MCI Worldcom International Inc v Primus Telecommunications Inc

Introduction

There are before the court two applications. The claimant (“WorldCom”) applies for summary judgment on its claim for £1,592,614.62 plus interest and dismissal of the counterclaim. The defendant (“Primus”) applies for permission to make substantial amendments to its defence and counterclaim. It is common ground that the question for the court is whether the defence or counterclaim as pleaded in the draft amended defence and counterclaim have a real prospect of success.

WorldCom and Primus are United States Corporations whose business is to supply telecommunications services by means of landl lines, including underwater lines. For this purpose WorldCom sold circuit capacity to Primus. It did so on a capitalised lease basis for fixed terms of years. Each lease provided for the initial payment by Primus to WorldCom of a capital sum followed by annual payments until the end of the term. There were three such agreements. All of them have been terminated long before the end of their term. On 21st July 2002 WorldCom entered Chapter 11 Bankruptcy in the United States. Mr Thornburgh, an examiner appointed by the Bankruptcy court issued a report to the effect that the parent company of WorldCom, called WorldCom Inc, had systematically and fraudulently inflated its reported profits. On 2^nd December 2002 Primus terminated all the agreements with the claimant, WorldCom, on the ground of the Chapter 11 Bankruptcy. WorldCom accepts that it was entitled to do so.

WorldCom claims to recover amounts due at the date of termination in respect of annual charges and, under a subsequent agreement made in December 1999, upgrading charges for one of the circuits the subject of an earlier agreement.

Under the earliest agreement made on 29 or 30 April 1999 (“the First Agreement”) WorldCom agreed to provide to Primus for a period of 10 years two circuits, one between London and Frankfurt and one between London and Paris. The capacity was to be type STM 1. The capital price was US$ 8 million. Primus paid that together with the annual charge of US$ 150,000 for 1999. The annual charges for 2000 and 2001 remained unpaid and are claimed in these proceedings.

The terms of the First Agreement were negotiated between Anna McKibbin who was a lawyer employed in its legal department by a UK subsidiary of WorldCom, called MCI WorldCom Ltd, to which I refer as “WorldCom UK”, and Neil Hazard, a director of Primus by training a certified public accountant.

On about 30 September 1999 two further agreements were entered into on similar terms to the First Agreement. Under the Second Agreement WorldCom agreed to provide for 20 years a type STM 1 circuit between Frankfurt and Amsterdam and under the Third Agreement, for a 10 years term, three more type STM 1 circuits and one type DS 3, which has a smaller bandwidth than STM 1, for Zurich-Paris.

Primus paid the capital cost under the Second and Third Agreements and also the annual charge for 1999. The annual charge for 2000 and 2001 remained unpaid and are claimed in these proceedings.

In December 1999, as evidenced by two service orders on WorldCom’s order form signed by Mr Hugh Gray Murray, General Manager of Primus’s European Network Service Division, it was agreed that the Zurich-Paris circuit provided under the Third Agreement would be upgraded from type DS 3 to the larger bandwidth represented by STM 1. I refer to this as “the Upgrade Agreement”. An additional US$1.2 million was to be paid by Primus in respect of this upgrade. The upgrade was provided.

It will be at once appreciated that termination of all these agreements left Primus in a position where it had paid the capital price of circuits, amounting in total to $11.2 million for terms ranging from 10 to 20 years but had only had access to the circuits for three and a half years in the case of the First Agreement, and for a maximum of three years and two months in the case of the Second and Third Agreements, although it is said by Primus that it stopped using the two First Agreement circuits on about 30 November 2001 due to their lack of reliability. It also claims to have stopped using all other circuits from about 21 February 2002, also due to their unreliability. On 27^th March 2002 Primus gave notice of cancellation of the Paris-Zurich circuit (Third Agreement) and the London-Paris circuit (First Agreement) on the grounds of interruptions in transmission which had occurred many months earlier.

The draft amended defence raises a large number of distinct issues but it is submitted by Mr Michael Lazarus, on behalf of the claimant, WorldCom, that there is no substance in any of these defences and that accordingly they have no real prospect of success. The defences raised can be summarised as follows.

It is convenient to set out the relevant paragraphs of the defence

In particulars of the falsity of those express or implied representations, set out at paragraph 8.3, it is pleaded that the claimant was not a “sound” company due to the fact that once it became known, as was likely in less than 10 years that since 1995 the claimant had implemented a strategy of fraudulent or otherwise inappropriate and/or unlawful accounting practices, the damage to its goodwill and commercial standing would create such uncertainty about its true financial position as to cause it to become insolvent or be likely to have that effect. The defendants rely on Mr Thornburgh’s interim report that the claimant kept the price of its shares at artificially high levels by various improper and unlawful accounting devices, so as to facilitate continuation of phenomenal growth by using its own shares to pay for take-overs, the maintenance by way of share value of the personal wealth of the directors and as a justification for paying them very high remuneration and the obtaining of enormous personal loans by Mr Ebbers, who largely controlled WorldCom, using his shares as security to Banks. A subsequent report by Mr Thornburgh reinforces evidence of unlawful accounting.

The defendant claims that those representations induced it, through Mr Hazard, to enter into all the agreements in question. Accordingly, the defendant claims to be entitled to rescind all the agreements and to do so on this ground by the service of the draft amended defence on 23 May 2003.

The defendant further pleads that each of the three Agreements expressly represented that WorldCom was “duly organised and validly existing under the laws of its state or jurisdiction of organisation”. It alleges that this was a mispresentation by reason of the fact that the regime of unlawful accounting was inconsistent with the corporation’s being “duly organised”.

In the course of argument Mr Tager explained that no allegation of dishonesty or knowing deception is made against Ms McKibbin. It is alleged that she was the relevant agent and mouthpiece of WorldCom and had, like everybody, except those directors knowingly involved with the unlawfulness, been led to believe that the company had great financial strength. Even if Ms McKibbin had no knowledge of the misleading nature of her response to Mr Hazard’s enquiry, it was the duty of WorldCom, which through those directors did have such knowledge at a level of management higher than her, to disclose before the agreements were entered into all matters necessary to give a truthful account in answer to Mr Hazard’s enquiry. Mr Ebbers and Mr Sullivan were the alter ego of WorldCom. The defendant submits on the basis of the contents of Mr Thornburgh’s Second Interim Report and of the Report of WorldCom’s Board’s Special Investigative Committee that the nature of the fraudulent accounting and other fraudulent matters perpetrated by Ebbers, the weakness and lack of control of the board of directors and the inadequacies of the audits by Arthur Andersen would inevitably have caused the financial collapse of the company within the 10 year term of the agreements. Once the fraudulent accounting regime had been embarked upon it was difficult to return to accurate and honest accounting without disclosing the previous deceptions and therefore precipitating the company’s collapse. It was only with the publication of the First Interim Report of Mr Thornburgh that the unlawful practices and therefore the untruthfulness of the representations emerged and came to the attention of Primus so as to enable it to formulate its amended defence and to inform it if its right to rescind on this ground.

On 2 August 1999 Mr Reid, on behalf of Primus, signed five service orders on service order forms provided by WorldCom. These five orders were for five circuits, namely Frankfurt-Amsterdam, for a term of 20 years, London – Frankfurt, Paris-Frankfurt, London-Paris and Zurich-Paris each for 10 years. The first four circuits were type STM-1 and the fifth type DS-3. Each of the service order forms included the following wording:

“Customer and MCI WorldCom International, a subsidiary of MCI WorldCom Inc, agree that this Service Order is subject to and governed by any applicable FCC tariffs in the master service agreement (MSA) between customer and MCI WorldCom International (or, if no MSA has yet been signed, subject to and governed by MCI WorldCom International Standard MSA in effect as of the date of customer signature below). Customer acknowledges and agrees that it has received and read the MSA and understands and agrees to its terms and conditions.”

On about 30 September 1999 Mr Hazard of Primus signed the Second and Third Agreements provided to him by WorldCom. These covered provision by WorldCom of precisely the same circuits as those referred to in the five service orders. Mr Hazard states in his witness statement that he was not then aware “that there were already agreements in existence relating to those circuits”. He states that he signed the Second and Third Agreements “because I was told by Ms McKibbin that I had to do so in order for the capacity to be handed over”, and continues:

“If I had been made aware that Primus already had a contractual entitlement to receive the capacity, then I would not have signed further documents.”

It is alleged in 5.1 of the Amended Defence that by the terms of the two draft agreements WorldCom expressly or impliedly represented that there were no existing agreements for the provision by it of a service between the sites identified and that in reliance on those representations Mr Hazard signed the Second and Third Agreements “in the belief that unless he signed them, there would be no agreement for those sites”. Those representations are alleged by Primus to be false by reason of the fact that the acceptance by WorldCom of the five service orders gave rise to five contracts for the provision of those circuits on the terms set out in the orders. On this basis it is pleaded in paragraph 5.2 of the Amended Defence that the Second and Third Agreements were void for mistake or by reason of total absence of consideration. Alternatively, it is pleaded that they have been rescinded for misrepresentation by service of the pleading.

According to Primus, and in particular to the account given by Mr Hugh Gray Murray in his witness statement, he had discussions with WorldCom technical staff prior to the entering into of the third Agreement in the course of which he made clear and it was agreed that the Zurich-Paris circuit was required to be an STM-1 optical delivery containing a D5-3 structured as 21 x VC12s. This is said to be compatible with the interface requirements of Primus at the point of connection between WorldCom’s cable system and a circuit board designated as an STM-1 by means of which WorldCom’s system would be connected to Primus’s system. The compatibility of the interface equipment (STM-1) with Primus’s system was essential to the effective functioning of the connection. The essential point in Primus’s case is that an electrical interface would be incompatible with Primus’s optical system.

The service order form for the Paris-Zurich circuit as signed by Mr Reid for Primus contained a cross in a box alongside the G703 75 ohm interface which was an electrical interface incompatible with Primus’s system which required an optical type of interface. This interface specification was repeated in the Third Agreement. Schedule 1, entitled “Technical Specification” under paragraph 2, headed “Demarcation Points and Interface Requirements,” specified at 2.2:

“The Demarcation Points should be the optical distribution frame owned by Primus at the relevant site.”

Then under paragraph 2.3 it is stated that the DS-3 interface would be such as to incorporate an interface standard – ITU-T G703 – which corresponded to the interface shown as ticked in the service order and which was an electrical and not an optical interface.

Thus, when the circuit came to be tested, it would not work.

It is Primus’s case that there was a common mistake in the Third Agreement, Schedule 1 at 2.5. Primus claims that the Third Agreement should be rectified to reflect the true agreement according to Mr Murray’s evidence.

It is further alleged that the defendant, Primus, is entitled to rescind the Upgrade Agreement, as rectified, on the following grounds. The circuit type that should have been made available for the Zurich-Paris link was a channelised DS-3 delivered as STM-1 and containing 21 x V12. This requirement for 21 x V12 was needed to make the DS-3 circuit compatible with Primus’s own equipment. The circuit provided under the Third Agreement was not packaged as VC12 but a VC3 and was incompatible. In paragraph 6.2.1 of the Amended Defence it is pleaded as follows:

“Following delivery of an unusable circuit Mr Jonathan Wright of the Claimant represented to Hugh Gray Murray (the Defendant’s operations manager) that the Claimant did not support or sell the service the Defendant wanted and that the Defendant would have to upgrade to an STM1 and pay an extra US$1.2 million for this upgrade.”

According to the defendant, it would have been possible to render the VC3 packaging compatible with the Primus system by a process of re-mapping the circuit at WorldCom’s end computer to produce 21 VC12. It is alleged that Mr Wright of WorldCom asserted when asked that such a modification was not supplied by then. He informed Mr Murray of Primus that the circuit could only be effectively connected if Primus up-graded the circuit to type STM-1 at a price of $1.2 million. STM-1 was a circuit of three times the capacity required by Primus and represented by a DS-3 circuit. It is alleged by Primus that, because they had urgent need of a working circuit, they agreed to take the upgraded circuit at that price by entering into the Upgrade Agreement.

It is further alleged that after that agreement had been entered into WorldCom changed its position and offered to modify the circuit temporarily by re-mapping it to 21 x VC12 as originally requested by Mr Murray of Primus. This was agreed to by Primus and the circuit was put into service. For this purpose an agreement was entered into for “re-engineering” to a DS-3 provided as 21 x VC12, the contract for that remapped interface to be terminated after 6 months or on confirmation that the STM-1 upgrade had been effected.

There is also a counterclaim under which Primus claims damages for misrepresentation under section 2(1) of the Misrepresentation Act 1967.

This is put forward in respect of all the alleged misrepresentations relied upon.

It is submitted by Mr Michael Lazarus on behalf of WorldCom that:

there was no misrepresentation, even on the basis of what Ms McKibbin is alleged to have told Mr Hazard in as much as it was clearly no more than a statement as to information to be derived from WorldCom’s published accounts and, put at its highest, it was no more than an expression of opinion by an employee in the legal department of the claimant’s UK subsidiary who had no knowledge of the system of fraudulent accounting and is shown not to have held that opinion or to have held it unreasonably;

for the purpose of the law of misrepresentation one looks only to the mind of Ms McKibbin and not to the mind of the alter ego of the corporation unless there is evidence that the fact that she was making or had made those representations was known to the alter ego who knew that the opinion was untenable due to that person’s knowledge of the fraudulent accounting and there is no direct evidence or any basis for the inference that Ms McKibbin’s remarks were known to the alter ego, Armstrong v. Strain [1952] 1 KB 236 being relied upon;

the representation was not materially untrue at the time when it was made, which was April 1999 and continuing through 1999 until the Second and Third Agreements were entered into on 30 September 1999 as evidenced by the First Thornburgh Report at pages 102 to 104 which indicates in terms of earnings per share that Enron’s published accounts were improperly distorted for the second quarter and were improperly distorted for the third quarter, that the extent of the improper distortion was marginal in both cases and that it was not until the major distortions occurred in the course of 2000-2002 that this course of conduct would lead anyone to question the continuing financial viability of WorldCom;

the alleged misrepresentation contained in clause 7.1.1 of the three Agreements that WorldCom was “duly organised” under the laws of its state or jurisdiction of organisation was not established by evidence of improper accounting in as much as the words referred to the legal structure of the corporation and not to the quality or lawfulness of its accounts;

it was too late for rescission by service of the Amended Defence in as much as Primus used the circuits until the end of November 2001 (London-Frankfurt and London-Paris) or 21 February 2002, (all the others) and had, prior to service of that pleading already effectively terminated the three Agreements under clause 9.2 on the grounds of the Chapter 11 bankruptcy on 2 December 2002, having previously (22 March 2002) given notice of termination of the Paris-Zurich and London-Paris circuits in reliance on various outages over 18 months earlier;

Primus was prevented by the terms of all three Agreements and, of the Upgrade Agreement, in as much as it was a variation of the Third Agreement and subject to its terms, from relying on any representation not expressed in the Agreements themselves and was further precluded from relying on any representation, the relevant terms being clauses 7.2 and 19, which provide as follows:

“7.2

Save as expressly provided herein, no warranties, conditions, representations or agreements are expressed or implied by MCI WorldCom in relation to the Capacity. Notwithstanding anything to the contrary in this Agreement, MCI WorldCom does not warrant or represent that the Capacity will be fault-free and any implied warranties and conditions of any nature are hereby excluded.

19.

Entire Agreement

This Agreement constitutes the entire understanding between the parties relating to the Capacity and supersedes all previous agreements, understandings and commitments between the parties and all previous representations and warranties made by either party whether oral or written with respect to the Capacity. Each party warrants to the other that it has not relied on any such agreement, understanding, commitment, representation or warranty (whether oral or in writing) in entering into this Agreement.”

It is first necessary to consider whether WorldCom could be treated as representor in respect of misrepresentations made by Ms McKibbin, its subsidiary’s employee, in the course of negotiations for the terms of the three Agreements. The company which employed Ms McKibbin at all material times was MCI WorldCom Limited. That company was on the face of it acting as the agent of WorldCom in negotiating the Agreements with Primus. There is no basis for the inference that Ms McKibbin’s relationship to WorldCom was that of its employee as distinct from that of an employee of its agent. The material question is therefore whether if an agent for negotiating a contract makes such a misrepresentation in the course of the negotiations without the principal’s knowledge the representee is entitled to avoid the contract.

In general, where an agent enters into a contract on behalf of a principal and the opposite party has been induced to enter into it by an innocent misrepresentation by the agent, the opposite party is entitled to rescission provided that the making of a representation of that kind was within the actual or apparent authority of the agent: see Mullens v. Miller (1892) 22 Ch D 194 and Wanton v. Coppard [1899] 1 Ch 92 and Bowstead and Reynolds on Agency, 17^th Edn, para 8-098. Accordingly, if Ms McKibbin made a representation of fact of a kind which she had express or implied actual authority or apparent authority to make in the course of negotiating the Agreement and such representation was untrue, the misrepresentation would be an available basis for rescission of the contracts. Because the existence or otherwise of an innocent misrepresentation does not depend on the state of mind of the person making it since, ex hypothesi, fraud is not alleged, Armstrong v. Strain, supra, has no relevance. There would be no question of aggregating two innocent minds to create one fraudulent intent.

Accordingly, if statements allegedly made by Ms McKibbin were (i) representations of fact and (ii) were untrue without her knowledge and (iii) were of a kind which fell within the express or implied scope of her authority as an agent for WorldCom to negotiate the terms of the Agreements or were within her apparent authority, they could form the basis for a claim for rescission.

The proposition that an employee in the legal department of the UK subsidiary of a United States corporation would have authority to give answers to be relied upon by the opposite party to negotiations as to the existing or future financial viability of the parent company presents itself to me as completely unreal. In her second witness statement Ms McKibbin stated:

“Although the TCA’s were concluded between two US companies, because the circuits were provisioned in Europe, WorldCom UK negotiated the transactions on behalf of WorldCom. At all relevant times I was one of the Commercial Counsel within WorldCom’s international Legal Group, based in the UK and with responsibility for network transactions outside the US. I reported to the European General Counsel. In my position I did not have access to financial information relating to the fundamental soundness or financial state of WorldCom UK beyond what was in the public domain. This was even more the case when it came to the financial data of WorldCom. Although I did from time to time liaise with employees of WorldCom Inc and its subsidiaries in the US, I did not have information divulged to me regarding the fundamental soundness (or otherwise) of any of the US companies.”

This accords exactly with the manner in which in-house lawyers normally operate. Her authorised function was to negotiate the contract wording with Primus. She had no authority to bind WorldCom. She did not sign the Agreements on its behalf. The suggestion that Mr Hazard in particular or Primus in general were reasonably entitled to treat what she said as a representation as to its financial position authorised by WorldCom to be relied upon by them is, in my judgment, so unconvincing as to be completely fanciful.

Did she make any misrepresentations? What she is alleged to have said, and for present purposes it must be assumed that she did make those remarks, could not have been relied on as anything more than a comment obviously by way of opinion derived from matters of public knowledge as to the size and viability of the parent company. These views were not put forward as WorldCom’s appraisal of its present financial condition. Thus at paragraphs 10 and 11 of Mr Hazard’s witness statement he says:

“I do remember discussing the draft agreement with Ms McKibbin, after her fax, on a number of occasions. In particular I recall pursuing my concerns over the insolvency aspects of clause 9. I explained to Ms McKibbin that although WorldCom’s accounts seemed to show that it was a very large and sound company, Primus was proposing to contract for 10 years and was concerned that it would lose the benefit of all its capital payment if WorldCom became insolvent.

Ms McKibbin was dismissive regarding my concerns. She said that I was silly and that WorldCom was a giant company. She explained that it was strong and said words to the effect that it would be ‘here for the full 10 years’. She assured me that WorldCom would not become insolvent and said that in the circumstances WorldCom would not change the provisions relating to insolvency.”

The argument that the existence of WorldCom’s unlawful accounting practices commencing with the first quarter of 1999 called rendered the statements by Ms McKibbin misleading and were therefore implied misrepresentations unless corrected, does not stand up to investigation on the evidence of the position at that time. The accounts in question for the first quarter of 1999 show only an over-statement of earnings of US$85 million. This is not an immense exaggeration compared to the total earnings of the company. I am unable to accept either that unlawful accounting as to this single defect or that in the third quarter 1999 accounts either separately or in aggregate would suggest any significant risk of corporate total collapse over a 10 year period.

The defence nowhere states that the representation by Ms McKibbin was made recklessly or without regard to its truth or falsity or that it was fraudulent. Nor does it plead that WorldCom made a fraudulent misrepresentation to Primus. Nor does it raise a courterclaim for damages for deceit. Indeed its only counterclaim for damages in respect of these representations is under section 2(1) of the Misrepresentation Act 1967 which is confined to negligent misrepresentation. In case it be suggested, if this matter goes further, that the representation in question was fraudulent it is right that I should briefly cover this point.

It is submitted that the unlawful accounting practices were clearly known by Ebbers and Sullivan who were the alter ego or directing mind and will of WorldCom. Consequently, in order to establish a fraudulent misrepresentation by the company through the medium of its subsidiary’s employee, it is necessary to establish that the alter ego was complicit in the making of the misrepresentation. In Occidental Worldwide Investment Corporation v. Skibs A/S Avanti [1976] 1 Lloyd’s Rep 293 the following statement of principle in Chitty on Contracts, 23^rd Edn was approved by Kerr J. at p320.

“If one agent makes a fraudulent statement to another agent, intending the latter to pass the statement on to a third party, and this done, the principal will be liable; for in these circumstances the first agent is guilty of the complete tort of fraudulent misrepresentation, the second agent being his innocent agent.”

The following statement of principle in Bowstead on Agency 13^th Edn was also approved by Kerr J.

“The principal is liable if, while not expressly authorising the agent to make the false representation, he knew it to be untrue and was guilty of some positive fraudulent conduct, as by consciously permitting the agent to remain ignorant of the true facts, so as to prevent the disclosure of the truth to a third party, if the third party should ask the agent for information, or in the hope that the agent would make some false representation.”

This last statement is qualified in Bowstead & Reynolds on Agency, 17^th Edn, paragraph 8-185 by the additional sentence:

“The agent’s representation when made would of course require to be within the scope of his actual or apparent authority.”

In my judgment this qualification is clearly correct. The reference to “some positive wrongful conduct” is directed to the case where the principal does something with the intention that the innocent agent will mislead the third party by a misrepresentation due to his ignorance of the truth: see, for example, Carnfoote v. Fowke (1840) 6 M&W 358. Such cases turn on the principal’s intent to defraud the third party by means of the agent’s ignorance of the whole truth.

In the present case there is no evidence that suggests that Ebbers or Sullivan knew that Ms McKibbin was to make or had made the alleged representations to Mr Hazard or that they concealed the truth from her with the intent that she would make such representations. Moreover, as I have held, there is no basis for the inference that Ms McKibbin had actual or apparent authority to make representations as to the financial viability of the company.

Accordingly, applying the above principles, there is no realistic prospect of Primus establishing that WorldCom made a fraudulent misrepresentation through the medium of Ms McKibbin.

The submission advanced on behalf of Primus that the working of clause 7.1.1 of the Agreements amounted to a misrepresentation by describing WorldCom as “duly organised” under the laws of its state or jurisdiction of organisation is misconceived. That phrase is incapable of bearing the meaning accorded to it by Mr Tager QC on behalf of Primus. It refers to and only to the compliance of the legal structure and constitution of the company with the law of Delaware. It is to be distinguished from “validily existing” which refers to its incorporation and registration as a corporate legal person under the law of Delaware.

As to the submission that it is too late for Primus to rescind the Agreements because they have already been partly performed and because Primus had already purported to terminate them as it was contractually entitled to do by reason of Chapter 11 bankruptcy, or, in the case of two circuits, by reason of outages I hold as follows:

As to the argument advanced on behalf of WorldCom that Primus is prevented by clauses 7.2 and 19 of the Agreements from relying on the representations as a ground for avoidance, I reach the following conclusions.

Clause 7.2, the text of which is set out at paragraph (30(vi)) above, defines the excluded representations as being “in relation to the Capacity”. This is defined in clause 1.1 as follows:

“ ‘capacity’ means the point to point transmission capacity provided between the Sites, as detailed in Schedule 1 and, in respect of each Unit of Capacity, as further identified by the circuit identification number notified by MCI WorldCom to Primus.”

Reference to Schedule 1 indicates that Capacity is used to indicate the extent of availability of a particular circuit to transmit messages between a transmission point and a reception point. Accordingly, it is only representations in respect of the extent of such availability which are covered by clause 7.2. A representation as to the existing or future financial viability of the company therefore lies far outside the scope of this provision.

Clause 19 is similarly designed to refer to Capacity. On its proper construction the “agreements, understandings and commitments between the parties” and the “previous representations and warranties” are to be understood as confined to the Capacity and therefore to the extent of a particular circuit to transmit messages. This clause is therefore also far too narrow in scope to cover representations as to the existing or future financial viability of the company.

In view of my decision on the proper construction of these clauses it is unnecessary to consider the applicability of the Unfair Contract Terms Act 1977.

For these reasons, in particular those in paragraphs (34-37) I conclude that Primus has no real prospect of succeeding in its defence based on entitlement to rescind any of the Agreements on the grounds of Ms McKibbin's representations as to the financial viability of WorldCom.

This claim for damages is based primarily on section 2(1) of the Misrepresentation Act, 1967. An alternative case is raised under section 2(2) on the basis that a court might order damages in lieu of rescission.

Section 2(1) provides as follows:

“Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true.”

This provision operates by reference to whether the party to the contract who has made the representation or on whose behalf it was made would be liable for damages if the representation were fraudulent. On its proper construction the section is concerned only with the liability of that other party to the contract and not with the liability of an agent: see Resolute Maritime Inc v. Nippon Kaiji Kyokai [1983] 1 WLR 857.

Mr Lazarus submits on behalf of WorldCom that where, as in the present case, an agent has made a misrepresentation, it is open to the principal to avoid liability for damages by proving that the agent had reasonable grounds for believing that the representation was true and that the agent held that belief. He refers to the Tenth Report of the Law Report Committee, since the 1967 Act was intended to give effect to that Report: see William Sindall v. Cambridgeshire County Council [1994] 1 WLR 1056. That Report stated:

“18.

‘We accordingly recommend that any person who has, either by himself or his agent, induced another to enter into a contract with him by an untrue representation made for the purpose of inducing the contract should be liable in damages for any loss suffered in consequence of the representation. But the defendant should not be liable if he proves that up to the time the contract was made he (or his agent, if the representation was made by him) believed the representation to be true and had reasonable grounds for his belief.’ (emphasis added)

Clearly, if Mustill J. was correct in his construction of the section in Resolute Maritime v. Nippon Kaiji Kyokai, supra, in confining liability under it to that of the party to the contract by whom or on whose behalf the representation has been made, the only person whose belief or whose grounds for belief are relevant is that party to the contract as distinct from his agent. That would exclude consideration of the grounds for belief of Ms McKibbin and confine the investigation to the grounds for belief of the directing mind or will of WorldCom.

Mr Lazarus has drawn attention to the approach to the application of section 2(1) of the Court of Appeal in Howard Marine v Ogden [1978] 1 QB 574 and has submitted that this involved that it was sufficient for the defendant to establish that his agent whose misrepresentation induced the contract had reasonable grounds for belief and did believe the representation to be true. I am not able to accept that this approach can be extracted from the judgments. The Court of Appeal was clearly treating Mr O’Loughlin, the marine manager who had personally male the representation not as the agent of Howard Marine but as the company itself, presumably because he was the ultimate decision-taker on the contract in that case. Accordingly, it was never necessary to consider the position if the misrepresentation had been made by an independent contractor who was acting as agent for Howard Marine in obtaining the contract, but who was not its alter ego.

Although Mustill J. recognised in Resolute Maritime that views could differ on the issue he had to decide, I consider his construction of Section 2(1) to be correct. The “person (who) shall be so liable” must be the other party to the contract. If that is so, there is no way in which the words can bear the meaning that the person whose grounds of belief and belief in the truth of the representation are relevant can be a different person from the person who was a party to the contract. It was the express purpose of the Law Reform Committee, Report, paragraph 27 to identify circumstances in which the party to the contract who was the representor should be liable in damages. The Report was not in any way concerned with making his agent liable, although it does appear to have been its purpose to regulate the party’s liability by reference to the agent’s grounds for belief in those cases where the contract was made by an agent on behalf of the party.

In the present case, therefore, the relevant belief is that the alter ego of WorldCom and not that of Ms McKibbin.

However, the question whether there were reasonable grounds for belief in the truth of the representation and whether that belief was actually held can arise only after it is established that (i) the representation was untrue and (ii) if it was not made by the principal, it was made by an agent acting in the course of the actual or apparent authority given by the principal.

There is absolutely no evidence that WorldCom’s directing mind and will knew that these representations were to be or had been made to Primus. I have already held in parargraphs (34 and 35) that there is no realistic prospect of establishing that Ms McKibbin had authority of any kind to make representations as to the financial viability of WorldCom, her authority extending only to negotiation of the contract wording. Accordingly, the claim for damages under section2(1) of the 1967 Act does not get past the first stage.

It was argued by Mr Tager QC on behalf of Primus that it was at least arguable that Ms McKibbin was the mouthpiece of WorldCom for the purpose of explaining to Mr Hazard why the standard terms of the contract could not be amended in the manner he suggested and that the response which she gave to him, in as much as it referred to the existing and future financial viability of the company, was a response by the company itself, as distinct from its agent. Reliance was placed on the approach taken by the House of Lords in Tesco Ltd v. Nattrass [1972] AC 153 in deciding how to identify the directing mind and will of the company.

In my judgment the proposition that Ms McKibbin was for any limited function the alter ego of the company is simply unarguable.

In particular, there is no evidence to suggest that she was or might have been the ultimate decision-taker over the making of the Agreements or over the inclusion or exclusion of matters of substance in the contract in case of dispute or over the making of representations as to the financial strength of the company. Her function was as a negotiating technician responsible for the wording of the contract with reference to the transactions which had already been agreed in principle. Her position vis-à-vis Primus and what she told Mr Hazard are certainly not analogous to the position of and comments by the marine manager in Howard Marine v. Ogden, supra, for the purpose of section 2(1).

Further, even if it be assumed that Ms McKibbin was acting within the scope of her authority in making the representation, it is very difficult to see how an expression of opinion by her as to the future financial viability of WorldCom could not be shown by WorldCom to reflect its own belief and, at least in 1999, to represent a reasonably held belief on the part of its alter ego, notwithstanding it had by then started to produce unlawful accounts.

The alternative claim for damages in lieu of rescission under section 2(2) of the Act only arises on the basis stated in that provision that the representee is entitled to rescind the contract. I have held in paragraph (52) that Primus was not entitled to rescind on this ground and accordingly it forms no basis for an alternative damages claim.

As to proof of loss recoverable as damages under section 2(1), the approach has to be that, were there an arguable case on liability, Primus would have to establish on this application that it had suffered recoverable loss by reference to the same measure as applies to the tort of deceit and that the amount of such loss was equal to the claim or at least was such as to reduce the claim. The relevant principles were fully discussed by the House of Lords in Smith New Court Securities Ltd v. Citibank [1993] AC 254. This decision adopted as correct the reasoning and conclusions of the Court of Appeal in Doyle v. Olby (Ironmongers) Ltd [1969] 2 QB 158. The party induced to contract by fraud is entitled to compensation for all the damage directly flowing from his having entered into the contract, including unforeseeable and consequential loss. Accordingly, in order to arrive at the recoverable loss one does not investigate the position in which Primus would have been had it been told the truth (the contract measure of damages), but all the losses directly caused to it by having entered into the contract. The decisions of the Court of Appeal in East v. Mawer [1991] 1 WLR 461 and Clef Aquitaine SARL v. Laporte Ltd [2001] QB 488 indicate that the application of the Doyle v Olby test may involve investigating the extent to which the misrepresentation has caused the claimant by entering into the contract so induced to be in a worse financial position than if he had never entered into it and for that purpose to investigate what financial position he would have been in if he had conducted his business in the manner which he could have been expected to do but for entering into the contract in question.

It is to be inferred that in the present case, but for their contract with WorldCom, Primus would have purchased circuit capacity from some other circuit provider. There is no evidence as to how much it would have had to pay for such service.

However, it is appropriate to assume that it would have purchased long term capacity which would have been available to it for as long as that provided by WorldCom. Its hypothetical capital expenditure could be assumed to give it a benefit far in excess of what it derived from the three WorldCom Agreements. Accordingly, an arguable measure of loss would be the net value of that lost benefit. Having regard to the small proportion of the terms of the three Agreements represented by the period expired at the date of the termination for the Chapter 11 bankruptcy, it is justifiable to infer that if this matter went to trial the damages recoverable for misrepresentation under section 2(1) in as much as they reflected the loss of benefit under the WorldCom Agreements would be likely to exceed the amount of the claim.

Accordingly, if contrary to the conclusion at which I have arrived, I had concluded that Primus had a realistic chance of success on liability I should have held that their lack of particulars of recoverable damage under section 2(1) should not be a bar to concluding that their counterclaim had a real prospect of success in an amount which at least equalled the amount of the claim. Calculation of this type of loss by reference to a hypothetical commercial scenario is a complex matter and provided a reasonably reliable overall general view of the order of magnitude of recoverable damages could be arrived at, it would quite wrong upon a CPR 24 application to exclude the defendant from pursuing his counterclaim at a full trial.

As to the claimant’s submission based on section 2(2) of the Misrepresentation Act 1967, this only arises on the hypothesis that Primus is entitled to rescind the three Agreements. Its substance is that, given that the court can in an appropriate case award damages in lieu of rescission if of the opinion that it would be equitable to do so, in the present case the court is bound to conclude that it would be equitable to take this course rather than to treat the contract as rescinded.

In William Sindall v. Cambridgeshire County Council [1994] 1 WLR 1016 the Court of Appeal explained very fully the correct approach to the application of section 2(2). In the judgment of Hoffmann LJ. those matters are identified which the court must consider. There are the nature of the misrepresentation, in particular its order of magnitude in relation to the contract as a whole, the loss that would be caused by the misrepresentation if the contract were upheld, namely the damage caused by the property transferred under the contract, or put more widely, the subject-matter of the contract not being what it was represented to be and thirdly the loss that would be caused to the representor by rescission and the extent to which that was disproportionate to the loss that would be caused to the representee if rescission were not ordered: see pages 1036-1038 of the judgment of Hoffmann LJ.

It is to be observed that section 2(3) of the 1967 Act provides as follows:

“Damages may be awarded under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under subsection (2) shall be taken into account in assessing his liability under the said subsection (1)”

It is argued on behalf of the claimant that a court would be bound to withhold an order for rescission because Primus has suffered little or no loss caused by the misrepresentation because it stopped using the capacity before the collapse of WorldCom. Therefore any court would be bound not to order rescission.

In my judgment, the appropriate remedies, where rescission can be ordered, cannot be viewed in isolation. Any court would be bound to investigate the extent to which restitutio in integrum was possible, what damages would be recoverable under section 2(1) and whether, in view of the availability or otherwise of those remedies, it was appropriate, in the interests of equity to make an award of damages under section 2(2). For that reason I do not consider it possible at this stage to determine that a court would be bound to exercise its power to award damages in preference to rescission. Further, I am not persuaded that the fact that Primus stopped using the circuits in question leads to the conclusion that they have suffered no loss caused by the assumed misrepresentation as distinct from having entered into the Agreements. As I have already indicated in relation to section 2(1), they have arguably lost the benefit of the availability of the circuits for their use if they chose to use them for the whole of the unexpired period of the term.

Accordingly, I am unable to accept the claimant’s submissions based on section 2(2) of the Misrepresentation Act.

Are the Defendants entitled to Rescission of the Second and Third Agreements due to there having been misrepresentation by failure to disclose the pre-existing Service Orders or mistake?

This point (see paragraph (19) above) was pleaded in the original Defence and remained in the Amended Defence. It was repeated, albeit briefly in the defendant’s skeleton argument. However, Mr Tager made no oral submissions on the point, albeit he did not expressly abandon it. I therefore consider it.

The whole basis of this point is that the five service orders gave rise to contracts for the provision by WorldCom of the circuits covered by them on 2 August 1999 and that the existence of these documents was not disclosed to Mr Hazard when the Second and Third Agreements were presented to him for signature.

On 29 July 1999 WorldCom and Primus entered into an Option Agreement under which Primus was granted an option to purchase capacity on the five circuits ultimately covered by the Second and Third Agreements an the five service orders. The Option Agreement stated the capital cost of the capacity offered as $11.2 million and specified the annual charges. Primus was to be entitled to exercise the option up to 31 August 1999 by entering into an agreement with WorldCom whose terms were to be negotiated on the basis of the First Agreement and by paying 10 per cent of the purchase price.

The five service orders were signed on behalf of WorldCom and Primus on 2 August 1999.

On 17 September 1999 Ms McKibbin sent to Mr Hazard a draft of the Agreement covering all five circuits for signature, stating that WorldCom could not hand over the circuits until the Agreement had been executed and suggested a conference call to discuss the drafts. Various changes to the draft were then discussed. On 27 October 1999 WorldCom sent a copy of the Option Letter to Primus. On a date between then and 29 October it was agreed to divide the five circuits into two separate agreements because the term applicable to one of the circuits had been agreed to be extended from 10 years to 20 years and it was therefore thought appropriate to provide for that circuit in a separate agreement. The Second and Third Agreements were signed immediately.

The overall effect of these contacts between the parties was clearly, in my judgment, that the service orders were mutually intended to indicate that Primus wished to exercise its option to purchase the Capacity identified in the Option Letter and were signed as an indication to WorldCom that it should proceed with the technical arrangements so that the capacity would be available to Primus by October 1999. The Option Letter could be given effect to only by means of the execution of an agreement based on the First Agreement. That was accomplished by the signature of the Second and Third Agreements. The Option Agreement was not arguably superseded by the five service orders. The parties proceeded in accordance with that Agreement and the Second and Third Agreements ultimately executed were mutually intended to represent the contracts between them. In these circumstances, Mr Hazard’s ignorance of the earlier service orders is irrelevant. His function was to give effect to the exercise of the option.

This point is therefore unsustainable. The defendants would have no real prospect of success on it.

The claimant contends that in view of after events rectification is not an available remedy. It is submitted that by entering into the Upgrade Agreement the parties provided themselves with a solution to the problem arising from the mistake in the specification under the Third Agreement. That solution was freely negotiated by the parties. Primus has not alleged that it was caused to enter into that agreement by duress but has asserted that WorldCom simply took the position that it did not provide the permanent modification of the equipment, namely by computer re-mapping to 21 x E1 and was only prepared to supply as a permanent solution a STM-1 optical which for its own commercial reasons Primus accepted. That WorldCom then also offered to provide a temporary solution by means of the same process of computer re-mapping as it had declined to provide as a permanent solution was simply their commercial choice. Further, Primus was not misled by any misrepresentation by WorldCom. Murray’s witness statement showed that he believed that the required re-mapping was a matter of 10 minutes work and that he realised that WorldCom were refusing to co-operate.

Mr Lazarus submits in the alternative that if there were a breach of the Third Agreement in relation to the unsuitability of the DS-3 circuit as supplied, there is no basis for a claim for the price of the Upgrade ($1.2 million) as damages for breach on the ground that Primus was, as submitted by Mr Tager, mitigating its loss by entering into the Upgrade Agreement. In order to found such a claim Primus would first have to have treated the Third Agreement as terminated, which they never did.

The documents and other witness evidence before the court leave no doubt that, put very simply, what happened was as follows:

The correct analysis of what happened is thus that:

Having regard to these considerations, in my judgment, there is no basis for a claim for rectification of the Third Agreement. Nor is there any arguable basis for a claim for damages for breach of that Agreement. Primus was not induced to enter into the Upgrade Agreement by any material misrepresentation but rather by its immediate commercial needs when confronted by WorldCom’s refusal to provide a less expensive permanent technical solution to the problem.

Accordingly, I further conclude that there is no arguable basis for rescission of the Upgrade Agreement and there is no arguable foundation for a claim for damages under section 2(1) of the Misrepresentation Act 1967.

For the reasons which I have set out in this judgment I am not persuaded that the defendant has made good any reasonably arguable basis either for rescission of any of the three Agreements or the Upgrade Agreement or for a counterclaim for damages for breach of any of those Agreements or under section 2(1) of the Misrepresentation Act 1967.

It follows that the defendant has no real prospect of success on any of the grounds of defence pleaded in the Amended Defence.

There will therefore be judgment for the claimant in the sum claimed.