT was settled in a letter on 8th October 2001, though that is not entirely clear from the evidence or correspondence, it is clear that there was no term in the agreement dealing with the haulage contract. The furthest the matter went was a paragraph in the letter of 28th October which stated:

"With regard to the transport of PFA from Cottan to Ketton Cement, Hargreaves will place that business with Brook House Transport at the current rate up to March 31st 2002."

The defendants, after the receipt of that letter, continued to press for the points to be dealt with, but it appears that on 8th January 2002 the defendants' evidence was that they found out that the haulage contract was coming to an end at the end of 2001 and therefore could not run for the fall year. From the materials that appear before the court, it appears that that is what brought the negotiations to an end.

12. Matters were then placed by the claimants in the hands of their solicitors. On 29th April, in writing to the defendants, the solicitors included in the letter the following:

"However despite prolonged negotiations, no formal agreement has been reached. We would therefore like to conclude matters as swiftly as possible for the benefit of both parties."

On 21st May their solicitors went on to say:

"Clearly, there have been negotiations as to a compromise agreement, but whilst some individual terms may have been agreed, no binding compromise has ever been reached between the parties."

The intervention of solicitors did not lead to a resolution of the matter. Proceedings were commenced in Sheffield on 29th July 2003, in which the claimants asserted in their claim that the termination had been agreed on 30th March, as varied by the letters of 10th April and 8th August, to which I have referred. They claimed the sum of £195,000 under the agreement or damages for failing to supply sand under the original agreement of 30th November 1999.

13. The Defence was served on 8th September 2003, together with what should have been described as a counterclaim. The case that was made in the defence was that an agreement had been proposed at the meeting on 29th March, and that the terms were that the claimants would arrange for the paperwork, namely a formal variation agreement, to be drafted and that the claimants would subcontract to a company called Brook House Transport, the haulage contract, held by the claimant company to haul bulk materials. In the Reply that was served to that, the claimants at paragraph 9 accepted that it was agreed that the necessary paperwork would be provided but denied that that constituted a term of the agreement. Secondly, they admitted that it was a term of the oral agreement that Brook House Transport would retain the Cottam contract to supply PFA to Ketton Cement, but said that was subject to a reservation that was referred to subsequently in the pleading. The pleading subsequently set out the variation in these terms at paragraph 29:

"It is averred that the said express term was subject to an implied reservation that Brook House Transport would only receive the benefit of the Cottam contract for so long as it was in the power of the claimant to subcontract the same to Brook House Transport and, accordingly, that the claimant is not in breach of the said express term."

After that exchange, directions were given by the district judges who looked at this case. The matter was listed for trial for June 2004. Witness statements were, on the terms of the order, to be served on 26th March 2004. The defendants did not serve their witness statements. On 4th June 2004 a deputy district judge at Sheffield District Registry made an unless order in these terms:

"Unless the defendants do serve statements of all witnesses of fact upon whose evidence it is intended to rely by no later than 4 p.m. on 11 June 2004 the defence be struck out and the claimants be entitled to enter judgment in respect of the claim."

That was a Friday. It appears that the order was served and received by the defendants on the following Monday, 7th June. The defendants, it appears, were in some financial difficulties and although, according to the evidence of Mr Freeman, it had been known for some time that witness statements had to be served, the solicitors who had acted for them had applied to come off the record. They refused to prepare witness statements. The defendants spoke to other solicitors who helped them prepare witness statements but would not act for them in the circumstances. It is the evidence of Mr. Freeman that on the Friday 11 June they started to transmit by fax the witness statements at 4 o'clock, but they were not received until 4.30. It is accepted that they were in breach of the order. In consequence of that breach the claimants, as they were entitled, entered judgment on 14th June.

14. On 17th June, the date fixed for the trial, the application, made by the claimants, to set aside the judgment made in pursuance of the unless order came on before the judge. The procedural requirements of considering such an application are set out in CPR Part 3.9. This court has in a number of decisions, in particular in Woodhouse v Consignia [2002] EWCA 275, and Oberon v Baguette [2002] EWCA 710, set out some of the considerations that a court must take into account and the way in which the court should approach it. In particular, the court must consider the circumstances set out in CPR 3.9 and in the subparagraphs enumerated between (a) and (i). This court made it clear in Woodhouse that judges had to submit themselves to the discipline of considering each of the matters listed in CPR 3.9 which appear to them relevant to the case they have to decide, but that judges should also bear in mind that, if the relief was refused, they were depriving the claimants of access to the court. The concept has particular resonance under the European Convention. In exercising the discretion, the judge set out each of the factors he considered relevant under CPR 3.9.

15. In the course of the written very full written skeleton argument put before us by Mr Geraint Jones on behalf of the claimants there is considerable criticism of the way in which the judge dealt with some of those factors. However, it seems clear from reading the judgment as a whole that the determinative factor was the view the judge took of the merits. In reaching that view, I of course have taken into account what the judge said in the course of his judgment when, after considering the merits, he observed that his view of the merits was not necessarily determinative of the issue that he had to decide; he had to have regard to all the other factors.

16. However, it seems to me clear that his view of the merits was the determinative issue and, for reasons I shall express briefly in a moment, if the judge had come to the correct conclusion on that issue there could be no possible merit in this appeal, but if he had come to an erroneous conclusion on that, then plainly he had taken into account as a major factor a matter on which he was wrong.

17. His conclusion on the merits was expressed in these terms at paragraph 27 of the judgment:

"I have looked at the merits, on the face of it, of the defence in relation to that. It does not seem to me that there is one, because the meeting on 29 March was one which effectively put an end to the supply agreement, and there cannot possibly be any defence in relation to that. I see no reason, in the circumstances of this case, why the claimants should be deprived of their judgment for that sum."

In the early part of his judgment the judge seems to have reached that conclusion because what had happened at the meeting on 29th March was not in dispute. As to the argument that there had not been a concluded agreement, or that there was a requirement that a formal agreement be reached, he concluded that the agreement that had been reached was one that was mutually beneficial, although not reduced to writing over the coming months. He observed at paragraphs 5 and 6 of his judgment:

"There was some trouble about what was essentially the dotting of the i's and crossing the t's. But it was an agreement which was arrived at on 29 March which contemplated the decent burial of the original supply agreement, and it was, as I say, mutually advantageous and a recognition of commercial realities at the time.

It is suggested that this is a variation of the original agreement. Well, having looked at the statements and heard the arguments from both counsel in this case, it seems to me quite clear that this was - whatever you want to call it: a rescission, a termination, an aberration - an extinction of the old contract, and that thereafter, following on from 29 March, the relationships between these two parties were at an end on the terms agreed in the meeting on 29 March or an end subject to particular negotiation about various things. The claim was put simply on that basis: that agreement in March of 2001 was a proper agreement; the terms should be carried out; and they are owed the money."

Finally, as to the argument that it was not intended to be binding until signed, he concluded:

"There were various drafts -- in which the lawyers got involved -- which seemed to indicate that both parties, on the face of it, may not have thought it was binding until it was written down and signed. But the fact of the matter is that the agreement on 29 March was overwhelmingly one which put an end to the supply contract because it simply wasn't workable.

Arguments to the contrary, it seems to me (as the claimant suggests in his argument), seem to me to be doomed to failure, because, as I say, quite clearly in my judgment, on the papers that I have in front of me, that agreement was, as it were, as final as it could be in relation to the supply."

18. With respect to the judge's reasoning, I do not think that the issues in the case should have been determined so summarily in the manner in which he did. In my view, there was plainly a real prospect of success on the points made by the defendants. I do not attach much weight to the point that has been raised from time to time in the pleading and in the arguments as to whether the contract had been made subject to formal approval by the claimants. There may have been strong merit in the claimants' argument that that approval was given.

19. However, much more important is the second issue raised by them. They contend that it was always contemplated that there would be no binding agreement until the terms were agreed and reduced to writing. I have, at the outset of this judgment, referred to what is meant by "a deal". I have no doubt that "a deal" was reached at the meeting on 29th March, but looking at what happened at that meeting and all the surrounding circumstances, it is clear that there is a real argument on the question as to whether the deal was one that was final and binding there and then, or whether it was dependent upon the agreement being worked out in detail and reduced to writing. It is one of the considerations that has led me to form that view that the defendants operated two businesses, one, a haulage business through Brook House, a limited company, and another through their partnership. They would no doubt, because of the cash flow and tax implications, have wanted to consider, as they say, the terms with their solicitors. One can see why, objectively looking at the matter, that might be a view that might be taken. It seems to me that there is on that point a real issue that is open for argument. Secondly, there is, it seems to me, an issue as to whether the terms in relation to the haulage contract were ever fully agreed. It is clear that the haulage contract was, as far as the defendants were concerned, the key to why they were prepared to terminate the supply contract. The claimants thought that they were getting a good deal, as is evident from their statement. It must have been obvious to anyone that the haulage contract was an important part of it. On the evidence it is clear that there was a dispute as to whether that had been agreed and, in particular, whether the contract was to be with the defendants through the haulage company Brook House, and whether it was subject to any reservation that the contract would only be subcontracted to either of the defendants or Brook House for as long as the claimants had the contract with the third party. It seems to me that there is a real issue as to whether that had been agreed or not.

20. It may appear also that there is a fourth issue, and that is as to how VAT was to be dealt with. However, I need not enter into that, as I am clear in my view that there are real issues for trial. In saying that there are real issues for trial, it is for the judge hearing this case to hear the evidence. The views that I have expressed have been expressed merely to show that there is an issue for a future trial and not any view other than that there is sufficient merit in the argument that the matter should go for trial. It is also striking that the claimants' solicitors who had been involved in the drafting of the original agreement had initially asserted that there was no binding agreement. It was also striking that there had been no application for summary judgment. In my judgment, on the materials before the judge, there was plainly an issue as to whether there was a binding agreement.

21. Having reached that view, I turn to consider the argument presented by Mr Howd that, even if the court came to that view, despite falling into error on one factor, the judge's exercise of his discretion should stand because he had properly considered all the other factors. I have at the outset of this judgment referred to the fact that criticisms were made by the defendants of the conclusions reached on the various factors by the judge, in particular by failing to take into account the circumstances in which the default had arisen. It is, however, in my judgment not necessary to go into those arguments. The view taken by the judge of the merits must have been a decisive consideration. It seems clear to me that if he had misdirected himself on that point, the exercise of his discretion cannot stand. As I have observed, there were circumstances which a court could have taken into account that explained the failure to serve the statements. There was no prejudice to the claimants and the matter could still, subject to one point, have been tried as regards liability on 17th June.

22. In all those circumstances, as the judge had misdirected himself on such an important issue, I consider that the matter should be looked at again. I have no doubt that this was a case where, taking into account all the matters, the judge should have set aside the judgment and granted the relief that the defendants sought.

23. The one point remaining relates to the counterclaim. The order provided that the counterclaim should be dismissed. It is important to bear in mind that there had been no order for a split trial, and the evidence served on 11th June by the defendants did not set out any evidence that could have formed the basis of putting forward their counterclaim. The counterclaim was formulated on the basis that, if there was a concluded agreement, then they were entitled to counterclaim under it. The judge dealt with the counterclaim briefly. He took the view that, although there might be some merit in it, the claim could be made by the defendants against their former solicitors. However, it seems to me that the question relating to the counterclaim is so closely bound up with the claim that, if there is an issue as to the scope of the agreement made and whether there was one, then it is in the interests of justice that the counterclaim should be heard as well. The claimants have put forward a contention that the true claimants in the counterclaim are not the defendants but Brook House and that they should be bringing the claim. That must be a matter which should be considered at a future trial, but it is so closely bound up with the issue as to whether there was a concluded agreement or not that it would be wrong to strike out the counterclaim. Furthermore, if at trial it is concluded that there was no binding agreement concluded on 29th March, as varied by the subsequent letters, as the claimants contend, there must be for resolution by the trial judge the question as to the repayment, if any, which has to be made by the defendants of the balance held by them and the extent to which there should be any set off of any profits to be made under the haulage contract or for other reasons. Whether the defendants are the sole party in respect of any set off or counterclaim is a matter that should be resolved at the trial. In those circumstances, it seems to me right that the counterclaim must go forward with the claim in this matter. For those reasons, therefore, I would set aside the judgment of the judge and allow the action to continue.

24. LORD JUSTICE TUCKEY: I agree. I think the consequence of that is that the appeal will be allowed and the judgment in default which has been granted will be set aside so that the case can proceed to trial. We were invited by Mr Howd, if we were minded to, to allow the appeal and to do so conditionally. We do not think that this would be an appropriate course to take in this case. The only other thing that I should say is that it might be sensible if this case were transferred to the Mercantile Court in Leeds to be heard there.

ORDER: Appeal allowed; judgment in default set aside; case to proceed to trial, with an indication that it should be heard in the Mercantile Court; defendants to pay claimant's costs of hearing to set aside judgment; claimants to pay costs of appeal save in respect of application to adduce fresh evidence.