Npower Direct Ltd v South of Scotland Power Ltd

The preliminary issues for the court to determine at this hearing are as follows.

On the assumption that the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) applied to the relationship between the claimant and defendant:

i)

Did the claimant lawfully terminate the contract between the parties (the Agreement) on about 11 February 2004?

ii)

Was the claimant in breach of the Agreement prior to its termination, and if so how?

On the assumption that the Regulations did not apply to the relationship between the claimant and the defendant:

i)

Did the claimant lawfully terminate the contract between the parties (the Agreement) on about 11 February 2004?

ii)

Was the claimant in breach of the Agreement prior to its termination, and if so how?

The Parties

Npower Direct Limited (“Npower”) is an electricity service provider within the meaning of Directive 2003/54/EC and the holder of an “electricity supply licence” within the meaning of s 6 Electricity Act 1989. Npower is also a “gas service provider” within the meaning of Directive 2003/55/EC and the holder of a “gas supplier’s licence” within the meaning of s 7A Gas Act 1986.

The defendant (“SOSP”) was in the business of providing agency services in relation to the sale and supply of gas and electricity. The essence of SOSP’s business was to persuade potential customers to sign up with Npower for their future requirements for both gas and electricity. SOSP was incorporated on 4 July 1997.

It is agreed that SOSP were obliged to meet the costs of the establishment of a sales team, together with the costs of business overheads and employment costs of SOSP’s paid employees. Sales sub-agents were self-employed, and were engaged by SOSP on a commission only basis.

SOSP was appointed by Npower in August 2001 to work within the Small and Medium Enterprise (“SME”) market. Prior to this time, from 1999 up until August 2001, SOSP had worked for Npower Limited (a sister company of Npower) within the residential market. Npower Limited agreed a settlement of SOSP’s domestic agency relationship on 30 September 2001. Npower agreed to pay SOSP £650,000, of which about £141,000 was offset against liabilities to Npower, resulting in a net payment to SOSP of approximately £509,000.

The Agreement

The dispute in this case arises out of the early termination of an agency agreement (“the Agreement”) entered into between Npower as principal and SOSP as agent on 1 April 2003 covering the SME market. The agreed expiry date under the Agreement was 31 March 2004. The Agreement was, however, terminated by Npower in a letter dated 11 February 2004, which was some 6 ½ weeks prior to the end of the contractual period under the Agreement.

The Agreement was by way of agreed variation of a written contract that had previously governed the relations between the parties between 1 March 2002 and 1 April 2003.

The commission structure for SOSP was set out in the Agreement at Schedule 2. Commissions under the Agreement were a function of the estimated annual spend of the customer and were based on each contract a customer was persuaded to enter. At the bottom end of the scale (for customers expected to consume less than £200 worth of energy p.a.) commission was in the region of £25 per contract. At the top end (for customers with an expected annual spend of over £8,000) the commission could in certain cases be as high as £1000. The disclosed documents suggest that the average cost per contract to Npower of contracts submitted by SOSP was £217.

Although the Agreement extended to gas as well as electricity, in practice gas formed only a very small part of the business elicited by SOSP.

SOSP was paid commissions of £1,162,688 in the period between April to December 2002; and was paid £1,848,430 in the period between 1 January 2003 and 23 May 2003. SOSP’s stated net profit before tax for the 2002 financial year (i.e. 1 December 2001 to 30 November 2002) was approximately £73,000.

The Agreement contained the following provisions material to the preliminary issues:-

“1.

Definitions and Interpretation

…

1.31

“Services” means:

1.31.1

the sourcing of SME Customers in the Territory by means of doorstep canvassing;

1.31.2

arranging for the completion of Mains Gas Supply Contracts and/or Electricity Supply Contracts with SME Customers in the Territory;

1.31.3

arranging for the ongoing provision of services to the SME Customers in the Territory in accordance with the Sales Office Procedures Manual or any training provided from time to time; and

1.31.4

such other services as Npower may with the written agreement of the Representative from time to time require the Representative to carry out;

…

2.

Appointment

2.1

Npower hereby appoints the Representative to provide the Services subject to the terms of this Agreement from the Effective Date until the Expiry Date, subject to earlier termination in accordance with this Agreement. The parties agree that this Agreement relates to the provision of services rather than the sale of goods and that the contents of this Agreement are construed accordingly.

2.2

The parties acknowledge that Npower is under no obligation to appoint the Representatives to provide further services to it after the Expiry Date and Npower shall have no liability to the Representative for failing to do so.

…

4.

Non-exclusitivity

4.1

The appointment of the Representative by Npower under this Agreement is non-exclusive. The Representative acknowledges that Npower has the right to appoint others to act in any part of the United Kingdom, including (without limitation) the Territory, for the provision of the Services and that Npower has the right to negotiate and enter into contracts directly with SME Customers for the supply of Mains Gas or electricity to any Customer Site or other premises located in any part of the United Kingdom.

4.2

During the term of this Agreement the Representative shall not directly or indirectly (which shall include by itself or with or on behalf of another person) within the Territory offer for sale, sell, canvass, market or promote to any person the same as or similar to an SME Customer the sale or supply of electricity or Main Gas.

5.

Advertising and Promotion

Npower makes no representation or warranty and gives no guarantee with regard to advertising or promotion of Mains Gas or electricity sales, nor as to the Representative’s potential earnings under this Agreement (whether by comparison with others or as a minimum sum over any particular period or otherwise). Npower shall only be required to advertise and promote the sale of Mains Gas or electricity to such extent, if at all, and in such manner as Npower in its sole discretion considers appropriate.

6.

Representative’s Obligations

6.1

The Representative shall perform the Services and all its obligations under this Agreement in accordance with Good Industry Practice and all relevant Legal Requirements.

6.2

The Representative shall achieve the Performance Standards.

6.3

The Representative shall and shall procure that its employees, sub-contractors, agents and Sales Advisers shall;

6.3.1

provide the Services and at all times act in a prompt, honest, diligent, efficient, professional and responsive manner and in the best interest of Npower;

…

6.3.13

use best endeavours to keep Npower informed of any matter which the Representative is aware is likely to affect or may be relevant in relation to the Services, Npower’s business or any part of this Agreement, including in respect of any competitors of Npower;

6.3.14

do all other acts as are in the best interests of Npower and conducive to the Representative’s duties and obligations under this Agreement;

…

8.

Npower’s Obligations

8.1

Npower shall:

8.1.1

supply the Representative with current copies of the Mains Gas Supply Contract and Electricity Supply Contract and such other information as may be reasonably requested by the Representative to assist it in securing SME Customers willing to enter into a Mains Gas Supply Contract and/or Electricity Supply Contract in accordance with this Agreement;

8.1.1

subject to Clause 9, have the right to vary the terms of the Mains Gas Supply Contract and Electricity Supply Contract;

…

9.

Agreements and Understandings

Npower and the Representative agree that:

9.2

Npower may vary, amend, reissue, withdraw, supplement, introduce or replace:

9.2.1

with immediate effect all or any part of the tariffs or prices charged by Npower in respect of Mains Gas or electricity;

…

Any variation effected pursuant to this Clause 9.2 shall form part of this Agreement and shall be complied with accordingly with effect from the date on which Npower states such variation to take effect.

11.

Fees and Expenses

11.1

Subject to Clause 11.2, Npower will pay the Representative a fee, to be calculated and paid in accordance with the provisions of Schedule 2, for each Mains Gas Supply Contract or Electricity Supply Contract described therein which has been properly, accurately and fully completed and submitted in accordance with this Agreement.

11.2

Notwithstanding the provisions of Clause 11.1 but subject to Clause 11.3 Npower shall have the right to refuse to make any payment to the Representative in respect of a Mains Gas Supply Contract or an Electricity Supply Contract if:

…

11.2.3

no supplies of Mains Gas or electricity are ever made to the SME Customer under the Mains Gas Supply Contract or Electricity Supply Contract (respectively) for whatever reason including as a result of cancellation or termination of the Mains Gas Supply Contract or Electricity Supply Contract or rejection or objection to the Mains Gas Supply Contract or Electricity Supply Contract;

…

11.3

Npower may only exercise the rights conferred upon it pursuant to Clause 11.2 in respect of a Mains Gas Supply Contract or Electricity Supply Contract before the expiry of 35 days from (and excluding) the date of receipt (being the earlier of date of receipt of the original version of the relevant Mains Gas Supply Contract or Electricity Supply Contract and the date of receipt thereof via the electronic data transfer process) by it of the relevant Mains Gas Supply Contract or Electricity Supply Contract.

…

13.

Term and Termination

13.1

This Agreement shall commence on the Effective Date and terminate subject to earlier termination in accordance with this Agreement, on the Expiry Date.

13.2

Either party (the “terminating party”) may terminate this Agreement with immediate effect by giving written notice to the other party in the event that:

a)

the other party is in breach of any of its obligations under this Agreement which the terminating party reasonably regards as serious and which is not capable of remedy which in the case of breach by the Representative shall be deemed to include any act, omissions or default on the part of the Representative which has, is, will or may cause significant damage to the goodwill in the name “npower” or to the standing or reputation of Npower or any company associated with Npower or which will put Npower or any such company in breach of its or their gas or electricity regulatory and licence requirements;

b)

subject to Clause 13.2 d) the other party is in breach of any of its obligations under this Agreement (with the express exclusion of the breaches which are terminable in accordance with clause 13.3 e) and has failed to remedy those breaches within 14 days of a notice from the terminating party requiring that breach to be remedied;

…

13.4

Without prejudice to the other provision of this Agreement if a breach by the Representative of any kind (whether or not amounting to a serious breach) has occurred more than once Npower may serve a notice on the Representative stating that such breach is a breach which if it or breaches like it recur frequently or continue, may result in termination of this Agreement. If following service of a notice under this clause the breach specified has continued or recurs frequently after the date falling 14 days after the date of service then Npower may serve another final notice to the Representative stating that if such failure continues or recurs within a 2 month period after the date of service of the final notice this Agreement may be terminated. If the procedures set out in this clause 13.4 has run its course Npower may forthwith terminate this Agreement by written notice to the Representative.

…

14.

Obligations Surviving Termination

…

14.7

Although the parties agree that this Agreement is intended to relate to the supply of services only, without prejudice to any rights which shall have accrued hereunder to either party or by operation of law if at any time it is considered by any lawful authority that the Commercial Representatives (Council Directive) Regulations 1993 apply (the “Regulations”) the Representative shall only be entitled to receive an indemnity (not a compensation) payment from Npower for loss of agency or otherwise upon the termination of this Agreement pursuant to and strictly in accordance with Clauses 17(3), (4), (5), (8) and (9) and Clause 18 of the Regulations. In the event that any rights accrue to the Representative pursuant to the Regulations in relation to this Agreement the Representative hereby assigns and transfers to Npower or an Npower company may direct all its rights, title and interest in such rights and agrees to execute such further documents and undertake such actions as are necessary or reasonably required by Npower to effect the assignment and transfer thereof.

…

SCHEDULE 2

Fees

…

Npower shall use its reasonable endeavours to ensure that the prices which Npower offer to SME Customers for electricity and Mains Gas pursuant to the Contracts are reasonably competitive in the market place when comparing Npower’s prices with the prices offered by other suppliers of Main[s] Gas and electricity of the same size and with the same market share. The Representative acknowledges that the prices offered by Npower to SME Customers at the date of this Agreement are competitive.

Without prejudice to the generality of the foregoing any change to the price of electricity offered to SME Customers by Npower shall be reasonably competitive if Npower is still reasonably competitive with the relevant deemed contract prices published from time to time by other electricity suppliers in each distribution area when signing new SME customers or (where authorised in accordance with the terms of this Agreement) Upgrade Contracts.

…”

Events to Termination

From about 2000, the electricity market in the SME sector was opened up to competition. By 2003 some 50% of the customers in that sector had switched from the previous monopoly suppliers to competitor suppliers.

Npower had been undertaking a review of its Commissions Budget for sales agents in the SME market in 2003. On 31 January 2003 Mrs. Heselwood, an employee of Npower, prepared a document entitled “NBS Sales Strategy”. The purpose of this document was stated to be: “to understand how NBS sales have developed its business over 2002 and how it will continue to evolve in 2003 and beyond”. The document noted, inter alia:

i)

That there were approximately 2 million SME businesses nationally, made up of 74% single sites, 18% small groups (2 – 14 sites) and 8% large groups (15 + sites);

ii)

Npower had approximately 12.8% of the overall market, with a higher penetration in MEB and YE;

iii)

(In a table) the electricity areas, and the number of sites that Npower had in each at that time;

iv)

In Scotland, that “…it was identified that we were losing approximately 50 sales per week as we were not competitive in Scotland. During the trial we did gain an additional 48 sales per week on base – 12%, however although we gained the additional business there was an impact on the margin made on each site”;

v)

In conclusion: “For Sales to continue to be successful in 2003 and beyond we need to recognize the changing market place and be ready to move with it. Part of this transition will mean we need to transfer much of our activity from cold calling field sales to telesales and appointment selling. By doing this we will be able to reduce the cost per contract and improve the quality of the contracts we receive … During 2003, and beyond we will need to look to increase our telesales capability whilst beginning activities to “freeze out” our field agencies. This will be done through fixed agency commissions and tighter controls, which will ensure we only pay for a fully qualified contract. Finally, it is important to recognize that rather than continually increasing the sales volumes, we need to focus on retaining the customers we have.”

As to this and other similar documents created by employees on the “Sales” side of Npower, Mr John Tarpey’s evidence was that they were simply “work in progress” representing the opinions of their authors and not the view of himself, who was the person responsible from 12 August 2003. SOSP contend that this was not the case and rely, in particular, on the internal document referred to as the “Channel Strategy” document, which contained Mr. Tarpey’s comments on it and the internal document dated 22 December 2003, the minute of the meeting of the Sales Agency Contract Project Review Group.

On 2 February 2003 Mr. Gary Robertson (the Managing Director of SME business) e-mailed a number of fellow employees at Npower including, inter alia, Mr. Tarpey (who at that time was the Divisional Managing Director of Major Business Accounts at Npower), and Mr. Burns (the Director of SME Sales) attaching the “NBS Sales Strategy” document and stated in the e-mail, inter alia, that: “…John Tarpey may wish to also give a view on the MBA approach as clearly being in the middle we need to be cognizant of those “above” and “below” us!”.

On 27 February 2003 a meeting took place between Npower and SOSP at Npower’s offices. The persons present were Mr Burns, Mr Frazer and Mr Boland of Npower and Mr Johnston and Greene of SOSP. At this meeting Npower gave a power point presentation to SOSP regarding the 2002 Review that Npower had produced regarding SOSP’s performance. Also, at the meeting the new contract was discussed. The Agreement was later signed by Mr. Greene (on behalf of SOSP) on 19 March 2003 and by Mr. Burns (on behalf of Npower) on 25 March 2003. The Agreement was in standard form, and was generally the same as the agreements that had been presented to the other sales agents, save for the fact that there were different commission structures in some of the other agreements.

On 24 April 2003 a document entitled “Review of Commissions Budget 2003” was produced by Mrs. Heselwood and provided to both Mr. Robertson and Mr. Burns. The document noted:

i)

That Npower had spent £4.1 million in the first quarter of 2003 against a budget of £2.7 million;

ii)

The current go live rate for electricity sales was 74%;

iii)

That SOSP had made 1,213 electricity contract sales in the period up to 11.02, which had resulted in a net payment of £475, 261; that there had been 46 gas contract sales in the period up to 11.02, which had resulted in a net payment of £18,048; and that there had been 276 renewals and upgrade contracts, which had resulted in a further net payment of £108,287;

iv)

That sales had “got off to a very positive start this year and it is anticipated that these levels will be maintained throughout the year. However, the dynamics of where these sales will come from will change. The proposed price increase in July 2003 could impact sales through the agency and broker route up to 30%”;

v)

That SOSP was forecast to produce 8,763 new contracts in the Year Forecast for 2003, which would result in a commission of £2, 466,085.

The document, entitled “Review of Commissions Budget 2003” was also attached to an e-mail dated 25 April 2003 from Mr. Burns, Npower’s Sales Director, addressed to Mr. Robertson. In Mr. Robertson’s response dated 28 April 2003 to Mr Titterton, Head of Markets at Npower Business Services, (with Mr Burns and the other named individuals copied in) Mr. Robertson noted: -

“This is only a draft but a good piece of work from Vince. We clearly need to do something quickly. The only way to control the main channels is through price, therefore I see the quick fix is to up prices to a level where if we get the business it still makes sense – we may even need to let different agencies sell at different prices (dangerous but possibly necessary). In the background we need to sort out operational processes to get more live”.

It is Npower’s case that from about April/May 2003, prompted primarily by actual/anticipated rises in the wholesale price of electricity (as supported by the ‘forward curve’ coupled with additional costs (e.g. the Renewables Obligation)), Npower undertook a re-benchmarking exercise which resulted in the prices of its electricity contracts increasing in respect of all sectors (Domestic, SME, and Industrial and Commercial). SOSP does not accept this.

On 15 May 2003 Mr Geoff Latham of Npower sent an e-mail to Mr. Johnston stating that the Z2005 Campaign (the then current COO trial) was to cease by 23 May 2003. It is accepted by both parties that such campaigns are temporary marketing tools or promotions for agents introduced and withdrawn by Npower from time to time.

On 22 May 2003 Npower confirmed by letter that there was to be a price rise on 1 July 2003. The letter did not state what percentage increase was going to be applied at that time. The letter of 22 May 2003 also confirmed that the Upgrade Campaign would be withdrawn. Further, the letter of 22 May 2003 discussed the issues caused by objections and rejections from other suppliers. It said: -

“In recent months we have found difficulty in progressing supply contracts from some customers you have introduced. From week commencing 26 May 2003, all contracts we have found difficulty in progressing within the last 35 days will be clawed back and included on your weekly statement, with the reason for the clawback being clearly identified. The main areas of difficulties currently are when either an objection or rejection has been received from the existing supplier. Objections and rejections are most common from customers whose current supplier is either BG or Economy Power.”

The letter concluded that the points raised in the letter would be discussed during a meeting that was scheduled to take place on 4 June 2003.

On 29 May 2003 there was an informal meeting between Mr. Burns and the directors of SOSP, Mr Johnston and Mr Greene. There is no minute of this meeting. At the meeting, amongst other matters, Mr. Burns instructed (as SOSP contend), or requested the assistance of (as Npower contend), SOSP to reduce their sales by 70% until the autumn of 2003.

Npower’s case is as follows.

Mr Burns explained in some details why the commissions budget was being exhausted more quickly than anticipated. He told the defendant’s representatives that only about half of the contracts being submitted were “going live” and in that context inter alia he referred to the fact that Npower’s agents, including SOSP, were submitting far too many defective contracts, that contracts were being rejected for that and other reasons including objections from the existing supplier. Further for reasons beyond Npower’s control coupled with the limited capacity of Npower’s relevant administrative systems, a very large proportion of such rejected contracts resulted in commission being paid out to agents which Npower had not been able to claw back within the stipulated 35 day period, following receipt of the application for a new contract. Mr Burns did not tell the defendant’s representatives that Npower would “price the defendant out of the market”, nor did he state that Npower would deliberately create administrative delays. Mr Burns did tell the defendant’s representatives that if the planned price increase together with the other measures discussed did not achieve a sufficient slow down in sales, then there might have to be another increase in about August 2003. The defendant’s representatives appeared to understand and accept the logic of all of the above and made no objection to it. This informal meeting ended (as it had proceeded) amicably. The defendant’s representatives were to attend a formal meeting on 4 June 2003 with representatives of Npower’s other relevant agents.

Mr. Burns was not in control of any price rises.

It is SOSP’s case that at the meeting Mr. Burns threatened them that in the event that they did not reduce their sales, then he would further increase prices and cause administrative delays.

Also on 29 May Mrs. Heselwood (the Commercial Manager of Sales) e-mailed Mr. Burns on the subject of “New Prices and Commissions” attaching a document dealing with the new pricing and commission options, which had been discussed at a meeting the previous day. In the e-mail dated 29 May Mrs. Heselwood said: -

“…I have suggested that under option 2, the difference between 5 yr contract prices and 2 yr ones will need to be wider if we are to slow down 5 yr sales. Suggestion is increase the 5 yr prices by a further 2% making the difference between 2 yr and 5 yr 4%…”

Again, on 29 May, a Statement of Account from Npower recorded that in the period from 1 January 2003 up to 23 May 2003 Npower had paid to SOSP £1,848,430.23.

On 30 May 2003 two of Npower’s employees, Mr. Latham and Mr. Boland, attended SOSP’s offices. A document, probably produced by Mr. Latham, said among other matters: -

“SOSP suggest a 4% price rise but reduced commissions!! SOSP – On the Friday we were there, they were making sales people redundant, this was on the back of the meeting they had with VB on Thurs, The intention is to half (sic) sales.”

Npower’s case is that SOSP reduced the number of active sales representatives from 48 to 23 in the period April to July 2003.

On 2 June 2003 Mr Greene of SOSP drafted a letter to SOSP’s sales representatives. SOSP contends that this letter was not sent. Npower contends that some version of it was probably sent or distributed to the representatives, given the reference to “our previous letter” in the Memorandum of 17 June (see below). The letter said: -

“You will be more than aware given the various rumours that are going about that there are problems with Npower in the electricity market. …

Npower is the largest energy company in the UK have had a number of constraints placed on them by their German owners which we have only been advised about over the last few days. I am writing this letter to advise you of what these restraints are and how we plan to deal with them …

The following changes will apply as of Mon 2 June 03 and you will be advised of any new initiative or practice changes as they occur:

1.

Npower will no longer accept COO’s (Commercial new tenants) but these can be signed up with Electricity Direct or London Electricity.

[I interpose to record that it was wrong to say Npower no longer accepted commercial new tenants].

2.

Npower will no longer accept upgrades and would expect these to be put through other fuel companies that we are selling on behalf of.

3.

I attach a sheet which gives a pecking order of fuel companies and how often they object to contracts. …

…

4.

As a result of the above, we will accept contracts but only pay on live from the following suppliers:

a.

London Electricity

b.

Biz Energy

c.

Electricity Direct

d.

Enron

e.

Economy Power

f.

British Gas

g.

Npower

We will accept contracts from all of the other 10 supply companies and pay on the normal schedule.

…

6.

The three other companies that we are passing contracts through are more than keen to have business activity passed through ourselves but you should be aware of the various restrictions that they have …

[The letter then referred to Electricity Direct, London Electricity and Atlantic].

…

7.

You will obviously have noticed that we took a 10% retention from last weeks commission and will [be] reviewing this on a weekly basis. We have a choice of either taking retentions or extending the payment schedule forward for another week and would be keen for you to advise ourselves via Andy Moore which you personally would prefer so as to cause the least pain to yourselves.

8.

… despite Npowers problems there is still considerable life in the fuel market throughout the UK and it is just unfortunate that we have to bare the brunt of the German economy’s somewhat erratic performance through Npowers host company.

9.

We have now won the contract as UK wide supplier for OneBill and this revamped product is proving to be highly successful and we are somewhat surprised that agents such as yourselves do not sign commercial electricity products on the back of fuel sales. …

10.

We have also re-branded our alarm sales under our own brand as well as selling for ADT and agents are gaining commissions which are far in excess of what can be gained through fuel sales. If you are in any way interested in selling the above products then please contact Danny McLaughlin (OneBill) … or Howard Young (SSP Security) … and you will find that they are more than happy to share their knowledge of these products.

…”

On 3 June 2003 a letter signed by Mr. Burns was sent from Npower to SOSP (which was acknowledged and countersigned by Mr. Johnston on behalf of SOSP) that varied the Agreement of 25 March 2003. SOSP confirmed, inter alia, that it had been overpaid £180,802.34 (“the Fixed Amount”) in respect of the “Fixed Weekly Fee”; and overpaid £22,974 in respect of “Introduction Fees”. Npower agreed that it had a contingent liability to pay SOSP £205,988 for the period up to and including 6 June 2003 (“the Npower Amount”). The parties agreed in the letter of 3 June 2003 that the “Fixed Amount” would be offset against the “Npower Amount” and the balance of monies (being £25,185.66) was to be written off by SOSP. This letter also confirmed that the Fixed Weekly Fee would continue to be paid by Npower.

There was a meeting on 4 June 2003, attended by four of Npower’s SME agents, SOSP, DES, GET and First Contact, to discuss the issues set out in the letter of 22 May 2003. At this meeting, which took place at a hotel in Leeds, Npower was represented by Mr Burns and Mr Frazer. Mrs. Heselwood, Mr. Latham and Mr. Harkus were also in attendance at the hotel, on behalf of Npower. The Npower representatives had slides for an intended power point presentation. Npower’s case is that the slide show probably took place; or, alternatively, that the substance of the content of the slides was communicated at the meeting. SOSP contend that the presentation did not, in fact, happen as the meeting descended into a general discussion on a number of issues, and that Mr. Burns repeated the substance of what he had said to Mr Johnston and Mr Greene on 29 May 2003. Mr. Greene was not in attendance at the meeting of 4 June 2003, as he was away on holiday.

The slides started with an Agenda.

A slide entitled “Quality” clearly identified Npower’s concerns about the poor “go-live” rate. It included the following: -

“Gross contracts = Nothing

-

fall out for defects, poor document completion, etc

Agency and NBS Lose £££

Net contracts passed defect check = Nothing

-

fall out for duplicates, customer price incorrect etc

Agency and NBS both Loose £££

Contracts sent for processing = Nothing

-

fall out for objections and rejections, related MPAN’s etc

Agency and NBS both Lose £££

Contracts fall out after 35 days

Win agency (short term only)??? NBS Lose £££

Contracts start supply = win agency £££ = Win NBS £££

GOAL 100% GROSS = 100% START SUPPLY”

Subsequent slides showed “Returns [by Npower to agencies] (Defect & Validation) as a % of Sales,” and “Returns [by Npower] … Reason as % of Returns” as follows: -

Duplicate 39%

Prices incorrect 17%

Copy bill missing 13%

Prices or other details amended 5%

Missing related MPAN 5%

Other 21%.

A slide entitled “Fixing Clawbacks” had 4 bullet points: -

“

•

Quick reporting information from NBS,

•

Actions agency can do …,

•

If clawback reason fixed payment reinstated by NBS, and

•

What if we had of clawed back over last 12 months (60 day window) in line with our agreement as all other suppliers have???”

Further slides were entitled “Remember Attachments to the contracts”, “Price Changes” and “July 2003 New & Renewals 5 and 2 year Fixed term prices compared to current price”.

There was a further review of the Commission Budget undertaken by employees on the Sales side of Npower on 13 June 2003.

On 17 June 2003 a Memorandum, addressed to all Commercial Fuel Reps was prepared by an individual at SOSP. According to a letter from the defendant’s solicitors dated 26 April 2005, SOSP sent this memorandum to its sub-agents. The memorandum started with the following: -

“Further to our previous letter where we requested that you contact Andy Moore in regards to whether you wish to have a 10% retention on a weekly basis or go onto a 3 week payment schedule so as to assist with the problems that we are all having with Npower, this letter is to advise you of what the new procedures will now be.”

This plainly suggested that a letter in the form bearing the date 2 June set out above (or in amended form) was in fact sent.

The Memorandum also referred to “a very difficult time for you over the last few weeks”, a weekly report on go-live objections, unjustified objections as not in the interest of deregulation and invoicing for commission – no invoice, no pay.

On 1 July 2003 Npower increased prices by 8% on 5-year contracts and proposed to introduce a new 2-year contract for which the price would be about 4% higher than had previously applied to 5-year contracts. At this point Npower also withdrew upgrade sales in respect of Npower tariff customers (which was previously set at a threshold of 10% of SOSP’s monthly sales). It is accepted that the price increase did not breach the express terms of Schedule 2 to the Agreement. SOSP however contend that it was in breach of Npower’s duties under Regulation 4 of the Regulations and / or Npower’s alleged implied contractual duties. Npower contend that the Regulations do not apply.

Npower says that, with effect from 1 July 2003, Npower implemented a 4% price rise in respect of the Domestic sector (where the contracts were rolling 28-day contracts, not fixed term contracts of 2, 5 years, etc.). SOSP does not admit this.

Npower’s price increases affected all of Npower’s agents and other sales channels selling to the SME sector. Other agents did continue to conclude electricity and/or gas supply agreements with SME customers - albeit that they sold at reduced volumes.

Tables entitled “Individual Field Sales Introducers” show the weekly sales of all agents. SOSP say it is not useful to compare the various performances of the other agents. Npower contends that the Table Show that all of Npower’s agents for SME contracts (i.e., SOSP, First Contact, DES, GET, WHU and Appco) were able to offer comparably priced contracts to their respective customers. I accept Npower’s contention and refer to the Tables for their full content.

On about 3 July 2003 Mr Greene ceased to be a director of and shareholder in SOSP.

On 25 July 2003 Mr. Titterton (Head of Markets at Npower Business Services) sent an e-mail to Mr. Burns which included the following: -

“We have not as yet seen any material change in sales volumes on the 5 year contract product from Agents, unless we see a material change next week then we must introduce a further price rise with immediate effect (1 August). As we notified this to the Agents before I assume we can do this, please can you put in place necessary actions to allow us to implement as soon as we decide to? This should apply to Sales Agents other than Appco & WHU.

…we can only afford to spend £146 Mpan against our current run rate of £270 Mpan!”

On 30 July 2003 Npower wrote to SOSP to announce the 4 August 2003 price rise. This gave 5 days’ notification of the August price increase (which the letter explained was on the basis of increasing energy prices). Prices were raised by a further 2-4% in respect of 5-year, fixed-term contracts only. SOSP accept that this price rise was not in breach of Schedule 2 of the Agreement. The letter stated “The differential between the five year and two year electricity selling price … makes the two year products very attractive to those seeking the keenest price.”

Also, on 30 July SOSP wrote a four-page letter to Mr. Robertson of Npower. In this letter SOSP listed eight points that they wished Mr. Robertson to investigate and respond to. The letter concluded with the following sentence: “…urgent remedial action is required to ensure the viability of our company”. SOSP said in this letter: -

“Vince Burns intimated to us that Npower were working under severe financial constraints and they required assistance from us to enable Npower to stretch out it’s budget to the end of the financial year rather than having them put the stop on activities in the marketplace.”

This letter (and subsequent letters) bore Mr Greene’s name as Director although he had ceased to be a director of SOSP.

On 4 August 2003 Npower raised its prices by a further 2-4% on 5-year, fixed-term electricity contracts only.

On 6 August 2003 Mr. Burns sent an e-mail to 15 named individuals employed by Npower regarding the subject “Agency Update”, which stated: -

“It has been a strange few months, it isn’t that often that a Sales Director is asked to stop selling and that he is disappointed when he gets the weekly sales numbers and they are high!!!! … it is even harder for our agencies who are seeing their commissions diminish as they struggle to sell on the new prices.

It is possible that the current situation may result in some agencies suggesting constructive dismissal … .

… ”

On 8 August 2003 Mr. Robertson responded to SOSP’s letter of 30 July 2003. Mr. Robertson set out Npower’s answers to the eight points that had been raised by SOSP. Among the points made by Mr. Robertson were the following:

i)

That costs were increasing, as driven by long-term power prices and increased costs of sales (due to the quality of contracts being delivered by the agents).

ii)

It undermined the basis of the relationship if SOSP did not have control of sales agents on any other basis than having the lowest prices/highest commission. Did SOSP operate solely as a shell admin company?

iii)

He was unaware of any deliberate campaign not to pay commissions on time, and invited SOSP to report specific, alleged instances.

iv)

Npower would continue to pay attractive commissions for ‘good quality’ customer revenues.

On 12 August 2003 Mr. Tarpey was appointed to the position of Managing Director for Business for RWE Npower, which included the role of being in charge of SME business. Thus he replaced Mr Robertson in the structure.

On 22 August 2003 a document entitled, “Sales Overview” was attached to an e-mail from Mrs. Heselwood to Mr. Titterton and Mr. Burns. The document gave a summary of each of the agents, as viewed by the authors of the document. The document included an assessment of the “likely compensation for terminating” with each of the six agents.

On 19 September 2003 SOSP wrote to Mr. Tarpey. In their letter SOSP stated:

“I know we have never actually met but I am sure you are aware of the various concerns, which have been asked of your predecessors, which still remain unanswered.

This begs us to ask one more question of you. Why have Npower constructively dismissed our company?”

On 24 September 2003 Mr. Tarpey e-mailed Mr. Johnston (with copies provided to Messrs Burns and Latham) on the subject of “Re: Constructive Dismissal” stating:

“Just seen your e-mail thank you. I will take advice from my team and will reply in full when I understand all of the issues.”

On 26 September 2003 Mr. Tarpey responded more substantively to the letter of 19 September 2003. The letter referred to Mr. Robertson’s letter of 8 August and continued: -

“If you feel that all your concerns have not been addressed then please let me know those that you consider to be outstanding.

Turning to the second paragraph, we do not understand what you mean by ‘constructively dismissed’. Your company has been appointed as a service representative for Npower Direct Limited under and in accordance with the terms of an agreement dated 25 March 2003. Our relationship is governed by the terms of that agreement and accordingly I would ask that you further articulate your question within the context of that agreement.”

No response was received by Mr Tarpey to this letter.

On 17 October 2003 Mr Titterton’s PA sent an e-mail to Mr Tarpey, Mr Burns, Mr Moir, Mr Titterton, Mrs Heselwood and Ms Foster stating: “please find attached the Channel Strategy document including John Tarpey’s comments”. The document set out a strategy and action plan for each channel which included:

“Increase sales through 2004 with efficient sales agencies, Appco, DES, and First Contact. …

Negotiate termination of agreements with WHU, GET, and SOSP”. Mr Tarpey inserted a comment against this: “Financial provision needed now!”

On 24 October 2003 Mrs. Heselwood sent an e-mail to Mr. Burns attaching a document entitled “Notes for the RMG (Retail Management Group) on Agency Regulations and potential costs”.

Mr. Tarpey’s evidence was that this paper was never presented to the RMG.

A document dated 24 October 2003 signed by Mr. Burns headed “South of Scotland Power”, stated under the heading “Personal View” - “Npower can demonstrate that it has been very reasonable in its relationship with SOSP. …. Approximately 2 months ago the two partners … split their business with Alan focusing on utilities and Phil on the alarms. They may have done this to increase their claim under agency regulations.” SOSP’s views (with answers) were set out as follows: -

(1)

the proposition was not commercially viable (“other agents perform”);

(2)

the introduction of increased clawback, particularly of objections, have impacted their business (“SOSP have one of the worst go live rates”);

(3)

that Npower have prevented them from selling and therefore are in breach of the Agreement (“other agents perform”). The note stated under the heading “Meeting Stance (Bullish): - “Other Agencies are able to sell and we are not clear why they can’t. Intend to let the contract run and if they think we are in breach they need to tell us why.”

On 30 October 2003 a document entitled “NBS Sales and Market Plan Version 3” was created. The Executive Summary stated that “Market conditions are constantly changing – Competitors consolidating – New MRA rules – Increased vigilance by Energywatch Ofgem – Drive for energy efficiency – Wholesale market volatility/retail market reactions.” As to market conditions, electricity wholesale prices were said to have increased considerably over the last 6 months.

The document included an analysis of Npower’s actions in managing the prices of its products during mid-2003; the relation of those rises to movements in the wholesale price of electricity; the actions of Npower’s competitors; and the effect on its sale channels of its price rises. The strategy by channel was considered, with a 3 stage approach set out. Under a table with the heading Agents 2004 the document noted “Negotiate termination of agreement with WHU, GET and SOSP.”

On 7 November 2003 an e-mail was sent from Mrs. Heselwood to Mr. Titterton, Mr Burns and others entitled “RMG Paper V3”. The document included the following comments: -

“SOSP - …Since the price increase, sales from this agency have dropped dramatically and they are claiming that we have prevented them from selling and are therefore in breach of our contract. Although we would dispute the breach we do not see SOSP as an agency who we would want to work with in the future and would be looking to not renew their contract in March 2004 …

SOSP – Meeting to be held with SOSP on 17/11/03 to begin exit discussions …

Recommendations. Our recommendation is that we meet quickly with WHU, SOSP, GET and First Contact to negotiate our way out of this relationship this financial year. This would require a maximum budget of 6.6 million, this does not include any residential payments to FC …

Strategy moving forward. In the short term try to establish why SOSP are unable to sell when other agencies can. Allow the contract to run until March 04 without renewing. We should not discuss termination. We will need to wait to see if SOSP claim under agency regulations within 3 months of the end date – thought to be highly likely. In this event, SOSP would be entitled to one years commission under agency regulations £ 2 million. If we settle out of court we would expect to pay 20% of this - £400k”.

On 7 November First Contact’s contract was terminated by Npower.

A meeting was held between Npower and SOSP on 17 November 2003 at which the following were present: Mr. Tarpey, Mr. Alcock (who was the Head of Finance, part of the meeting only), Mr. Johnston, and Mr. Greene.

Mr. Tarpey prepared some pre-meeting notes which included the following: “Sales – background – 250/week – now nothing – (is this the case – breach?) – all personnel left – shut office. Admin staff (family) left.”

Mr Tarpey’s notes of the meeting included the following: -

“Background:

…Great relationship with npower. Wanted to be part of it – 2002

…

May / June things started to go wrong – objections, rejections and price

SOSP propose to commence discussions on ending arrangement. Referred to npower settlement Sept 2001 (sweet taste). £7.6 m - legal advice on their regs entitlement. £2 million – indicative offer by SOSP - £0.5 million “floated” by Npower. 20-12 months period assessed by their lawyers? Exit to finalise arrangement. Been advised that they should not commit into writing and offer to terminate, however they initiated these discussions. Way forward: ‘Amicable’, good spirit – well intentioned discussion – npower would consider SOSP proposal and revert – Direct agent – telecoms, commercial options of interest post settlement – Wednesday / Thursday – JT will contact”

On 21 November 2003 at 14.52 a telephone call was made from Mr. Tarpey’s telephone extension line at Npower to the landline number of SOSP, lasting at least 4 minutes 17 seconds. On 1 December 2003 at 12.56 a telephone call was made from Mr. Tarpey’s office to SOSP’s landline, with the telephone call lasting a duration of 2 minutes 42 seconds. On 12 December a telephone call was made at 12.46 from Mr. Tarpey’s land line telephone number at Npower to Mr. Johnston’s mobile telephone number, with the call lasting a duration of 20 seconds

On 12 December 2003 Npower wrote to SOSP notifying it of further price increases as a result of increasing wholesale prices, together with the launch of a new 3-year fixed term contract. The letter also requested information on the number of sales and advisers that SOSP were projecting for 2004:

“Npower are committed to growth in 2004 and we must be able to confirm that we are able to deliver our plans. As one of our service providers please provide us with your expected sales volumes for 2004 and the number of advisers you will have to carry out this activity.”

There was a further meeting on 17 December 2003 at which Mr Latham and Mr Boland of Npower and Mr Johnston and Mr Greene were present. There are two sets of Npower minutes of the meeting. The first set of these minutes was sent to SOSP at the time and no objection to their accuracy was made. The new prices were discussed and the minutes record the following discussion: -

“GL explained the reasons behind the 2004 price increase. AJ said that even before the 2004 price increase, that in Scotland, SSP would not be able to compete against either Scot Pow or Hydro. He said that with the new prices it would need Scot Pow to increase their prices by 25%”.

The minutes record that Mr Latham asked Mr Johnston what he thought SOSP’s sales projections might be for 2004. SOSP’s response was recorded as: -

“ ... AJ was slightly bemused and replied that until negotiations with Npower surrounding their [SOSP’s] claim for compensation were concluded the answer is zero. However, should all issues be resolved, both AJ and PG were confident that they had ideas which, if implemented, would allow sales volumes to reach 250 per week. AJ and PG would not discuss their ideas”.

On 17 December SOSP wrote a letter to Npower. In the letter SOSP referred to the meeting of 17 November 2003 and stated that discussions had begun about a financial settlement “due to the damage Npower had inflicted on our company”. The letter continued: -

“At that meeting we agreed on two major areas, as a result of Npower’s actions our company had been mortally wounded in both its ability to function as a sales agency and it’s reputation along the UK wide sales force being severely prejudiced. Your acceptance of this was that you made an initial offer to ourselves of £500,000.00 which given our previous discussions we both knew this would not be accepted. We agreed that if a financial settlement could be reached within a reasonable timeframe, we would be more than willing to try and resurrect our depleted workforce for the forthcoming year and not have to go to litigation”.

The letter then referred to the receipt of Npower’s letter dated 12 December 2003, and said that SOSP “feel totally bemused, angry and very let down”.

On 22 December 2003 there was an Npower Sales Agency Contract Project Review Meeting. Persons present at this meeting included Mr. Tarpey, Mr. Robinson, Mr. Barlow, Mr. Burns, Mr. Crook and Mr. Curtis. The minute of this meeting recorded: -

“It was agreed that once [the] SOSP letter was replied to then SOSP could be put onto the back burner, subject to agreed way forward.

Action – SC to ensure SOSP letter circulated to Project Team and Caroline Farebrother so suitable response could be drafted. This would be run by Operational Team and JT for comment, before being amended and sent. Update – given CF’s unavailability, I have requested this action of the external lawyer. He had come back requesting a copy of the contract, which I have sent to him. However, we may not get a view this side of Christmas due to DES issue (see bottom of notes). …”

SOSP wrote to Npower on 24 December 2003, explaining how SOSP’s claim for “damages and breach of contract” in the “grand total” of £7,222,679.00 was reached. The statement in the letter “We were given a number of headings from our solicitor” was untrue. SOSP had not consulted solicitors. Having referred to various provisions in the Regulations, and to their proposed settlement figure of £2 million, SOSP said: -

“The only part of the regulations we will use to reach this figure will be under the heading 17.4 of the ... regulations”.

The penultimate paragraph of the letter read: -

“We also advised you that over the past few years we have had a good working relationship with Npower and would if were possible wish to contribute towards the sale and development of your products in whatever meagre way we can especially given our present straights (sic)…”

On 6 January 2004 SOSP wrote to Mr. Tarpey:

“I have tried in vain to contact both yourself and Vince Burns by Email and telephone which now begs the question, has communication between both our companies finally ceased?”

On 13 January 2004 a telephone call was made from Mr. Tarpey’s mobile to Mr. Johnston’s mobile lasting 3 minutes and 8 seconds.

On 14 January 2004 Npower wrote two letters to SOSP.

The first letter signed by Mr Tarpey was an open letter. It read: -

“Following the letter from Vince Burns of 12 December 2003 … the notice of price change given in Vince’s letter expires on 11 January 2004. As such, we are proceeding under the Agreement on the basis set out in that letter with effect from Monday, 12 January.

We are disappointed not to have received the information requested from you in Vince’s letter. Please would you let us have in the form set out in the letter the following requested information:

-

South of Scotland Power Limited’s expected sales volumes for 2004; and

-

the number of advisers who will be performing South of Scotland Power Limited’s obligations under the Agreement on its behalf in 2004.

Please send the information to Vince Burns, Sales Director, …

As you are aware, this information is necessary to assist Npower to develop its business and to confirm that it can deliver its plans. As such, I should be grateful if you would supply the information as soon as possible and, in any event, by Friday 23 January 2004.

We look forward to hearing from you.”

The second letter was a without prejudice letter. Privilege has been waived by the parties. In the without prejudice letter Mr. Tarpey wrote: -

“I confirm that, at the present time, the Agreement is continuing and Npower wishes the Agreement to continue. As such, SOSP should continue to the [sic] perform the Agreement and carry out Npower’s instructions. Please address any further communications to John Robinson…”.

On 26 January 2004 SOSP wrote to Npower referring to its first letter of 14 January 2004 (the open letter). SOSP’s letter referred to the meeting of 17 December 2003 and stated that “the minutes were noted and E-mailed back to SOSP with our views on sales for 2004”. The letter also stated that SOSP felt that they were “getting passed from pillar to post”.

A meeting took place between the parties on 2 February 2004. Those present at this meeting were Mr Robinson, Mr Barlow and Mr Curtis (on behalf of Npower) and Mr Johnston and Mr Greene. The minutes were prepared by Mr Curtis. At that meeting Mr Johnston stated that SOSP were doing nothing under the Agreement. He believed that by reason of the price rises in July and August 2003, Npower were in breach of contract. SOSP was reminded by Mr. Robinson of its statement made in the minutes of the meeting held on 17 December 2003 that it could sell up to 250 contracts per week but was not willing to explain how “until the compensation issue had been resolved”. SOSP replied “if all the issues were resolved then 250 new contracts per week were possible, but not from the standing start that Npower had caused”.

SOSP wrote a letter to Mr Robinson dated 6 February 2004. SOSP said with regard to the meeting on 2 February 2004:

“ You … proceeded to attempt to open a discussion on such subjects as fraudulent contracts, non submission of contracts over the past number of months by ourselves and difficulties that your company was experiencing with agencies such as ourselves. We advised you in words of one syllable, and on a number of occasions throughout the meeting that although we wished to increase our activities on behalf of Npower we were unable to do so because of your actions in June and July of 2003. It was your view that Npower was a fully sellable product within the Scottish area, which if you care to look at the prices being quoted by the host recs, you will recognise that this is not the case.”

On 11 February 2004 Mr Tarpey on behalf of Npower wrote a letter to SOSP terminating the Agreement. The letter read: -

“I refer to the meeting between NDL and SOSP in Scarcroft on 2 February 2004. I also refer to the earlier meeting between NDL and SOSP in Glasgow on 17 December 2003.

At the meeting on 17 December 2003, you said that SOSP is capable of procuring 250 contracts for NDL’s products per week. You also said that I had asked you to confirm in writing to NDL how you proposed to do this. At that meeting, you refused to do this.

At the meeting on 2 February 2004, you repeated the assertion that SOSP is capable of procuring 250 contracts for NDL’s products per week. At that meeting, John Robinson of NDL made a fresh request for you to inform NDL of how SOSP proposes to procure such contracts. You refused to do so.

As such, SOSP’s refusal to provide the information requested by John Robinson is a failure to comply with reasonable instructions from NDL. This is a serious breach of the duties owed by SOSP to NDL, including a breach of the contractual duties to NDL under claims 6.3.2 of the Agreement.

Such failure amounts to a repudiatory breach of the terms of the Agreement. I hereby accept SOSP’s repudiatory breach on behalf of Npower Direct Limited. As such, the Agreement is now at an end.”

On 12 February 2004 Npower issued these proceedings.

On 17 February 2004 Npower’s employees attended the offices of SOSP in Glasgow to remove all documents pertaining to Npower. An inventory was prepared.

The Table entitled “Individual Field Sales Introducers” shows that SOSP’s sales figures were as follows

2003

October 2

November 3

December 0

THE CLAIMANT’S SUBMISSIONS

Mr Mildon QC for Npower submitted as follows.

SOSP’s only defence to the repudiation issue is to argue that the alleged breaches of contract by Npower in May - July 2003 made it impossible for SOSP to continue or resume performance at any time prior to termination in February 2004.

The law on repudiation does not involve any inquiry into the state of mind of the innocent party. The motive and intent of the innocent party in accepting a repudiatory breach is wholly irrelevant. It is self evident that the innocent party which elects to terminate will do so because it perceives it to be in its best interests to do so. Inquiring into the motive which lies behind such a decision is a waste of time and costs.

The same applies to SOSP’s state of mind. For the purposes of the law of repudiation what matters is the objective characterisation of SOSP’s words and conduct. The emotions and feelings of those who constituted the alter ego of SOSP are not relevant to the contractual questions which the court is being asked to determine.

In summary:

None of the obligations now pleaded against Npower for the purposes of Issue 2 exist in law. Even if they did exist they have not been breached.

On SOSP’s own case SOSP was not performing the Agreement at all by early 2004 at the latest and was refusing further performance unless Npower provided a sufficient capital injection to get SOSP back on its feet.

On Npower’s case not only was SOSP not performing the Agreement at all, but SOSP was also refusing further performance unless Npower agreed to pay the sums to which SOSP claimed it would be entitled under Regulation 17 upon a termination.

On either analysis SOSP was clearly in repudiatory breach and Npower was entitled to accept that breach and bring the Agreement to an end.

SOSP’s legal arguments based on the terms of the termination letter and/or the alleged effect of clauses 13.2 and 13.4 of the Agreement are bad in law.

THE DEFENDANT’S SUBMISSIONS

Mr William McCormick for SOSP submitted as follows.

Issue 1

The Agreement was not lawfully terminated on 11 February 2004. SOSP was not in breach of the Agreement. If SOSP was in breach it had not renounced/repudiated the contract. Npower did not in fact terminate the Agreement by reason of either breach alleged (but rather in an attempt to try and avoid the contract running to full term). Clause 13 of the Agreement sets out a comprehensive code for the termination of the contract which excludes the operation of the common law. The procedure was not followed.

Were it not for Npower’s fear of having to meet a claim under the Regulations the Agreement would not have been terminated. At all times after September 2003 Npower had decided that SOSP’s contract would not be renewed and Npower’s only concern was to identify the best “exit strategy”. The strategy that developed was to create the appearance of a breach of contract and hence an excuse to terminate, when no such breach either existed or was believed to exist. It was for this reason, and not because of any perceived breach of contract, that the letter of 11 February 2004 was sent. As to the breaches relied upon: -

i)

Npower did not actually want the information requested (as opposed to wanting to see if it would be provided). By 11 February 2004 SOSP had provided the information requested (albeit the figures were zero).

ii)

Npower did not want SOSP to sell. Npower incurred no liability to SOSP if SOSP did not sell and this prevented SOSP depleting the commissions budget. SOSP’s reduced turnover could also be used to mitigate any payment ordered under the Regulations. Although SOSP was not in any event obliged to sell, SOSP would have tried to sell had it been able to do so

Neither breach alleged was repudiatory or within the terms of clause 13.2(a).

Issue 2

On both 29 May and 4 June 2003 Npower breached the Agreement by:

i)

requiring SOSP to reduce its sales by at least 70% until the autumn;

ii)

threatening to increase prices in a manner which would make it impossible for SOSP to make any/any significant sales;

iii)

threatening to create administrative delays in order to make it impossible for SOSP to make any/any significant sales.

Between 20 June and 10 August 2003 Npower breached the Agreement by increasing prices in a manner which made it impossible for SOSP to make any/any significant sales.

Insofar as Npower argue that the instructions/threats relied upon by the SOSP were for a limited time, Npower is in breach of the Agreement in that it failed at any time to give any/any clear instruction that SOSP should re-commence selling.

Npower was driven by budget pressures, caused (in large part at least) by its own inability to comply with the provisions of the Agreement (i.e. the 35 day period for rejecting a contract), to take extraordinary steps. The instructions/threats on 29 May and 4 June 2003 sought to transfer the financial burden caused by Npower’s poor administration from Npower to SOSP, in a manner which was not permitted under the Agreement. Price rises to levels at which sales would be effectively impossible for SOSP were notified and as a result SOSP’s business collapsed. Npower never informed SOSP that the previous instruction was at an end because Npower was perfectly happy to receive no further sales from SOSP.

THE WITNESSES

Witnesses called by Npower

Mr John Tarpey

Mr Tarpey has been Managing Director for Business for Npower since 12 August 2003. Since that date he has been in charge of SME Business, which is the part of the company that deals with selling gas and electricity to small to medium sized businesses. Prior to 12 August 2003 Mr Tarpey was the Divisional Managing Director of Major Business Accounts.

I was impressed by Mr Tarpey’s evidence. His account seemed credible and in accord with the commercial probabilities. In my view he did his best to assist the Court when giving evidence, and was prepared to concede a point when he felt it ought to be conceded.

Mr Tarpey’s evidence covered Npower’s SME Business, Restructuring Npower’s SME Business, the prices increases of 1 July and 4 August 2003, the meeting on 29 May 2003, the meeting on 4 June 2003, alleged damage to SOSP’s business, the meeting on 17 November 2003, the refusal to provide information on request, the meeting on 17 December 2003, events in 2004 and the termination of the Agreement.

Mr Tarpey said that at the meeting on 17 November 2003 Mr Johnston and Mr Greene said that they had dramatically reduced their sales team to almost nothing and that they did not intend to sell on behalf of Npower. I accept this evidence. Mr Tarpey made manuscript notes at the meeting and in my view they reflect what happened at the meeting.

Mr Tarpey explained that “wholesale prices drive the fundamental price mechanism to customers who buy electricity”. Mr Tarpey said that the primary motive for every price increase and decrease during his time at Npower has been the forward (price) curve and elaboration on the forward curve. This evidence makes commercial sense. Any sensible businessman would have appreciated this. Mr Burns was on the sales side. He was not concerned with setting prices. He had little or no influence on the prices arrived at from time to time.

Mr Tarpey referred to the fact that Mr Burns had provided conflicting accounts as to what was said on 29 May and 4 June 2003.

Mr Tarpey referred to a number of reports, strategy papers, sales and other documents prepared by Npower personnel below him (and his predecessor Mr Robertson) in the Npower hierarchy. Many of these documents were leaked to SOSP by one or more persons in Npower. Mr Tarpey described these documents as “work in progress”, i.e. papers that reflected the views of the authors thereof, which might or might not be implemented depending on a decision taken at his (or his predecessor’s) level. As Mr Tarpey put it “I accept all these documents were produced …[the only point I disagree with you on] is that a decision had been made at my level to terminate [the Agreement] with SOSP”. Despite the views of persons below Mr Tarpey in the Npower hierarchy, I am persuaded that he was open-minded as at 17 November 2003 as to SOSP’s future with Npower. Mr Tarpey was right to distinguish between “work in progress” and binding decisions that would be taken at his level. This important distinction should be borne in mind at all times when considering the history set out above and in particular a number of documents relied on by SOSP.

Mr Tarpey pointed out that five of Npower’s competitors increased their prices in 2003 and two did so before Npower (Scottish Power and British Gas).

Mr Tarpey said that Mr Johnston and Mr Greene told him that they could not sell because Npower’s price was not competitive, but in Mr Tarpey’s belief this was fundamentally incorrect.

It was suggested to Mr Tarpey (on instructions) that he did not have telephone conversations with Mr Johnston after the meeting on 17 November. Mr Tarpey said that he totally disagreed and believed that his telephone records would prove that he was correct. In the event they did so.

Mr Tarpey underlined the fundamental commercial importance of go-live rates. He said that in 2003 go-live rates were in the high 50s to low 60s. The ideal was that if Npower sold 100 contracts, Npower would go live with 100 contracts and obtain the revenue.

Mr Tarpey explained the commercial points reflected in the slides prepared for the meeting on 4 June 2003. I accept this explanation.

Mr Michael Robinson

During the late autumn of 2003 (the time of Mr Robinson’s initial involvement in this matter) he was Director of Procurement, Shared Services.

Mr Robinson said that given SOSP’s non-performance, he was alerted to the fact that Npower did not know the extent to which SOSP would form part of the sales force in 2004. Npower had to be able to plan how it was going to acquire sales in the year ahead and, as far as SOSP was concerned, Npower did not know what its intentions were looking forward. For this reason, and also to gather information as to what other major sales agents were likely to achieve for Npower in 2004, Mr Robinson initiated the sending of letters to agents requesting information as to expected sales volumes for 2004 and the number of advisers they would need to carry out this activity. Letters were sent out to DES, GET, WHU, Appco and SOSP on 12 December 2003. Whilst the letter was signed by Mr Burns, Mr Robinson was responsible for drafting the section relating to the sales projections for 2004.

As to the meeting on 2 February 2004, Mr Robinson said it was made clear by SOSP that its priority, ahead of actually achieving sales, was to resolve its perceived entitlement to a settlement amount. He put it to Mr Johnston and Mr Greene that Npower was concerned as a business about SOSP’s non-performance, as well as other issues relating to its business practices. According to Mr Robinson, Mr Greene remarked that “[SOSP] wanted to walk away from the contract with a sweet taste in their mouths”.

Mr Robinson added that in early 2004 there were three contractors who were not performing, two of them he said are now performing including (so far as relevant to this case) DES.

Mr Robinson struck me as a credible witness.

Witnesses called by SOSP

Mr Alan Johnston

Mr Johnston is a shareholder in and director of SOSP. SOSP was incorporated in July 1997 for the purpose of marketing and selling gas and electricity, following the deregulation of the energy markets. SOSP was jointly owned and managed by Mr Johnston and Mr Greene until July 2003, when Mr Greene withdrew. Mr Johnston’s daughter Collette Johnston replaced Mr Greene as a director.

Mr Johnston’s evidence covered the Domestic Agreement with Npower Limited, the move into the SME market, the nature of the work in the SME market, Sales Campaigns, the working relationship with Npower, difficulties encountered with Npower’s administration, the meeting on 22 December 2002, customer complaints/effect on SOSP, New SME Agreement/2002 Quarterly Review, the meeting on 29 May 2003, the 4 June meeting, Price increases and the effect of Price increases, the meeting on 17 November 2003, the meeting on 17 December, the letters of 14 January 2004, the meeting on 2 February 2004, termination, Documents removed from SOSP’s offices by Npower and documents between SOSP and sub-agents/employees.

I have marked reservations about Mr Johnston’s evidence in a number of respects. In my view the contemporary documents are generally a much more reliable guide as to what was said at meetings between the parties and as to the course of events.

By way of example Mr Johnston’s account of the meeting on 17 November was at odds with Mr Tarpey’s contemporary notes. The latter are a far more reliable guide to what happened at the meeting.

In a supplemental witness statement Mr Johnston said that on 4 June 2003 the slide show presentation barely got started before the meeting descended into the discussion set out in his statement. I find that the power point presentation probably took place and that if and to the extent that a full presentation of the slides did not take place, the probability is that the substance of the slides was communicated at the meeting. The points made in the slides (as explained by Mr Tarpey), broadly reflected understandable commercial sense.

Mr Johnston’s account as to the absence of telephone calls between Mr Tarpey and Mr Johnston after 17 November, did not accord with a record of Mr Tarpey’s calls.

Mr Johnston’s evidence that since late 2001 the only business of SOSP was the marketing of electricity and gas contracts pursuant to agreements with Npower, was at odds with the contents of the letter drafted by Mr Greene on 2 June 2003. The letter dated 2 June 2003 was inconsistent with Mr Johnston’s evidence in a number of other respects.

Mr Johnston referred to the fact that some of SOSP’s former sub-agents left SOSP 2003 and worked for First Contact.

Mr Philip Greene

Mr Greene was a shareholder in and director of SOSP between July 1997 and July 2003.

Mr Greene’s evidence covered the Sales Process, the Domestic Agreement, the SME Agreement, difficulties encountered with Npower, discussions with Mr Burns, the new SME Agreement/SOSP quarterly meeting, effect on SOSP, the meeting on 29 May 2003, price increases, the meeting on 18 November 2003, the meetings on 17 December 2003 and 2 February 2004, and Termination.

According to Mr Greene’s witness statement following the meeting on 29 May 2003, Mr Johnston and Mr Greene met with their management team to discuss the various strategies open to SOSP. “We agreed that we would not approach any other supplier at that time and would only do so if our relationship with Npower came to an end. … Alan and I decided not to tell the agents that they had to reduce the number of contracts to be tended by 70%, but told them that we would not submit low value contracts and SOSP would continue to make part payment up front. We also informed our agents that in the early autumn we would be re-launching our activities with Npower and expanding our present activities throughout the UK. We made this pledge under the assumption that there would be no further price rises over the period between June and September 2003”.

I have marked reservations about Mr Greene’s evidence in a number of respects. In my view the contemporary documents are generally a much more reliable guide as to what was said at meetings between the parties and to the course of events.

There are passages in Mr Greene’s witness statement which are contrary to the terms of the letter he drafted on 2 June 2003. His evidence that the draft of 2 June 2003 was not sent (either in the form before the Court or in amended form) is contrary to the terms of the Memorandum dated 17 June 2003. Mr Greene’s evidence that Mr Johnston made an independent decision to go and tell the agents about the instructions to reduce volumes by 70% was flatly inconsistent with the passage in his witness statement quoted above and the defendant’s pleaded case. There is a marked contrast between some of the contents of Mr Greene’s witness statement and the letter that he drafted on 2 June 2003.

Mr Tarpey’s notes of the meeting on 17 November 2003 record reference being made to SOSP receiving “legal advice on their regs entitlement” and being “advised that they should not commit into writing and offer to terminate”. In truth and in fact, according to Mr Greene, SOSP had not received any such legal advice.

Further the reference in the letter of 24 December 2003 “we were given a number of headings from our solicitor” was according to Mr Greene untrue.

Mr Nicholas Price

Mr Price is a director of Duelstone Power Services Limited, an energy broker which supplies SME customers to some of the main gas and electricity suppliers in the United Kingdom.

According to Mr Price on 13 October 2004 Duelstone terminated its contract with Npower due to, amongst other matters, Npower’s failure to get contracts to go live, its failure to provide status reports on Duelstone’s outstanding contracts and its various administrative problems.

Mr Chaudhary Khan

Mr Khan was a director of First Contact Power Limited.

Mr Khan gave an account of the meeting on 4 June 2003.

I did not find Mr Khan a satisfactory witness. His account of receipt by First Contact of leaked documents was contrary to what First Contact’s solicitors wrote, inconsistent and confusing.

The litigation between Npower and First Contact (case number 2004 Folio 113) was settled at the beginning of this year.

Ms Tracy Houlihan

Ms Houlihan was employed by Npower from September 2000. She worked with the SME Division. In late October 2002 she took up the position of Telesales Channel Manager. She was responsible for both internal telesales and also telesales which were outsourced to two external third parties. Her first witness statement addressed the commission budget, the Regulations and referrals.

Unchallenged evidence

Statements from Mr Simon Poole, Mr Christopher Turner, Mr James Murphy and Robert Thomson were admitted as unchallenged evidence.

Evidence admitted under the Civil Evidence Act 1995

The statement of Mr Norman Haigh (a shareholder in and director of DES) was admitted under the 1995 Act.

EXPERT EVIDENCE

The only expert witness was called by Npower.

Mr Sam Eadie

Mr Eadie provided a report as to the competitiveness of Npower’s electricity and gas prices to SME consumers in 2003/2004.

In Mr Eadie’s opinion, Npower’s market prices for electricity throughout the period from July 2003 to February 2004, in all the regions and profiles examined, were lower than the “LC 28 legacy tariffs” and therefore competitive. Mr Eadie considered that after the July 2003 price rises, Npower’s market prices for electricity and gas remained generally competitive, with the temporary exception of certain areas. By the end of the year, however, they had once again become competitive with those of other suppliers (it had been agreed that they were competitive in April 2003). Mr Eadie said that Npower’s 2-year and 5-year fixed price contracts for electricity and gas could also have provided additional attractions to customers in the rising markets of 2003 – 4.

Mr Eadie concluded that in relation to deemed contracts (LC 28 legacy tariffs), the terms and conditions offered by other suppliers in the market and the emerging advantages of fixed-price contracts in 2003 – 4, Npower’s prices were competitive.

Mr Eadie said that the price rises introduced by Npower were consistent with increases in forward prices plus other cost pressures, including environmental requirements and cost pressures within the electricity supply industry.

Mr Eadie provided valuable independent assistance to the Court.

It is convenient to consider Issue 2 before Issue 1.

Issue 2: Was Npower in breach of the Agreement prior to its termination, and if so how?

The relevant legal principles

The following legal principles are common ground.

As to the construction of the express terms of the Agreeement:-

…

“as in the case of any other written document, in situations of ambiguity the words of the document are to be construed more strongly against the party who made the document and who now seeks to rely on them.” Chitty on Contracts 29^th edn volume 1, para 14-009

See also Tamarind International Ltd and Others v Eastern Natural Gas (Retail) Ltd and Another [2000] EULR 708 para 48 per Morison J.

As to the bases upon which terms are implied at common law:

Obvious Terms: -

“Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common, “oh, of course.” Shirlaw v. Southern Foundries (1926) Ltd [1939] 2 KB 206 @ 227, Chitty supra 13-007.

Necessary Terms: -

“The touchstone is always necessity and not merely reasonableness.” Liverpool CC v Irwin [1977] AC 239 @ 266, Chitty supra 13-009

“The common law contains however, no general law on the implied duties of principal to agent… ……The notion of good faith has been little developed in the common law, and a principal is not normally regarded as owing fiduciary duties to his agent.” Bowstead & Reynolds on Agency17^th edn 11-023.

As to the extent of the assumed obligation under Regulation 4(1) there are no UK or ECJ authorities directly in point.

“The common law contains, however, no general law on the implied duties of principal to agent, and here therefore the regulations break a certain amount of new ground. Regulation 4(1) … There is scope here therefore for the development of implied terms of fair treatment, co-operation and disclosure of relevant information; and contract terms in which the principal retains the right to act in a manner contrary to these requirements will not be valid.” Bowstead supra 11-023.

The Regulations must be interpreted in the light of their declared purposes which were the establishment of a level playing field, and the social policy objective of protecting commercial agents, a perceived downtrodden race, from their principals (Page v Combined Shipping & Trading [1997] 3 All ER 656 (CA) (per Staughton LJ p.660)).

Those reasons

“point fairly strongly to an intention to depart from the domestic legal provisions of the various countries in the Community, or at any rate some of them, and achieve a regime which is new to some and will be the same for all.” Page (per Staughton LJ p.660).

“The requirement of good faith in this context is one of fair and open dealing….Good faith in this context is not an artificial or technical concept; nor, since Lord Mansfield was its champion, is it a concept wholly unfamiliar to British lawyers. It looks to good standards of commercial morality and practice.” Lord Bingham LCJ in Director General of Fair Trading v. First National Bank ([2002] 1 A.C. 481, para 17) (considering the same words in Regulation 5 of the Unfair Terms in Consumer Contracts Regulations 1999).

Analysis

SOSP have withdrawn an allegation that “the claimant was in breach of its obligations to the defendant under Schedule 2 of the Agreement in that it failed to take reasonable steps to ensure that the prices which it offered for gas and electricity were reasonably competitive” (see paragraph 41 of the Re-Amended Defence). Thus it is accepted that Npower ensured that the prices which Npower offered to SME customers for electricity and Mains Gas were reasonably competitive in the market place, having regard to the provisions of Schedule 2 to the Agreement. Schedule 2 provided that any change to the price of electricity offered to SME customers by Npower was to be deemed to be reasonably competitive if Npower was still reasonably competitive with “the relevant deemed contract prices”. SOSP now accept that this criterion was met.

SOSP’s case (as amended in the course of the trial) was set out in the Re-Amended Defence as follows.

“Implied Terms (Common Law)

9.

There were terms to be implied into the Agreement (as necessary or obvious) that:

i.

the claimant would not act so as to prevent the defendant making commissionable sales under the Agreement, and

ii.

the claimant would not act so as to render substantially more difficult, the defendant from making commissionable sales under the Agreement.

Implied Duty (1993 Regulations)

9A. By Regulation 4 (1) the claimant owed to the defendant an obligation to act dutifully and in good faith in its relationship with it.

9B. The claimant’s obligation to act dutifully included duties:

i.

not to give to the defendant unreasonable instructions;

ii.

not to make to the defendant unreasonable threats;

iii.

to give the defendant clear instructions, and

iv not to raise prices to levels at which the defendant would be unable to make any or any significant sales under the Agreement.

9C. The claimant’s obligations to act in good faith required it to deal openly and fairly with the defendant and in particular duties:

i.

not to give to the defendant instructions that were unfair;

ii.

not to make to the defendant unfair threats;

iii to give the defendant clear instructions, and

iv not to raise prices to levels at which the defendant would be unable to make any or any significant sales under the Agreement.

…

40A. On both 29 May and 4 June 2003 the claimant breached the following terms and duties,

40A.1 In breach of the terms and duties at para 9i, 9Bi and 9Ci above, the claimant required the defendant to reduce its sales under the Agreement by at least 70% until the autumn.

40A.2 In breach of the terms and duties at paras 9i, 9Bii and 9Cii above, the claimant threatened to increase prices in a manner which would make it impossible for the defendant to make any/any significant sales under the Agreement.

40A.3 In breach of the terms and duties at paras 9i, 9Bii and Cii above, the claimant threatened (but did not in fact implement) to create administrative delays in order to make it impossible for the Defendant to make any/any significant sales under the Agreement.

40B Between 20 June and 10 August 2003 the claimant further breached the terms and duties at paras 9i, 9ii, 9Biv and 9Civ by increasing prices in a manner which made it impossible for the defendant to make any/any significant sales under the Agreement.

40C Insofar as the claimant may argue that the instructions/threats relied upon by the defendant as constituting the breaches in para 40A above were for a limited time, the claimant is in breach of the duties at paras 9Biii and 9Ciii in that if failed at any time to give any/any clear instruction that the defendant should re-commence selling.

40D As a result of the combination of the instruction and threats set out at para 40A and the price increases set out at para 40B the vast majority of the defendant’s sales staff left the defendant. The defendant was thereby deprived of the staff through whom sales would ordinarily have been made and was unable to maintain sales at 30% of the pre- 29 May 2003 level.”

I turn to consider the pleaded case.

As to paragraph 9, in my judgment the wide and uncertain terms contended for in paragraph 9i and 9ii are not to be implied into the Agreement. The Agreement was a lengthy and carefully drafted contract. The rights and obligations of both parties were set out in detail. (See in this connection the judgment of the Court delivered by Sir Thomas Bingham MR in Philips Electronique v British Sky Broadcasting Limited 19 October 1994 at pages 12-15).

The principal will only be liable for preventing the agent from earning his remuneration when the implication of a promise that he will not do so is necessary to give business efficacy to the contract, or otherwise to effect the intention of the parties. (Bowstead & Reynolds supra Article 60, paragraph 7-032). No express contractual promise is relied on by SOSP. A term that Npower “would not act so as to prevent [SOSP] making commissionable sales under the Agreement” is too wide and too uncertain. The means of prevention are not identified in the formulation of the implied term. (See generally Bowstead supra 7-040).

Similar considerations apply to the term alleged in paragraph 9ii (that Npower “would not act so as to render substantially more difficult, the defendant from making commissionable sales under the Agreement”). Given the detailed provisions in the Agreement as to the respective rights and obligations of the parties, a term to the effect alleged is too wide and too uncertain when the nature of the acts, which it is alleged Npower was not permitted to do, are not identified.

On the assumption that the Regulations applied to the relationship between Npower and SOSP, I turn to consider paragraph 9B and paragraph 9C.

Part II of the Regualtions (Rights and Obligations) provides: -

“Duties of a principal to his commercial agent

4(1) In his relations with his commercial agent a principal must act dutifully and in good faith.

(2)

In particular, a principal must –

(a)

provide his commercial agent with the necessary documentation relating to the goods concerned;

(b)

obtain for his commercial agent the information necessary for the performance of the agency contract, and in particular notify his commercial agent within a reasonable period once he anticipates that the volume of commercial transactions will be significantly lower than that which the commercial agent could normally have expected.

(3)

A principal shall, in addition, inform his commercial agent within a reasonable period of his acceptance or refusal of, and of any non-execution by him of, a commercial transaction which the commercial agent has procured for him.”

The parties cannot derogate from Article 4.

The duty to act dutifully and in good faith is illustrated by the specific provisions of Regulation 4(2) and (3).

When considering the impact of Regulation 4, the starting point must be the express written terms of the Agreement.

If and to the extent it is to be suggested that the express terms were contrary to the requirements to act dutifully and in good faith, the relevant contract terms must be identified.

Npower’s contractual obligations were set out in the Agreement and in addition Npower was required to act dutifully and in good faith. The particular duties alleged in 9B i, ii and iii and 9C i, ii and iii are considered below in the context of paragraphs 40A-40D.

If and to the extent that it is suggested by paragraph 40B that the requirements to act dutifully and in good faith gave rise to a wider obligation on the part of Npower than that set out in Schedule 2, I reject that contention. Where in the Agreement the parties set out the extent of Npower’s express obligation to use reasonable endeavours to ensure that its prices to SME customers for electricity and Mains Gas were reasonably competitive in the marketplace, there is no scope for a duty to some wider and uncertain effect at common law or in reliance on Regulation 4.

Before turning to consider paragraph 40A to D of the Re-Amended Defence, it is necessary to set out my findings as to what happened on 29 May and 4 June 2003 and thereafter.

The meetings on 29 May and 4 June

In my judgment the meeting on 4 June was the definitive meeting attended by four of Npower’s SME agents. The meeting on 29 May 2003 was an informal meeting and Npower’s considered position was set out on 4 June.

I find that SOSP’s business was subject to difficulty and uncertainty prior to 29 May/4 June and that in particular: -

(a)

a number of SOSP’s agents had already left (see for example the statements of Mr Murphy and Mr Poole) and

(b)

there was an emerging difference of opinion between Mr Johnston and Mr Greene as to the future of the business.

I find that the power point presentation probably took place and that if and to the extent that a full presentation of the slides did not take place, the probability is that the substance of the slides was communicated at the meeting.

The request made by Mr Burns to reduce volumes by 70% for a limited period of time was made in, and must be seen in, the wider context of a serious commercial problem which affected both Npower and SOSP as reflected in the slides.

The content of the slides is summarised above.

The price changes from 1 July 2003 mentioned at the meeting (and the subsequent changes in August) were driven by a number of factors including most importantly the rising cost of buying electricity forward in the wholesale markets in order to cover the cost of fulfilling 5 or 2 year fixed term contracts. The go-live rate was unacceptably low and Npower was paying commissions (which were not always clawed back) in respect of contracts which did not go live for a variety of reasons. For understandable commercial reasons Npower was in difficulty in relation to its budget for sales commission. As Mr Tarpey explained “if we were selling contracts profitably, then the issue of how much we spend in commission up to a level is not relevant. The issue was that the commissions budget was expiring because we were selling a greater ratio of five-year contracts relative to two than we expected and also the go live rates for contracts were lower than expected. The way to fix the commissions budget therefore was to make sure we were managing the administration of the contracts better and encourage the sales agents to do the same, such that we could improve the go live rate.”

Mr Burns’ request to reduce volume by 70% until the autumn was, on SOSP’s own pleaded case, not communicated to SOSP’s sub-agents. Further Information served by SOSP in the course of the trial under paragraph 40D, Response 1, incorporated paragraphs 56 - 57 of Mr Greene’s statement in which Mr Greene said that he and Mr Johnston decided, after the 29 May meeting, “not to tell the agents that they had to reduce the number of contracts to be tendered by 70%”. Instead (according to Mr Greene) the agents were informed that “... in the early autumn [SOSP] would be re-launching [its] activities with Npower and expanding [its] present activities throughout the UK”.

As to paragraph 40A of the Re-Amended Defence, Npower accept that Mr Burns requested SOSP to reduce volume by 70% until the autumn in the context set out above. The request was a request (and not an instruction) and must be seen in its context. SOSP was free to disregard the request. SOSP would continue to receive commission due whatever the level of the sales achieved. Mr Burns was probably making the obvious commercial point – “please do all you can to help improve the go-live rates, with fewer but better quality sales, with a potentially higher go-live rate.” The purpose of the request was to mitigate the problem with Mr Burns’ commission budget, namely that very substantial sums by way of commission were being paid out by Npower on contracts that did not go live, and therefore generated no revenue or profit to Npower. If contrary to the above Mr Burns gave an instruction (as opposed to making a request) and the same was unlawful in the sense of being contrary to the terms of the Agreement and unreasonable, SOSP was not obliged to obey the request (see Bowstead & Reynolds supra Article 39 paragraph 6-008). If SOSP had thought at the time that Mr Burns had made an unlawful and unreasonable request, Mr Johnston and Mr Greene would surely have written to Mr Robertson (or some other person at his level) in May or June to complain. They did not do so. SOSP’s real complaint was about prices, but Npower’s obligations as to prices were set out in Schedule 2 to the Agreement. I repeat that SOSP’s pleaded case that Npower was in breach of Schedule 2 has been withdrawn.

It follows that Npower was not in breach of any express or implied terms of the contract or any duty owed by virtue of Regulation 4, in the respects alleged in paragraph 40A 1.

As to paragraph 40A 2, as Mr Tarpey explained those concerned with sales (including Mr Burns) did not set Npower’s prices. Further Npower’s obligations in relation to reasonably competitive prices were those set out in Schedule 2 to the Agreement.

As to paragraph 40A 3, it is not alleged that the alleged threat was in fact implemented.

I reject the allegations in paragraph 40B for the reasons set out above.

I reject the allegations in paragraph 40C for the reasons set out below.

I do not accept the allegations in paragraph 40D. Some of SOSP’s sub-agents left to join First Contact.

The agents were not told that they had to reduce the number of contracts to be tendered by 70%.

I add the following for completeness. I do not accept that Npower increased prices in a manner which made it impossible for SOSP to make any/any significant sales. The Territory was not confined to Scotland. After the July 2003 price rises, Npower’s market prices for electricity and gas remained generally competitive, with the temporary exception of certain areas. By the end of the year, however, they had once again become competitive with those of other suppliers. Such changes from time to time are inherent in the nature of a fully competitive market. Sales were possible as were shown by the performance of some of the other agents. Mr Tarpey made it clear throughout his involvement with SOSP that the Agreement was subsisting and that Npower required SOSP to perform its obligations under the Agreement (see for example the second letter of 14 January 2004).

For these reasons I answer Issue 2 in the negative.

Issue 1 – Did Npower lawfully terminate the Agreement on about 11 February 2004?

The relevant legal principles

The following legal principles are common ground.

As to the circumstances in which a party renounces a contract: -

“A renunciation of a contract occurs when one party by words or conduct evinces an intention not to perform, or expressly declares that he is or will be unable to perform, his obligations under the contract in some essential respect. ........... Also the party in default ... may refuse to perform the contract unless the other party complies with certain conditions not required by its terms. In such a case, there is little difficulty in holding that the contract has been renounced…It is not a mere refusal or omission …to do something which he ought to do, that will justify the other in repudiating the contract; but there must be an absolute refusal to perform his side of the contract”. See Chitty supra at 24-018

“The renunciation must be “made quite plain”. In particular, where there is a genuine dispute as to the construction of a contract, the courts may be unwilling to hold that an expression of an intention by one party to carry out the contract only in accordance with his own erroneous interpretation of it amounts to a repudiation; and the same is true of a genuine mistake of fact or law”. Chitty supra para 24-019.

As to the effect of a party who purports to accept a repudiatory breach of contract not stating in the letter of acceptance a reason on which he later seeks to rely, there is no need for a party accepting a repudiation of contract to give the reason for doing so to the party in default at the time of termination (see e.g. Wethersfield v Sargent [1999] ICR 425, CA).

“The proper approach ... once a repudiation of the contract by [one party] has been established, is to ask whether the [other party] has accepted that repudiation by treating the contract ... as at an end. ... the fact that the [other party] also objected to the other actions or inactions of [the party in default], not amounting to a breach of contract, would not vitiate the acceptance of the repudiation. It follows that, in the present case, it was enough that the [innocent party] [terminated the contract] in response, at least in part, to fundamental breaches of contract by [the other party].” Nottinghamshire County Council v Mielke [2004] IRLR 703, CA, at para. 33.

As to the relevance of contractual terms as to methods of termination: -

“The fact that one party is contractually entitled to terminate the agreement in the event of a breach by the other party does not preclude that party from treating the agreement as discharged by reason of the other’s repudiation ..., unless the agreement itself expressly or impliedly provides that it can only be terminated by exercise of the contractual right.” Chitty supra 22-048.

In National Power plc v United Gas Company (Colman J, unreported, 3 July 1998), the court was concerned with a termination clause under which the innocent party was entitled to give notice of termination in the event that the other party was in material breach and failed to commence to remedy the same within 7 days of a notice requiring him to do so. Colman J concluded (at page 60) that because of the opening wording of the clause (including in particular the use of the word entitled) the clause ... “cannot have had the purpose of obliging the innocent party to confer on the party in breach a locus poenitentiae, for the giving of a notice to remedy the breach is not said to be mandatory. Accordingly, if the term relates only to actual repudiatory breaches, the innocent party may in the case of such a breach terminate at once as a matter of law or may confer a last chance by means of a notice to remedy, exactly his position at common law”.

As to the relevance of any prior breach of contract by Npower on its ability to accept SOSPs ex hypothesi repudiation/renunciation, in Fercometal S.A.R.L. v Mediterranean Shipping Co SA [1989] A.C. 788, HL, Lord Ackner said at para 805: -

“When A wrongfully repudiates his contractual obligations in anticipation of the time for their performance, he presents the innocent party B with two choices. He may either affirm the contract by treating it as still in force or he may treat it as finally and conclusively discharged. There is no third choice, as a sort of via media, to affirm the contract and yet to be absolved from tendering further performance unless and until A gives reasonable notice that he is once again able and willing to perform. Such a choice would negate the contract being kept alive for the benefit of both parties and would deny the party who unsuccessfully sought to rescind, the right to take advantage of any supervening circumstance which would justify him in declining to complete.”

The only exception to this principle is where a continuing repudiatory breach by one party amounts to breach of a condition precedent to the performance of the contract by the other party. In State Trading Corp. of India v M Golodetz Ltd [1989] 2 Lloyd’s Rep. 277, CA, at 286 per Kerr L.J. said:

“ [i]f A is entitled to treat B as having wrongfully repudiated the contract between them and does so, then it does not avail B to point to A’s past breaches of contract, whatever their nature. A breach by A would only assist B if it was still continuing when A purported to treat B as having repudiated the contract and if the effect of A’s subsisting breach was such as to preclude A from claiming that B had committed a repudiatory breach. In other words, B would have to show that A, being in breach of an obligation in the nature of a condition precedent, was therefore not entitled to rely on B’s breach as a repudiation.”

It is a basic principle of law that if an innocent party elects to treat the contract as continuing, then it remains in existence for the benefit of the wrong-doer as well as himself: Chitty supra 24-011 (see also at 24-015).

Was SOSP in repudiatory breach of the Agreement?

By 11 February 2004 (and for some months before that) SOSP had ceased performing its primary obligations under the Agreement. SOSP was not attempting to sell Npower’s supply agreements to customers. In particular (but without limitation) SOSP was not providing the Services it was required to provide under clause 6.3.1 of the Agreement (the sourcing of SME customers in the Territory by means of doorstep canvassing; arranging for the completion of Mains Gas Supply Contracts and Electricity Supply Contracts with SME customers in the Territory; and arranging for the ongoing provision of services to the SME Customers in the Territory).

I refer to the events leading to termination set out above.

I accept Mr Tarpey’s evidence that at his first meeting with SOSP on 17 November 2003 “it soon became very clear that, from SOSP’s point of view, the primary purpose of the discussion was not to clear the air and review a way forward, but rather to discuss their ‘entitlement’ to an immediate settlement payment under the Regulations … The message remained clear: SOSP would not be performing the Agreement unless they received a substantial payout. They indicated that unless their demands were met they would continue not to perform and ... would not enter into discussions for the future”.

Subsequently (as Mr Tarpey put it) SOSP “persisted in [its] approach of pushing for a payment upon termination of the Agreement”, including at the meeting on 17 December 2003 in correspondence in December 2003 and January 2004, and at a meeting on 2 February 2004.

Mr Tarpey said: -

“The fact that SOSP had refused to provide sales projections and furthermore had blatantly withheld important information about how it could obtain further sales sent a clear signal to Npower that SOSP would not perform the Agreement unless it received a substantial payout to which it was not entitled - certainly at that time before their Agreement expired. This was supported by the fact that sales figures ... had dropped to zero, and by the several express statements by the directors of SOSP that they would do no more business for Npower until they received compensation. This was an unacceptable situation and the decision was therefore taken to terminate the agreement immediately.”

Mr Tarpey made it clear throughout his involvement with SOSP that the Agreement was subsisting and that Npower required SOSP to perform its obligations under the Agreement (see for example the second letter of 14 January 2004).

I accept Mr Robinson’s evidence to like effect.

In my judgment by its decision to cease selling Npower’s supply contracts to customers/to cease providing the Services it was required to provide under the Agreement and/or by its refusal to cooperate with Npower in discussing how SOSP intended/planned to reverse that situation and achieve sales and/or by expressly refusing to reverse those decisions until Npower had paid it the compensation to which it claimed to be entitled under Regulation 17 of the Regulations or otherwise, SOSP was in repudiatory breach of the Agreement.

In so far as any/all of SOSP’s repudiatory breach(es) of the Agreement were not expressly relied on in Npower’s letter of termination, can Npower now be prevented from relying on such repudiatory conduct in support of its case that it lawfully terminated the Agreement?

I answer this question in the negative. The relevant legal principles are set out above. The reasons why Npower terminated the Agreement are set out in the passages from Mr Tarpey’s evidence quoted above.

Was Npower’s termination of the Agreement unlawful by reason of its failure to serve notices on SOSP in accordance with clauses 13.2(b) or 13.4 of the Agreement?

As Npower points out it is difficult to see how SOSP’s renunciation of the Agreement could have been remedied. SOSP had effectively given Npower an ultimatum: agree to pay us compensation or we will not perform the Agreement. Given that Npower was not prepared so to agree, SOSP’s repudiatory non-performance and its repudiatory conduct in repeatedly insisting on compliance with that ultimatum were, on any realistic commercial view of matters, not capable of remedy within the intended scope of clause 13.2(b).

In company with Colman J in National Power plc v United Gas Company I consider that because of the opening wording of clause 13.2 (a) (including in particular the use of the word “may”), the clause

“cannot have had the purpose of obliging the innocent party to confer on the party in breach a locus poenitentiae, for the giving of a notice to remedy the breach is not said to be mandatory.”

I accept Npower’s submissions as follows. Clause 13 does not purport to set out an exhaustive code ousting the common law position in respect of acceptance of repudiatory conduct. It provides that either party “may” terminate the Agreement in a number of ways. Only 13.2(a) even implies that the triggering conduct might well be repudiatory as a matter of common law (where the breach is one “which the terminating party reasonably regards as serious and which is not capable of remedy ...”). 13.2(b) and 13.4 are intended to deal with breaches which, at least in the main, are not repudiatory per se, but which, if not rectified or if repeated after due notice, nonetheless will entitle a party lawfully to terminate. Clause 13 provides for various ways in which a party might lawfully terminate the Agreement, in addition to the common law right lawfully to terminate summarily by way of accepting the other party’s repudiatory breach of contract.

I add the following for completeness. I find that Npower did actually want the information requested. The agreed expiry date under the Agreement was 31 March 2004. Npower had to be able to plan how it was going to acquire sales in 2004 (see the evidence of Mr Robinson in this connection).

Further Mr Tarpey was, I find, open-minded as at 17 November 2003 and thereafter as to SOSP’s future with Npower (whatever the views of those below him in the hierarchy). As Mr Tarpey pointed out, if Npower were selling contracts profitably, then the issue of how much Npower spent in commission was not relevant.

Conclusion

SOSP was, as at 11 February 2004, in repudiatory breach of the Agreement, for the reasons set out above.

Npower was not itself in repudiatory breach of the Agreement as at 11 February 2004.

Npower’s letter of termination was a lawful method of its accepting SOSP’s repudiation of the Agreement as terminating the Agreement (and the fact that some or all of SOSP’s conduct constituting its repudiation of the Agreement was not expressly set out in the termination letter is irrelevant in law).

Thus Npower’s termination of the Agreement was lawful and it is entitled to a declaration to that effect.

These conclusions stand whether or not the Regulations apply.

I accordingly declare that Npower was not in breach of the Agreement (Issue 2) and that this is so whether or not the Regulations apply.

I accordingly declare that Npower was entitled to accept SOSP’s repudiation of the Agreement thereby bringing the Agreement to an end in February 2004 (Issue 1) whether or not the Regulations apply.