Groveholt Ltd v Hughes & Anor

At the heart of the problem for Mr Hughes in this litigation lies the fact that the parties to the Sainsbury Agreement agreed on institutional procedures for defining the Costs that were to be Mr Hughes’ responsibility, and for settling any disputes in establishing those costs. These were contained in clause 15 of the former agreement as amended and I shall refer to them as “the Sainsbury procedure”. Like provision was not made in the Hughes/Chelverton agreement, but Mr Hughes does not suggest that that Agreement does not represent what the parties to it agreed. Mr Hughes naturally seeks to capitalise on this deficiency of drafting in his dispute with Groveholt over the overage payments, which are charged on Groveholt’s property, by asserting that, although not so stated, the Sainsbury procedure applied to the Hughes/Chelverton Agreement too. Non-compliance with that procedure leads on his case to the claims for avoidance of the liability for the deduction of Costs altogether or at least to cross-claims in damages. Clause 15 could not be followed once the Novation Agreement had been disclaimed.

The amendments disallowed by the judge are set out verbatim in appendix 1. Essentially, paragraph 31 raises “the condition precedent issue”, as I shall refer to it, namely the argument that, on the true interpretation of the Hughes/Chelverton Agreement, there was a condition precedent that Costs could not be deducted unless the Sainsbury procedure had been followed. It is accepted that this machinery did not need to be scrupulously followed but it had to be substantially followed. There is a further condition precedent alleged in paragraph 31, namely that Sainsbury should first serve a demand under clause 15.9 of the Sainsbury Agreement (set out below) for the excess of the Costs over £5m. Paragraph 32 serves the same purpose as the first condition precedent alleged in paragraph 31, but is structured on the basis that there is an implied term that Chelverton would not seek to recover Costs over and above the aggregate costs specified in the Sainsbury Agreement (“the implied issue”). Paragraph 33 seeks to aver that the Sainsbury Agreement (as amended) by the loan agreement dated 10 March 1998, (which substituted a new clause 15 into the Sainsbury Agreement) became a part of the matrix of fact admissible on the interpretation of the Hughes/Chelverton Agreement following the conclusion of the Novation Agreement and the Supplemental Agreement (“the matrix issue”). I have placed the words “at least” in this paragraph in square brackets as Mr Martin was content to restrict his argument as I have just described it.

Paragraph 50 avers that there were serious discrepancies in compliance with the Sainsbury procedure in the way the Costs were incurred. I will call this “the non-Hughes/Chelverton Agreement Costs issue”. The words in square brackets are words substituted with the reluctant agreement of Mr Martin in the course of argument. We have not been concerned with the detail of paragraph 50 and understand that the Infrastructure Works Contract and Site Assembly Agreements were entered into as part of the process of completing the infrastructure and site assembly works. The allegations in paragraph 50 are in whole or to a large extent disputed.

The judge considered that the condition precedent issue and implied term issue were nothing more than an attempt to rerun issues already decided against Mr Hughes by Mr Nicholas Underhill QC, this court and himself. Mr Martin submits that this is not so, and Mr Kitchener seeks to uphold the judge. If the point is correct, it is the end of the appeal so far as these paragraphs are concerned.

It is convenient to deal with this point first and to take with it an argument raised by Groveholt in its respondent’s notice. That argues that it was also an abuse of process and a violation of the CPR for Mr Hughes to raise these amendments now, given that he has had an opportunity to formulate his case on the two previous summary judgment applications. Mr Kitchener submits that this is the third occasion on which Mr Hughes has formulated his case and that it constitutes an abuse of process for him now to assert a condition precedent or implied term when that was not put before the court on either of the two previous occasions, and it is established by Woodhouse v Consignia plc [2002] 1 WLR 2558 at [55] to [57] that there can be an abuse of process even on interim applications. Mr Martin’s riposte is that it is unnecessary for a party to raise its entire case on a summary judgment application.

I do not consider that the reference to the CPR adds anything to the point on abuse of process. There may have been a breach of a litigant’s duty to co-operate with the court and the other party due to the piecemeal way in which Mr Hughes has formulated his case, but in my judgment to refuse to adjudicate on his application to amend on its merits would not be a proportionate sanction for that breach of that obligation alone, despite the importance which is to be attached to it. This is complicated litigation and I agree with Mr Martin that in the circumstances of this litigation the court should not expect a litigant necessarily to bring forward at an interim stage all his arguments on the way he puts his case. For the same reasons I would not disallow the amendment on that basis under the inherent jurisdiction of the court, especially as it did not occur to the judge with his considerable knowledge of this litigation to do so.

I add at this point in parenthesis that it is not necessary hereafter in this discussion to identify separately arguments put forward by Groveholt in its respondent’s notice for upholding the judge’s judgment, but those arguments have of course been taken into account.

Mr Martin sought to define what Mr Nicholas Underhill QC and this court had decided. He submits that both decisions have to be read in the light of the very different issues which were being addressed. This court went no further than to hold that the case for summary judgment was not made out. In each case the courts were only looking at the question whether clause 11 had to be taken into account when calling for the overage payments. It followed that when, in his decision under appeal, the judge concluded that this court in paragraph 97 of its judgment (set out above) decided that every possible cost was to be taken into account because otherwise it would flout common sense, he was in error. The declaration made by this court, when read in context, did not mean that the Costs were in all circumstances to be subject to deduction pursuant to clause 11. This court was only addressing whether you had to look at clause 11. This court failed to deal with the question of how the Costs were to be ascertained for the purpose of the accounting between the parties.

Mr Kitchener submits that the words "or otherwise" reflect the fact that this court decided the point against Mr Hughes on a wider principle than simply the limited principle that some costs had to be deducted by reason of the disclaimer or clause 11. It was thus barring any route for avoiding any deduction based on the express or implied terms of the Hughes/Chelverton Agreement. Mr Kitchener’s argument is essentially that we should take both declarations according to their tenor. They are in the present tense and admit of no exception. The effect of the decision of this court was that Mr Hughes could not avoid deductions for the Costs. That would be circumvented by these amendments which would enable Mr Hughes to obtain a windfall.

Were it necessary to do so, I would reject Mr Kitchener's argument on abuse of process and issue estoppel in relation to paragraphs 31 and 32. I would also disagree with the judge if when he says that the present application is merely an attempt to rerun issues he was referring to the issues in paragraphs 31 and 32 (it is not clear to which issues he was referring). What has previously been decided is that Mr Hughes has no escape from the deduction of Costs under the disclaimer and no escape under the express terms of the Hughes/Chelverton Agreement. But I do not consider that we should read the decision of this court as going wider than the judgment itself states simply because the declaration, if read without reference to the judgment, might support that conclusion. As Mr Martin put it, what has been decided is whether costs can be deducted, not which costs can be deducted. Hence it could not have decided what consequences followed from certain Costs being outside the terms of the Hughes/Chelverton Agreement. Accordingly, in my judgment, the decision of this court was not inconsistent with the existence of an implied term or condition precedent now sought to be raised by paragraphs 31 and 32.

Paragraphs 31 and 32 are different ways of putting the same case and so I will take them together.

The right of Mr Hughes to the overage payments depends on the true meaning of the Hughes/Chelverton Agreement, and thus the argument centres on that, even though Groveholt is not a party to this agreement. What Mr Hughes has to show is that it is reasonably arguable that compliance with the detailed Sainsbury procedure was a condition precedent to the deduction of any Costs from the overage payments under the Hughes/Chelverton Agreement.

Mr Martin starts from the proposition that it is clear from the terms of clause 8 of the Hughes/Chelverton Agreement that Chelverton was well aware of the existence of the Sainsbury procedure, and that it was planned that there would be a novation of the obligations of Mr Hughes under the Sainsbury Agreement to Chelverton. It was not necessary that Chelverton should have known all the detailed terms of the Sainsbury Agreement. Clause 11 has to be approached with knowledge of how the Sainsbury procedure works. When that clause uses the words “known and certain” and “known”, it means “known” or “certain” because of the operation of the Sainsbury procedure. Mr Martin also points out that it was accepted by Mr Nicholas Strauss QC, who represented Groveholt before the judge in June 2008, and in this court, that there was no difference between the Costs to be incurred under those two agreements. I would accept that, even if Mr Hughes and Chelverton did not agree that the same works should be carried out under the Hughes/Chelverton Agreement, it appears from clause 8 of that Agreement that both parties perceived that those costs would be the same. Mr Martin continues that it was an essential protection to Mr Hughes that the costs should be established by the Sainsbury procedure. Although he may have other remedies, it was of great importance to him that that procedure should be followed if he was fairly to be held liable for Costs over £4.5 million. Mr Martin further submits that it would have been known to Chelverton that the safeguards were to be operated for Mr Hughes’ benefit and thereafter Chelverton’s benefit. It was, therefore, on his submission a condition precedent that the Sainsbury procedure should be gone through.

Mr Martin reminds us that all he has to show is that paragraph 31 is reasonably arguable. As a matter of principle the only Costs that should be capable of being deducted from the overage payments are those permitted to be incurred by the Sainsbury procedure. The amount of Sainsbury's aggregate costs would pass down the line. The expectation of the parties was that the costs incurred by Sainsbury would be identified by their accounting exercise in accordance with clause 15 and that the amount of those costs would then be utilised for the purpose of the accounting exercised required by clause 8 of the Hughes/Chelverton Agreement.

Mr Martin accepted that the amendment to insert paragraph 31 would result in the calling of further evidence, but no one raises that as an objection to giving leave to amend.

Pausing there, it seems to me that the highest that this argument can be put on clauses 8 and 11 of the Hughes/Chelverton Agreement itself (and it is not put in any other way) is that Chelverton knew of the existence of the Sainsbury agreement, and that Sainsbury had accepted an obligation to pay £5m towards the Costs and to make the balancing payment to Mr Hughes. I do not accept that these clauses suggest that Chelverton knew about a detailed procedure for incurring those costs. It seems to me that the argument on the condition precedent breaks down at that stage though that is not the only reason for rejecting it.

Mr Martin goes on to suggest that the position for which he contends is confirmed by the fact that the Supplemental Agreement provided that clause 15 could not be amended without Mr Hughes’ consent. The assumption in that agreement is that clause 15 will be operated. The Supplemental Agreement was concluded because it was vital to ensure that costs were controlled. I do not consider that that helps Mr Martin unless he succeeds on his argument on the matrix issue considered below. But more fundamentally if the Supplemental Agreement can be used to interpret the Hughes/Chelverton Agreement, Mr Martin has to overcome Mr Kitchener’s argument on it, which is set out below. Mr Martin has his own argument on the Supplemental Agreement, namely that the provision that Chelverton undertook not to amend the Sainsbury procedure without Mr Hughes’ consent underscores his proposition that the expectation of the parties was that the Sainsbury procedure would be followed unless otherwise agreed.

As to paragraph 32 Mr Martin was inclined to accept that since paragraph 31 involves the implication of a condition precedent there is little that can be said in addition about paragraph 32 which also involves the implication of a term to a similar end. Paragraph 32 is predicated on the basis that, if some method was stipulated for incurring the Costs, the maximum costs that could be claimed was the amount of the Costs which would have been incurred under the Sainsbury procedure.

Mr Kitchener adopts an analytical approach. The new paragraph 31 is but an implied term in disguise. Thus paragraphs 31 and 32 involve the implication of terms and so the strict tests for the implication of terms into contracts apply. It is trite law that one of the basic requirements for any implied term of this kind is that it should be one which the parties would have unhesitatingly accepted: see, for example, per Lord Cross of Chelsea in Liverpool City Council v Irwin [1977] AC 239 at 257:

“When it implies a term in a contract the court is sometimes laying down a general rule that in all contracts of a certain type - sale of goods, master and servant, landlord and tenant and so on - some provision is to be implied unless the parties have expressly excluded it. In deciding whether or not to lay down such a prima facie rule the court will naturally ask itself whether in the general run of such cases the term in question would be one which it would be reasonable to insert. Sometimes, however, there is no question of laying down any prima facie rule applicable to all cases of a defined type but what the court is being in effect asked to do is to rectify a particular - often a very detailed - contract by inserting in it a term which the parties have not expressed. Here it is not enough for the court to say that the suggested term is a reasonable one the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give - as it is put - "business efficacy" to the contract and that if its absence had been pointed out at the time both parties - assuming them to have been reasonable men - would have agreed without hesitation to its insertion.”

Counsel very properly took us to the speech of Lord Hoffmann in Attorney General of Belize and others v Belize Telecom Ltd [2009] 2 BCLC 148, in which Lord Hoffmann rebases the doctrine of implied terms within the principles of contractual interpretation, thus imposing what Mr Kitchener called the “superstructure of interpretation” on the conditions necessary for the implication of a terms on the grounds of business efficacy. However, in the light of the decision of this court in Mediterrranean Salvage and Towage Ltd v Seamar Trading & Commerce Inc [2010] I All ER (Comm) 1 that nothing in that approach affects those conditions, there is no need to go further into that authority.

Mr Kitchener’s principal argument is that the test of necessity for implied terms cannot be met. It was not inevitable that the parties would have agreed to the Sainsbury procedure. For example, with respect to the third sentence of paragraph 31, which referred to one aspect of the procedure which was a demand by Sainsbury, Mr Kitchener took us to clause 15.9 of the Sainsbury Agreement. This provides:

“15.9

To the extent that the Actual Costs exceed £5 million plus VAT they shall be borne by the Seller and the Seller agrees to indemnify the Buyer On Demand against All Costs and Expenses in Excess of £5 Million Plus VAT Incurred by the Buyer in connection with the Infrastructure Works and/or the Site Assembly Process.”

Mr Kitchener submits that there is no basis for requiring a demand by Sainsbury under the Hughes/Chelverton Agreement. Indeed in some circumstances Sainsbury was not entitled to make a demand when costs became deductible under the Hughes/Chelverton Agreement even if the arrangements had been implemented as planned. Under the Hughes/Chelverton Agreement Mr Hughes was liable to pay costs over £4.5 million. Under the Sainsbury Agreement, he was liable only if the costs exceeded £5 million. Sainsbury cannot be liable to make a demand when the costs are over £4.5m but less than £5 million because it has no contractual right to do so.

Furthermore, if the Hughes/Chelverton Agreement fell to be interpreted in the light of the Novation Agreement and the Supplemental Agreement, clause 1.1 of that Agreement, requiring Chelverton to use its best endeavours to obtain Sainsbury’s compliance with the Sainsbury procedure, was inconsistent with the proposed implied terms.

Mr Kitchener also made a number of other submissions based on a comparison between the Hughes/Chelverton Agreement and the Sainsbury Agreement, but it is not necessary for me to deal with them in the light of my conclusion.

Attractively as Mr Martin developed his argument, I conclude that paragraphs 31 and 32 are not reasonably arguable. The asserted condition precedent can only be arrived at by implication of a term. This clearly does not meet the rigorous test of necessity. If the effect of non-compliance is, as Mr Hughes now suggests, that Chelverton became disentitled from deducting Costs, then it is a highly significant term and thus it is highly unlikely that the parties would have left it to implication. As Mr Kitchener pointed out, a small failure to comply with clause 15 could, if Mr Martin is right, have serious consequences. The court could not conclude that the parties would have unhesitatingly agreed it. The Hughes/Chelverton Agreement simply failed to deal with the possibility that the Sainsbury procedure might not be followed, just as it failed to deal with the consequences of Chelverton entering liquidation or its liquidator disclaiming the Hughes/Chelverton Agreement.

Moreover, as already explained, in my judgment, the Hughes/Chelverton Agreement does not bear out what must be an implicit proposition in these amendments that Chelverton knew that there was a detailed Sainsbury procedure. It would have known that by the time of the Novation Agreement, but, at the time it entered into that Agreement, it also entered into the Supplemental Agreement. As Mr Kitchener points out, the Supplemental Agreement expressly imposed an obligation on Chelverton to use its best endeavours to obtain compliance by Sainsbury with the Sainsbury procedure. That provision is inconsistent with the condition precedent sought to be alleged since under the Supplemental Agreement it is clear that the parties contemplated that there should be no absolute obligation on Chelverton to follow the Sainsbury procedure in clause 15 and that the remedy for any failure to follow it should be in damages, not that it should automatically preclude any deduction of the Costs. The fact that the clause imposed only a “best endeavours” obligation also completely undermines Mr Martin’s argument that the Supplemental Agreement made it clear that the commercial purpose of that Agreement was that the Sainsbury procedure was to have a direct bearing on the calculation of the Costs. If Chelverton was obliged only to use its best endeavours, there could be little certainty about the extent to which Chelverton was able to ensure that the Sainsbury procedure was followed. Moreover it would have been paradoxical for Mr Hughes to exact an obligation in these terms if his interests would in fact have been best served by Chelverton’s failure to comply with the Sainsbury procedure (because no Costs at all would then be deductible).

I would therefore uphold the judge’s decision on the condition precedent issue and the implied term issue.

As to paragraph 33, Mr Martin submits that when the parties entered into the Novation Agreement they entered into new arrangements and so the Sainsbury Agreement is part of the matrix of fact known to both parties at that date which is admissible for the purposes of interpreting the Hughes/Chelverton Agreement. If there had been a new agreement in terms of the Hughes/Chelverton Agreement at that point in time, then there would have been no doubt about that. But that did not happen and there is no evidence to show that the parties agreed that the Hughes/Chelverton Agreement should bear some different meaning from that date. If there is no such agreement, then on the face of it the Novation Agreement and Supplemental Agreement cannot alter the meaning of the Hughes/Chelverton Agreement, which had already been made: see National Grid plc v Mayes [2001] 1 WLR 864 at [64] to [67]. Mr Martin points out that Mr Kitchener accepts that the Sainsbury Agreement is admissible as an aid to the interpretation of the Supplemental Agreement where it is expressly referred to. That is of course a very different situation.

Mr Martin relies on a passage in Lewison, The Interpretation of Contracts, 3rd edition, para 303 which, while recognising that it is unlikely that the party would have wished to alter the meaning of a contractual provision without altering the words, offers the view that:

“On the other hand, it may then be argued that having taken the opportunity to renew their contract, the parties must be taken to have entered into a new contract on the date of the (last) variation to it. If the latter view is correct, it may also alter the nature of the factual matrix of fact which may be considered in considering the contract.”

I accept that this passage contains a reasonably arguable point of law, and I accept that that there is at least one unreported case where the court has asked the question whether the meaning of a provision contained in an agreement had changed in the light of a subsequent deed of variation which repeated the same provision (St Martin’s Property Investments Ltd v Cable & Wireless plc [2007] EWHC 582 (Ch), where the question was answered in the negative). However, the court has to be able to reach the conclusion that the parties have made a new agreement. In St Martin’s there was a deed of variation which contained the relevant term. In this case, the Novation Agreement and the Supplemental Agreement did not repeat any relevant provision of the Hughes/Chelverton Agreement. Nothing is pleaded as a basis for that argument for interpreting the Hughes/Chelverton Agreement in the light of those later agreements: there is simply no substratum of fact to support it. The Supplemental Agreement and Novation Agreement cannot supply that as the first of those agreements adds to the Hughes/Chelverton Agreement, and the second of those agreements makes no reference to it. There is thus no evidential basis for the proposition that the parties intended the Hughes/Chelverton Agreement to bear some new meaning from the execution of the Supplemental Agreement and Novation Agreement. In those circumstances paragraph 50 is not reasonably arguable, and the judge was right to refuse permission to amend.

Paragraph 50 contains an allegation that certain costs were not incurred “under the auspices of the Hughes/Chelverton Agreement”. The phrase derives from paragraph 85 of the judge’s judgment on 20 June 2008, where he held:

“The Court of Appeal clearly determined that Mr Hughes in claiming his entitlement to an enhanced price for the Property was subject to a requirement to give credit for the works that were carried out to enable that enhanced value to be achieved. What the Court of Appeal did not do was give any guidance as to how that exercise was to be decided. It arises under the Hughes/Chelverton Agreement but Chelverton of course is not a party to the current dispute. Self-evidently Groveholt is not a party to that Agreement. Equally the works do not appear to necessarily have been done under the auspices of the Hughes/Chelverton Agreement. I say necessarily because no disclosure has taken place and as I have set out above there are other contractual arrangements between different parties which were applicable to the work. In particular it is significant that whilst Chelverton disclaimed the Hughes/Chelverton Agreement it did not disclaim the benefit of the Chelverton/Groveholt Agreement and in particular the obligations on behalf of Groveholt to carry out the Infrastructure Works and its indemnity against the obligations arising under the Novation Deed.”

I do not read the judge as saying that it would be a breach of the Hughes/Chelverton Agreement for any of the works to be carried out otherwise than, as he puts it, “under the auspices of” that Agreement. He is simply saying that the facts need to be investigated and established and accordingly there is a need for disclosure.

One looks in vain in the draft re-amended defence to find the significance which Mr Hughes attaches to the expression “under the auspices of” the Hughes/Chelverton Agreement. There are copious allegations of breaches of the Hughes/Chelverton Agreement pleaded under a heading to that effect starting at paragraph 51 of the draft re-amended defence but paragraph 50 is not among them. It appears under a heading which reads “Subsequent Events”.

Mr Kitchener submits that paragraph 50 serves no purpose as no consequences are said to flow from the allegation. It is not said, for instance, that the costs to which paragraph 50 refers are not costs deductible under clause 11 of the Hughes/Chelverton Agreement. In any event any such allegation would be unsustainable because the Costs are defined in clause 1 of the Hughes/Chelverton Agreement without any restriction on their being incurred “under the auspices of” the Hughes/Chelverton Agreement.

I conclude that the judge was right to disallow paragraph 50. Paragraph 50 fails to set out Mr Hughes’ defence based on it with the requisite clarity and hence lacks arguability. The context for this allegation is entirely missing. If it is intended to raise some further case as to the meaning of the Hughes/Chelverton Agreement, that should be clearly alleged so that the basis of it can be examined. If I had been in favour of Mr Hughes on paragraphs 31 and 32 of his draft re-amended defence, different considerations might have arisen as it would appear that paragraph 50 was intended to be read with them, but in the light of my conclusion on those paragraphs I do not need to consider that possibility.

There is an alternative route to the same conclusion which may explain why recourse has been had to the expression “under the auspices of” the Hughes/Chelverton Agreement. If what the pleader means is “under the Hughes/Chelverton Agreement” the allegation in paragraph 50 is precluded by the judge’s judgment of 20 June 2008. The judge held:

“89.

Mr Hughes has raised various arguments one of which is a matter of construction that no claims can be made if the work was done by Sainsburys but not under the Chelverton/Hughes Agreement. Such an argument in my view is not open to Mr Hughes as a result of the Court of Appeal decision which plainly decided that if work was done that enhanced the value then credit must in some way be given for that. It was the examination of that principle which led to the changes in stance of Groveholt during the Part 24 hearing as set out above. Disclosure in my view is necessary (not in all probability limited to the parties to this litigation) in order to see how the Infrastructure Works were carried out. This is not as Mr Strauss QC submitted seeking to look at ex post facto events as an aid to construction of the Hughes/Chelverton Agreement; it is more a question of finding out what actually happened. Subject to the overriding decision of the Court of Appeal it seems to me that all arguments remain open and cannot be finally determined at this stage. ”

The first two sentences are significant. The argument rejected in the first two sentences is that the Costs can be challenged, not on the basis that there was a condition precedent as to compliance with the Sainsbury procedure (the argument raised in this appeal), but on the basis that the Costs were not incurred under the Hughes/Chelverton Agreement but under the Groveholt/Sainsbury Agreement. Mr Hughes did not appeal from this order. I do not accept Mr Martin’s submission that in this judgment the judge left everything open. He did not. Rightly or wrongly he decided that Mr Hughes was precluded by the decision of this court from raising an argument to the effect that the Costs were not incurred “under” the Hughes/Chelverton Agreement. Thus, if the expression “under the auspices of” means nothing more than “under”, the point has been decided against Mr Hughes and he is bound by the court’s decision on this point and paragraph 50 fell to be disallowed on that basis too.

For the reasons given above I would dismiss the appeal against the judge’s disallowance of the amendments to the re-amended defence and allow the respondent’s notice in part. No separate argument was raised on the second ground of appeal on the judge’s order for costs but, in the circumstances, if my Lords agree with the order I propose, there is no basis for interfering with his order as to costs.