Wittmann (UK) Ltd v Willdav Engineering SA

This an appeal by the defendant, Willdav Engineering S.A. (“Willdav”), against an order of Her Honour Judge Alton giving judgment in favour of the claimant, Wittmann (UK) Ltd (“Wittmann”), for the sum of £405,255 and interest under a guarantee entered into by Willdav in August 2002 in respect of the price of certain goods sold by Wittmann to a company called Automold Ltd.

Wittmann carries on business as a supplier of process equipment. For some years prior to the events with which this appeal is concerned it had supplied equipment for use in manufacturing parts for motor vehicles to Automold, a subsidiary of Latimer Automotive Group Ltd which was itself owned by Willdav, a Swiss company. As a result of their dealings in the past Wittmann had become aware that Automold generally obtained financing of one kind or another for individual purchases. On many occasions at its request Wittmann had invoiced a finance house for goods supplied to Automold, although on some occasions it had invoiced Automold itself and, as far as one can tell, received payment direct from that company.

In December 2001 Automold asked Wittmann to provide a quotation for the supply of certain equipment, the full technical description of which was set out in a document entitled ‘Cell Specification and Request for Quotation’. Following discussions between the parties an agreement was reached for the purchase of equipment identified in five purchase orders numbered P013529, P013612, P013613, P013614 and P013615 for shipment to Automold’s wholly-owned subsidiary, Automold of America Inc., at Auburn Hills, Michigan. There was some correspondence between the parties relating to the terms of the contract, but it is unnecessary to refer to it because it was accepted before us that the contract was made on Wittmann’s standard terms and conditions. The only terms which it is necessary to mention at this stage are those relating to payment which provided that 90% of the purchase price should be paid 30 days after delivery in Auburn Hills and the balance at a specified time thereafter.

In the course of the discussions Automold had made it clear to Wittmann’s managing director, Mr. Barry Hill, that it intended to obtain finance to enable it to pay for the goods, but as time passed it became apparent that satisfactory arrangements had not been put in place. By August 2002 Wittmann had goods ready for shipment, but it was unwilling to start making delivery until Automold had made the necessary arrangements to ensure that payment would be made in due course. In order to persuade Wittmann to begin shipment Automold arranged for Willdav as its ultimate parent company to guarantee payment of the price. At the same time Wittmann agreed to vary the terms of payment so that 75% of the price was to be paid by 27^th November 2002 and the remaining 25% on or before 1^st September 2003 with interest at 10% per annum until payment.

On 21^st August 2002 Willdav executed a guarantee in favour of Wittmann in the following terms:

The document was executed as a deed by Mr. Beat Corpataux on behalf of Willdav. Attached to it were five pro forma invoices covering the various items of equipment making up the full order. Each one was addressed to Automold and stated that title to the goods remained in Wittmann until the goods had been paid for in full.

Following the execution of the guarantee Wittmann began shipping goods to the United States in accordance with the contract, but Automold continued to seek financing and in due course it managed to obtain the support of three separate finance companies, each of which was prepared to make part of the goods available to it on lease-purchase terms. As a result Wittmann entered into agreements with Automold and with each of the finance companies under which title in certain goods passed to each finance company in return for payment of part of the relevant purchase price. It was a term of the agreement between Wittmann and the finance company in each case that if Automold failed to pay the amounts due under its contract with the finance company Wittmann would repurchase the goods against payment of the outstanding balance.

The original value of the order was £1,518,584 exclusive of VAT as denoted in the guarantee, but the contract was subsequently varied to exclude certain items, thereby reducing the total price to £1,306,331 to which VAT had to be added bringing the total to £1,534,938.93. Automold itself paid £324,886.75 in respect of the goods and the finance companies between them paid Wittmann a further £886,383 leaving an outstanding balance of £323,669.18. As a result of subsequent adjustments and accrued interest the total amount outstanding as at 1^st September 2003 came to £338,531.14. In the event, however, Automold failed to pay any part of the balance and in due course the company went into liquidation. On 20^th May 2004 Wittmann made a formal demand under the guarantee and on 18^th June 2004 it commenced the present proceedings against Willdav to recover the amount still outstanding.

Willdav has not sought to deny the existence of the guarantee as such, but it has denied liability on the grounds that the contract under which Wittmann is entitled to recover the amounts outstanding from Automold is not that to which the guarantee relates. In summary, its case is that it guaranteed the obligations of Automold under its contract for the purchase of equipment from Wittmann and that the arrangements with the finance companies resulted in the discharge of that contract and the substitution of new contracts which do not fall within the terms of the guarantee. The judge rejected that argument. She accepted that the agreements between Wittmann and the finance companies were inconsistent with the original contract because they provided for a sale of the goods to the finance houses instead of to Automold and must therefore have involved making new contracts in substitution for the original contract. She also accepted that in the ordinary way the guarantee would not extend to obligations arising under a new contract entered into in substitution for the original contract, but she held that in this case the original contract provided for an alteration of the contractual relationships of the kind that had subsequently occurred and that the guarantee therefore extended to Automold’s obligations to Wittmann under those new arrangements, a conclusion which she considered was reinforced by the terms of clauses 1, 3.1 and 3.2.2 of the guarantee itself. Moreover, she found that Willdav knew of and consented to the changes brought about by the financing agreements and would if necessary have based her decision on that ground also.

Mr. Charman submitted on behalf of Willdav that the judge was right to regard the change in the contractual arrangements brought about by the agreements with the finance houses as involving far more than a mere variation of the original purchase contract, but that she was wrong to hold that the contract provided for it or that the new contracts fell within the scope of the guarantee. He submitted, moreover, that it did not matter whether Willdav knew about the proposals for financing the purchase or had consented to them because the new contracts simply fell outside the terms of the guarantee. There is, he submitted a fundamental difference between a variation of the contract under which the obligation guaranteed arises and the substitution of completely new contracts giving rise to completely new obligations. The fact that the guarantor knows of and consents to such a course is not sufficient to bring the new obligations within the scope of his guarantee. Mr. Wilson Q.C. for Wittmann submitted that the judge reached the right decision for the reasons she gave, though he did, if necessary, seek to rely on the previous course of dealing between the parties as providing further support for her conclusion as to the terms of the contract between Wittmann and Automold.

Since the judge’s decision turns in part on the terms of the original purchase contract, that is a convenient point at which to start. The previous course of dealing between Wittmann and Automold, as described by Mr. Hill, shows that it had been common for Automold with the co-operation of Wittmann to enter into financing arrangements of a kind similar to those adopted in relation to this order. That had not been its invariable practice, however, because on some occasions Wittmann had invoiced Automold itself and had received payment in the ordinary way. Whether Automold had obtained financing of some kind in those cases would not necessarily have been apparent to Wittmann and would not have been its concern. It is clear, however, even without reference to any of the documents, that Wittmann was aware that Automold might ask for its co-operation in enabling it to obtain financing under lease or lease-purchase arrangements or some other kind of arrangements that would make it necessary for title in the goods to be transferred to a bank or finance company.

It was not suggested that Wittmann’s standard terms of business (which Mr. Charman accepted applied to the present contract) made any reference to financing of the purchase price, but clause 14 of Automold’s Request for Quotation touched on the matter in the following terms:

The judge found that Wittmann and Automold were from the start working in accordance with that provision and with the common intention that the purchase would be externally financed. She also found that Wittmann and Automold were seeking to make arrangements under which one or more finance companies would be invoiced for the goods to enable them to enter into lease-purchase agreements in respect of them. On that basis she held that

Mr. Charman criticised that part of the judge’s decision on the grounds that it was not supported by any of the contractual documents and involved importing into the contract terms which were too vague to be enforceable. In my judgment these submissions are well-founded. The Request for Quotation is nothing more than that: a request to quote for the sale of equipment of the description and on the terms set out in the document. Clauses 14.1 and 14.2 do contain terms relating to payment, but in my view clause 14.3 contains nothing more than an indication that the seller may be asked to invoice a finance company if the buyer’s financing arrangements make that necessary. There is nothing in the Request for Quotation or accompanying documents to identify any particular finance company and, even if a seller agreed to supply goods on the terms of the Request for Quotation, I do not think that a clause in those terms would be sufficient to impose on it an obligation to enter into a contract with any finance company nominated by Automold. Much less, in my view, would it be sufficient to impose on the seller an obligation to enter into a contract with a finance company on terms less favourable to it than those of the original contract. The judge did not seek to formulate with any precision the term which she considered applied to financing, but in my view there is force in Mr. Charman’s submission that an obligation “to co-operate with the buyer to enable appropriate financing arrangements to be put in place” (which was one formulation suggested in the course of argument) is too vague to be enforceable as a legal obligation.

In the present case, however, Wittmann did not simply offer to supply goods on the terms of the Request for Quotation; its response took the form of a detailed offer setting out the specification of the equipment and the terms on which it was willing to supply, which did not include any reference to financing arrangements. That being the case, I am unable to accept that the contract contained terms of any kind obliging Wittmann to enter into a contract with a finance company. In the event, the contract which Wittmann entered into with each of the finance companies included an obligation to re-purchase the goods if Automold failed to pay for them. I can see no basis for holding that the original contract imposed an obligation on Wittmann to contract with finance companies on terms of that kind which had not been a feature of any previous arrangements.

On 5^th September 2002 Wittmann entered into a contract with Broadcastle Finance Ltd (“Broadcastle”), the first of the three finance companies which became involved in the matter. It is regrettable that the circumstances in which these contracts came into existence were not explored more fully at the trial since there is little evidence available of what passed between the parties other than a few documents and the brief explanation given by Mr. Hill. The documents relating to the Broadcastle contract consist of an invoice dated 5^th September 2002 addressed to the finance company, which includes a reference to the original purchase order P013614, a repurchase undertaking in the form of a letter addressed to Wittmann by Broadcastle counter-signed by Wittmann to signify its agreement and a lease-purchase agreement between Broadcastle and Automold providing for payment of a total of £177,996.48 in instalments over a period of 24 months. A sum of £143,750 was shown as owed to Wittmann. The invoice addressed by Wittmann to Broadcastle showed that the total price of the goods plus VAT was £293,750 of which Automold had already paid £143,750 by way of a deposit and VAT leaving a balance due from Broadcastle of £150,000. Despite what was shown in the invoice, however, nothing had been paid by Automold at that stage, as Broadcastle appears to have been aware. The contractual arrangements involving the other two finance companies were substantially identical.

In his evidence Mr. Hill described these arrangements in terms of the finance companies’ buying a proportion by value of the goods, leaving the remainder to be bought by Automold, but that is clearly not an accurate description of what occurred in legal terms. It was common ground that in each case Wittmann agreed to transfer title in the relevant goods to the finance company against immediate payment of part of the original purchase price (in fact 67.9%), leaving the outstanding balance to be paid by Automold. The judge took the view that the arrangements constituted the discharge of the original contract of sale between Wittmann and Automold and the substitution of new contracts under which Wittmann sold the goods to the finance companies in return for part-payment of the original price and Automold entered into new obligations to Wittmann to pay the outstanding balance in each case. However, I do not think that is correct. There was nothing in the existing arrangements to prevent Automold from directing Wittmann to transfer title in the goods to one or more third parties (for example, as security for a loan); nor was there anything to prevent Wittmann from agreeing to transfer title to a finance company against payment of part of the price leaving Automold liable for the balance. In other words, it was not a necessary consequence of the new arrangements that Automold’s original obligation should be wholly discharged in order to be replaced by fresh ones. The question is whether that was their effect.

There is nothing in the evidence to indicate that Wittmann or Automold intended to discharge their original agreement and to enter into new contracts in respect of different items of equipment under which Automold agreed to pay Wittmann a sum equal to the outstanding balance of the original price in return for its entering into a sale at a reduced price to the finance companies. On the contrary, such evidence as there is tends to suggest that they intended that Automold’s original obligation should be discharged only to the extent that Wittmann obtained the right to be paid by the finance companies. The judge found as a fact that although Mr. Corpataux was managing director of Willdav, he was essentially no more than a cipher, being accustomed to act at the direction of Mr. Dennis Keech who effectively managed the group’s affairs. She found that Mr. Corpataux had no knowledge of or interest in these transactions and had signed the guarantee at the behest of Mr. Keech without being aware of the nature of the arrangements which Automold was even then seeking to put in place to finance the purchase of the equipment. She also found, that Mr. Keech was intimately involvement in Automold’s day to day affairs and that he was aware of and consented to the arrangements with the finance companies which were already in contemplation at the time he asked Mr. Corpataux to execute the guarantee.

It follows from these findings that both parties were aware at the time the guarantee was given that Automold was seeking to put in place financing arrangements which would result in title to the goods being transferred to one or more finance companies and Automold remaining liable for part of the price of the goods. Under those circumstances I find it difficult to accept that the parties intended that the new arrangements should entirely discharge the original contract and replace it with one or more new contracts to which the guarantee would not apply. In my view the effect of the new arrangements was that Automold’s original obligation to pay the price of the goods was discharged to the extent that Wittmann obtained the right to obtain payment from the finance companies, but remained in existence to the extent that it did not.

For the reasons given earlier I do not think that the contract between Wittmann and Automold obliged Wittmann to enter into arrangements of the kind I have described and I am unable, therefore, to agree with the judge’s conclusion that, if the new arrangements involved a discharge of the original contract and its substitution by three new contracts, the guarantee extended to those new contracts as being already provided for by the original contract. Moreover, even if the original contract had envisaged a restructuring of that kind I do not think that the guarantee would have extended to the new contracts because by its own terms it relates only to the obligation reflected in the five pro forma invoices attached to it. Nor can I accept that, if the new contractual arrangements had involved the substitution of entirely new obligations, the case would have fallen within clauses 3.1 or 3.2.2. Clause 3.1 provides that the guarantor shall not be discharged

However, having regard to the view I take of the financing arrangements none of these arguments is necessary for Wittmann’s case to succeed. The question for decision, as Mr. Charman correctly submitted, is whether the obligation embodied in the guarantee continued to have any content as a result of the changes in the contractual arrangements. He submitted that it did not because the original obligation to which it had applied had been swept away and a new obligation had been put in its place which did not fall within the scope of the instrument. In my view, however, that is not right. Automold’s obligation to pay for the goods was not wholly discharged but was merely reduced in amount to take account of the obligations assumed by the finance companies. The guarantee cannot therefore be said to lack content.

One consequence of the financing arrangements was that title in the goods passed at once to the finance companies instead of being retained by Wittmann as security pending payment. The judge noted that parting with security might well discharge the guarantor in the absence of any provision of the guarantee to the contrary, but it could not have that effect in the present case for two reasons: first, because by clause 1 of the guarantee Willdav expressly contracted as a primary obligor, not merely as a surety, a conclusion reinforced by the terms of clauses 2.1 and 3.2.3, and thereby incurred an obligation that was not susceptible of being discharged by dealings of a kind that would ordinarily discharge one whose liability is secondary only: see Chitty on Contracts, 29^th ed. vol. 2, para. 44-003; second, because such a parting with security falls within the scope of clause 3.1 which is sufficient to ensure that Wittmann’s position is unimpaired.

In these circumstances it is unnecessary to consider the arguments based on the judge’s finding that Willdav knew of and consented to the changes to the contractual structure brought about by the financing arrangements. However, since the matter was fully argued I propose to say something about them shortly.

The judge, as I have said, found that Mr. Keech controlled the affairs of both Willdav and Automold. It is not surprising, therefore, that she found that Willdav, through Mr. Keech, had consented to the restructuring of the contractual arrangements. In those circumstances it may seem surprising that Willdav should now be contending that the guarantee does not extend to Automold’s outstanding obligations; indeed, Mr. Wilson submitted that this was a classic example of a guarantor’s consenting to a variation of the underlying contract which would otherwise operate to discharge him. Basing himself on the well-known case of Holme v Brunskill (1873) 3 Q.B.D. 495, he submitted that, having consented to the changes in question, Willdav remained liable on the guarantee in any event.

Mr. Charman accepted that he could not challenge the judge’s findings of fact; he submitted, however, that the change in the contractual arrangements meant that Automold’s liability no longer arose under the contract to which the guarantee related but under three new contracts to which, as a matter of construction, it did not extend. It was as if one contract for the sale of chalk had been replaced by three contracts for the sale of cheese without Willdav having given its express agreement for the guarantee to extend to the new obligations.

In Holme v Brunskill a farm had been let by the plaintiff on a yearly tenancy together with a flock of sheep. The defendant provided a bond to secure the tenant’s obligation to deliver up the flock in good order and condition at the end of the term. During the course of the tenancy the tenant agreed to surrender one parcel of land in consideration of a reduction in the rent. At the end of the term the sheep were found to be reduced in number and to have deteriorated in quality and value. The plaintiff sought to recover on the bond, but the defendant said that the variation of the contract by the surrender of part of the land operated to discharge him from liability. The argument succeeded. Cotton L.J., with whom Thesiger L.J. agreed, said at page 505

Mr. Wilson submitted that the present case was covered by that statement of principle and that the judge’s decision could be supported on that ground. However, I think Mr. Charman was right in submitting that a distinction is to be drawn between a variation of the principal contract and its discharge and replacement by a new contract. The terms of the guarantee were not apt, in my view, to extend to new obligations of the kind for which Mr. Charman contended and it would therefore have been necessary for Wittmann to obtain Willdav’s agreement before the guarantee could cover them. Any such agreement would have to have been evidenced in writing in order to satisfy the Statute of Frauds 1677. Moreover, I think it is at least arguable, even in relation to a variation of the underlying contract which does not alter the obligation guaranteed, that when Cotton L.J. said that

For these reasons I am satisfied that, notwithstanding the changes to the original contract brought about by the financing arrangements, Willdav remained liable under the guarantee in respect of Automold’s residual liability in respect of the purchase price of the goods and I would therefore dismiss the appeal.

I gratefully adopt the statement of facts and issues set out by my Lord. Like him, I consider that the appeal must fail. Since in some limited respects my reasons for that conclusion differ from those of my Lord, I add some brief words of my own.

At her §60 the judge held that the principal contracts that were covered by the guarantee

In assessing these arrangements it is essential to remember that Willdav was no ordinary guarantor, and Automold no ordinary contracting party. The judge sets out the history of the negotiations in §§9-13 of her judgment. She made three important findings. First, at §9, that Wittmann had from the start been led to understand that Automold would be financing the contract from outside sources; second, at §11, that it became almost certain that “outside finance” would involve sales to lease companies; and third, §10, that the provision of the lease contracts and Willdav’s guarantee of Automold’s liability were essential to the sale going forward at all. Given that background, and in particular the interest of Willdav in the contracts as parent company of Automold, it departs from reality, both factual and commercial, to contend that when Willdav gave its guarantee of Automold’s liability to Wittmann arising out of the delivery of the goods, that guarantee was limited to liability arising out of direct contracts of sale between Wittmann and Automold: contracts which on the judge’s findings everyone concerned knew were never going to take place. Certainly, if Willdav had suggested that in the course of the negotiations the deal would have foundered there and then.

It is only if that view is wrong; and also if my Lord is wrong in the analysis that he adopted in §21 above; that it is necessary to consider the alternative argument, that, assuming that the principal contracts envisaged by the guarantee were limited to contracts of direct sale, Willdav nonetheless consented to a variation of those contracts to include financing by the “tripartite” agreements that were in fact entered into: what was referred to by way of shorthand as the Holme v Brunskill point. But since the matter was raised before us at some length, again like my Lord I express some, though not concluded, views upon it.

The right of a surety to discharge if the terms of or obligations under the principal contract are altered is founded in equity: see per Blackburn J in Polak v Everett(1876) 1 QBD 669 at p 673. The surety therefore cannot assert that right in circumstances where it would be inequitable for him to do so: most obviously, where he has assented to the alteration. In the present case the alteration is substantial; but provided that the new terms fall within the matrix or general ambit of the obligation guaranteed the guarantor will continue to be bound if he has assented to those terms.

It is assent to, and not merely knowledge of, the new terms that is required: so emphasised by Blackburn J in the passage already referred to. But Willdav did not appeal the judge’s finding, at §§87-89 of her judgment, that Willdav, through a combination of Mr Corpataux and Mr Dennis Keech, did consent to the restructuring of the acquisition of the goods from the claimants. Mr Charman said that that was irrelevant, as I understood it on two grounds. First, that any consent by Willdav could not alter or affect the construction of the guarantee. Second, that any alteration to the guarantee had, under the Statute of Frauds, to be effected in writing.

In my view, those submissions misunderstand the nature of the issue as to consent. If a guarantor agrees to an alteration in the contract guaranteed, he cannot rely on that alteration to secure his discharge. In relying on that agreement, the other party to the guarantee is precisely not claiming that the guarantee has been amended. Rather, he is asserting that the guarantee still applies to the principal contract, although that contract has been amended, and the guarantor cannot rely, as otherwise he would be able to do, on that amendment in order to secure his discharge. If that analysis is correct, it follows that the Statute of Frauds has nothing to do with the case, because it is not the guarantee that has been added to or amended.

We were shown the Privy Council case of Republic Resources Ltd v N&I Leasing, 25 July 1990, apparently unreported, in which in an agreed variation case this objection under the Statute of Frauds was raised by counsel. The Board did not reject the argument as irrelevant, but dismissed it on the ground that the consent relied on in that case had been given in writing. I would conclude, with appropriate deference, that if the point had been seen as in any way germane to the decision of the appeal a fuller analysis of the relevance of the Statute of Frauds point would have been undertaken. I do not think that, in the absence of such analysis, the Board’s assumption on the point raised by counsel should deflect us from the analysis set out in §35 above.

I agree that this appeal must be dismissed.

In the background against which the guarantee was entered into was the clear contemplation and acceptance of the fact that outside financing was bound to be procured to assist Automold. In those circumstances, it would, I agree, be commercially astonishing if the guarantee was meaningless. The court should strain to give it the effect it was intended to have. Creative construction must, however, have its limits. With respect to Buxton L.J. I consider that he pushes the limits too far when it is unnecessary to do so. There is another construction which does give effect to the parties’ common intention. In view of the fact that they contemplated that the external financing would raise part only of the purchase price, there is no difficulty in construing the guarantee to continue to operate on the balance remaining after receipt of the money from the finance companies as Moore-Bick L.J. holds. I also agree with him that it was all too vague to read into the negotiations a term that the principal contracts were, as the judge held them to be, subject to modification so as to enable sales to a third party finance company to take place. I would, therefore, dismiss the appeal for the reasons given by Moore-Bick L.J.

That leaves the interesting and difficult question raised in the Holme v Brunskill point. I am taking cowardly refuge behind the fact that it is unnecessary to decide this point and I will leave it to the court that has to decide to choose between the views expressed by my Lords.