Dream Doors Ltd v Lodge

This is an appeal, pursuant to permission granted as to one ground by Elias LJ on 27 June 2012 and as to the other three grounds by Arden LJ on 2 August 2012, from an order made in the Queen’s Bench Division on 10 May 2012 by His Honour Judge Seymour QC (sitting as a Judge of the High Court).

The judge was hearing an application by the claimant, Dream Doors Limited, for an interlocutory injunction against the two defendants, Lodgeford Homes Limited and Martin Lodge, to enforce covenants in what the claimant alleged was a written franchise agreement dated 1 May 2008. The company did not contest the application, and an injunction was granted against it in the terms sought. It has played no part in the appeal. Mr Lodge, who was at all material times a director of and shareholder in the company, denied that he was a party to the agreement. The judge found that, as a matter of construction, Mr Lodge was not personally a party to the agreement or bound by any of its provisions. He rejected as being fanciful the claimant’s alternative claim for rectification. The claim against Mr Lodge for an injunction accordingly failed, so the judge found, on the basis that there was no serious issue to be tried.

The judge then took it upon himself, acting of his own motion, to ask why he should not strike out the claim against Mr Lodge. The claimant’s counsel, Mr Alexander Goold, objected, but to no avail. So far as concerned Mr Lodge the judge made an order dismissing the application for an injunction and striking out the claim against him.

The claimant now appeals against both limbs of the order. Four grounds of appeal are relied on. Grounds 1 and 2 challenge the judge’s holdings on the issues of construction and rectification. Ground 3 alleges error of law, it being said that the judge wrongly equated the test applicable to consideration of the application for an injunction – is there a serious issue to be tried? – with the test applicable under CPR 3.4(2)(a) to consideration of whether a claim should be struck out – “discloses no reasonable grounds”. Ground 4 complains that in acting of his own motion the judge had, in the circumstances, acted unfairly and in a manner not compliant with CPR 3.3.

Elias LJ gave permission on the papers limited to ground 4. On renewal, Arden LJ gave permission on the other three grounds.

Putting the matter very shortly, the problem arose because although the franchise agreement identified the parties, both on the front sheet and on the third page, as being the claimant (described as the “franchisor”) and the company (described as the “franchisee”), on the page where the parties’ signatures appeared there was no reference to or space for signature on behalf of the company. But there was a space for a signature under the typed words “SIGNED BY Martin Lodge” and over the typed words “AS A PRINCIPAL”. Mr Lodge had signed his name in that space. His signature was witnessed by Polly Smalley.

We have been provided with a transcript of the proceedings both before and after judgment. In the course of argument before the judge it was suggested that, as a matter of construction, there were, in principle, three possible views of what had happened: either, and this was the claimant’s primary position, Mr Lodge had signed as a principal, or he had signed on behalf of the company, or he had, by his single signature, signed in both capacities. During the course of argument the judge expressed the view that if Mr Lodge had signed only as principal and not on behalf of the company there would be no consideration. Mr Goold’s appropriate riposte on behalf of the claimant was that the consideration was the grant of the franchise to the franchisee. But the judge would have none of it.

In his judgment, the judge approached the matter in this way:

“The first issue I have to determine on this application insofar as it concerns Mr Lodge is whether there is a serious question to be tried. Bearing in mind the point raised by Mr Lodge, that he was not a party to the agreement, the first question which I have to consider, I think, is the proper construction of the franchise agreement. There are, as it seems to me, two logical possibilities, neither of which are satisfactory from the point of view of the claimants. The first is that the agreement is indeed an agreement between the franchisor (the claimants) and the franchisee (the first defendant) and signed on behalf of the first defendant by Mr Lodge, albeit named beneath his signature as signing as a principal. The second alternative is that the agreement was never made between the parties who are expressed to be the parties to it, because it was never signed by the franchisee, but in some marvellous form an agreement was made between the franchisor and Mr Lodge as principal alone. If that were the proper construction of the agreement, the consequence would be that the agreement was wholly ineffective as a matter of law for want of consideration. In those circumstances, it seems to me obvious that the only conceivably sensible construction of the agreement is that it was an agreement between the identified parties to it and signed by Mr Lodge on behalf of the franchisee. In those circumstances, Mr Lodge was not personally a party to the agreement or bound by any of the provisions in it.”

Evidence as to the circumstances in which the franchise agreement had come to assume its final form, and which was therefore highly relevant to the issue of rectification, came from a number of witnesses. The claimant’s evidence in support of its application was in the form of a witness statement by Troy Tappenden dated 1 May 2012. He explained how the franchise agreement had replaced earlier contractual arrangements between the parties embodied in a franchise agreement between the claimant and the company dated 25 July 2007 and a guarantee/indemnity dated the same day given by Mr Lodge and his then fellow director of the company, a Mr Forde. (Mr Forde was subsequently released from his obligations by a deed dated 6 February 2008.) He deposed that “we continued to deal with Martin Lodge and believed him to be the Principal by virtue of the Agreement”, adding that “unfortunately” the claimant had failed to insert his details as “principal” on the third page alongside those of the “franchisor” and “franchisee”. He made the point – as did Mr Goold during the course of argument before the judge – that the franchise agreement contains many provisions referring to, and in many cases imposing obligations on, “the Principals”.

Mr Lodge relied upon his own witness statement dated 8 May 2012 and a witness statement by Mrs Smalley dated 9 May 2012. Mr Lodge set out a rather different account of the events leading to the execution of the franchise agreement, asserting “I am certain that I was not and would not have been prepared at that time to enter into an agreement with the claimant in my personal capacity.” Both Mr Lodge and Mrs Smalley in their respective witness statements deposed to a conversation between them immediately before he signed the franchise agreement and she witnessed his signature – she was at that time employed by the claimant – in which he asked her to confirm, and she did, that the agreement was between the claimant and the company only and not with him personally.

The claimant responded on the morning of the hearing with a further witness statement from Mr Tappenden dated 10 May 2012. This made clear that he challenged Mr Lodge’s version of events. In relation to Mrs Smalley’s evidence he said “I have no personal knowledge as to the evidence she gives in her statement. She refers to conversations with [Mr Lodge] and I was not party to those alleged conversations nor were they reported to me.” He challenged Mrs Smalley’s authority: “I agree that Polly Smalley, in her capacity of Regional Manager, was asked to obtain the Defendants’ signatures [sic] to the new franchise agreement and to return that to Head Office. She had no authority to sign the agreement on behalf of the Claimant nor to make any statements or representations to franchisees on behalf of the Claimant.” He went on to refer to the fact that Mrs Smalley had subsequently been made redundant by the claimant, that she was now working for the claimant’s principal competitor and that her husband was employed by the defendants.

The transcript of the proceedings shows that, unsurprisingly, Mr Goold sought to rely upon both of Mr Tappenden’s witness statements in support of the rectification claim. In response to the judge’s comment:

“the only evidence as to what was the previous understanding between the parties before the moment of signature is that in the witness statement of Mr Lodge and the witness statement of Mrs Smalley”,

Mr Goold pertinently pointed out that:

“that is not the only evidence because there is the evidence to be set against that of Mr Tappenden as to such discussions as there were leading up to the production and signature of this document on 1 May.”

A little later the judge said:

“At the moment the evidence is all one way, is it not? … to give rise to a serious question to be tried on the issue of rectification there has to be some evidence to suggest a possibility of rectification, rather than a speculative possibility that one may emerge in cross-examination.”

Again, Mr Goold’s response was pertinent:

“But … that is to ignore both Mr Tappenden’s evidence and the evidence of the prior agreement – the earlier franchise agreement.”

He might also have added, but perhaps felt that he did not need to because the judge had already made the point, that “something has obviously gone wrong with the production of the document.”

What the judge said, however, in his judgment was this:

“When it comes to the allegation that the agreement, properly construed, should be rectified, the only evidence as to the circumstances in which the agreement was signed by Mr Lodge is the witness statement of Mr Lodge, and the witness statement of Polly Smalley.”

Having set out the relevant passages in their witness statements, the judge continued:

“There is not a scrap of evidence to suggest that what Mr Lodge and Mrs Smalley say about the circumstances in which the franchise agreement was signed by Mr Lodge is incorrect. It is not suggested, for example, that any third party was present who might be able to give evidence to some effect different from the evidence of Mr Lodge and Mrs Smalley. In the circumstances it is plain, as it seems to me, that the suggestion that a court might be persuaded that it was appropriate to order rectification of the franchise agreement as made is fanciful, and that in the end there is no serious question to be tried between the claimant and Mr Lodge either on the issue whether he was party to the franchise agreement (he was not), or on the issue whether the franchise agreement should be rectified, because there is not a scrap of evidence to suggest that that is necessary or appropriate.”

On that basis the judge dismissed the claimant’s application for injunctive relief against Mr Lodge.

Following the hearing before the judge, and in support of its application for permission to appeal, the claimant has provided further evidence in the form of witness statements by Kelly Chambers dated 23 May 2012 and Alexander Waite dated 24 May 2012. They set out an explanation, supported by various documents, of how, as they assert, the drafting mistake in the franchise agreement came about. I need not go into the details. Their account, taken at face value, is seemingly coherent and consistent with known events.

After he had given judgment the judge said this:

“Having come to the conclusion that there is no serious question to be tried as between the claimant and Mr Lodge, in the exercise of my discretion I am minded to strike out the action as against Mr Lodge. There is no reason not to.”

Mr Goold’s response was as follows:

“Having heard your Lordship’s observations during the course of this application, and having heard the terms of your Lordship’s judgment, no doubt the claimant will wish to go away and consider those matters … it is appropriate that the claimant should be given an opportunity do so, so that it can take either one of two courses … Either, if on advice it considers that it is capable of sustaining this claim, then it may seek to amend … it should be given an opportunity to do that. Or, alternatively, the claimant on advice can decide to discontinue with such costs consequences as may follow as a result of that. So my submission is that that is not a step that the court should take of its own motion at the end of the hearing, because the claimant needs an opportunity to consider its position.”

The judge’s response was swift and blunt:

“Right. Well, I am not persuaded. I am going to strike out the action as against Mr Lodge.”

It is convenient to consider first the second ground of appeal, challenging Judge Seymour’s holding in relation to the issue of rectification. In my judgment, the judge here fell into plain error and on this ground alone the appeal must be allowed.

The judge’s error is most obvious in the passage I have set out in paragraph [13] above:

“the only evidence as to the circumstances in which the agreement was signed by Mr Lodge is the witness statement of Mr Lodge, and the witness statement of Polly Smalley.”

If by “the circumstances in which the agreement was signed by Mr Lodge” the judge is referring to those events when, as it were, Mr Lodge’s pen was hovering over the page as he decided whether or not to sign, then the judge’s statement is factually accurate; but it takes him nowhere. For, as Mr Goold had correctly submitted, in relation to the rectification claim one had to look to a much wider canvas, embracing not just the circumstances immediately surrounding Mr Lodge’s signature of the document (as also, I might point out, the circumstances immediately surrounding its signature on behalf of the claimant) but the whole of the discussions leading up to both the production – the drafting – of the document and its execution. And also relevant, as Mr Goold had correctly pointed out, was the existence of the earlier franchise agreement.

In relation to all that the judge had Mr Tappenden’s two witness statements, but they were ignored. For only by ignoring them could the judge possibly have concluded that the rectification claim was “fanciful” and supported by “not a scrap of evidence”, observations that might in any event be thought a little odd given the fact, acknowledged by the judge in the course of argument, that “something has obviously gone wrong with the production of the document.” Indeed, something had very obviously gone very wrong.

In my judgment the material before the judge – I leave out of account the evidence that has subsequently been filed – plainly established, at the very least, that there was a serious issue to be tried in relation to rectification.

It follows that, on this ground alone, the judge’s decision to refuse the claimant the injunctive relief it was seeking against Mr Lodge cannot stand. It is not, therefore, necessary to deal with the claimant’s first ground of appeal, challenging the judge’s holding in relation to the issue of construction. I should make clear however that in my judgment the judge fell into error, if less obviously, on this point also. In my judgment he was wrong in relation to the consideration point, and with that removed as a ‘knock down’ point it is very far from “obvious”, as the judge thought, that the “only conceivably sensible construction” was that being contended for by Mr Lodge, a construction the effect of which, as Mr Goold had pointed out, was to render large parts of the agreement otiose.

It follows from this, of course, that the judge was wrong to strike out the claim against Mr Lodge. But I should add that, in my judgment, he would have been wrong to do so, even if he had been justified in refusing to grant the injunction for the reasons he gave. Irrespective of the procedural requirements of CPR 3.3, it was unfair for the judge, of his own motion, to strike out the claim without giving the claimant the opportunity for consideration which Mr Goold had sought. So far as concerns the other two grounds of appeal, I think there is substance in the complaint that the judge treated his finding that there was no serious issue to be tried as determinative of whether the claim should be struck out without ever considering whether the test in CPR 3.4(2)(a) was satisfied. Moreover, there may have been non-compliance with CPR 3.3, though that is not, in the circumstances, something on which it is either necessary or appropriate to come to a decision.

For these reasons, in my judgment, we must set aside both the order Judge Seymour made dismissing the application for an injunction against Mr Lodge and the order he made striking out the claim against him.

The question then arises as to whether we should ourselves determine the application for the injunction or whether we should send it back for hearing by a different judge. Having canvassed the issue with the parties, and bearing in mind that the claimant’s application to amend its pleadings will in any event have to be determined in the Queen’s Bench, it seems to me that the more appropriate course is for us to remit both matters for hearing there.

I agree. It remains a mystery to me why the claimant’s primary position advanced before the judge was not that Mr Lodge had, by his single signature, signed in two capacities, both on behalf of the company and to bind himself as, in effect, guarantor of the company of which he was the sole owner. I suspect that had that position been adopted, the judge would have regarded it as plainly arguable that that is the proper construction to be placed upon the signed document and would not have reached the conclusions which My Lord has set out at paragraph 8 above. In any event, in regarding the proposition that by his signature Mr Lodge bound himself alone as inconsistent with there being an effective agreement between the claimant and the franchisee company, the judge overlooked that the agreement had in fact been performed by both the claimant and the franchisee company for several years, with each deriving benefit under it.

I agree with both judgments.