I-Way Ltd & Anor v World Online Telecom Ltd & Ors

The claimant (“I-Way”) was an internet service provider (“ISP”). At the relevant time, the defendant (“Localtel”) was engaged in offering telephony services including internet access to members of the public. Both companies were taken over during the events with which this action is concerned. But since the parties agree that any judgment against either of the claimants and the defendants respectively should be a judgment against both claimants or both defendants respectively, it is not necessary to elaborate on the corporate history any further.

Under an Agreement dated 21^st April 1999 (“the agreement”), the claimant agreed to provide internet access to the defendant’s customers. The relevant terms of the agreement were in summaryas follows:

Early on during the trial, I ordered that the hearing be limited to issues of liability. There was initially an exception to this ruling in the sense that I agreed to determine one issue of fact which related solely to quantum, namely whether the defendants had diverted customers at a date earlier that that which they conceded. In the event, this latter contention was abandoned by the claimants. This left four primary issues between the parties.

The first is an allegation of misrepresentation which arises in the following way. The claimant says that, prior to the agreement being concluded, the defendant provided projections to the claimant about the following three matters:

The claimant says that the projections were made in circumstances amounting to an implied representation that the defendant had reasonable grounds for the projections. Moreover, the claimant says that the defendant held itself out as having relevant knowledge such as to enable it to make reliable projections as to the likely volume and use of the internet platform which the claimant was to construct. The claimant further says that it relied upon these projections in assessing the likely capital expenditure required and in calculating its likely monthly revenue during the subsistence of the agreement and thus to determine whether or not to enter into the agreement and, if so, on what terms.

The claimant says that the defendant had no reasonable grounds for the projections: a reasonable and careful assessment would have resulted in a much higher rate of take up, a much longer average call length and a much lower rate of daytime use. The claimant also says that the projections were in fact inaccurate in that the timing of the calls were not as projected such that the income stream was much less, and the volume of user and the call profile were such that the equipment required was much greater, than could have been allowed for on the basis of the defendant’s projections. The result was that the sums agreed to be paid to or retained by the claimant were too low in all the circumstances.

The claimant says that if the representations had not been made, it would have required the defendant to produce reliable projections. If the defendant had produced reliable projections, the claimant would have required an initial fee of £400,000 and the right to retain 40% or in any event no less than 30% of the telco rebates and that the defendant would have agreed to such terms. The same would have occurred if the defendant had said that it was unwilling or unable to produce such projections, provided that the defendant had assured the claimant that there would be substantial user. Thus the claimant says that the defendant is liable in misrepresentation and/or negligent mis-statement in respect of the difference between the sums which it actually earned under the agreement and the sums it would have earned under the agreement containing the different terms which, it says, it would have negotiated.

The defendant, in response, says that there were no firm projections or representations and that the figures were mere guesswork (whether made by the defendant or jointly with the claimant) and expressed as such. Further, the defendant says that there was no reliance on the projections. In any event the defendant denies that it would have agreed to the more preferential terms which the claimant says it would have sought.

The second primary issue concerns the outcome of a meeting between the parties about two weeks after the agreement began. The meeting took place on 14^th May 1999 between the respective directors of the claimant and the defendant. The claimant says that it was agreed at that meeting that the amount of the rebate which the claimant had to pass to the defendant should be reduced from 80% to 70%. The defendant says that it did not agree to give up the additional 10%, but agreed only that it would not require that sum to be paid immediately, in order to enable the claimant to fund the provision of the additional equipment required, and would instead “accrue” the amounts due and invoice the claimant for the total at a later date.

The claimant confirmed its understanding of the outcome of the 14th May meeting in writing by a letter dated 17^th May 1999. The defendant contends that it responded by a letter dated 18^th May 1999 rejecting the claimant’s understanding and spelling out its own. The claimant denies having received this letter and alleges it to have been created at a later date.

In any event, the defendant contends that the alleged variation to the arrangement contended for by the claimant was ineffective in law because there was no consideration for it and also by reason of a provision in the agreement that any variation must be in writing and signed by the parties. It was on this latter basis that the defendant applied earlier for summary judgment on its counterclaim for the 10% “accrued”. But this application was unsuccessful, the Court of Appeal holding that the matter should go to trial.

The third issue concerns steps taken by the defendant about 20 months into the agreement to establish its own server. From 8^th December 2000 and thereafter, the defendant concedes that it took steps which had, and were designed to have, the effect of diverting (the defendant says “migrating”) all its actual and prospective customers away from the claimant’s server. The claimant contends that the said diversion was in breach of an express or implied term that the defendant would direct all of its users to access the internet via the claimant’s server or that it would not take steps that were designed to have the effect of diversion. The defendant contends that there was no such implied or express term, and that the “migration” was permissible under the Agreement.

The fourth primary issue concerns the impact of the refusal of the claimant to pay the cumulative balance of the share of the rebate originally agreed. In August 2000 the defendant invoiced the claimant in respect of 10% of the telco rebates since the beginning of the agreement, being a sum of over £700,000. In February 2001, the defendant claimed by its defence in this action that the claimant’s failure to pay the 10% difference, which then amounted to over £1 million, amounted to a repudiatory breach of the contract, which the defendant thereby accepted. The claimant says that this money was not owed, that it was in any event entitled to set off its own claims, that there was in any event no repudiatory breach (the claimant prior to the purported acceptance seeking by these proceedings that the Court should resolve the contractual issues) and that the purported termination was of no effect so that the agreement continued thereafter until, after three years, it expired by effluxion of time.

In October 1998, British Telecom (“BT”) launched a new wholesale service that enabled other companies to take responsibility for BT’s residential customers. Such companies could make money by reason of the difference between the price they paid BT for wholesale minutes and the price at which they sold those minutes on to final customers. Part of that difference was represented by a rebate paid by BT to such companies on the cost of the calls made by their customers. The amount of that rebate varied depending on the number of call minutes generated by the customers of that operator in any one month.

The amount of the rebate also depended on the times at which the customers made their calls. A higher level of rebate was payable on peak-time than on off-peak calls, reflecting the higher cost of such calls, and a somewhat higher rate of rebate was payable on evening as opposed to weekend calls.

Seeking to take advantage of the new market, Localtel was incorporated the same year and launched a voice telephony service for the residential market in the Godalming area. Part of Localtel’s business idea was to offer its customers access to the internet in addition to voice telephony. At the time, most companies which offered internet access charged customers both the cost of the internet telephone calls and a subscription fee. Localtel intended to attract customers by offering them subscription-free access to the internet. Such customers would only pay for the cost of the telephone calls by which they obtained such access and the cost of the CD-ROM containing the software to enable them to do so through their home PCs.

At an early stage, Localtel was forced to change its business strategy because in January 1999 the ‘Freeserve’ service was launched by Dixons, an electrical retailer. This service gave consumers subscription-free internet access and, in addition, provided the CD-ROMs for free. Localtel therefore came up with an entirely new business idea, which was to give its customers free access to the internet at off-peak times. Localtel would still have to pay BT for the minutes used by customers accessing the internet at such times; it hoped to recoup the cost of such minutes by the margin it made on voice calls and by profits from advertising. This was a ground-breaking business idea, because no company in the UK had ever before offered its customers completely free internet access.

A company which enables customers to access the internet through their home PCs is known as an ‘internet service provider’ (thus ‘ISP’). Certain equipment is required in order to provide such access, primarily modems and computers. The equipment owned by an ISP which enables customers to access the internet is referred to collectively as its ‘platform’ or its ‘server’. Localtel did not own such a platform. In order to provide internet access to its customers, therefore, Localtel had to conclude an agreement with an ISP whereby that ISP would make its platform available to Localtel’s customers for the purpose of accessing the internet.

In addition to owning the UK telecom network, BT also acted as an ISP. In early 1999, negotiations took place between Localtel and BT with a view to the provision of an appropriate platform and a letter of intent to that end was signed in February 1999. However, it appears that these negotiations foundered some time in late March or early April 1999. The stumbling block was the substantial up-front payment sought by BT in the region of £1million.

By this time Localtel had entered into an agreement with the Tempo group of stores for the launch of an internet service to be entitled “screaming.net”. The retailer had about 44 stores. The arrangement was that Localtel CDs were to be given away with Tempo’s “Computer Buyer’s Guide”. The date set for the commencement of the service was the 29^th April, with a press launch set for the same day.

With this date fast approaching, Localtel got in touch with I-Way with a view to I-Way providing a platform instead of BT. A meeting was set up for the 8^th April. The meeting took place at I-Way’s premises in Reading. The attendees on behalf of Localtel were Mr. Jeremy Stokes and Mr. Derick Martin, the sole directors and shareholders of the company. As regards I-Way, the meeting was attended by Mr. Glenn Rothwell (the managing director), Mr. Dick Houghton (sales manager) and Mr. Steve Leitch (finance Director). All five gave oral evidence during the trial.

The meeting was brief, lasting about 20 minutes. During it, Mr. Martin and Mr. Stokes explained their business idea and the timescale involved. Later the same day Mr. Houghton went to Localtel’s offices in Godalming where Mr. Stokes gave a fuller explanation of the system whereby telecom operators could make a profit on the buying and selling of minutes.

A further meeting took place on the 12^th April 1999. Mr Rothwell had by now gone on holiday. His place was taken by Mr David McCarthy (sales director). He also gave evidence at the trial. There were also a number of telephone calls and e-mails in the interim, primarily between Mr. Stokes and Mr. Leitch. It was during one or more of these meetings and other exchanges that the claimant contended that representations were made by the defendant as regards their expectation of the number of customers that would take up the service each month, the profile of the use of the service by customers as between the day, the evening and the weekend and the time spent by a customer using the service each day.

Heads of Agreement were signed on the 13^th April. The next stage was for I-Way to reach an agreement with a telecoms provider for the routing of calls made through the server. This was duly accomplished by the 20^th April. The company selected was Colt Telecommunications Ltd (“Colt”). The deal was for a sliding scale of percentage rebates, reaching 50% once a figure of 15 million minutes per month was achieved. This was reckoned by I-way to require about 28,000 users by the end of month two, a threshold that was not anticipated to be a problem, as Mr Leitch of I-Way put it to Mr Stokes of Localtel in an e-mail of the 20^th April, “based on your numbers to us”.

The agreement between I-Way and Localtel was executed on the 21^st April and the service got under way on the 29^th April. It was highly successful in terms of customer take up. Indeed, by the time of the meeting on the 14^th May, over 24,000 customers had registered. However the profile of utilization was very unattractive in terms of revenue. In particular, the daytime use was only about 13%. It was the claimant’s case that it was this situation that led the I-Way representatives at the meeting to seek a revision of the revenue sharing agreement to the effect that I-Way would retain 30% of the rebate not 20%.

It is the claimant’s case that the defendant agreed to this alteration albeit reluctantly. It was submitted that this was confirmed as such in a letter dated the 17^th May from Glenn Rothwell of I-Way to Jeremy Stokes of Localtel:

“Thanks for meeting with Steve Leitch and I last Friday. I am really pleased that the Screaming.net business is such a success for you. May I confirm our agreement that the retained call revenue will change from the 20% originally shown in the contract to now be 30%. This will enable I-Way Limited to adequately fund the provision of equipment now that the take up has doubled over the original estimates.”

The defendant’s primary case is that all that was achieved at the meeting was a temporary arrangement where by 70% would be passed on but, whilst the arrangement lasted, the balance of 10% would be “accrued” for later payment. This understanding was said to be reflected in a letter to I-Way dated the 18^th May. I quote it with all its typographical and grammatical errors which were said by the claimant to be revealing:

“Thank you for your letter dated 17^th May the content of which has been noted with interest and confusion, our interpretation of the points discussed are as follows.

You indicated that I-way would find it difficult “In your words” to continue with the service if the minute profile was as indicated by the first two weeks of usage continued, our immediate reaction is to ask, Are you committed to the service?

Whilst we sympathise with your situation and in some respects have to ask for your continued support during these difficult times, We can Not and have Not agreed to a material change in our terms of rebate, both Jeremy and myself agree that we will accept part payment i.e.: 70 % of the rebate to assist your cash flow and investment requirements but we will accrue for the revenue and invoice at a later date.

Clearly this is a contentious issue for both parties but we cannot be browbeaten into a situation that will disadvantage our future position.

I hope this letter is taken in the sprit written, as our continued relationship is paramount to the success of Screaming.net, which has got of to a fabulous start.”

As already indicated, the authenticity of this letter is in issue. The claimant says that it was not received (this appears to be accepted). But the claimant goes further and say that it was never sent. Indeed, the claimant says that it was written much later and that it is in fact entirely bogus.

The defendant’s alternative case is that, if there was an agreement to vary the contract at the 14^th May meeting as contended for by the claimant, such was by way of settlement or compromise of any claim by the claimant that might arise from any misrepresentations or misstatements made prior to the agreement. In these circumstances (bearing in mind that the repudiation claim is also dependent on the defendant establishing its version of the outcome of the 14^th May meeting), it is convenient to start by considering the second primary issue referred to above – namely the outcome and effect of that meeting.

It is not necessary to spell out the detail of the manner in which, as from the 8^th December 2000, Localtel diverted the existing and potential customer base from the I-Way server to its own newly established server since it is conceded by Localtel that it took steps which were designed to achieve that end. The only issue, classified by the parties as one of “exclusivity”, is whether Localtel was in breach of the agreement in taking those steps. I deal with this aspect later on in this judgment.

Those who attended the 14^th May meeting all gave oral evidence at the trial. In regard to the essential dispute as to the nature of the agreement reached, the cross-examination of Mr Martin and Mr Stokes by Mr Freedman QC was to my mind highly effective. Mr Stokes was reduced to placing great emphasis on the proposition that the commercial operation of the agreement was very much Mr Martin’s responsibility, with he, Mr Stokes, being occupied with other more pressing matters. Mr Martin was an unsatisfactory witness: when faced with any difficulty, he came across as evasive and thus unconvincing.

Nonetheless, it must be borne in mind that the discussions they were seeking to recall took place over 4 ½ years earlier and thus memories can easily have become dimmed and distorted. In the circumstances, my approach has been much influenced by the helpful observations of Lord Justice Robert Goff as he then was in The Ocean Frost [1985] 1 Lloyd’s Rep. 1 at p. 57:

“It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses motives, and to the overall probabilities, can be of very great assistance to a Judge in as certaining the truth.”

It is common ground that, at the meeting, the representatives of the claimant made it clear that I-Way wanted its share of the income stream increased from 20 to 30%. The rationale for such a request was, in part, also uncontroversial. The parties had been working on the assumption that something in the region of 20,000 users would register each month (for this purpose it matters not whether that was a reasoned projection or a guess). In the event, some 24,000 users had registered in the first 15 days. From I-Way’s point of view, this would require, at best, an accelerated investment in the platform if the same standard of service was to be maintained and, at worst, a substantial increase in the anticipated overall investment in the event that this enhanced rate of registration was maintained.

The claimant’s case was that its representatives at the meeting were also greatly concerned about the call profile that had been established in the initial period, with only 13% of calls being made in the high rate daytime period. The claimants had adopted a profile for planning and budgeting purposes involving 20% of daytime use (again for this purpose it matters not why such an assumption had been made). Initially, the representatives of Localtel were minded to assert that the call profile played no part in motivating the proposal for a variation of the income sharing arrangement but in the course of their evidence both Mr Martin and Mr Stokes accepted that it had. Indeed, that such was the case is a clear inference from a contemporary note of Mr Martin.

The first difficulty that I have with the defendant’s case on the nature of the deal reached (viz. mere postponement of payment of 10%) is that I am very doubtful whether any of the participants in the meeting, and in particular the claimant’s representatives, would have had any understanding of the concept of “accrual”. Whilst it is probably a term in common parlance amongst accountants, if such a proposition had been advanced by Messrs Martin and Stokes, the claimant’s representatives would almost inevitably have sought an explanation of what was involved. But no such elaboration is said to have been sought, let alone given.

In any event, against the background of higher than anticipated expense and lower than anticipated premium income, the nature of the bargain which the defendant alleges was struck makes no commercial sense, something which would have been emphasised by any further explanation. On the face of it, the package which the defendant says was agreed consisted of what I categorized during the evidence as no more than a short term interest free loan, repayable on demand. This would afford no assistance whatsoever to the claimant in meeting any additional expense or making good any shortfall in income. (I should make it clear that the defendant disclaimed any alternative case involving a temporary waiver of liability for 10% of the income stream with the full 80% being reinstated on notice). The acceptance of such a proposal is made all the more astonishing given the defendant’s insistence that the negotiating stance adopted by the claimant was robust, if not threatening. In short the probabilities, given that all the participants in the meeting accept that an agreement was achieved, give support to the version contended for by the claimant being correct.

I will revert to the defendant’s letter of the 18^th May quoted above later. But I propose first to consider whether the subsequent exchanges between the parties are also consistent with the claimant’s version. In my judgment they are: equally they are inconsistent with the defendant’s version.

On the 11^th June 1999, Mr Martin sent an email to Mr Leitch. In it he appeared to suggest that he wanted to revisit the statistics from Colt pending which an 80% share should apply. Mr Leitch’s reply was: “Derick we are also awaiting a final, final figure from Colt and will advice accordingly. However our preliminary investigations suggest we are not far from the revised and already agreed calculation and will run with the figure of 30%.” Mr Martin never came back. It may be that Mr Martin was having second thoughts about the arrangement and was hoping that the percentage of day calls had taken a turn for the better. In fact they proved to have got worse and had gone down to 9%.

On the 1^st July 1999, Mr Martin, having been notified by Mr Leitch that Localtel would be credited with £63,000 out of the £90,000 June rebate, sent an email to the following effect:-

“Your figure is based on 70/30 to which we have not formally agreed, I consider a little more talking on SLG’s is required before I-Way can expect us to forfeit a very substantial amount of money, at this time it would be cheaper to give interest on late payment to maintain good will. I do not expect this to be a one-way street.”

The contents of this email are entirely inconsistent with an agreement for accrual. Indeed the message implies that the variation in the share was at least informally agreed and, accordingly, if effective, the 10% share would be lost permanently. No question of a “forfeit” arises for a loan accruing month by month which could be called in at any time.

It is not clear that this email of the 1^st July was actually replied to by Mr Leitch, but he did draft a reply for consideration by Mr Rothwell:-

“Your figure is based on 70/30 to which we have not formally agreed … Yes we have – it was agreed at the meeting between Jeremy Glenn you and myself. It was agreed that the 70/30 split would apply until it was proved that there was a move towards the original 20/40/40 standard/evening weekend profile … We now need to knock this one on the head. It was agreed at 70/30 split and all this current profile proves is that we were right in our assessment. All credits to you will be based on the 70/30 split.”

This message is entirely consistent with an amended rebate, provoked by a less advantageous profile than originally perceived. I shall revert in due course to the contention tentatively raised during the oral evidence but only fully formulated during the final speech of counsel for the defendant that the agreement was for accrual until such time as the originally perceived profile was achieved or at least approached.

On the 26^th July 1999, Mr Martin sent a further email to Mr Leitch:-

“I am sending over the payment due as discussed. We need to clarify the Colt revenue split as the way things are progressing Localtel cannot justify the extra 10%….at the rate of usage this could equate in excess of 250k pa …”

Again, this email is inconsistent with an existing agreement to forego 80/20 and accept 70/30 in its place. The build up of a shortfall of £250,000 could not occur if it was open to Localtel to submit an invoice at any time. I accept the claimant’s submission that it reflects an agreement to forego the 10% for the duration of the agreement, something Mr Martin was perhaps anxious to renegotiate.

This view is confirmed when regard is had to the subsequent exchange that day. Mr Leitch’s response was predictable:-

“Derick the only way we can justify our (I-Way) model is if we can all get back to the original dial-in profile of 20:40:40. You are right in that with the profile moving more to 6:48:46 none of us are making the monies we were expecting. However, as we have discussed many times a verbal agreement was entered into concerning a 70:30 split; we have based our calculations on a particular value for an average minute and the model doesn’t work at all unless this minimum figure is achieved. Unfortunately even with the 70:30 split we are close to not achieving this figure.”

If the defendants version of the 14^th May meeting was correct, it might be expected that the inevitable and immediate counter would be a reference to the 10% difference being “accrued” and at least a threat to invoice for it. Yet Mr Martin merely replied: “Thanks Steve I hope you are relaxing”.

It should also be noted that all the emails from Mr Martin quoted above were copied to Mr Stokes. Whilst Mr Stokes had largely delegated management of the I-Way contract to Mr Martin, nonetheless it would be expected that Mr Stokes would intervene if either side could be perceived to have wholly misunderstood the agreement reached at the 14^th May meeting. Yet no intervention was forthcoming.

On the 10^th February 2000, Mr Martin sought by email to insist that, although I-Way had used a 70/30 split, this was inconsistent with the contract. (I will revert later to the significance of the concurrent due diligence exercise being conducted by Ernst & Young on behalf of World On-Line who were in the process of negotiating to purchase Localtel). Mr Leitch replied immediately to say that the 70/30 split had been agreed (although recognizing that a formal amendment to the agreement probably needed to be affected).

Mr Martin’s response was to assert: “not at any time have Localtel agreed to a 70/30 Split”. This response is entirely contradictory to his account of the meeting in which he claims that an agreement was reached which indeed was for a 70/30 split. The additional comment in the e-mail that “as far as Localtel is concerned we are showing the balance due as a debtor” is also impossible to reconcile with the proposition that the outcome of the meeting was for the 10% to be accrued pending presentation of an invoice. Indeed otherwise it would be anticipated that Localtel would have taken the opportunity to call in the loan by way of presentation of an invoice for the substantial sums that had already then “accrued” (already about £200,000), all the more so when Localtel was by then suffering from severe cash flow problems.

Mr Martin’s email went on: “If you feel that we have [agreed to a 70/30 split] please provide the documentation”. This is a particularly striking example of the strange failure throughout the correspondence to refer to the letter of the 18^th May which challenged root and branch any agreement as postulated by I-Way. My own conclusion is that Mr Martin was simply seeking to undermine the claimant’s stance by directing attention to the absence of a formal amendment to the agreement.

Albeit internal, it is worthy of note in passing that Mr Leitch sent an email to Dick Houghton on the 7^th June 2000 which records the profiles that had been achieved over the previous 12 months. This demonstrated that daytime use remained well below 10% throughout the year until April 2000 when it increased to 14% and May 2000 when it increased further to 23% (no doubt reflecting the introduction of newly priced products by Localtel in April). The email contains this passage:-

“For clarity the original deal was premised on a minute split of 20% Day, 40% Evening and Weekend 40%. On day one we were running at a much worse day time split (nearer 12%). This obviously prejudiced us and made the running of the service untenable. We (Glenn and myself) confronted Derick and Jeremy with these facts and forced them to verbally (subsequently followed up with a letter from Glenn of which I have a copy) agree to a 70/30 split with an agreement to review if the minutes moved back in their favour. Patiently this has now happened and we should (honorably) consider going back to the original agreement deal of 80/20 …”

This email is again entirely consistent with I-Way’s case as to the motivation for seeking an amendment to the split and the outcome of the 14^th May meeting.

Localtel suddenly issued an invoice six months later in August 2000. This on its face explained the sum claimed (£841,682.97) as follows:-

“The invoiced amount represents the additional 10% to be invoiced as per the contract to comply with the contract terms of an 80% rebate share.”

This description is wholly at odds with the presentation of an invoice being by way of termination of an agreement allowing temporary retention of a 10% share. Only something along the following lines would be consistent with Localtel’s case:-

“The invoiced amount represents the 10% rebate share accrued as per the arrangement made on the 14^th May 1999.”

In short, the natural inference from the fact that the invoice was not issued earlier is that there was no question of Localtel having made a loan that it was free to call in at any time.

Mr Leitch responded to the presentation of the invoice on 11^th August. He did so by letter:-

“…We do not accept this invoice. It is erroneous in content and wholly outside the terms as agreed at a meeting held between Messrs Rothwell, Stokes, Martin and Leitch on 14^th May 1999, subsequently documented in a letter to Mr Jeremy Stokes on 17^th May 1999 by Mr Rothwell …”.

It is striking there was no written response to this letter by Localtel, let alone any reference to their letter of the 18^th May. Yet the attempt by I-Way (on Localtel’s case) to continue grossly to misrepresent the outcome of the 14^th May meeting would on the face of it call for a reiteration in the strongest terms of the content of the letter.

As already indicated, the likely explanation is that it was the absence of any written amendment to the contract which was tempting Localtel to try it on. It appears that Mr Martin having received the letter, telephoned Mr Leitch on the 14^th August and, having complained that I-Way were in default in not paying the invoice, simply threatened to issue a Statutory Demand for payment. The explanation for this abrupt approach was probably the imminent lapse of the debt for the purposes of the share sale agreement between World Online and Localtel, the details of which I do not believe is necessary to embark on save to note that it was on the 22^nd August that there was an extension of time accorded by World Online for recovery of the outstanding debt balances.

It was not until October 2000 that the first mention of any accrual of the 10% was made by Localtel to I-Way. The occasion was a meeting on the 10^th October attended, amongst others, by Steve Leitch (SL) Jeremy Stokes (JS) and Derick Martin (DM). A note of the meeting reads as follows:-

“SL stated the position from I-Way (now VIA) standpoint in that on the 15^th May 1999 a verbal agreement was reached between I-Way (Glenn Rothwell and SL) and Localtel (JS and DM) confirming that the 80-20 split was untenable, based on the real profile of minutes and that I-Way needed an agreement to move the service to a 70-30 split instead. Neither JS nor DM disagreed that there was a conversation took place, in fact confirmed same, however, JS admitted that they were under pressure to agree to same as the service needed to continue, to be successful and that was in danger of not happening unless they agreed to I-Way’s request i.e. they absolutely agreed that a verbal agreement had taken place but this was not valid unless in a written contract format. SL then stated they had received the letter from Glenn Rothwell confirming the verbal agreement and this was not disputed as having been received. There was no written dispute over the contents of this letter and as such would stand up in a court of law if it became appropriate. DM stated that this was never agreed on a contractual basis and therefore was invalid. SL stated that despite there being no written contract there was a verbal agreement and that would stand up in law. KW intervened and questioned both JS and DM as to the exact nature of the agreement at the time and both confirmed our reading of the situation. DM felt it appropriate to expound upon the fact that WOLT had accrued for the 10% in their books as that they had wanted to help us out at the time on a cash flow basis only. SL stated that both accruals and cash basis were never mentioned at that original meeting.”

The accuracy of this note was not seriously in issue. It is illuminating in various respects:-

So much for the correspondence and other contacts between the parties. I now turn to consider the management accounts of Localtel in the light of Localtel’s contention that there was an agreement for the 10% to be accrued pending presentation of an invoice. At first blush, the position was clear – namely that, despite the alleged agreement for accrual, no entry was made for the 10% in the monthly management accounts for the period from May 1999 onwards until, in December 1999, a “rate adjustment” was suddenly effected to include the accumulated 10% in the sales figures.

Mr Martin’s evidence was to the effect that, although there was an agreement to accrue, he had decided not to record the accrual because he took the view that it was not necessary to put such information in the monthly management accounts, but only in the year end accounts because they might be shown outside the business. (By December, negotiations for the purchase of Localtel by World Online were well under way)

In startling contrast, the defendant also relied on the evidence of a Mr Fulton, an accountant formerly employed by Localtel’s auditors. His evidence was to the effect that he had prepared monthly management accounts containing the appropriate accrual, but these were an entirely separate set from those disclosed which had been prepared by someone else. Notably none of this appeared in his witness statement.

This position was thoroughly unsatisfactory. For instance:-

I agree with the claimant that the proper and fair inference is that there was only one set of accounts and that the fact they did not contain the monthly accrued sum is strong support for the proposition there was no agreement to accrue.

This conclusion is further fortified by consideration of the content of the Ernest & Young report prepared for World Online as part of their due diligence exercise. The authors had access to the management accounts referred to above and noted “the adjustment” contained in the December accounts. The report goes on:-

“Historically I-Way had only rebated to Localtel 70% of its income received from Colt, not 80% as per the contract. We have been advised by Localtel management that I-Way has been informed of this error and have agreed to rebate the additional 10% payable under the terms of the contract. This amount is the “Rate Adjustment”.

Once again this is wholly inconsistent with Localtel’s case. The explanation for the shortfall in question was not that the sum was being accrued pursuant to an agreement made in May (indeed by definition there had been no such accrual) but that there had been simply an error and that I-Way had agreed to pay the additional 10%.

I accept I-Way’s case that “Localtel’s management” who gave this information must be a reference to Mr Martin. Yet it was entirely false information:-

It follows that this wealth of contemporary material (leaving aside the controversial letter of the 18^th May) is all consistent with my assessment of the probabilities of the outcome of the 14^th May meeting. Accordingly I now turn to that letter which Localtel contends was written and sent by post on the 18^th May. It was the claimant’s case that they did not receive it. That much seems to be common ground. It was not suggested on behalf of Localtel that the letter had been received at I-Way’s offices but somehow had not come to the attention of the addressee Mr Glenn Rothwell.

It has to be Localtel’s case that the letter was lost in the mail. This is, of itself, improbable, the more so when it involves the striking coincidence that such a fate befell the only relevant letter dispatched by Localtel to I-Way. The only alternative consistent with the letter being genuine is that the letter was written and filed but for some reason not sent in May 1999. Not surprisingly, this alternative was not supported by Localtel’s evidence. The only remaining explanation is the letter was written and filed at some later date but not sent, the scenario which renders the letter in effect a forgery.

There are various factors which merit consideration in regard to the genuineness of the letter:-

The disclosure process also raises concerns as regards to the authenticity of the letter. In January 2001, I-Way’s solicitors forwarded a draft claim and statement of case to Localtel. This led to Messrs Linklaters being instructed by Localtel. Linklaters responded to the draft on the 1^st February. As regards the paragraph dealing with the alleged reduction in rebate from 80 to 70%, the following passage is contained in their letter:-

“In any case it is denied by our clients that there was a factual agreement to this effect. The existence of a letter from your clients purporting to “confirm” such an agreement is self serving and inconsistent with a number of written responses from our clients. Most obviously, on the 18^th May 1999, immediately upon receipt of Mr Rothwell’s letter purporting to record the alleged agreed variation, Mr Martin on behalf of our clients wrote back to Mr Rothwell unequivocally and completely rejecting his interpretation of events and expressly insisting that the 80% level was still binding and would be enforced by Localtel. Mr Martin indicated the agreement to accept 70% as part payment was simply to address your clients’ then cash flow and investment requirements. There can be no more decisive or conclusive answer to your clients’ assertion in this regard …”

Messrs Eversheds, on behalf of I-Way, immediately asked for a copy of the letter. It appears from a document, in respect of which privilege was waived during the trial, that Linklaters only received a copy of the letter, faxed direct to them by Mr Martin, on the 1^st February. Linklaters’ comment in the letter on the 6^th February was as follows:-

“We enclose a faxed copy of the letter of 18 May 1999 to which you refer. Subject to taking further instructions, we believe the letter was sent by post (as was Mr Rothwell’s letter to Mr Stokes sent on the previous day). …”

(Notably, there then followed negotiations for the amendment of the share purchase contract, leading to an agreement on the 28^th March by World Online to pay Mr Martin and Mr Stokes a share of the rebate recovered from I-Way as a result of these proceedings.)

In their Reply dated April 2001, I-Way pleaded not only that it had not received the letter but expressly did not admit that the letter had been sent at all. Thus, the content and format of Localtel’s files were obviously of some significance. In addition, Miss Spiteri gave evidence to the effect that she typed a number of letters each day. Copies were then inserted in a general correspondence file in chronological order and further copies were inserted in an individual customer file.

As regards the general file, which presumably should have the 18^th May letter in chronological sequence, this has not been produced, despite the fact that Mr Martin gave evidence that Miss Spiteri had furnished him with a copy of the letter from that very file at some unidentified stage after the dispute arose. As regards the I-Way customer file, the relevant letter was disclosed, outside the covers of the file, within another folder apparently prepared (or at least retained) by Mr Martin. (I-Way had also sought disclosure of other letters typed by Miss Spiteri but Localtel had been unable to locate any such examples.)

The non-production of the relevant files and of sample letters typed by Miss Spiteri is rendered the more surprising when the only explanation tendered (without any appropriate comment in the list of documents) is the move by Localtel from their Godalming offices in June 2001, by which time the pleadings were closed and a summary judgment application had already been issued by Localtel. This was said to give rise to the inference that they had been accidentally destroyed.

I have well in mind the heavy burden of proof that rests on a party who seeks to establish that a document is bogus. Nonetheless, for all the reasons outlined above, I have come to the clear conclusion that the 18^th May letter was never sent. This of itself undermines the evidence of Mr Martin and deprives the content of the letter of any reliable evidential value. But I go further and conclude that it was not a contemporary letter. It was written and typed at some later stage by Mr Martin. Quite when remains obscure. Its relatively elaborate content is inconsistent with it having been prepared in haste. But the important thing is that it was clearly prepared by way of reinforcement of a proposition known to be untruthful that the meeting in May had led to an agreement for accrual.

Before leaving this topic, I must deal with two alternative propositions advanced by the defendant which were only formulated during counsel’s final speech. First it was contended that the agreement for accrual was not terminable simply on presentation of an invoice but only if and when the call profile reached 20:40:40 or at least until, in some unspecified way, “the cash-flow implications had been resolved”.

I reject this contention:-

The second alternative submission was that the parties were never ad idem during the 14^th May meeting and that there was no oral variation at all. I reject this submission as well if only because it was too late to raise such a contention which was in such stark conflict with both the defendant’s pleaded case and the evidence called on its behalf. The one thing on which there was common ground was that the 14^th May meeting had ended with an agreement (and a handshake).

These conclusions dispose not only of the counterclaim for a further share of the rebate but also of the allegation of repudiatory breach on the part of the claimant.

I turn now to the issues arising from the misrepresentation claim. Put very shortly, I find that matters were as follows:-

Although I have taken these issues very shortly, it inexorably follows that I-Way would have had at the least an arguable case that it was entitled to damages under the Misrepresentation Act 1967 (BG v. Nelson Services, 24^th April 2002 C.A.) or for negligent misstatement (Esso v. Mardon [1976] QB 801). The reason for approaching matters in such a cursory way is that, in my judgment, on any objective review of the content of the 14^th May meeting, the outcome constituted a settlement of any such claim, whether valid or not. The issue of the undue rate of registration and the inaccurate profile formed the basis of I-Way’s negotiating position. It was made clear that the complaints were directed at the defendant. The defendant did not suggest that the complaints were misdirected. The claimant’s demand for relief was met in full. Following the meeting, these grievances were never aired again. By the time of the 14^th May meeting, the problem of an enhanced daily usage rate had yet to emerge. When it did, no complaint was made.

This conclusion renders it unnecessary to consider the contention of the defendant that the variation was of no effect either by reason of want of consideration or by reason of the absence of an executed addendum in compliance with the terms of the contract. It was common ground that, in the face of such a conclusion, such issues were thereby rendered redundant.

Localtel conceded that, as from the 8^th December 2000, it had taken steps which had (and were designed to have) the effect of “migrating” its actual and prospective customers away from I-Way’s server. (As noted earlier, I-Way abandoned its case that such diversionary steps commenced at an earlier date.) I-Way contended that, on its true construction, the contract imposed an obligation on Localtel not to take any steps designed to have the effect of diverting actual prospective customers away from the server of I-Way. In the alternative I-Way contended that there was an implied term to the same effect.

These propositions are to all intents and purposes coincident: see Banque Bruxelles Lambert SA v. Eagle Star Insurance [1997] AC 191. Equitable Life Assurance Society v. Hyman [2002] AC 408. The written submissions for each side were very lengthy. Nonetheless, the focus of much of the argument was the definition of the word “User” for the purposes of the agreement contained in clause 1 as being “a Localtel customer authorised by Localtel (by having registered with Localtel) to access the Company’s server to access the Internet.” This definition was at the heart of the primary benefits and obligations under the agreement. In particular:-

All this was against the background that, as recorded in clause 4.5, I-Way was incurring a substantial financial commitment based on the number of “Users” provided by Localtel. It followed, so the claimant contended, that the contract required that all users registering with Localtel by virtue of the distribution of CD’s would be given access to the Internet only through the I-Way server and not be diverted from it.

The defendant contended that it was free not to authorise its customers to access I-Way’s server but to access the server of any other company, including its own server, even though the customers were prompted to make applications by reason of the CDs. In this regard, reliance was placed so far as the contract was concerned on the absence of any service level guarantees, the substantial scope of exemptions from liability on the part of I-Way and the absence of any assurance that a rebate would be forthcoming from the telecom provider.

In addition, the defendant places reliance on various circumstances in which the agreement was concluded as giving support to its submission. In particular, emphasis was placed on the fact that:-

Both parties prayed in aid in support of their case the decision of the Court of Appeal in Philips Electronique Grand Public SA v. British Sky Broadcasting [1995] EMLR 472. I confess that I have derived little assistance from this decision based as it is on its own particular contractual provisions and surrounding circumstances.

Allowing for all the considerations outlined above and bearing in mind that the term of the agreement was only three years, I prefer the construction advanced by the claimant. As a starting point, the whole purpose of passing on information about the number of CDs distributed would be lost if registration for use on I-Way’s server was optional. Furthermore, in my judgment, the recognition of the reliance that could properly be based on the projected response to the distribution of CDs could only be predicated on the common understanding that all users registered with Localtel would access the internet through the claimant’s server. Indeed only then was any income stream for division between the parties assured.

It would be a commercially absurd outcome for Localtel to be entitled (as in effect it did) to build up a customer base by the distribution of CDs, notify I-Way of the same for the purpose of obtaining a server of an adequate scale to cope with such demand and then to divert the entire base elsewhere, leaving I-Way by definition without any income stream from rebates whatsoever. Thus, whether viewed as a matter of construction or as a need for implication of a term as a gap filler, I accept the claimant’s case on the issue of exclusivity.

I can accordingly summarise my conclusions as follows:-