Dalkia Utilities Services Plc v Celtech International Ltd

In the present case I have to decide, amongst other things, (i) which, if either, of the two parties to a 15 year agreement lawfully terminated it; (ii) whether, if one of them did so, it was by giving notice under a contractual termination clause or by way of acceptance of the repudiation of the contract by the other party, or both; and (iii) whether a notice of termination pursuant to a particular clause of the contract may, also, serve as an acceptance of a repudiation by the other party or may, if the notice was invalid and there was no such repudiation, itself, be a repudiation.

The dispute has certain remarkable features. First, at the time when the agreement was brought to an end, the relevant representatives of both parties, including the then managing director of the defendant and its external legal advisors, were ignorant of two important written amendments to it. Second, the last of those amendments contained provisions which, according to the claimant produced, on their literal meaning, a result that was commercially absurd and which was, on any view, surprising. Third, the claimant sought at the commencement of the trial to amend its Points of Claim to rectify the agreement as amended. I refused permission to amend. But the claimant contends that the absurdity of the literal meaning of the amendment can be remedied by a process of construction.

The claimant – Dalkia Utilities Services Limited (“Dalkia”) – designs, constructs, funds, installs, commissions and operates energy plants. It is part of a group which is said to be Europe’s leading energy services provider.

The defendant – Celtech International Limited (“Celtech”) – is a subsidiary in a group of UK companies involved in the paper industry. Its parent company is Celtech Holdings Ltd. It is ultimately controlled by Mr Fabio Perini, a wealthy and successful businessman, whose Group originally had a 50%, then a majority, and later a 100% interest in the holding company. Celtech’s principal business is the manufacture of tissue paper which it does by making large reels, up to a couple of tonnes in weight. These reels are later converted by those who purchase them into industrial and domestic paper products such as towels and toilet paper. In 1993 Celtech embarked upon the construction of a large paper mill at a site at Lansil Industrial Estate, Lancaster, the total cost of which was in the region of £17 million. In order to operate the mill Celtech required both electricity and steam. For that purpose it negotiated a series of agreements with Dalkia (then named AHS Emstar Utilities Services PLC) whereby Dalkia would provide energy services by means of an energy plant, described as a combined heat and power facility (”CHP”), the cost of which was anticipated to be in the region of £3 million.

Between 17^th October 1994 and 27^th June 1997 Dalkia and Celtech signed six agreements in connection with the construction of the Plant and the supply and management of the Energy Services and the Charges for them:

an agreement dated 17^th October 1994 in connection with the development of the project to design, build, commission and operate the Plant;

the Principal Agreement dated 24^th October 1995 whereby Dalkia agreed (a) to procure the design, construction, funding, installation, commissioning and operation of the Combined Heat and Power Plant (“the Plant”) which was to provide the necessary electricity and steam to the mill and (b), over a fifteen year period, to supply certain defined Energy Services by means of the Plant;

an agreement dated 24th October 1995 by which Celtech (as landlord) agreed to lease to Dalkia the property that would house the Plant (“the Agreement for Lease”);

an agreement dated 17^th April 1996 covering certain new works which Dalkia agreed to finance, which amended certain specific provisions of the Principal Agreement (“the First Amendment Agreement”);

a supplemental letter agreement dated 22^nd May 1996 in connection with the provision of further services by Dalkia (“the Supplemental Agreement”); and

an agreement dated 27^th June 1997 that again amended the Principal Agreement and provided for rescheduling of the finance element payable by Celtech and for charges for new works (“the Second Amendment Agreement”).

The Plant took gas from the mains gas supply, for which Celtech paid, and converted it into electricity (“power”) and steam (“heat”) which were used to operate the paper mill. The purpose of the CHP facility was to take advantage of the energy efficiencies which it was thought would be achieved so as to reduce the cost of electricity and steam below that which would arise if power and heat were derived solely from conventional sources, in particular electricity from the grid. The generation of power by the facility should have been almost as efficient as the national grid, but without the inevitable energy loss in transmission, and the “waste heat” recovered through a heat exchanger (Footnote: ¹) to raise steam was effectively free. The electricity derived from the Plant could be used in the mill and, depending on the relationship between gas and electricity prices, sold back to the grid. The Plant was housed on a discrete parcel of land located within the paper mill. The freehold of this land is owned by Celtech.

The Principal Agreement came into force on its date – 24^th October 1995. It was conditional on Celtech executing and delivering to Dalkia the Agreement for Lease. Under clause 3.1 – headed “Supply of Energy Service”- Dalkia undertook to procure the design, construction, funding, installation, commissioning and operation of what was described as the Interim Energy Plant and the New Plant. The Interim Energy Plant consisted of a fired packaged boiler and a number of boiler ancillaries. The New Plant comprised a gas turbine driven generator set, gas turbine ancillary equipment, a waste heat boiler, and a standby boiler (Footnote: ²), with boiler ancillaries, a computer based plant management system and various other items of plant and equipment. Under clause 3.2 Dalkia was bound to supply from what turned out to be 15^th March 1996 until 2^nd December 1996 (Footnote: ³) what was described as the Interim Energy Service, defined in Part 1 of Schedule G as being a quantity of saturated steam to be supplied by the use of the interim energy plant. From 2^nd December 1996 Dalkia was to supply the New Energy Service, defined in Part 2 of Schedule G as electricity and steam up to certain maximum quantities and turbine exhaust gases. These utilities were to be supplied by the New Plant which Dalkia and its staff were to operate, and which Dalkia was to maintain and repair. For its part Celtech was obliged, by clause 3.7, to supply a number of specified Support Services including space within the building for the New Plant and concrete foundation plinths therefor.

The Principal Agreement was to last in the first instance for an “Initial Period” of 15 years from the Certification Date, i.e. from 2^nd December 1996 until 2^nd December 2011. Thereafter it was to continue for successive periods of one year unless either party gave a year’s notice to terminate at the end of any such successive period. By clause 2.2.3 of the Second Amendment Agreement the Initial Period was defined to mean the period commencing on the Certification Date and ending on 31^st December 2011.

Clause 4 provided for Dalkia to charge Celtech and Celtech to pay for the Energy Service in accordance with Schedule A. Part II of that Schedule specified that for the duration of the agreement Celtech should pay for the New Energy Service, an annual charge of £950,232 in 12 equal monthly instalments. That charge was divided into two parts:

The “Finance Element” of the annual charge, being £409,926;

The “Operational Element” of the annual charge, being £540,306;

Schedule B provided for variation of the charges. In respect of the finance element clause B1.1 provided that after Celtech’s first full annual accounting period after the fourth anniversary of the Certification Date and after each full accounting period thereafter until such time as Dalkia had completely amortised its investment in the Interim Energy Plant and the New Plant Celtech should make additional payments at the rate of 40% of the actual cost savings arising from the agreement in the relevant accounting period. Those savings were to be the difference between (i) the aggregate of the finance and operational elements paid by Celtech to Dalkia in the relevant accounting period and (ii) Celtech’s annual non-CHP energy and operating costs (i.e. the costs that Celtech would have incurred for steam, electricity, and hot gases for the paper machine drying hood if the New Plant had not been installed and all steam was generated by conventional boiler plant, all electricity imported from the regional electricity company and all hot gases for the hood provided from direct natural gas firing) calculated in accordance with a complicated formula.

Clause B1.2 allowed Celtech not to make additional payments if it had insufficient cash available to do so. Clause B1.3 however required Celtech to make sufficient additional payments to amortise the whole of Dalkia’s investment in the two Plants on or before the tenth anniversary of the Certification Date. In the event no additional payments have been made. Clause B 1.4 provided that on the day that Dalkia’s investment in the two plants was fully amortised by Celtech the finance element of the charges should be reduced to zero and the operational element reduced from £540,306 to £415,306 i.e. a reduction of £125,000 (Footnote: ⁴). The rationale for that reduction is not clear. Mr Roberts, the Group Finance Director of Dalkia Plc, the parent of the claimant, thought that it was intended as an incentive for early repayment and a reflection of Dalkia’s view that the overall risk of the transaction would reduce once the financial element was paid off.

Clause B1.7 allowed Celtech to elect to have the finance element only become payable on the date six months after the Certification Date. In that case the finance element would be payable at the revised rate of £424,226 and, if no additional or further payments had been made by Celtech, an additional £212,113 (i.e. an additional six months charge) on the expiry of the Initial Period. Celtech made this election. Under that clause the election should have been made before the Certification Date of 2^nd December 1996. In fact it was made by a letter of 14^th January 1997 but Dalkia accepted it.

Schedule B also provided for variations in the operational element of the charges in accordance with the movement of certain labour and materials indices; for variation of the charges if certain assumptions as to the incidence of taxation turned out to be incorrect, and for a general entitlement on Dalkia’s part to adjust the charges to reflect changes in local or government taxes.

Schedule C Part II provided that one twelfth of the annual charge for the New Energy Service would be invoiced to the client monthly in arrears, to be paid by direct debit (although one was never in fact set up). Dalkia was to be entitled to charge interest on overdue amounts at 4% above the National Westminster Bank base rate. It also provided for the undisputed portion of any sum the subject of a bona fide dispute to be promptly paid and for the balance to be paid within 14 days of the settlement of the dispute by agreement or determination, with interest at that rate from the date when the sum was originally payable.

Clause 14 provided for rights of termination. Under clause 14.1 either party could terminate the agreement forthwith by notice in writing if the other party ceased to trade or was wound up or entered into liquidation or compounded with its creditors or had a receiver, administrator, or similar officer appointed over all or a major part of its assets or undertaking, or any resolution was passed relating to any of the foregoing. Clause 14.2 provided:

Clause 14.3 gave Dalkia a right to terminate if by reason of force majeure pursuant to clause 13 it was unable to proceed with the construction of the New Plant for a continuous period of 12 months or more or to provide the Energy Service for a continuous period of three months or more.

Clause 14.4, upon which Dalkia relied to terminate the agreement, is in the following terms:

The remaining sub clauses of clause 14 gave Dalkia rights of termination in various events such as:

Clause 15 provided for the consequences of termination, which differed according to the clause pursuant to which termination took place and whether termination took place before or after the Certification Date. Clauses 15.4 – 15.8. provided as follows:

the TERMINATION SUM as specified in Schedule D.

any expenditure incurred on the repair and/or replacement of the NEW PLANT over and above that which has already been recovered through the CHARGES defined in Schedule A up to the date of such termination.

any expenditure on labour, materials and subcontractors incurred in the provision of the ENERGY SERVICE which would have been recovered through the CHARGES defined in Schedule A but for the early termination and for any redundancy, employment associated costs, or other costs which the COMPANY may incur as a result of termination.

any other costs and losses incurred by the COMPANY in relation to the fulfilment of its obligations under clause 3 and otherwise as provided for under this Agreement up to and including the date of termination.

On a termination of this Agreement by the CLIENT pursuant to

In the event that this Agreement is terminated for whatever

The consequences of termination set out in this clause represent

On termination of this Agreement for whatever cause the

It is necessary to determine whether or not clause 15.7. should be interpreted to mean that clause 15 provides a complete code as to the rights and remedies which either side shall enjoy in the event that there is any form of termination or purported termination of the agreement, whether by a notice given under any of the sub-clauses of clause 14, or by reason of the acceptance by one party to the agreement of a repudiatory breach (e.g. a total refusal to perform) committed by the other. Dalkia submitted that the answer was “yes”; Celtech submitted in its written opening (paragraph 59) that the answer was “yes” (whilst allowing for either possibility in oral submission), and in closing that the answer was “no” (paragraph 41 b).

In my judgment clause 15.7 should not be so construed. First, although the word “any” is a word of wide import, the clause must be looked at in its context. Clause 14 contains 9 separate categories of circumstances in which one party or the other may terminate the agreement. In all of these categories the right to terminate would or could arise in circumstances which did not give rise to a right of termination at common law. Clause 15 deals with the consequences that will follow according to which ground for termination has been invoked. The natural reading of clause 15.7, in that context, is that the only rights or remedies that will arise in respect of a termination on any of the bases provided for by clause 14 will be those specified in clause 15. Secondly, clause 15.7 does not seem to me sufficiently clear, as it would need to be, to exclude the parties’ common law right to accept a repudiatory breach of contract (e.g. an outright refusal to perform) as discharging the innocent party from further liability and to claim damages for the loss of the contract. The presumption is that it does not unless there are clear express words to that effect: Modern Engineering (Bristol) Ltd v Gilbert Ash (Northern) [1974] A.C. 689,717.

Clauses 15.4 and 15.5 provided that, in respect of terminations, whether by Dalkia or Celtech, after the Certification Date, payment should be made by Celtech of a Termination Sum (and, in the case of a termination by Dalkia, certain other sums). Upon payment of that sum Celtech was “to keep the plant”. The Termination Sum was defined in Schedule D as a figure varying between £4,121,330 and zero as at each of the yearly anniversaries of the Certification Date from the first to the fifteenth, with provision for the figure to be adjusted for terminations occurring between two anniversary dates. The sums contained in the Schedule are the net present value (at a 5% discount rate) of the instalments payable under Schedule J, i.e. the instalments due in respect of the finance element as from the Certification Date (Footnote: ⁵).

The intention behind the Agreement was that Dalkia would obtain capital allowances which would reduce the tax payable by it. It was to the advantage of Celtech that Dalkia should be able to obtain such allowances since, if it did, that would reduce the charges that would otherwise have been payable. Further Celtech, which was a start up company, would only be able to obtain capital allowances (if otherwise eligible) when it started making profits. In order for Dalkia to claim capital allowances it had to show that it was the owner of the asset for which an allowance was sought. A number of provisions of the agreement were drafted in order to ensure that Dalkia remained the owner of the Plant at least until the termination of the agreement. Clause 1.24 defines “Owner” as the person who properly incurs the expenditure on the two Plants, which, under clause 3.1. Dalkia was to supply. By clause 9.5 Celtech was not to attempt to transfer any title to, or any other interest in, either of the Plants or the Property (defined as the property demised by the lease), or create any charge lease or other encumbrance of any type over them with one exception. Under clause 9.5. Dalkia was to have the right at any time throughout the Initial Period and any successive period to replace, modify, adapt, or alter either Plant provided that the Energy Service was maintained. Under clause 10.1 Dalkia was to insure the Plants. Clause 17.1 provided in terms that for the duration of the agreement the Plants were “not and shall not become the property of the client”. Under clause 17.3 Celtech was bound to provide Dalkia with any necessary consents by mortgagees or debenture holders or others having an interest in or charge over the Premises (i.e. the mill) for the provision of the Energy Service, such consents to be upon terms which would ensure that those giving them should not be able to claim title to, or prevent Dalkia from removing, the Plants from the Premises in accordance with the terms of the Agreement. Clause B4 of Schedule B recorded that it had been assumed that a writing down allowance “shall be made otherwise than to the CLIENT” in respect of the accounting period in which expenditure was incurred and subsequent periods and provided that Dalkia should be able to adjust the Charges should that assumption turn out to be incorrect.

As is apparent from these provisions the agreement between the parties was that Dalkia should be the owner of the Plant during the duration of the agreement but that when the agreement terminated Celtech would, on paying the Termination Sum, keep the Plant. Notwithstanding that agreement Dalkia contend that the Plant became annexed to the Land so as to become part of it and so that it could not be removed by them after the termination of the lease.

Clause 16 provided for a right of suspension in the following terms

The Agreement for Lease was executed on 24^th October 1995. It provided, by clause 5, that it should cease and determine and cease to be of effect forthwith upon the determination of the Operating Agreement (i.e. the Principal Agreement). Under the Lease, which is annexed to the Agreement for Lease, Celtech leased to Dalkia for a peppercorn rent the parcel of land within the mill on which the Plant was to stand until the end of the Initial Period (within the meaning of the Principal Agreement), and thereafter for successive periods of one year until the Principal Agreement (in the Lease described as “the Commercial Agreement”) was determined.

Clause 3.4. of the Lease provides as follows:

Clause 5.7. of the Lease provides:

(for the avoidance of doubt) termination of the Commercial Agreement by notice pursuant to the provisions of the Commercial Agreement shall (subject to payment by the Landlord of any sums due to the Tenant under Clause 15 of the Commercial Agreement and subject also to the provisions of Clause 15.3 (iii) thereof) also operate to determine this Lease but without prejudice to any right of action either party may have in respect of any breach non-observance or non-performance of the other party’s covenants agreements or obligations herein or in the Commercial Agreement contained AND SO THAT for the purposes of this Clause 5.7.2 termination of this Lease and the Commercial Agreement in consequence of this (sic) exercise by the Landlord of its rights under Clause 5.1. of this Lease shall rank as a termination of the Commercial Agreement by the CLIENT pursuant to Clause 14.2. thereof.”

Clause 6.6. of the Lease provides:

As is apparent the Lease treats the New Plant as a tenant’s fixture which Dalkia is not bound to yield up at the expiry of the lease. It was submitted on behalf of Dalkia that since clause 15.6 (iii) of the Principal Agreement provides that Dalkia shall be entitled on termination for whatever cause to enter upon the premises and to remove any property other than the New Plant there is an inconsistency between the Lease and the Principal Agreement and that it is the latter that is to prevail. I do not, however regard clause 15.6 (iii) as creating such an inconsistency. If there is a termination under clause 15.4 or 15.5 and Celtech pays the Termination Sum they are entitled to keep the plant. For that reason clause 15.6 could not provide that in the event that the Agreement was terminated for whatever cause Dalkia should be entitled to remove the plant. But if that sum is not paid then the Principal Agreement and the Lease, taken together, contemplate, as it seems to me, that Dalkia will be able to remove the plant, of which, according to the terms of the Principal Agreement it was always the owner, and which, according to the terms of the Lease, was a tenant’s fixture that it was entitled to remove.

The plant is removable. It was originally delivered to the factory in sections and assembled and installed in the plant room. The major components (Turbine Gearbox Assembly, Waste Heat Boiler, and Standby Boiler) are mounted on skids which can be manoeuvred and lifted on low loaders and the ancillary items (pumps, ducting etc) can be disassembled and loaded onto suitable transport by crane. It was installed on concrete foundation plinths; see Schedule H 1 (2). It can, for the most part, leave the premises in the same way as it came in, although some pieces of equipment, such as a high voltage breaker, would have to be replaced, at a cost probably not more than £100,000. I have no further information as to the degree of annexation of the Plant to the land, nor has authority been cited to me other than Megarry & Wade. I do not think it necessary for me to decide whether the degree of annexation of the Plant was prima facie sufficient to make it a fixture, or whether, if that is so, the Plant is not to be treated as such because the purpose of the annexation was for the better enjoyment of the plant as a chattel rather than a permanent improvement to the land; or whether, like the looms in a worsted mill fixed by nails to wooden beams and plugs in the floor in Mills v Stockman [1967] 116 CLR 61 it remains part of the land. If it is necessary for me to do so I hold that the Plant was a fixture. That is how the parties treated it in the Lease. Further since the Plant was to generate the power and heat needed for the mill, it seems to me that it was intended as an integral part of the premises and a permanent improvement to them. It is true that the provisions of the Principal Agreement treat the Plant as belonging to Dalkia. But:

In 1996 Celtech wished to carry out certain works which Dalkia agreed to finance. The First Amendment Agreement of 17^th April 1996 defined those works as the “New Works” which were in two parts: the Part 1 and the Part 2 Works. The Part 1 Works consisted of certain gas supply installation work to the value of about £300,000. The Part 2 Works consisted of some relatively minor works relating to noise abatement and fire protection and other items to the value of about £50,000. The charges for the two Works were described as the Part 1 and Part 2 Charges, or, together, the New Works Charge. The First Amendment Agreement added a new clause 9A to the Principal Agreement whereby Dalkia agreed to advance to Celtech the cost that Celtech incurred in completing the New Works by paying the relevant contractors in instalments. Clauses 9A.5 – 9A.8 provided as follows:

The “Part 1 Costs” were defined as the cost of the Part 1 Works plus interest from the date that the relevant portion of the advance was made until the Certification Date at National Westminster Bank’s base rate. The “Part 1 Charge” meant an annual sum equal to £390 per £1,000 of the Part 1 Costs. The “Part 2 Costs” meant the cost of the Part 2 Works plus interest as aforesaid. The “Part 2 Charge” meant an annual sum equal to £123 per £1,000 of the Part 2 costs. The “Payment Date” was defined as the first banking day of each month commencing with the first banking day of the month following the month of the Certification Date i.e. the first banking day of January 1997. The “Final Payment Date” was, in the case of the Part 1 Charge the third, and, in the case of the Part 2 Charge, the fifteenth anniversary of the Certification Date.

Clause 3 of the First Amendment Agreement provided that for the purposes of Clause 14.4 of the Principal Agreement “Charges” should include any part or all of the New Works Charge.

Accordingly, under the terms of the Principal Agreement as amended by the First Amendment Agreement, Celtech were bound to pay by way of charges the following amounts monthly:

Further, upon a termination by Dalkia under clause 14.4 (and other clauses) the Termination Sum specified in Schedule D i.e. the net present value (at a discount rate of 5%) of the instalments due in respect of the finance element as from the Certification Date was recoverable. In addition by virtue of clause 9A.8. if Dalkia became entitled to terminate the Agreement it could declare the full New Works charge due with a deduction in respect of unaccrued interest.

The Plant became operational in about January 1997. On 27^th June 1997 the parties entered into the Second Amendment Agreement. There were four recitals to the Agreement. The first three recorded (i) the making of the Principal and First Amendment Agreements; (ii) Celtech’s entitlement under the former to elect to make a deferral of payment of the finance element; (iii) the Certification Date of 2^nd December 1996, and the making of such an election by Celtech by its letter of 14^th January 1997. The fourth recital then read:

Paragraph 1 defined the expression “Original Charges” so as to mean the £35,352.17 referred to above and, in relation to the Final Payment Date to mean £247,465.19 being the product of £35,352.17 and £212,113.02, (i.e. the final deferred payment in respect of the Finance Element). The Original Charges are, thus, the finance element of the existing charges. Paragraph 2.2 of the Agreement replaced some of the definitions in the Principal or First Amendment Agreement. The Part 1 and Part 2 charges were given a definition in figures (£9,887 and £542.70 respectively (Footnote: ⁷)) with provision for a final payment of £59,332 and £3,256. The “Initial Period” was defined as the period from the Certification Date to 31^st December 2011 (cp the original definition where the period ended on 2^nd December 2011). The “Payment Date” is defined as the last day of each month commencing on 31^st July 1997 and ending with the Final Payment Date, which means, in relation to the Part 1 Charge, 31 December 1999 and, in relation to the Original Charge and the Part 2 Charge, 31 December 2011. The “Payment Due Date” means the 25^th day of the month following the payment Date. By paragraph 2.3 clauses 9A 5 and 9A.6 are replaced with the following.

The effect of the amendments to which I have so far referred was that Celtech was to pay to Dalkia the following monthly charges (save in respect of the Final Payment Date), to be invoiced on the last day of the month in the amount due on that date and paid on the 25^th day of the next month:

In addition, however, the expression “Charges” was by clause 2.2.1 henceforth to mean “the charges to be paid by the Client to the Company in accordance with the provisions of this Agreement”. These were now the charges set out in the previous paragraph. Further clause 2.4 of the First Amendment Agreement provided:

Most significantly of all, clause 2.2.8 amended the definition of “Termination Sum” to mean:

If clauses 9A.5 – 8 are set out in extenso as amended they read as follows:

If the Second Amendment Agreement is to be understood in accordance with its literal meaning the termination sum that is to be paid by Celtech upon a termination by Dalkia under clause 14.4 is the unpaid interest on any part of the Charges: clause 9A.7. This may be nothing or a very small amount. On the other hand clause 9A.8 provides that if Dalkia becomes entitled to terminate the agreement the amount that it can declare to be payable is “the full Charges” i.e. (a) the operating charges that are to be paid in accordance with the agreement, (b) the Original Charges; (c) the Part 1 and (d) Part 2 charges with a deduction in respect of interest that has not yet accrued. Accordingly, under the former clause Celtech would be in the fortunate position of being able to obtain the Plant for nothing more than the outstanding interest, if any. The instalments due but unpaid would be an accrued obligation but no further payment would be due. Under the latter clause Dalkia would be entitled to an amount that would include all the operational charges even though it was no longer going to operate the plant.

Clause 15.8 of the Principal Agreement provided that on termination of the agreement for whatever cause the provisions of some but not all of the clauses of the agreement should apply “mutatis mutandis as if a new Agreement had been entered into containing those clauses, but all other obligations of the parties shall cease”. One of the clauses that was to survive was clause 15 itself, including, therefore, clause 15.4 which contains the obligation to pay the Termination Sum. Another clause was 9.4. However, no mention was made in the Principal Agreement of any other sub-clause of clause 9, and neither the First nor the Second Agreement provided for clause 15.8 to be amended so as to include clause 9A. The potential significance of this will later appear.

Dalkia’s invoices were, at any rate by 2003, expressed to be for the “Energy Service” for a four or five week period, ending on a date during the month in question. Thus the invoice of 31^st May 2003 was in respect of the Energy Service from 21.04.03 to 19.5.03 and that for 30^th June was for the period 19.5.03 to 23.6.03. The invoices contained 3 elements:

The “Standing Charge”, which was the operational element of the charges and was calculated by dividing the annual charge by 365 and multiplying it by 28 or 35 days depending on the period of the Energy Service the subject of the invoice, the resulting figure in 2003 being either £46,451.24 or £58,064.04 for the 28 and 35 day periods.

The “Additional Service Charge” pursuant to the Supplemental Agreement of 22^nd May 1996, which was £1,868.07 (the charge per week) multiplied by 4 or 5 weeks;

The “Capital Service Charge” which was £35,894.87 each month. This sum is the product of the Original Charge of £35,352.17 and the Part 2 Charge of £542.70. The Part 1 Charge had by now been paid.

The Plant did not produce for Celtech the savings that had been hoped for. The parties dispute the causes of this. Dalkia contend that one of the reasons that the hoped for efficiencies were not secured was that the Plant, which was designed so as to be able to be run flat out all the time, was not run at full, or close to full, capacity (Footnote: ⁸) because the mill was not producing paper at full capacity; and that there were further cost saving measures that could have been taken but were not (Footnote: ⁹). Further the relative prices of gas and electricity moved unfavourably to Celtech. The price of gas went up and the price of electricity went down (although after 2003 electricity prices gradually went up again). Celtech contend that the terms of the agreement were unfair and uncompetitive and that there were deficiencies in the operating capability and service performance of the Plant. From at least as early as 2001 Celtech attempted to renegotiate the Principal Agreement but without success.

Payment of Dalkia’s invoices was not always made on the due date. In respect of all the monthly invoices issued between January 2000 and March 2003 there was always a delay in payment. The interval between the date when the invoice said that the amount was due (i.e. the last day of the next month) and the date when the cheque cleared the bank varied from about 10 days to 73 and was, from about mid 2001 generally in the 30 – 40 day range. The average number of days overdue for invoices dated between June 2001 and 31^st March 2003, all of which were paid by 7^th July 2003 was 37.7 days.

On 28^th February 2003 Dalkia issued invoice S 2002536 in the sum of £105,536.58, due for payment by 31^st March. Celtech paid Dalkia that sum by cheque dated 3^rd June 2003, which cleared on 11^th June (72 days after the due date according to the invoice). On 31^st March 2003 Dalkia issued invoice S 2002585 for £121,376.60 for payment on 30^th April. That was paid by transfer on 23^rd June 2003, 54 days later.

On 30^th April 2003 and 31^st May 2003 Dalkia issued Invoices numbered S 2002635 and S 310000113 in the sums of £105,536.58 and £105,536.61, calling for payment by 31^st May and 30^th June.

The paper industry operates in a volatile market. Pulp prices fluctuate. Consolidation amongst retailers put pressure on suppliers. In June 2003 prices were lower than they had been for some time. By then Celtech’s parent company and Mr Perini had come to realize that only large volume suppliers could survive in the paper market and that Celtech’s future could only be secured if it either merged with another paper manufacturer or was sold. A potential purchaser was found in the form of the LPC Group PLC (“LPC”), which is one of the largest tissue manufacturers in the UK. On 12^th June 2003 a meeting took place at Dalkia’s premises in Manchester. Present were representatives of Dalkia, namely Mr John Elliott, the Finance Director, who prior to this date had had very little involvement with Celtech (Footnote: ¹⁰), Mr Ray Howell, the National Sales Manager and Mr Graham Anderson, the National Sales Director, and, on the other side, Mr Antonio Veronesi, a Director of Celtech, Mr Chris Sear, the Managing Director of Tissue Tech, a shareholder in Celtech, and Mr John Danton, the Group Business Development Director of LPC. Mr Sear explained that the paper market was very difficult with prices at their lowest for years, that the Plant was not fully loaded, and that the quality of output was not delivering good enough margins. He said that Celtech had attempted for a few years, but had failed, to perform in the market, that the Plant was not producing at a level that could produce profits and that financial support was being given monthly by the shareholder – i.e. Mr Perini, who about two years previously had bought out David Brown, Celtech's former owner and Managing Director - and that that state of affairs could not continue. Celtech’s note records, no doubt truthfully, that Mr Sear said that Celtech’s shareholders were tired of providing monthly cash injections. As a Dalkia note records, he indicated that there was little prospect of the new management achieving the goal that Mr Perini had set them and that it was time to sell Celtech or to put it into administration.

Mr Danton told the meeting that LPC had been in protracted negotiation to acquire Celtech but that LPC was not prepared to take Celtech on if the cost of electricity at Celtech was, as he believed it to be, about £70 - 78 per tonne of paper produced compared to £21 - 24 at LPC. He indicated that a first review of Celtech’s accounts showed a “competitive disadvantage in energy costs of over £ 1 million a year”. Mr Veronesi made some reference to the prospect of Celtech going into either liquidation or administration – it is not clear which. One of the Dalkia notes of the meeting indicates that he said that if the merger did not go forward “more precipitative action would need to be taken (liquidation)” but the words in brackets may be the note taker’s interpretation rather than the actual words. Mr Veronesi said that the purpose of the meeting was not to negotiate but to put the problem on the table with a view to finding a solution. Mr Danton inquired whether, if the acquisition went forward, Dalkia would wish to continue supplying energy on a CEM (contract energy management) basis (Footnote: ¹¹) selling electricity at market prices. He indicated that he would consider signing a contract to last until 2011 whereby he would take electricity at Grid prices but with no minimum take and a “meet or release” clause in the case of offers to supply electricity at prices below those of Dalkia. Mr Howell indicated that Dalkia was keen to find a way forward acceptable to all parties and suggested that Dalkia could sell excess electricity made in the Plant to its own customer base at better prices than those at which the Grid would be purchasing and this income could be used to amortise the cost of running the plant. Mr Anderson broached the question of the Termination Sum. Mr Veronesi observed that there seemed to be an inconsistency between Schedules J and D and suggested that Dalkia could consider a more realistic termination sum taking account of the payments received to date, the current carrying value of the plant in Dalkia’s books and the interest movements since the deal was done. Mr Howell indicated that modelling a proposal would take some time. It was agreed that he would respond as soon as possible but in any event by Tuesday 17^th.

In the event no proposal was forthcoming. On 20^th June Wayne Tierney, Celtech’s finance director sent Mr Elliott the Celtech Group Trading results for the 5 months ending 31^st May 2003. These showed Group losses increasing for the first 4 months but reducing for May. On 23^rd June Celtech paid £121,376.60. On 24^th June a meeting took place at Dalkia’s offices in Staines attended by Messrs Elliott, Howell, Veronesi and Sear. The meeting did not go well. Celtech did not appear to Dalkia to be prepared to make any significant capital payment for the Plant. Whilst Mr Howell was in the course of putting forward a proposal Mr Elliott received a telephone call from Mr Faulkner, who was speaking on the instructions of Mr Pascal Guillaume, Dalkia’s managing director, telling him to stop the meeting, which he did. This happened because the proposal, which appears never to have been reduced to writing, was not going to be satisfactory to the management team. It involved a capital payment from Celtech and the supply by Dalkia of power and heat pursuant to a formula reflecting or relating to market pricing. Mr Elliott was stopped because neither Mr Guillaume nor Mr Faulkner understood exactly what was involved. Mr Elliott said that he would get back to Celtech. On 26^th June Mr Tierney sent the draft statutory accounts for Celtech Holdings, Celtech International (i.e. Celtech) and Celsoft Tissue for the year to 30^th June 2002. The accounts in respect of Celtech showed turnover for 2002 to be almost identical to that for 2001, but they also showed a sizeable reduction in the cost of sales and administrative expenses turning an operating loss of £1.14 million into an operating profit of £1.014 million. The Balance Sheet as at 30^th June 2002 showed a technical insolvency since the equity shareholder’s deficit was £1,058,649. But it also contained a note of a Post Balance Sheet Event namely the purchase of one of the group’s loans by Ticassa SA, the immediate parent of Celtech Holdings, on behalf of UK Tissues SA, and the waiver of that loan in exchange for share capital in Holdings. The effect of this was to reduce the liabilities in the Balance Sheet by £9 million. On 27^th June 2003 Mr Elliott e-mailed Mr Veronesi and Mr Sear to say that Dalkia were happy to explore any reasonable options but that they were not currently in a position to suggest any change of the situation regarding ownership of the asset (a payment from Celtech with Dalkia ending up owning the Plant or a joint sale to a third party had been mooted) and added:

Before Mr Elliott or Mr Veronesi sent a letter to each other they would telephone and inform each other. In the course of these courteous conversations they would agree that they should be trying to sort out the problems between their companies, although Mr Elliott was eager to make sure that Mr Veronesi understood that Dalkia needed some money to keep things going. It was Mr Veronesi’s evidence that in the course of most of these conversations he assured Mr Elliott that Dalkia would be paid, the implication being that Mr Perini would see that the necessary funds were provided. Mr Elliott’s evidence was that Mr Veronesi did not say this. He did, however, recall him saying in their conversations that Celtech was not able to pay at that point and, also, a discussion on one occasion about the provision of security. He also recalled him saying that he was not prepared to go back to Mr Perini to get a cheque to pay Dalkia without having a long term solution to put forward. I am not convinced that Mr Veronesi gave repeated assurances that Dalkia would be paid. On this point I prefer the evidence of Mr Elliott, whom I found a quietly convincing witness. I doubt that Mr Veronesi would be giving repeated and unqualified assurances of this kind at a time when he was negotiating for a markedly different deal, including references to the possibility of insolvency, and when it cannot have been certain that Mr Perini would ensure that Celtech was enabled to comply with the agreement. Mr Veronesi’s evidence was that communication between Celtech and Dalkia was on two levels. One was the correspondence. The other was represented by the telephone conversations with Mr Elliott in which he was giving the message that Mr Perini would not let Celtech down but that it was necessary to try and work things out in the first instance without reference to the possibility of funds coming from the ultimate shareholder. If Mr Veronesi was giving repeated assurances that Dalkia would be paid, by Mr Perini arranging it if necessary, it seems to me likely (a) that Mr Elliott would not have forgotten them and (b) that the correspondence on both sides would have contained some reference to them. In saying that I do not intend to suggest that Mr Veronesi, who struck me as a suave and experienced businessman, was not seeking to give truthful evidence. But he was not, as I find, as positive as he now recollects.

On 30^th June Dalkia invoiced Celtech another £121,376.63.

On Friday 4^th July 2003 Mr Elliott wrote to Mr Veronesi a letter which included the following:

On Monday July 7^th Mr Veronesi wrote to Mr Elliott saying that the buyers had estimated that the current contract produced a competitive disadvantage in terms of energy costs of about £1.1. million per annum “compared to industry standards” and that for that reason they would not proceed with the purchase unless the contract could be renegotiated in such a way as to assure them that no further payments would be due for capital and interest; but they would be willing to make an agreement with Dalkia until 2011 to purchase energy from the CHP plant if this would result in their power costs being at or lower than their Group grid prices up to that date. He said that Celtech would be willing to reach the same agreement and that it would “make sense for Celtech to operate this system as from today. This would remove one of our major competitive disadvantages, and would certainly assist in the recovery of the company”. He added:

Also on July 7^th Mr Elliott wrote to Celtech informing them that Dalkia calculated that the April and May invoiced sums of £105,536.58 and £105,536.61 were due to be paid on the 25^th of May and 25^th June and asked for immediate payment of the total of £211,973.19.

On 17^th July Mr Elliott wrote to Mr Veronesi expressing surprise at, and an inability to understand, the £1.1 million figure of competitive disadvantage, and expressing the view that changes to the operating regime of the CHP coupled with a small capital investment could generate annual savings of around £250,000 on energy costs. He suggested a meeting to establish a project team to bring this about. (This proposal involved the use of waste exhaust gases from the CHP to dry the paper (Footnote: ¹²)). He added:

On 23^rd July Mr Veronesi sent Mr Elliott a calculation by “our potential buyer” of the competitive disadvantage. This showed a difference in Celtech energy costs compared with industry energy costs of between £43 and £53 per ton, making a yearly difference on 25,000 tons of £1,075,000 to £1,325,000. The comparison was not, in fact, a comparison of like with like, because included within the Celtech charge was the cost of financing the acquisition of the plant (Footnote: ¹³). The letter indicated that a potential administrator would “not take a very positive view” about the Agreement; and that he might well start looking around for a case for damages against Dalkia on competition grounds. Mr Veronesi said that he could not understand the relationship between Schedules D and J, or how savings of £250,000 p.a. would be achieved and that it seemed that there had been significant overcharging of the service element. He expressed a wish to find a commercial solution involving either Celtech operating the CHP plant at competitive grid costs or a purchaser being found for the Plant and its location elsewhere. He added:

On 24^th July Mr Elliott wrote to Mr Veronesi expressing disappointment that his letter of 23^rd July did not mention payment of overdue debts. He insisted on immediate payment of £372, 416.04 consisting of the April, May and June invoices (in fact the June invoice was not due until 25^th July or, according to the invoice, 31^st July), together with a 2002 invoice in the sum of £39,966.22 for certain modifications to the generator set. He indicated that, unless that sum was transferred by close of business on 25^th July 2003 Dalkia would be forced to issue a notice of suspension under Clause 16.

On 25^th July Mr Veronesi replied telling him that he could not see what Dalkia would gain by suspension and that it would only invite the shareholders to react defensively “and my last letter gave an indication of some of their thoughts on this”. He pointed out that Celtech would almost certainly have to shut the Plant down in the short term which would quickly lead “in all probability as we see it” to the appointment of an administrator or put the company into liquidation. He pointed out that only two payments could really be said to be in arrears, the third having only just fallen due. He added:

On 28^th July Mr Elliott wrote saying that:

On 29^th July 2003 Mr Elliott replied in detail to Mr Veronesi’s letter of 25^th July. He suggested that the industry figure of £35- 45/tonne was too low because it did not take account of the cost associated with the provision of energy. He said that Schedule J was not referred to in the body of the agreement (Footnote: ¹⁴) and was redundant. He refuted any suggestion of overcharging; and repeated his suggestion of a meeting to establish a project team to work on generating energy savings, adding:

On 30^th July Celtech wrote to Mr Elliott informing him that the directors of Celtech had had to take a view on the company’s ability to pay £251,039.41 by the deadline and stating that Mr Elliott was well aware of the difficulties of Celtech “mainly due to the losses resulting from the contract with Dalkia”. He said that “in the light of these difficulties it is the Directors’ opinion that CIL cannot meet the deadline and must therefore expect to receive formal notice of suspension with effect from Friday 1^st August at 5.00 pm”. The letter said that Celtech would be procuring alternative means of ensuring that the mill continued by hiring external equipment.

On 31^st July Mr Elliott wrote to say (i) that it was Celtech’s wilful refusal to pay anything whilst expecting Dalkia to continue supply that had precipitated the imminent suspension; (ii) that a request for a delay for a further six months without any offer of any form of payment or suggested proposal was not acceptable. He expressed surprise that Celtech preferred to spend money on alternative supply rather than try to use available funds to satisfy their obligations to Dalkia. He also warned that suspension might be followed by a termination of the contract in which case sums in excess of £3,000,000 would become due. He urged payment of £251,039.41 by the end of banking hours on the morrow. Mr Veronesi, who was at the zoo in Salzburg, spoke to Mr Elliott on the telephone: it was probably in this conversation that the possibility of Celtech giving security was raised by Mr Veronesi. Such discussion as there was appears to have been inconclusive.

Later the same day he wrote to Celtech giving notice of Dalkia’s intention to suspend performance of its obligations from 5.00 p.m. on Friday 1^st August unless £251,039.41 was received within 24 hours.

As at 1^st August the amounts outstanding, by way of charges, and the period for which they had been outstanding were, according to the invoices rendered, as follows:

On 1^st August Mr Whiteley on behalf of the board of directors of Celtech wrote to Mr Elliott a long letter in which he asserted that Clause 16 was disproportionate and in the nature of a penalty; that the suspension would make it extremely difficult, if not impossible, for the mill to continue to operate; and that Celtech would be claiming damages and reporting the matter to the Office of Fair Trading. He went on to say:

Later on the same day Mr Whiteley wrote another letter in which he made a formal offer to settle the outstanding invoices. The terms proposed were that Dalkia would suspend the service for six months but cooperate with Celtech to ensure that Celtech had full access to all utilities and could continue operations. Celtech would pay a monthly fee for the use of the package boiler (i.e. the standby boiler supplied as part of the Plant) equivalent to the sums which would be paid to the external boiler suppliers, excluding the sums already committed to them for the first month. Celtech would continue with the supplementary service contract (i.e., the Supplemental Agreement of 22^nd May 1996) at £1,868.07 per week, paid monthly, in order to avoid Dalkia having to make the relevant employees redundant. During the six months a moratorium would apply on all monies due but interest would apply at a rate to be agreed and Celtech would pay the outstanding sum of £372,416.01 (Footnote: ¹⁷) in six equal instalments plus interest starting from September 1^st in the form of post dated cheques; and the parties would enter into constructive negotiations with a view to reaching final agreement.

On Friday 1^st August Dalkia suspended the performance of its obligations under the agreement. Mr Elliott had taken the decision to suspend in order to bring matters to a head, in the light of what he regarded as conflicting messages from Celtech, and to discover whether or not Celtech would pay. His view was that, if they did, the relationship would continue and, if they could not, it would be better to know sooner rather than later.

At the end of the week ending Friday 1^st August Mr Elliott of Dalkia went on holiday. Before he did so he had had no intention of terminating the contract or issuing a statutory demand, and expected to return to continue sorting out the problem, which would be dealt with in his absence by Mr Faulkner. Mr Veronesi was also on holiday. So was Mr Pascal Guillaume. The running was taken up by Mr Laurent Bermejo, the Chairman/Chief Executive Officer, and Mr David Faulkner, the Commercial Director. Mr Faulkner came back from holiday on Monday 4^th. Their attitude was to prove less accommodating. Mr Bermejo had been concerned about what he regarded as Dalkia’s £3,000,000 exposure and the losses that Dalkia would suffer if it went on supplying Celtech without payment. He was concerned that Celtech might be trading whilst insolvent (Footnote: ¹⁸); and he believed that the only solution for Dalkia was to suspend performance. He had seen Mr Veronesi’s letter of 23^rd which indicated that, if that was done, he would probably have to appoint an Administrator, a course which he favoured. At a meeting at Dalkia’s London offices Mr Bermejo told Mr Faulkner that, having taken legal advice from Beachcroft Wansbroughs, he had decided to issue a statutory demand for the outstanding sums. In the evening of Monday August 4^th Mr Bermejo called Mr Veronesi. In the course of the conversation Mr Bermejo, whose tone was aggressive, said that he would prefer to deal with an administrator of Celtech rather than Mr Veronesi since the administrator would be representing the interests of creditors and not Celtech’s ultimate shareholder (Footnote: ¹⁹) and that CIL was trading whilst insolvent. He informed Mr Veronesi that Dalkia would be serving a statutory demand for £390,000 the next day, and would then serve a petition to wind up the company, in which they would be successful, and Mr Veronesi would cease to be a director. Mr Veronesi referred to the Celtech proposal. Mr Bermejo said that post dated cheques were totally unacceptable and that the Celtech proposal was the same as that of an administrator, and repeated that he would prefer dealing with an administrator rather than Celtech. Mr Bermejo said that Dalkia would request the administrator to re-qualify all related party transactions with the group (Footnote: ²⁰). Mr Veronesi said that all transactions had been approved by the auditors and he was not losing any sleep on that account. Although no reference to this appears in Mr Veronesi’s note of the telephone call I accept Mr Bermejo’s evidence that Mr Veronesi said something to the effect that Celtech were not in a position to pay the outstanding debt. But this was not a statement to the effect that Celtech would never be able to pay. The tenor of his statement was the same as that contained in his letter of 1^st August.

On Monday 4th August Beachcroft Wansbroughs, on behalf of Dalkia, drafted a statutory demand on Celtech under sections 123(1)(a)/221(1)(a) of the Insolvency Act 1986 in which Dalkia claimed that Celtech owed it £390,915.45. That sum was made up of the April, May and June invoices, the invoice for the 2002 generator modifications, and a number of 2002 invoices in respect of interest for late payment totalling just below £18,500.

The form of the statutory demand has on its face the words:

This is an important document

A copy of the demand was enclosed with a letter from Mr Faulkner of 5^th August 2003. In that letter Mr Faulkner pointed out that Celtech had made no proposal which would result in a reduction of the outstanding debt but had proposed that Dalkia continue to supply on an unsecured basis; stated that Dalkia intended fully to exercise its rights if the statutory demand was not satisfied shortly; and reserved all rights that Dalkia might have under the contract. He confirmed that the service could be reinstated within 24 hours once the Statutory Demand was satisfied. He strongly urged payment of the outstanding sum in accordance with the demand, adding “we can then look forward to discussing realistic options for the future”. For the reasons set out in paragraph 86 below Dalkia was, in my judgment, entitled to demand payment of all three invoices despite the statement in its letter of 28^th July that it was prepared to accept a delay in the collection of the June invoice by 30 days.

Mr Whiteley took steps to ensure that Celtech could continue to operate by taking electricity off the grid and hiring in a boiler, which could be powered by oil or gas, to make steam. This boiler, which weighs about 20 tons, had to be installed outside the mill. The activity of closing down the mill and installing a new boiler in order for it to re-open (as it did on 7^th August) was a sizeable task and Mr Whiteley was under very great pressure at this time. Mr Faulkner learnt that this was going on and informed Mr Bermejo. As a result, after taking legal advice, he took the view that Celtech were not going to make any attempt to pay and that termination should take place if payment remained outstanding.

On Monday 11^th August Mr Faulkner of Dalkia wrote to Mr Whitely of Celtech informing him that if Celtech did not make full payment or “make a significant move to persuade us that you intend to pay us promptly” by 4 pm on Tuesday 12^th Dalkia would have no alternative but to issue a notice of termination under clause 14.4 and would take immediate steps to wind up the company.

On Tuesday 12^th August Mr Whiteley repeated the offer made in 1^st August with the variation that the first of the six instalments would be paid on August 15^th and negotiations would start on Tuesday 19^th. A telephone conversation took place between Mr Whitely and Mr Faulkner at 3 o’clock in the afternoon at which Mr Faulkner said that he intended to reject the offer because it was no different to the previous proposal. Mr Whitley pointed to the fact the first payment was to be earlier and said that it could be possible to pay it by bank transfer. Mr Faulkner described the £62,000 offered as derisory; his proposal was that Celtech pay £390,000 forthwith. He said that he saw Celtech as a risk and the offer as a delaying tactic. By a letter sent by e-mail at 3.20 Mr Faulkner rejected the new proposal and stated that a termination notice would be issued at 4.00. At 3.45 there was a further telephone conversation between the two of them. Mr Faulkner expressed concern that Mr Whiteley had not replied to his letter of 5^th August enclosing the statutory demand. Mr Whitely said that he had been under the impression that the statutory notice would run for 21 days and that Celtech had expected to respond to him early in the following week. Mr Faulkner repeated that he saw Celtech’s proposal as a £60,000 contribution to a debt which was close to £600,000, being “390k overdue, £105k plus extras due at the end of July and circa £60k for additional services, which will become due when notice is given” (Footnote: ²¹). He said that if Celtech were able to offer a bit more that week and a payment in the next week that would be enough to get the parties to a meeting in the next week but declined to make a proposal that would satisfy him. He agreed to extend the deadline until 5 pm. A further telephone conversation took place at about 4.30 – 4.40 pm in which Mr Faulkner stated that what Dalkia wanted was £3,000,000 in termination charges plus the outstanding £500,000 receivables and indicated that, if Celtech could make some proposal for, e.g. £60,000 that week, £60,000 on Monday, £60,000 next Friday, he would be prepared to consider it but that he needed the proposal then in order that he could respond by the 5 p.m. deadline. When Mr Whitley said that he was not able to make a proposal that day Mr Faulkner said that there was no more time.

At 5 50 pm Mr Faulkner e-mailed to Mr Whiteley a letter of termination. The letter included the following:

The final decision to terminate was, according to Mr Bermejo, who sanctioned it, made on the day the letter was sent, on the recommendation of Dalkia’s lawyers as the route whereby Dalkia’ exposure would be crystallized and its rights as creditor established. It is clear that he was concerned to safeguard what he saw as Dalkia’s entitlement to about £3,000,000.

On 14^th August Constant & Constant, who had been instructed on behalf of Celtech wrote to Beachcroft Wansbroughs. They asserted that Clause 16 was in the nature of a penalty insofar as it inhibited access by Celtech to the mains gas supply. They required Dalkia to allow Celtech access to the mains gas supply in order to operate the substitute boiler. They contended that Celtech had not repudiated the contract and was not in breach of any condition and said:

Constant & Constant had not been provided with the Second Amendment Agreement and were, like Dalkia, labouring under the misapprehension that Schedule D was still in operation. They must however have been told that some agreement had been made in July 1997 because their letter refers to “the July 1997 minor adjustment” and “the 27 June 1997 variation (the precise terms of which we have not seen but we understand they arise from exercise of a 6 month moratorium arrangement and some adjustments to the payment schedule in consequence)”.

On 15^th August Beachcrofts wrote joining issue with Constant’s letter and making clear that Dalkia still sought payment of the sums claimed in the Statutory Demand.

In the event Celtech paid the following sums by bank transfer on the following dates:

On 15^th October 2003 Dalkia served a further statutory demand on Celtech for £3,648,367.29. This sum included:

the Termination Sum specified in Schedule D to the Principal Agreement calculated at £3,266,183 inclusive of VAT;

a sum of £330,329.59 for expenditure on the matters specified in the third bullet point under clause 15.4 (i) and

costs and losses said to be £51,844.70 under the fourth bullet point of that clause.

On 5^th November 2003 Celtech applied in the Chancery Division to restrain the presentation of a winding up petition. In the course of those proceedings Dalkia abandoned a claim in respect of the Termination Sum under the first bullet point of clause 15.4 (i). But it claimed to be entitled to a sum larger than that contained in the statutory demand on the basis of clause 15.1, bullet point 3, a claim which Richards J held was at the very least disputable.

In the course of his judgment Richards J held that Dalkia was entitled to withdraw the concession made in the letter dated 28^th July extending time for payment of the June invoice by 30 days on the ground that the extension was agreed in the context of requiring immediate payment of the earlier invoices and was not supported by consideration. I respectfully agree. There was no binding agreement for an extension of the time for payment of the June instalment; and, insofar as the letter constituted a representation that Dalkia would not seek to enforce payment in accordance with the strict terms of the contract it was open to resile from the concession, given that, as Mr Gibson accepted, there was nothing that Celtech did in reliance upon it which made it inequitable for them to do so.

Richards J expressed the view that whether the breach relied on was material came into a “grey area” where the contentions of both sides were arguable.

But he rejected the contention that the effect of the statutory demand and Dalkia’s accompanying letter of 5^th August 2003 was to extend Celtech’s time for payment by 21 days thereby suspending any contractual right to terminate for that period. As to that contention he said this:

Richards J’s judgment was given on 12^th February 2004. On 26^th March 2004 Dalkia purported, pursuant to clause 9 A.8 of the First Amendment Agreement, to declare the full Original and New Works Charges to be immediately due and payable in the sum of £2,633,832.04 plus VAT. That sum consisted of £3,826,549.83, the charges unpaid as at 12^th August 2003, less £1,192,757.75 which Dalkia certified as the interest which had not yet accrued on that date. Dalkia also claimed £110,324.59 under Clause 15.4 (i) and interest on the amount of the two claims (net of VAT).VAT was claimed in addition to these amounts.

Clause 15.4 of the Agreement gave Dalkia a right of immediate termination in the event that Celtech was “in material breach of its obligations to pay the Charges”. As at 12^th August those breaches consisted of a failure to pay the following invoices:

As at that date Celtech had told Dalkia that it did not presently have it within its power and cash resources the ability to make the payments claimed under the Agreement and was facing insolvency. It had proposed a six month moratorium on payment on the basis that a sum of £372,416 (covering the invoices and the amount for generator modifications) would be paid by post dated cheques in six equal instalments of £62,069.13 plus interest, beginning on 15^th August. During this period further charges would accrue from month to month amounting to over £600,000. Celtech had indicated that the cost savings which would result from suspension would generate some cash flow (of unspecified amount) which Celtech would apply to meeting current outstandings.

It is common ground that the expression “material breach” does not mean a repudiatory breach. If “material” was synonymous with repudiatory”, the clause would add nothing to Dalkia’s remedies at common law. Mr Michael Soole Q.C., for Dalkia, submits that “material” covers any breach which is more than trivial or, to put it another way, which is not immaterial. Mr Charles Gibson Q.C., for Celtech, submits that the materiality of the breach must be judged by reference to the nature of the contract. Whilst the breach need not be repudiatory it must be of seriousness sufficient to justify bringing to an end a long term contract involving something of a partnership endeavour between the parties.

In Fortman Holdings Ltd v Modem Holdings [2001] EWCA Civ 1235 Fortman sold to Modem the entire share capital of Tele Links Holdings Ltd for £30 million. £20 million was payable immediately. Payment of the final £10 million was to be made in four instalments. Modem issued loan notes in respect of the £10 million. Under the notes the instalments were payable as follows:

The loan notes provided that the principal sum should become immediately repayable in a number of events, one of which was:

30^th April 2000 was a Sunday. The parties agreed that payment could be made on Tuesday 2^nd May. The instalment then due was not paid. Modem’s solicitors told Fortman’s solicitors, in a letter of 4^th May, that Modem had received funds in the UK to meet the loan notes but was holding them pending clarification of whether it had some claim against Fortman in respect of a building contract. The period of grace allowed by clause 4.5 ended on 16^th May. On 22^nd May proceedings were begun in respect of the whole £10 million. At first instance the judge, having rejected a claim that Modem was entitled to a set off and decided that £1 million was due on 2^nd May 2000, held that the failure to pay was not a “material” breach because (a) it related to only 1/10^th of the £10,000,000 due; (b) the reason for non-payment was that Modem believed that they enjoyed a bona fide right of set off; and (c) clause 4.5 was apt to cover deliberate action by Modem to frustrate its contractual obligation to pay under the Loan Notes.

Before the Court of Appeal counsel for Modem submitted that the non-payment was not material since (a) an explanation for non payment had been provided in the letter of 4^th May, which provided a sufficient undertaking that funds were available so that the risk of non payment was minimal; and (b) the non payment represented only 10% of the total due. The Court rejected this contention. Judge L.J. said:

Lord Justice Pill said:

In Glolite Ltd v Jasper Conran Ltd, 28 January 1998, The Times, Neuberger J, as he then was, observed that :

In National Power plc v United Gas Company Ltd , 3^rd July 1998 Colman J was concerned with a termination clause which entitled either party to terminate the agreement with immediate effect if:

In the Chancery proceedings Richards J accepted that, in considering the meaning of “material” in clause 14.4 it was right to have regard to the contractual consequences of material breach namely the obligation to pay, at least under the contract as originally drafted, the Termination Sum. Those consequences, he thought, would suggest that “material” would carry a proportionally greater degree of seriousness than would be the case if the contractual consequences were themselves less serious. He pointed out that the Agreement provides for the payment of interest, and gives to Dalkia a power of suspension, itself a serious consequence, which had some bearing on the gravity of breach necessary to bring clause 14.4 into operation.

Celtech submit that their failure to pay the charges due as at 12^th August 2003 was not a material breach of their obligations to pay the Charges. They point out that the charges were annual sums divided into the Finance Element/Original Charges, Part 1 and Part 2 Charges, and the Operational Element, payment of which secured the provision of the “New Energy Service” over a 15 year period, in a market in which the price of gas and electricity would fluctuate, possibly giving rise to temporary difficulties. The contract was not one of sale or loan; it was a collaborative venture. Throughout the term of the agreement Dalkia was entitled to retain ownership, possession and control of the Plant (and under clause 9.6 was entitled to replace, modify, adapt or alter it) unless and until a Termination Sum was paid to it. They were entitled to suspend the service and did so. Celtech were not, therefore, enjoying the benefit of the Energy Service, whilst under a continuing obligation to pay. Dalkia had served a statutory demand which would enable them, if the demand was well founded and unpaid, to wind Celtech up. Interest was payable in the event of late payment at a market rate compounded at monthly rests. Celtech had by 12^th August already paid about £7.9 million (inclusive of VAT) by way of charges out of the £ 14 million or so (exclusive of VAT) payable over the period of the contract. Termination bringing with it an obligation to make a £3,000,000 payment would or could have serious consequences for Celtech and the livelihood of its employees. In those circumstances the failure of Celtech to pay 3 monthly instalments out of 174 – time not being of the essence and the agreement providing for interest – could not be regarded as a material breach. This conclusion was supported by the fact that Celtech had been in similar breach of its obligation to pay charges over the years without Dalkia seeking to resort to termination and often not charging interest; and by Mr Elliott’s reaction when he returned from holiday and learnt of the termination (“very disappointed”). He had expected to carry on negotiations.

In my judgment, despite Mr Gibson’s very able submissions, Celtech was, as at August 12^th, in material breach of its obligation to pay the charges for the reasons, taken together, set out below. The whole of three separate instalments of Charges was due and unpaid. The third instalment had only just become due and Dalkia had been willing to postpone payment of it for a month. The non payment of that instalment, taken on its own, is, therefore, of less significance than the non payment of the other two. At the same time this instalment was the third of a series and there was nothing to suggest that it had any better prospect of being paid than its predecessors. Although the amounts due were a very small proportion of the total amount due over a 15 year period they were the amounts due in respect of a quarter of the current year and just over 8.5% of the total charges unpaid, including interest, for the remainder of the initial period. The sums involved were neither trivial nor minimal. Celtech’s continued failure to pay them was serious. In assessing the materiality of any breach it is relevant to consider not only of what the breach consists but also the circumstances in which the breach arises, including any explanation given or apparent as to why it has occurred. The reason why payment was not forthcoming in the present case was not because of some mishap, mistake or misunderstanding. Celtech failed to pay because it did not then have the money to do so, in circumstances where the picture presented by Celtech to Dalkia was that it was facing insolvency, could not presently pay any part of the outstanding debt, and needed a 6 month moratorium (during which further debts would accrue) in order to be able to do so by monthly payments of £62,069 starting on 15^th August. The offer to pay these instalments came late in the day. The tenor of what was being said was that, unless there was a renegotiation of the agreement, there was a real likelihood that Celtech would not be able to continue paying in full in the future. Dalkia could not, in practice, realise the Plant, unless there was a termination, because, whilst the agreement lasted, it was bound to have the Plant available (subject to modifications and alterations) for Celtech to be able to keep on payment of the termination sum. It seems to me that a clause of this kind, in this context, is designed to protect a client where the default is minimal or inconsequential or (even if it is not) is accidental or inadvertent, but otherwise to enable a supplier such as Dalkia to bring the period over which it is effectively extending credit to an end where there is a failure to keep up the payment schedule established by the contract. The provisions of clause 9A.8 are an indication of the importance that was attached to prompt payment. Termination by Dalkia would have the consequences that Celtech would, whilst Schedule D was in force and subject to any question of penalty, have to pay a sum representing the capital value of the Plant, the commercial impact of which would depend on whether it was able to obtain refinance. But it would, on payment, be entitled to keep the Plant. This is a serious consequence, which I take into account (although, in relation to the question of material breach the primary focus must, as it seems to me, be on the character of the breach rather than the consequences to the “guilty” party if the “innocent” party avails himself of his contractual remedy). But it is not a draconian one.

The Termination Sum payable by Celtech on a termination by Dalkia pursuant to clause 14.4 was, according to the wording of the Second Amendment Agreement the sum described in clause 9A.7. That amount was, in the present case, a miniscule proportion of the outstanding capital sum.

Dalkia claim, however, that they are entitled to recover the sum of £2,633,832.04 in accordance with the letter of 26^th March 2004 on one of two bases. Firstly they say that there has been an obvious mistake in the drafting which the Court can remedy by a process of construction. The definition of “Termination Sum” substituted by clause 2.2.8 of the Second Amendment Agreement was “the sum described in clause 9A.7.” That must, Dalkia submits, have been intended to mean “the sum described in clause 9A.8”. Clause 2.4 of the Second Amendment Agreement amended clauses 9A.7 and 9A.8 by replacing the expression “New Works Charge” by “Charges”. As so amended clause 9A.8 refers, in material part, to “the full Charges (with a deduction therefrom in the amount which the Company conclusively certifies to be the portion thereof attributable to interest which has not yet accrued).” Clause 2.2.1 of the Second Amendment Agreement defined Charges as “the Charges to be paid by [Celtech] to [Dalkia] in accordance with the provisions of the Agreement”. But that is a mistake too, at any rate if Charges is construed as including the operational element. What must have been intended was for clauses 9A.7 and 9A.8 to refer to the finance but not the Operational Element of the Charges. So it would include the Original Charges and the New Works Charge; but not the Operational Element of the Charges.

Alternatively Dalkia submit that, they were entitled to terminate the Agreement under clause 14.4 and, thus, under 9A.8 introduced by the First Amendment Agreement as amended by clause 2.4 of the Second Amendment Agreement, they were entitled to declare the full amount of the Original Charges and the New Works Charge immediately due and payable with a deduction for interest, and by their letter of 26^th March 2004 did so. This they can do on the footing that as a matter of construction the word “Charges” in clauses 9A.7 and 9A.8 does not include the operational element or, if it does, since the greater includes the less, they may declare payable all the Charges other than the operational element.

Celtech contend that Dalkia are, in effect trying to rectify the agreement, a course denied to them by my refusal to permit them to amend to make such a claim, and for which they lack the necessary evidential foundation. So far as clause 9A.8 is concerned they submit that it was too late, in March 2004, for Dalkia to invoke that clause, which did not survive termination. Further it is not open to them to declare immediately due and payable anything other than that to which the clause refers namely “the full Charges” and thereby, escape the difficulty that declaring the whole amount due and payable may contravene the law in respect of penalties.

In a claim for rectification it would have been necessary for Dalkia to prove that they and Celtech had, prior to and up to the time of making of the Second Amendment Agreement, a continuing intention as to what the agreement should provide, that there was some outward expression of their common accord, that by mistake the agreement as executed failed to give effect to that intention, and that the form of alteration that they propose would do so. A court of Equity will then make good the defective expression of their accord constituted by the written agreement by declaring, in effect, that it is to be treated as if it had originally embodied the change necessary to give effect to the parties’ true intention.

Such a process is distinct from an exercise in construction. When the court construes a document it seeks to discern from the material admissible for that purpose what the parties intended to mean by the words they used in the context in which they used them. The court takes the words as it finds them and treats their natural and ordinary meaning as the primary, albeit not the exclusive, source from which to determine what the parties meant by what they agreed. That does not mean that the court is bound to regard the literal meaning of the words used as representing what the parties intended or that it cannot correct obvious errors.

In East v Pantiles Plant Hire Ltd [1982] 2 EGLR 111 Lord Justice Brightman said:

In JIS (1974) Ltd v MCP Investment Nominees Ltd [2003] EWCA 721 an attempt to invoke this principle failed in a case where the offending clause was not an obvious nonsense but practically inoperable. The Court held that in those circumstances the defects in the agreement could not be cured by construction (“The task of interpretation does not allow the court to rewrite the contract”). Lord Justice Carnwath, delivering the judgment of the court went on to uphold the decision of Hart J that, on the facts, a plea for rectification was arguably maintainable. In the course of his judgment Hart J had observed that the requirement of an “outward expression” of accord:

Lord Justice Carnwath thought that there was “room for argument” on this ground, while resting his decision on the basis that on the facts of the case and on the state of the evidence it would be wrong to shut the defence out without a trial. It was in the light of those dicta that Dalkia sought, at the commencement of the trial to plead a claim for rectification, having previously taken the view that there was no sufficient outward expression of accord to get such a claim off the ground.

I have come to the clear conclusion that there is an obvious mistake in the Second Amendment Agreement. The manifest purpose of that agreement was to provide for the rescheduling of the Finance Element and the New Works Charge. Recital D says as much. There is no suggestion in the Agreement (or elsewhere) that the parties intended to effect a fundamental change so as to provide that the Termination Sum would be limited to such interest, if any, as was outstanding on any of the charges at the relevant time. Such a provision would be commercially nonsensical. It would have the extraordinary consequence that, in the event of a receiver of Dalkia being appointed, Celtech could under clause 14.1 terminate the agreement forthwith and, on payment of any outstanding interest (to which Dalkia would be entitled in any event) keep the Plant without further payment. In the present case it would mean that Celtech, who are in material breach of their payment obligations, could escape from the contract and keep the Plant without paying for what is outstanding in respect of it. I can think of no basis upon which the parties should have intended so bizarre a result and none has been suggested to me. It was suggested in the Defence, but not in argument, that after the Second Amendment Agreement it was no longer envisaged that Celtech would or might purchase or acquire legal ownership or title to the Plant during or after the expiry of the Initial Period and that the contract comprised no more than an operating lease; but this is inconsistent with the continuance in operation of provisions whereby Celtech would be entitled to keep the Plant, together with the obligation to continue to pay the “Original Charges” as well as the operational element of the charges, and with Celtech’s treatment of the plant as an asset in its annual accounts in conformity with SSAP 21.

In addition, if the amendment of the definition of “Termination Sum” so as to refer to clause 9A.7 is not to be treated as a mistake, the amendment to clause 9A.8, if read literally, is inexplicable. On this hypothesis, clause 9A.7 has been amended in order to make the Termination Sum, payable by Celtech on termination for material breach, a figure for whatever is due in respect of interest on unpaid charges, which may be zero. But by the same instrument clause 9A.8 is amended to provide that Dalkia’s entitlement to terminate carries with it the right to declare the full Charges immediately due, whereas the obvious intention, as it seems to me, was for the “Termination Sum” and the sum provided for by clause 9A.8 to coincide.

It is also clear to me that the parties did not intend that the Second Amendment Agreement should entitle Dalkia to recover, upon a termination, pursuant to clause 9A.8 as amended, the operational charges that had not accrued at the time of termination. Such an agreement would have been nonsensical and inconsistent with Recital D to the Second Amendment Agreement, which declares that the purpose of the agreement is to reschedule the Finance Element and says nothing about the Operational Element.

The structure and terms of clause 9A and its history show that what the parties had in mind was financial charges. The First Amendment Agreement was made in order to enable Dalkia to recoup, in addition to the monies advanced for the Plant, the monies advanced in respect of the New Works. Clauses 9A.5 and 9A.6 provided for the monthly payment of the Part 1 and Part 2 Charges. Clause 9A.7 provided for interest on those Charges. Clause 9A.8 provided for Dalkia to be able to declare the full New Works Charge (i.e. the Part I and Part 2 Charges) payable, less interest not yet accrued. The Second Amendment Agreement, conformably to its declared purpose of providing for the rescheduling of the Finance Element and the New Works Charge, amended Clause 9A.5 so that that clause would provide for the invoicing of the Finance Element, (now to be called the Original Charge), and the Part 1 and Part 2 Charges on each Payment Date. Clause 9A.6 would henceforth provide for payments to be made on the Payment Due Date.

Clause 9A.7 remained the same, save for the substitution of “Charges” for “New Works Charge”. The last sentence continued to deal with interest payable under clauses 9A.5 – 9A.7, i.e. the interest payable as a result of the non payment of the Original Charge and the Part 1 and Part 2 Charges. These were to be invoiced under clause 9A.5, and paid pursuant to clause 9A.6, with interest, if unpaid, being due under clause 9A.7. The Second Amendment Agreement did not provide for clause 9A.7 to act as a substitute or replacement for the interest provisions of Schedule C so as to cover interest on all Charges. Schedule C remained unaltered save for the addition at the beginning of the first sentence of the first paragraph of Part II of the words “Unless otherwise provided for in clause 9A of this Agreement”: see clause 2.6 of the Second Amendment Agreement.

Clause 9A.8 provided for a deduction from the amount which Dalkia might declare immediately due in respect of interest not yet accrued, a provision which can have no application in respect of the operational element. It would, as I have said, be nonsensical for the clause to provide for a deduction in respect of interest on financial charges that had not been earned whilst entitling Dalkia to recover in full the charges for operational services that it was never to perform. That clause 9A.8 was confined to financial charges is, also, reflected in the fact that provision (b) triggers a right of accelerated payment if any sums “due under this clause 9A” are 3 days late. Those sums are financial charges only: see clause 9A.5 as amended by clause 2.3. of the Second Amendment Agreement.

In those circumstances it seems to me that, insofar as clause 2.4. substitutes the expression “Charges” for “New Works Charge” in clauses 9A.7 and 9A.8, there has been an obvious drafting error; and that those clauses should construed so as to refer to such of the “Charges” as are pertinent to clause 9A and the Second Amendment Agreement, i.e. the Original Charge and the Part 1 and Part 2 Charges, but not the Operational Element. In other words clauses 9A.7 and 9A.8 should be construed as if Charges read “Original Charges and Part 1 and Part 2 Charges”.

I recognise that it is not the function of the court to rewrite a contract and that it cannot succumb to the temptation to achieve a reasonable result by ignoring or abandoning the words that the parties have chosen. But if it is obvious that an error has been made and what it is, the court can and should correct the mistake by way of construction so as to give effect to the parties’ intention rather than to frustrate it: see “The Starsin” [2003] UKHL 12 in which the House of Lords upheld the interpolation of a 17 word phrase in order to repair the omission produced by a homoeoteleuton. The alternative is to attempt to reach “what answer [the court] can on the basis that the uncorrected words represent the manner in which the parties decided to express their intention”. In the present case I am quite satisfied that to treat the Termination Sum as that literally described in 9A.7 and apply the definition of “Charges” without qualification to clauses 9A.7 and 9A.8 would not represent what the parties intended.

I am conscious that the error which appears to me to be obvious, now that I am fully acquainted with the relevant facts, escaped the notice not only of Dalkia but also of its previous legal advisors, and that in his second witness statement in the Chancery proceedings, made after taking legal advice, Mr Faulkner accepted that “…the definition of Termination Sum now provides only for the payment of interest which is not claimed”. No suggestion of error was made in those proceedings and the claim for substantial recovery was put on another contrived and now abandoned basis. But, in the absence of any plea of estoppel, this second error cannot disentitle Dalkia to a judgment to which they are otherwise entitled.

Accordingly Dalkia are, in my judgment, prima facie entitled to recover pursuant to clause 15.4(i):

The obligation on Celtech to pay the termination sum is not penal. It does not constitute a sum payment of which has the effect of punishing Celtech for breaking its contract by making it pay a sum that is more than any genuine pre-estimate of the loss caused to Dalkia by the breach. Nor is it “a payment of money stipulated as in terrorem of the offending party” – per Lord Dunedin in Dunlop Pneumatic Tyre Ltd v New Garage and Motor Company Ltd [1915] A.C. 79,86. Celtech is only required to make an earlier repayment of the capital in effect advanced by Dalkia in return for which Celtech can keep the plant: see The Angelic Star [1988] 1 Lloyd’s Rep 122. I do not think that the clause is properly to be regarded as penal because the calculation of accrued interest is to be conclusively certified by Dalkia.

If, however, I am wrong in my construction of clause 9A.8 and Dalkia, when terminating for breach under clause 14 is entitled to a Termination Sum being the sums described in 9A.8 i.e. the full charges, including the operational element, immediately due, the provision is penal since the operational element will have been wholly unearned and payment of it cannot represent any genuine estimate of Dalkia’s loss. In The “Angelic Star” Lord Justice Gibson said that the rule against penalties:

In those circumstances it is not strictly necessary to determine whether or not, in addition to their right to the Termination Sum under clause 15.4 (i) Dalkia had a freestanding right under clause 9A.8 to declare the Charges, other than the Operational Element immediately due, which survives the termination of the contract.

Mr Soole submits that they do. When Clause 9A 8 was originally drafted it must, he submits, have been intended to have a freestanding existence because it was the only means, by which upon termination Dalkia could recover the outstanding Part 1 and Part 2 charges. If, by virtue of clause 15.7 the only rights of the parties arising out of any termination were those specified in clause 15 it would not be possible to recover those charges under clause 9A.8 on termination. And if the only provisions of the agreement that applied post termination were those specified in clause 15.8 the Charges could not be recovered after termination either. This cannot have been intended. Further there was, he submitted, no time limit imposed for the exercise of the right to make a declaration. In addition he relied on the fact that clause 2.6 of the Second Amendment Agreement provided that there should be added at the beginning of the first sentence of the first paragraph of Schedule C Part II the words:

Mr Gibson submits that clauses 9A.8 (a) and (b) only entitled Dalkia to make a declaration prior to termination. Termination would bring to an end any entitlement to exercise rights under the agreement. Clause 15.8 made express provision for those rights that would survive and those that would cease. Clause 9A.8 was not in the former category. Further (a) the events described in clause 9A would naturally occur prior to termination, (b) the parties must have intended that if a declaration was made Celtech would have the opportunity to pay off the amount due so as to avoid termination, (c) the words “interest which has not yet accrued” in clause 9A.8. presupposed the subsistence of the agreement. Accordingly a notice served 7 months later was ineffective.

I prefer the submission of Mr Gibson. Under the Principal Agreement the only route by which, in the absence of a termination by the Client, Dalkia could secure payment of the Termination Sum was by serving a notice pursuant to the clauses mentioned in clause 15.4. Their entitlement to a Termination Sum was a right which arose upon termination. The First Amendment Agreement then needed to provide a means by which Dalkia could also recover the outstanding principal in respect of the New Works Charge. There would be nothing surprising in it providing that Dalkia should recover that principal at the same time i.e. at the time of termination. In fact it went further and provided that Dalkia could recover before then if it became entitled to terminate or in the circumstances specified in (b). But there is no reason why clause 15.8 cannot or should not take effect in accordance with its terms. If Dalkia was minded to terminate the agreement all it had to do, in order to recover the New Works Charge (less interest that had not accrued) was to declare the New Works Charge due and payable before the agreement terminated. Its right to the New Works charge would then arise from the declaration and not “out of [the] termination”. It could include the declaration in the notice of termination itself since the termination would not be complete until the notice had been received. But once the termination is effected the agreement is, by definition, at an end, and the obligations of the parties other than those specified in clause 15.8 cease. I am not persuaded that the fact that, after termination, Schedule C survives and that Schedule C, as amended, applies unless Clause 9A otherwise provides, means that the whole of clause 9A, or such of it as is capable of application, applies after termination. Such a construction would be inconsistent with clause 15.8 of the Principal Agreement, which was not amended. Further it is difficult to see what, after termination, is the scope for Schedule C Part II other than (i) the obligation to pay interest on overdue amounts; and (ii) the provision that, in the event of a bona fide dispute, the undisputed portion shall be promptly paid and the balance, with interest, paid 14 days after the amount due is agreed or determined. The only respect, as it seems to me, that clause 9A “otherwise provides” would be if, on its proper construction Schedule C does not provide for compounding whereas clause 9A.7 does. Whilst that may mean that, so far as that topic is concerned, Schedule C is applicable after termination, it does not mean, in my view, that the rest of clause 9A is.

Dalkia only seeks to rely upon a declaration under 9A.8 if the Termination Sum to which they are entitled, after serving notice under clause 14.4. is that provided for by 9A.7. But, upon that hypothesis, Dalkia would already have become bound, pursuant to the agreement, to allow Celtech to keep the Plant upon the payment of a minimal sum. If that really was the agreement, then a provision that enabled Dalkia, seven months later, to claim the outstanding instalments less future interest, in reliance on the breach which gave it the right to terminate in the first place, is penal. This would be so even if the operational charges are excluded. I should add that, although this point has not been expressly taken, I entertain considerable doubt as to whether, if Dalkia was entitled to make a declaration under 9 A.8 after termination it was entitled to do so seven months later. I should have thought it implicit that it was bound to exercise such an option within a reasonable time, which would, in my view have elapsed by the time the notice was given.

Dalkia contends, in the alternative, that as at 12^th August 2003 Celtech were in repudiatory breach of contract in that:

Stipulations as to time of payment are not generally of the essence of a contract of sale or hire, or other similar commercial contracts unless a different intention appears from the terms of the contract: Sale of Goods Act 1979, section 10; Halsbury’s Laws, Vol 2 para 1858; Chitty Vol 1 para 12 -037. None of the agreements made time for payment of the charges of the essence, and I do not think that that is to be implied. Mr Soole relied on the fact that the contract draws a distinction between termination for material breach of the obligation to pay charges, which can be immediate (clause 14.4), and termination for material breach of other obligations, which can only be done if the breach has subsisted for 120 days (clause 14.2), and on the fact that clause 9A.8 entitles Dalkia to declare the financial charges due and payable if any part is unpaid three days after the due date. I do not, however, regard the fact that the contract gives different rights of termination for breaches of different kinds, with immediate rights of termination in respect of material breach in respect of charges, as necessarily indicating that the common law right to accept a repudiatory breach as discharging the contract arises on any breach in respect of charges. On the contrary the contract may more aptly be regarded as giving to Dalkia, but only in the circumstances to which its provisions expressly apply, rights which differ from, and are more extensive than, its common law rights. As Colman J, put it in National Power plc v United Gas Company “the tenor of conferment of the termination rights suggests a contractual extension of available remedies” (Transcript page 47). Further if time for payment of every instalment was of the essence it would not have been necessary to give Dalkia an entitlement to terminate for any material breach of Celtech’s obligation to pay charges because any breach of that obligation would give them that right.

In Re Olympia & York Canary Wharf Ltd (No 2) [1993] BCC 159 Morritt J, as he then was, considered the authorities relating to the making of time of the essence. From that analysis and other authority (Footnote: ²³) I derive the following propositions:

Equity, before the Judicature Acts, insisted that prima facie time for payment was not essential (Footnote: ²⁴). But Equity’s patience was exhaustible. It would allow the contract to be treated as repudiated if the party in default had been given the opportunity to mend his ways by the giving of a notice to comply within a reasonable time. Whilst this is described as making time of the essence in reality the notice is the means of bringing to an end equity’s interference with the contract. Behzadi v Shaftesbury Hotels [1992] Ch 1;

Such a notice, which may be given in respect of any species of term, may not be served until the time for performance has expired; but it may be served as soon as that time arrives;

Such a notice must state clearly what the other party is required to do and the consequence if he fails i.e. that the contract may be terminated; Afovos Shipping v Pagnan [1982] 1 WLR 848,854C;

If the defaulting party fails to perform after service of such a notice, the failure is not automatically a repudiation of the contract, giving rise to a right to terminate. The breach must go to the root of the contract;

The notice operates as evidence of the date by which the promisee considers it reasonable to require the contract to be performed, failure to perform by which is evidence of an intention not to perform: see Lord Simon of Glaisdale in United Scientific Holdings Ltd v Burnley Borough Council [1978] A.C. 904, 946E – 947A; Astea (UK) Ltd v Time Group Ltd [2003] EWHC 725, TCC, paras 147 -

The only letter which qualifies under (c) is the letter of 11^th August. It is true that in its letter of 31^st July Dalkia had indicated that, following suspension, it might have to determine the agreement. But that is not sufficient. I do not regard the 24 hours (or so) notice given by the letter of 11^th August as reasonable in the circumstances. Mr Whiteley’s evidence, which I accept, was that the letter was received late in the afternoon of 11^th August. It was unexpected. It followed a notice of suspension, which was highly disruptive of Celtech's business, and a statutory demand which appeared to represent Dalkia’s response to the non payment of outstandings. Further, as appears below, the breach upon which the notice was based was not, even after the expiry of the notice, such as went to the root of the contract, nor was failure to perform it such as to evince an intention no longer to be bound by the contract.

A party may be in repudiatory breach as a result of breaches that he has committed or indicated that he will commit or a combination of the two. As to the former, Celtech failed to pay the instalments due in respect of April, May and June. As to the latter, it never said that it would not perform its financial obligations under the agreement. But it made plain that it was in financial difficulties, was facing insolvency, and could not presently honour its obligations under the agreement as they fell due. It asked for a 6 month moratorium on the instalments due in respect of April, May and June upon the footing that it would make monthly payments of about £60,000 in order to satisfy them and would apply energy savings from not running the Plant towards payment of its outstanding debt. In those circumstances the relevant test appears to me to be that stated in Chitty (Footnote: ²⁵):

I do not regard Celtech as having renounced or repudiated the agreement. The failure to pay the three instalments by 12^th August 2003 did not amount to a breach of condition, nor did that failure, coupled with the statements made about its financial difficulties (in particular its inability “presently” to pay) indicate that it intended to perform, or could only perform, in such a manner as would deprive Dalkia of substantially the whole benefit of the contract . Celtech did not evince an intention never to pay, although it skirted close to the wind by indicating, no doubt as a lever in the negotiations, that “the current scenario can only lead Celtech International to bankruptcy” (23^rd July) and that it was “facing insolvency” (1^st August). Mr Elliott told me more than once that he regarded the messages he was receiving as conflicting and that it was difficult to pick out the true message. I have little doubt that he appreciated that Celtech was taking a negotiating position in which both the prospect of insolvency and the prospect that Mr Perini would come up with funds were cards in their hands. At the same time the failure to come up with any payment prior to or after suspension (even though that would have expensive consequences for Celtech) gave an indication of inability or unwillingness to make payment, certainly within a short timeframe. There is, however, as it seems to me, force in Mr Gibson’s point that a mixed message lacks the necessary clarity to constitute a repudiation. Nor was Dalkia’s response to Celtech indicative of a belief that Celtech’s breaches, actual or intimated, were fundamental. On 29^th July Mr Elliott observed that “to threaten insolvency is not a helpful way to resolve any difficulties. I look forward to receiving your constructive suggestions”. He saw the letter of 1^st August before he went on holiday and intended to continue discussions on his return. On that date Dalkia suspended the contract. In the letter of 5^th August accompanying the statutory demand Dalkia indicated that, on payment of the demand, the energy service would resume. The tenor of the discussions on 12^th August was that some further relatively modest movement from Celtech might avert termination. The notice of termination made no reference to repudiation.

If, contrary to my view, Celtech was in repudiatory breach the question arises as to whether or not Dalkia ever accepted that breach and treated themselves as discharged from further performance. Dalkia rely on their letter of 12^th August 2003. That letter said nothing about acceptance of repudiation but informed Celtech that:

Mr Gibson drew my attention to a passage in Keating on Building Contracts (7^th Edition) 2001, page 189 that reads:

Mr Soole submits that the proposition in the penultimate sentence of that passage is not supported by the authorities cited namely Dyer v Simon Build [1982] 23 BLR 23 and Mvita Construction v Tanzania Harbours Authority [1988] 46 BLR 19, 33. I agree. In Dyer the employer gave notice expelling the main contractor from the site pursuant to clause 63 of the main contract without prejudice to is other rights and remedies under the contract. The main contractor then purported to determine the employment of the sub-contractor in accordance with a clause of the sub contract which entitled him to do so “if the main contract is determined for any reason whatsoever…” The arbitrator held that the expulsion of the main contractor by the employer did not determine the main contract. Nolan J, as he then was, upheld the award. This was a decision that the word “determined” in the sub-contract did not cover the invocation by the employer of his rights under clause 63 because, as the arbitrator held, such invocation did not amount to a determination by acceptance of repudiation, left the employer with duties to the contractor to perform under the contract, and did not release the contractor from any of his obligations under the contract.

In Mvita the Court of Appeal of Tanzania, following Dyer, held that the exercise by the employer of rights under a similar clause 63 did not have the effect of repudiation or rescission, by which I understand them to have meant that it did not have the effect of an acceptance of a repudiatory breach (the existence of which the arbitrator had been invited to assume). In essence the Court held that, since the operation by the employer of clause 63 did not terminate the contract in the sense of excusing the employer from further performance, it could not amount to an acceptance of a repudiation which would, if effective, have that consequence.

The topic was extensively considered in Laing Management Ltd v Aegon Insurance Company (UK) Ltd [1996] 86 BLR 70. In that case LMK entered into a sub-contract with Kentz which LMK were entitled to terminate in a number of specified circumstances one of which was the appointment of a receiver. The wording of the clause was as follows:

If a receiver …of any of the property or income of the sub-

A Receiver of Kentz was appointed. LMK served on Kentz a letter giving notice of termination of the sub-contract with immediate effect. The judge was asked to assume that at the date of the letter Kentz was in repudiatory breach of the sub contract and that, prior to the service of the statement of claim there was, apart from the letter, nothing which amounted to an acceptance of that repudiation.

Judge Lloyd Q.C., after referring to the passage from Keating to which I have referred, and to Dyer and Mvita, held that the exercise of the right to terminate under clause 20.2 was not to be treated as an acceptance of a repudiation since the exercise of that right was not sufficiently clear and unequivocal to amount to an acceptance. His reasons were fourfold:

the contractual power being exercised did not have the effect of terminating the contract but only of terminating the execution of the work in the hands of Kentz. The contract remained alive in order that the consequences specified in it, including a number of obligations on Kentz, should take effect.

the letter said nothing about any decision to treat any repudiatory contract as discharged. It was no more than a decision to terminate on the grounds of the appointment of an administrative receiver.

the appointment of an administrative receiver was not a repudiatory event.

the exercise of the right to terminate did not negative the contract being kept alive for the benefit of both parties since there were obligations on the part of LMK which survived termination.

Mr Soole submits that an acceptance of repudiation requires no particular form so long as it is clear that the innocent party is treating the contract as at an end. The doing of an act which is inconsistent with the subsistence of the contract may suffice to constitute an acceptance. He can pray in aid those hire purchase cases in which the finance company, exercising a contractual right to terminate the contract when the hirer was in repudiatory breach, was held entitled to damages on the footing of a repudiation. In order to be effective, a repudiation must be accepted and in those cases the acceptance was, so it appears, the notice. In Yeoman Credit v Waragowski [1961] 1 WLR 1124 the finance company terminated the agreement. The report of the case records that it was entitled to do so under the agreement, but does not reveal whether, when terminating, the company made explicit reference to any contractual clause. The plaintiff recovered what were, in effect, damages for repudiation. In Financings Ltd v Baldock [1963] 2 QB 104, 123 Diplock L.J., said, in relation to Overstone v Shipway [1962] 1 WLR 17:

The same conduct may be such as to give rise to a contractual right to terminate and a common law entitlement to accept a repudiatory breach. This will typically be so if (i) the guilty party has failed to make the payments stipulated by the contract, (ii) that failure either amounts to a repudiation or is, by the terms of the contract, to be treated as such, and (iii) there is a contractual right to terminate which is applicable to the circumstances giving rise to the breach. In such a case the innocent party can exercise either his contractual or his common law right of termination. Prima facie he can rely on both. He is not disentitled to rely on the latter on the ground that recourse to the former constitutes an affirmation of the contract since in both cases he is electing to terminate the contract for the future (i.e. to bring to an end the primary obligations of the parties remaining unperformed) in accordance with rights that are either given to him expressly by contract or arise in his favour by implication of law. If he can rely on both there is no reason in principle why, if he terminates the contract without stating the basis on which he does so, he cannot be treated as doing so under any clause which entitles him to do so and in accordance with his rights at common law. “Termination” is capable of meaning both a termination pursuant to a contractual clause and the acceptance of a repudiation: Maersk v Mobil [2001] 2 Lloyd’s Rep 127. Even if he refers to a particular clause upon which he relies, that would not inevitably mean that he was only relying on that clause. If that were so an innocent party who, in the face of a repudiatory breach, terminated the contract by reference to a clause which was in fact inapplicable, might, on that account, find himself disentitled to terminate at all.

The fact that service of a contractual notice of termination is not inconsistent with the acceptance of a repudiation does not, however, mean that in all cases such a notice amounts to such an acceptance. If the notice makes explicit reference to a particular contractual clause, and nothing else, that may, in context, show that the giver of the notice was not intending to accept the repudiation and was only relying on the contractual clause; for instance if the claim made under the notice of termination is inconsistent with, and not simply less than, that which arises on acceptance of a repudiation: United Dominions Trust (Commercial) Ltd v Ennis [1968] 1 QB 54, 65, 68. In the present case markedly different consequences would arise according to whether or not there was a termination under clause 14.4 or an acceptance of a repudiation. In the former case Celtech would be liable to pay a Termination Sum and entitled, on payment, to keep the Plant. In the latter Dalkia would be entitled to the Plant, which either always remained its property (if it was never a fixture) or was something that Dalkia would be entitled to remove; and their claim would not (unless, perhaps, the value of the Plant was nil) be in the same amount as the Termination Sum. Further, in the event of a termination under clause 14 the provisions set out in paragraph 15.8 apply as if a new agreement had been entered into containing only those clauses. The same notice cannot operate to produce two so diametrically opposing consequences. In those circumstances it should take effect in, and only in accordance with its express terms, namely as a determination under clause 14.4.

If I am wrong in my conclusion that Dalkia was entitled to terminate the contract then the question arises whether Dalkia’s notice of termination of 12^th August 2003 was, as Celtech contend, a repudiation that it was entitled to accept. If so the repudiation was accepted by Constant & Constant’s letter of 14^th August. Dalkia rely in this respect on the decision of the majority of the House of Lords in Woodar v Wimpey Ltd [1980] 1 WLR 277. In that case Wimpey contracted to purchase a plot of land from Woodar. Under a special condition of the contract of sale Wimpey had power to rescind the contract if prior to the date of completion:

Lord Salmon expressed himself as entirely unable to agree with the proposition that Wimpey’s notice of rescission was a neutral averment consistent either with the intention to preserve or abandon the contract. He regarded it as served with the clearly expressed intention of bringing the contract to an end, particularly as it was accompanied by a letter describing the contract as “now discharged by the enclosed notice”. He also said that, if the notice of rescission did not evince an intention no longer to be bound by the contract and therefore amount to a repudiation, he could not imagine what would; and that he did not understand how Wimpey’s honest belief in a bad point of law (as to the validity of their notice) could in any way avail them. Lord Russell held that if a party to a contract purports to rescind and renounce it on grounds that are not justified in law, there can never be circumstances in which the rescinder can dispute the repudiatory quality of his action.

Lord Keith regarded the critical question to be whether Wimpey’s conduct showed that they would refuse performance of the contract in the event that that the issue of construction was decided against them. Lord Salmon took the view that the Court of Appeal was in error in concentrating on the notice of rescission alone as opposed to considering whether Wimpey’s conduct overall showed an intention not to be bound.

The decision of the majority must be contrasted with the proposition – most powerfully enunciated in The Nanfri [1979] A.C. 757 - that it is no defence to a party who has repudiated a contract to say that he acted in good faith under a mistaken understanding of the law. A reconciliation may lie in the fact that in The Nanfri the repudiation consisted of an act – the instruction of the master not to sign pre-paid bills of lading – which had the immediate effect of substantially depriving the charterers of virtually the whole benefit of the charter since the issue of such bills was essential to the maintenance of the charterers’ trade. By contrast the notice of termination in Woodar did not have that or a similar consequence. In Vaswani v Italian Motors [1996] 1 WLR 270, the Privy Council said:

It seems to me that Woodar is distinguishable. On the facts of that case the majority felt able to conclude that, despite the unqualified terms of the notice, the circumstances in which it was given did not manifest an intention to refuse further performance. The time for performance had not arisen, Woodar needed to serve a notice in order to reserve its position, and the discussions between the parties had proceeded on the basis that the service of a notice was not to be regarded as a hostile act, and that the entitlement or otherwise of Woodar to serve the notice would be determined by the court, to which Woodar would apply, by whose decision both parties would abide.

These factors are absent from the present case. Although Dalkia’s obligations were in suspense the time for their performance had arrived and termination was a means of bringing them to an end permanently. There were no discussions similar to those that took place in Woodar. Dalkia relied and continues to rely on the notice as having in fact brought the agreement to an end and as entitling them to over £3,000,000. There is no understanding that Dalkia will continue to perform should its interpretation be wrong.

I regard that conclusion as a satisfactory one. Were it otherwise the curious position would be reached that a letter which Dalkia relies on as a termination pursuant to a clause in the contract and the acceptance of a repudiation cannot itself be regarded as repudiatory. It might seem to follow that, by the same token, Celtech’s acceptance (under a mistaken views as to their entitlement to terminate by this means) was not repudiatory either, leaving the contract in existence, unless it can be regarded as mutually abandoned.

Dalkia submits that, even if Dalkia were in repudiatory breach and that breach was accepted by Constant’s letter of 14^th August that was in effect the same thing as Celtech terminating the agreement under clause 14.2 with the result that, under clause 15.5 the Termination Sum was due. The fact that Celtech did not give Dalkia the 120 days notice required by clause 14.2. could not leave Dalkia in a worse position than if such notice had been given. Such a conclusion is consistent with the obvious intention of the parties, as shown in the agreement, that Dalkia would be repaid its capital advance however that termination came about.

I do not accept this submission. Constant & Constant’s acceptance of a repudiation, if there was one, did not purport to be a notice under clause 14.2. Nor could it have been since the breach in question was capable of remedy and no notice to remedy was given as required by that clause. Further, even if an innocent party who gives notice to terminate on account of a repudiatory breach may also, in appropriate circumstances, be taken to accept a repudiation based on the same facts, a party who accepts a repudiation may not necessarily seek to avail himself of an additional contractual entitlement, particularly if that entitlement is hedged with onerous obligations. Celtech neither sought nor purported to avail themselves of that right.

Since Dalkia has validly terminated the agreement under clause 14.4. Celtech has become obliged to pay the Termination Sum together with the other payments called for by clause 15.4. (i) and, upon payment, will be entitled to keep the Plant. In those circumstances Dalkia, who claim that sum, cannot be required to remove the Plant. Had it been Dalkia who had repudiated the agreement, I would have taken the view that Celtech was entitled as part of its damages to the cost of removing the Plant. Dalkia could not, I think, be compelled to remove the Plant in the absence of an agreement that they must do so – see Never-Stop Railway (Wembley) v British Empire Exhibition (1924) Incorporated [1926] 1 Ch 877. But, on that hypothesis, Dalkia would have repudiated the agreement under which it was obliged to provide the Energy Service by use of the Plant, which Dalkia would be entitled, but not obliged, to remove; and Celtech would have no further use for it nor wish to keep it.