Finning (UK) Ltd. v Inveresk Plc

The defendant in these proceedings, Inveresk plc, appeals with her permission from the judgment of HHJ Faber given in the Central London County Court, Mercantile List, in which she awarded Finning UK Limited £53,786.56 for early termination of plant hire contracts. The issue is whether these contracts were novated to a third party, Klippan International plc, thereby discharging Inveresk from liability to pay the early termination charges.

We have also had to deal with a renewed application by Finning for permission to appeal a decision of Cox J, who on appeal from HHJ Knight QC gave Inveresk its costs of strike out and stay applications. At the end of the argument this morning we granted permission to appeal and the parties said they did not wish to address us further so we must decide this appeal as well.

Finning is the assignee of Lex Harvey Limited. Its business includes the long term hire of fork lift trucks and similar equipment. Until the end of October 2002, Inveresk operated Caldwell’s paper mill in Scotland where it used such equipment. In 2000 and 2001 Lex and Inveresk entered into hire agreements relating to a number of trucks, including the five the subject of these proceedings, which were hired for minimum periods of three or five years. Each was on terms which provided for liquidated damages in the event of early termination.

On or before 1 November 2002, Inveresk sold its business to Klippan as a going concern. It had no further use for the trucks but Klippan did. Without telling Lex Inveresk allowed Klippan to take over the trucks and it immediately began to use them. On 5 November 2002, Klippan wrote to Inveresk’s suppliers including Lex saying:

“All goods and services supplied to Caldwells Mill… as of 30 October 2002 are now the responsibility of Klippan and should be invoiced to this new company ...

“All goods and services supplied to Caldwells Mill prior to 30 October 2002 remain the responsibility of Inveresk …”

This letter was accompanied by a letter of comfort from Klippan’s Swedish holding company pointing out that it was a leading European paper supplier and had been in business since 1573. These letters led to negotiations between Lex and Klippan with a view to agreeing a novation. It had clearly been Inveresk’s intention that Lex and Klippan should agree that it would be discharged from further liability under their hire agreements; but it did not take part in these negotiations, or the correspondence which followed. Nor did it contend that Klippan was at any stage acting as its agent.

In the course of the negotiations on 4 December 2002, Lex’s credit manager sent Klippan a letter saying:

“In order that we amend our records against the attached Contracts could you please arrange for an Officer of Klippan… to sign and return the attached copy of this letter agreeing to the novation of the Contracts to the new Company and accepting our Standard Terms and Conditions of Contract Hire in their entirety …”

Acceptance of Lex’s terms in their entirety of course included agreement to the early termination provisions. Had this letter been returned signed as asked, it is, I think, common ground that the agreements would have been fully novated from Inveresk to Klippan, despite Inveresk’s lack of participation in the negotiations or correspondence; but Klippan did not do so.

Instead on 10 February 2003, the letter was returned signed by Klippan’s General Manager, Mr Hurst, who had added a hand written proviso which said it was:

“Subject to the agreement with Klippan International PLC to cover the period 1 November 2002 to 31 December 2003 with no termination charges payable by Klippan International PLC at the end of that period.”

The minimum period would be five agreements the subject of the proceedings extended beyond 31 December 2003. So Klippan were agreeing to assume Inveresk’s liability under these five agreements but only until 31 December 2003 and not for any early termination charges.

On 18 February, Lex’s Regional Director, Mr Harris, wrote to Mr Hurst saying:

“Thanks for the return of the novations letter transferring contracts from Inveresk to Klippan. I note your written comments and confirm our agreement to them with the following provision.

“There are three [that was a mistake subsequently amended upon which no point turns to five trucks] which expire beyond your suggested end dates of 31 December 2003. We will be invoicing Inveresk Plc for the early termination of these trucks to be calculated from 1 January 2004 to the agreed expiry date of each piece of equipment.

“This will not affect any agreement between Klippan International Plc and Lex Harvey Limited”.

The same day Mr Harris wrote to Inveresk saying:

“We have recently signed a novation of contract transferring your contract for forklifts at Caldwells to Klippan International Plc. Klippan has advised us that the novation of contracts will only include the period up to 31 December 2003.

“Three [and that was subsequently again amended to five,] of the fork lifts at Caldwell’s have an expiry date beyond 31 December 2003 and I therefore have to advise you that early termination charges on the three trucks will apply from 1 January 2004 to the agreed minimum term expiry dates of the three [then five trucks.]

“We will be issuing notification and invoices from our contract management team.”

The judge found that in these exchanges there was an agreement between Lex and Klippan to allow Klippan to continue in possession of the equipment provided that Klippan paid the charges under the contracts until the end of the year. As for the continuing use of and payment for the equipment after that time both parties intended further discussions to take place later in the year to decide on the use of the payment for the equipment. After 31 December 2003 there was no agreement in February 2003 that Inveresk would be discharged from liability. Inveresk was not party to and did not consent to the contract agreed between Lex and Klippan.

Consistent with the agreement between Lex and Klippan and found by the judge, Lex invoiced Klippan for the hire charges from February 2003 and invoices which had been sent to Inveresk since 1 November 2002 were credited to Inveresk and reissued to Klippan. On 29 November 2003 Klippan closed Caldwell’s Mill because it was not a success and shortly after that Lex repossessed the five machines. This, of course, was an early termination of the hire agreements and gave rise to a liability to pay the agreed charges payable in that event.

Various forensic points were taken about exchanges between the parties before and after November 2003 and the judge heard from a number of those involved. However, I think the outcome of this case depended upon the exchanges between the parties between November and February 2003, which can be gleaned from the documents to which I am referred without recourse to any oral evidence. It is however perhaps worth noting that in July 2003, Lex prematurely invoiced Inveresk for the early termination charges. Lex agreed to withdraw the invoice at Klippan’s request because the agreements had not at this stage been terminated but in doing so Mr Harris wrote to Mr Hurst with a copy to Inveresk saying:

“We do however wish to retain our right to reissue the invoice to Inveresk should the contracts be terminated at any point before the earliest expiry date. The above contracts are still legal with Inveresk as they have not been novated to Klippan even though Klippan are assuming responsibility for the payment of the monthly rental for the time being.”

There was no reply to this letter either from Klippan or from Inveresk nor had there been any reply to Lex’s earlier letter to Inveresk on 18 February to which I have already referred.

I have already quoted the essence of the judge’s reasoning. This followed a succinct summary of the evidence and an analysis of the exchanges between the parties between November 2002 and February 2003. After the passage I have quoted, she dealt with a number of the arguments made by Mr Chapman, counsel for Inveresk then as now.

He now submits that the judge reached the wrong conclusion. He submits that the only logical legal explanation for the factual position after 1 November 2002 is that the agreements were fully novated to Klippan. From that time, the equipment was used and paid for by Klippan and not by Inveresk. All three parties wanted a novation and after February 2003 acted as if there had been one. He submits that the judge’s analysis does not work because she found that Inveresk had not been a party to or agreed to the variation which was the subject of the agreement between Lex and Klippan. Absent Inveresk’s agreement it should be inferred that Lex had agreed to discharge Inveresk altogether from all further liability under these hire agreements. Given the situation on the ground, it would be impossible to say that Inveresk remained liable as the original hirer under the agreements. He submits that it could not be inferred from their silence that they had been party to the agreement made between Lex and Klippan.

Tenaciously though the submissions were advanced, I do not accept them. A novation, as the judge said, is a species of contract between the original contracting parties and a third party under which the original contractual obligations of one of the parties are extinguished and replaced by contractual obligations owed by the third party. The consent of all three parties is necessary.

Looking at the intentions of the three parties concerned at 10 February 2003, the date when Klippan added its proviso to Lex’s letter of 4 December 2002, Lex was prepared to novate to Klippan provided Klippan agreed to accept the terms upon which the equipment had been hired “in their entirety”. Klippan were not prepared to do this. Inveresk wanted to be discharged from all further liability but Lex did not agree that it should be. The parties had not therefore agreed a novation or any other variation of the hire agreements at this stage.

By its letter of 18 February, Lex accepted Klippan’s counter-offer that it would assume liability under the agreements for hire charges et cetera until 31 December 2003 but not for early repayment charges. But in doing so, Lex did not agree to discharge Inveresk from its liability to pay such charges and made this clear both to Klippan and to Inveresk. Either Inveresk remained liable for all its obligations under the agreements alongside Klippan’s collateral agreement to meet some of these obligations; or Inveresk was discharged from liability for those obligations which Klippan assumed but not for those which Klippan had accepted. Either way, Inveresk were liable upon this claim.

Of those two alternative ways of analysing the situation; I prefer the latter. Mr Chapman’s objection to this analysis is that it required Inveresk’s agreement which cannot be inferred but I think it can in the same way as its agreement to Lex’s original offer of novation would have been inferred if that offer had been accepted unconditionally. Inveresk wanted out and was told of an agreement which partly achieved that objective to which they did not object.

On my preferred analysis, this was obviously not a novation of the agreements from Inveresk to Klippan properly so called. Whether it is best described as some form of assignment or as a partial novation or variation is debatable. Partial novation does, however, aptly describe what happened. Lex had made it clear that it would not look to Inveresk for the hire charges et cetera due under the agreements until the end of 2003. So to that extent, Inveresk was discharged from liability under the agreements but the discharge was limited and so the novation was only partial. I think this is a perfectly satisfactory legal explanation for how things were on the ground after 18 February 2003: before that there was simply no agreement. Lex tolerated Inveresk’s breach of contract for allowing the equipment to be operated by Inveresk but continued to invoice them under the agreement. No more elaborate analysis of that situation is required. After 18 February 2003, Klippan assumed and Inveresk were discharged from liability for hire charges until the end of the year but Inveresk remained liable for any early termination charges. It follows that I think HHJ Faber reached the right conclusion in this case and Inveresk’s appeal should be dismissed.

So I turn to Finning’s cost appeal. As is apparent from what I have already said that is a second appeal. It was not contended that it raised any important point of principle or practice but Mr Anderson for Finning argued that we should grant permission because there was some other compelling reason for us to hear it. Relying on what this court said in Uphill v BRB (Residuary) Ltd [2005] EWCA Civ 60 reported also in [2005] 1 WOR at page 2070, para 24, he said that this was a case in which the proposed appeal had a very high prospect of success and we should hear it for that reason. After hearing full argument from both parties we decided that Mr Anderson was right about this and so granted permission.

I can deal quite shortly with the facts around which this appeal turns. Before the proceedings were started there was some preliminary skirmishing between solicitors in correspondence, from which it is clear that Inveresk were saying that the relevant agreements had been novated to Klippan and Finning were saying that this was not the case. In its Particulars of Claim, Finning pleaded and exhibited the relevant hire agreements and schedules of the amounts that it claimed under those agreements referenced to the agreements themselves. It recited without analysis the relevant correspondence between November 2002 and February 2003, to which I have already referred, and said at paragraph 13:

“The Claimant [Finning] contends that the Defendant [Inveresk] remained liable for all further charges, or alternatively, for all charges arising after 31 December 2003, in the agreements [which were defined in the pleading].”

The pleading did not state what the cause of action was but it was obvious that the claim was made under the terms of the hire agreements because, as paragraph 13 said, Inveresk remained liable under those agreements.

In its defence, Inveresk said that it pleaded to the Particulars of Claim without prejudice to its primary contention that the claim form and Particulars of Claim are liable to be struck out on the ground that they disclose no reasonable ground for bringing the claim and/or that the claim is liable to summarily dismissed on the ground that it stands no real prospect of success. It then said in support of that contention that it relied on a number of legal points, including the first of those which was that the claimant’s claim relates to hire due under (^inaudible due to cough) those agreements after those agreements had been novated to a third party Klippan and that the novation took effect from 1 November 2002. In other words, they were saying that the Particulars of Claim themselves pleaded a good defence to the claim which was made in that pleading.

After service of the defence there followed a wave of correspondence between the solicitors, the opening salvo of which was filed on behalf of Inveresk in the following terms:

“Having referred to the points raised in the defence they say which plainly demonstrate that the claim is misconceived. We hereby invite you to discontinue the claim forthwith. Alternatively and if your clients are despite the contents of the defence, determined to pursue the proceedings we would expect the points raised in the defence to be addressed fully in a draft amended Particulars of Claim. In making this suggestion we do not give consent to any application for permission to file an amended Particulars of Claim but would expect them to be produced in short order if the claim is to proceed or else our clients will press on with their summary application. Please serve on us within fourteen days from the date of this letter a draft Amended Particulars of Claim. If you fail to do so we will without further notice issue the application pursuant to what is said in the defence.”

It is unnecessary to refer further to this correspondence. Suffice it to say that it is extensive, although in the course of it Finning did say that they denied that there was any novation. The issue between the parties was not much elucidated by either side. However after Inveresk had issued its summons to strike out Finning did so and amended Particulars of Claim ,which persuaded Inveresk not to proceed with its application. However, it contended that Finning should nevertheless pay its costs of that application and the costs of an application to stay because Finning would not agree to one pending determination of the strike out.

So it was that the matter came before HHJ Knight QC, the judge in charge of the Mercantile List in the Central London County Court. Mr Chapman soon realised that he was in for a rough ride during the course of this hearing. Whilst he was arguing his case, the judge said:

“The crucial point is: Was there a novation and was it pleaded ... No novation was pleaded … and all this correspondence which has been generated in my view is totally unnecessary.”

Later on he described it and the application as using a sledge hammer to crack a nut. A little further in the course the argument, the judge said this:

“I have no difficulty in understanding what paragraph 13 is saying. It might be a bit fuller, it might have been put more felicitously, but what it is saying is: The defendant remained liable; alternatively… they remained liable after 31 December.

“I think whoever was taking this point was not living in the real world.”

In the result, HHJ Knight gave Finning its costs of the application to strike out and ordered costs in the case on the application for a stay. His reasons were as follows:

“Firstly, the original Particulars of Claim were adequate and set out [Finning’s] case, which was reasonably comprehensive. Secondly, that the issue of novation was a non-issue and in my view it was unnecessary to resolve. Thirdly, I reject the arguments that the limited assignment was such a crucial amendment as to warrant the defendants getting their costs. It seems to me that that was contemplated in the original Particulars of Claim. Fourthly, … [Finning maintained] a consistent attitude that novation was not an issue. Fifthly, I do not take the view that the amount of reduction between the original and amended statements of claim warrant you getting any of the costs of that amendment other than the normal rule.”

Inveresk appealed. Cox J reserved her judgment. It is accepted that she adopted the right approach to such an appeal, recognising that she was dealing with the exercise of discretion in relation to an order for costs. She set out the facts, which I have summarised, very fully. Her reasons for allowing the appeal are to be found in paragraphs 27 to 32 of her judgment. First, she concluded:

“It was a permissible reading of the original particulars that a novation was pleaded and the defendants, in my view, were entitled to seek clarification in order to confirm this or alternatively to understand what the case against them was.”

She added at paragraph 32:

“In the absence of the amended particulars the original claim as pleaded was, in my view, bound to fail.”

I do not accept that it was a permissible reading of the Particulars of Claim that a novation was pleaded. Novation was not pleaded and the pleading was not, it seems to me, required to say that Finning was not relying on a novation. The claim could obviously have been pleaded more clearly but the basis for it really could not or should not have been misunderstood. I do not accept that the original claim as pleaded was bound to fail.

The correspondence which followed the pleading was as much directed to trying to persuade Finning to drop its claim as to elucidating what that claim was. HHJ Knight is an experienced mercantile judge who was entitled to take the view that it was unnecessary in the context of this relatively modest commercial (^inaudible word). The judge also criticised the Particulars of Claim because no cause of action had been pleaded. We have had some debate about whether the CPR requires that to be done but I do not think it is necessary to engage with that debate in this case. This was not one of the grounds upon which the application to strike out the claim was launched. As I have already said, it seems to me that the pleading did make sufficiently clear that it was being made under the terms of the original hire agreements upon which Inveresk remained liable despite what had happened.

A number of other points were made by the judge but I have dealt with the principal ones which led to her decision. Those points I have dealt with and the other points made by her, do not, in my judgment, provide a sufficient basis for enabling her to interfere with the wide discretion which the experienced judge at first instance had as to what orders for costs he should make, particularly in the context as here of a case management exercise.

For those reasons I would allow the costs appeal and restore the judge’s orders which gave Finning the costs of the strike out and made the costs of the stay costs in the case.