Shared Network Services Ltd v Nextira One UK Ltd

The Defendants apply by Application Notice dated 28 September 2011 for summary judgment under Part 24 of the Civil Procedure Rules to be entered against the Claimant, which is a company incorporated in the Republic of Ireland. The dispute between the parties arises under a remote NOC services agreement for the provision of the services of a remote network operation centre by a company called Vanguard to the Claimant. That agreement was made in May 2003, immediately prior to the incorporation of the Claimant company, the negotiations having been conducted on behalf of the Claimant company by Mr Mark Faye, who is a director of the company. That contract was subsequently either novated by Vanguard to the Defendant, or the rights and obligations under the contract were assigned by Vanguard to the Defendant, and it is common ground that the Defendant is to be treated as the other contracting party for present purposes.

On 28 February 2005 the virtual private network (“VPN”) connection between the Defendant and the Claimant was closed. The Claimant claims that that was a repudiatory breach of contract by the Defendant, which the Claimant says it accepted, entitling it to damages for wasted expenditure which it assesses in the amount of some €1.75 million, plus interest and costs. The Defendant’s case is that the link was not being used, which is why it was closed.

The Claimant commenced proceedings on 8 December 2010, a year ago, and the Particulars of Claim drafted by counsel were served. It is clear that the claim that is made in that pleading is a claim for damages for breach of contract, which is limited to the breach said to have arisen as a consequence of the Defendant severing the VPN. No wider claim for breach of contract is made in that pleading.

In the Defence served on 3 June 2011 a number of grounds are put forward for denying the claim. For present purposes, only one of those matters, which is that it is said by the Defendant to be a complete answer that clause 14.2 of the agreement provides as follows:

“Vanguard MS’s total liability to Service Reseller [the Claimant] for damages under this Agreement will not exceed fifty percent (50%) of the service charges paid by Service Reseller to Vanguard MS during the twelve months preceding any claim. This limitation will apply regardless of the form of action (i.e. whether the law suit is in contract or in tort, including negligence). But it will not apply to Service Reseller’s claims for bodily injury or damage to real or tangible personal property for which Vanguard MS is solely liable.”

The Defendant’s evidence is that no service charges at all were paid in the 12 months preceding the date of the Claim Form for the purpose of calculating this liability. In fact, it appears from the material set out in the witness statement in support of the Defendant’s application that there is no evidence of the Claimant ever having paid any service charges over the course of this agreement. Mr Faye has not denied that, and indeed his whole case as presented on behalf of the Claimant was that the Claimant had been precluded from earning any money under the contract by the actions of Vanguard and/or the Defendant, and that it was a consequence of not having been able to earn anything under the contract that no service charges had been paid. However, the Defendant’s case is that, by virtue of the fact that no service charges were ever paid, the Defendant, pursuant to clause 14.2 of the agreement, is under no liability whatsoever.

On 26 June 2011 Mr Faye, who as I say is a director of the company, wrote to the Defendant’s solicitors saying that the company no longer had legal representation and asked for extra time to file a Reply. A rRply was then filed, which Mr Faye evidently had drafted himself (or may have had some help from counsel, I do not know), and in relation to clause 14.2 that raised two purported answers. Firstly, that clause 14.2 does not apply to damages for repudiatory breach, such damages not being damages payable “under the agreement” – the words of clause 14.2. Secondly, that the Defendant was not entitled to limit its liability, as clause 14.2 fails to satisfy the requirement of reasonableness within the meaning of section 3 of the Unfair Contract Terms Act 1977. The Defendant sought further information as to the grounds upon which that requirement was said not to be satisfied, but the Claimant declined to provide any particulars, saying that that was a matter for trial.

In those circumstances, the Defendant issued the present application, seeking, in the alternative, security for costs. The application was served on the Claimant as long ago as 5 October 2011, and by the end of October 9 December 2011 had been fixed as a mutually acceptable hearing date. The Claimant has served no evidence in reply to the Defendant’s evidence. Instead, because the only person who can represent the company is Mr Faye, he made an application via Irish solicitors on 1 December for an adjournment of this matter, on the basis that his health was such that he could not attend the hearing fixed for 9 December. That application was supported by medical evidence, from which it is clear that Mr Faye does suffer from heart disease and high blood pressure, and that his doctors are saying that the stress of the litigation was such that they advised against attendance or any form of participation. That application was considered on paper by Gloster J (the judge in charge of the Commercial List), who refused it on Tuesday of this week, 6 December, saying that the matter should proceed today, if necessary with Mr Faye participating by telephone. That is how matters have proceeded.

At the outset I indicated that, because the Claimant is a limited company, permission of the court is required under CPR 39.6 for Mr Faye to represent the company. I will give that permission, whilst noting that, at least before the Commercial Court, that is the exception rather than the rule.

Mr Faye began this morning’s hearing by making a further application for an adjournment of this matter for six weeks or so, until a date in February, on the basis that his cardiologist was advising against participation in the hearing, and it was hoped that, by that stage in six weeks’ time, his blood pressure would be under control and his health would have improved sufficiently to enable him to participate. The difficulty with that application, whatever one’s personal sympathy for Mr Faye and his state of health, is essentially twofold.

Firstly, as I said to Mr Faye, the issue of his health is, in a sense, open ended. No doctor is saying that he will be fit in February, and one has to recognise that, if the court accedes to his application, there is a real risk that in six weeks’ time another similar application will be made. Mr Faye has to recognise, and indeed does recognise, in fairness to him, that it is the company which is the Claimant and not him, and it is incumbent on the company to get its affairs in order to ensure that it can be represented if he is not fit to act for it. The Defendant is entitled to know where it stands sooner rather than later, as again I think Mr Faye accepts.

Secondly, whilst the medical evidence suggests that Mr Faye’s doctors do have misgivings about his attending a hearing, and indeed appear to have suggested that he should not even participate by telephone, the fact is that he is in a position where he has participated, and it is not suggested that his health has been such that he could not, for example, have filed any evidence or submissions upon which he wished to rely prior to the hearing. I indicated that I would not accede to a further adjournment, and the matter proceeded.

So far as the Claimant’s first point that the damages for repudiatory breach fall outside clause 14.2 because they are not damages under the agreement, that point is fallacious and heterodox. Damages for repudiatory breach of a contract are as much damages under the agreement as any other damages for breach of contract. The Claimant needs to set up the contract and its alleged breach to have any claim at all, and once that inevitability is realised, the damages claims must be under the contract.

To the extent that behind that plea was the suggestion that the Defendant could not rely upon clause 14.2 where the Defendant was in repudiatory breach, it seems to me that that argument is misconceived, since it is an attempt to revive the doctrine of fundamental breach laid to rest finally by the decision of the House of Lords in Photo Production v Securicor [1980] AC 827. It is always a question of construction of the contract as to whether the words of an exclusion or limitation clause cover the events which have occurred, including an alleged repudiatory breach. In my judgment, clause 14.2 does apply to all such breaches, not least because of the sentence beginning “This limitation will apply regardless of the form of action”.

I did not understand in his submissions before me that Mr Faye was contending that because the claim is one for wasted expenditure, somehow such a claim is not caught by clause 14.2, and in any event, as is pointed out by the Defendant, Teare J held in The Mamola Challenger [2011] 1 Lloyd’s Rep 47 that such a claim is a species of expectation loss no different in principle from any other damages for breach of contract. So, however the claim is formulated, it is a claim for damages for breach of contract which, on the face of it, falls within and is caught by clause 14.2.

There remains the question whether that clause is unenforceable because it does not satisfy the requirement of reasonableness under section 3 of the Unfair Contract Terms Act. The reasonableness test is set out in section 11 of the Act, and provides as follows:

In his submissions to me over the telephone, Mr Faye essentially took two points. First of all, he accepted that, at the time when the contract had been entered into, Vanguard had asked him whether he wanted to take independent legal advice. He had not done so, although there is no reason why he should not have done, and he was anxious at that stage, I think, to proceed with the contract. That was on the basis that he was optimistic that they would be doing considerable business together which would generate a deal of income, and he accepted that, in those circumstances, he thought that clause 14.2 was a reasonable provision, because, on the basis that he was going to be earning a great deal of income and necessarily paying service charges to Vanguard, a clause which enabled him, in the event of breach to recover 50 percent of those service charges back from Vanguard, was a clause which he did not regard as unreasonable.

Secondly, following on from that, he says that he never believed that what would in fact happen was that he would be left high and dry by Vanguard. He said that what had in fact happened is that Vanguard had never actually performed any of the services which they were expected to perform under the contract, and that he has a number of witness statements which will prove that in fact Vanguard never actually conducted anything under the contract, never completed the operations centre, and indeed he seemed to be going as far as to suggest that Vanguard had deliberately breached the contract at the very outset and precluded him or precluded the company from earning any fees under the contract. In those circumstances, he submitted that the clause was an unreasonable one.

It seems to me that there are two answers to that point. The first is that that is not the case which is pleaded against the Defendant, and I have to decide this case on the basis of the currently pleaded case, not on the basis of some case that might be pleaded in the future or that might have been pleaded in the past. Whether or not the clause would be apt to cover the sort of deliberate breach which Mr Faye referred to in his submissions is not a matter for today. I have already indicated to Mr Faye that, if he wished to present a case of that kind, he would have to make an application for permission to amend, and I have no doubt that, were he to do so, he would be met immediately with the argument that any such claim was now time barred under the Limitation Act 1980. But, at all events, I have to decide whether or not this clause is unreasonable by reference to the case which is before the court.

Secondly, and more fundamentally, as is clear form section 11 (which I read out a moment ago), the court assesses the issue of reasonableness at the time when the contract is made, and not by reference to what has happened during the course of the contract with the benefit of hindsight. I think Mr Faye accepted, and indeed it is quite clear from the way in which he put his point, that at the time when the contract was made he thought this provision was a perfectly reasonable one. In those circumstances, it seems to me that any argument by reference to section 3 of the Act, on the basis of the currently pleaded case, is totally hopeless.

Insofar as there is any vestige of other points that might have been taken, it is perhaps sensible that I deal with them, particularly since Mr Faye or his company is not being legally represented today. Mr Gerald Rothschild, who appeared on behalf of the Defendant, very fairly set out both in his solicitor’s witness statement (which I suspect he drafted, although I do not know for sure) and in his oral submissions to the court, the sort of points that might have been taken, but which in truth Mr Faye has not really pursued today.

The first is that, to the extent that it was being said that Mr Faye was unhappy with the terms that were being offered by Vanguard, this was a commercial contract and the Claimant could have sought to renegotiate it, or decline to contract with Vanguard and sought the business elsewhere. As I say, I do not think that point is really being pursued, because Mr Faye accepts that he was asked whether he wanted to take legal advice, he decided that he did not want to, he could have taken legal advice, and indeed part of his case before me was, that at the time, not realising what he now alleges Vanguard did subsequently, he thought this provision was a perfectly reasonable one, from which I deduce that he would not have wanted to renegotiate the contract, even if he had had an opportunity to do so, and the likelihood is that, whatever legal advice he received would have been to the effect that the provision was not unreasonable.

Secondly, the clause is not an absolute exclusion or limitation clause. It is a clause under the terms of which, for example, if there is bodily injury or damage or damage to property, then the Defendant would remain totally liable for that. So it is only limiting certain categories of claim, whether in contract or in tort, and in any event it is not an absolute exclusion clause, because it operates by reference to 50 percent of the service charges paid. As Mr Rothschild points out, the clause is one which not only encourages the prompt bringing of claims within 12 months of any breach, but also has the effect of increasing the level of any cap under the clause on damages in proportion to the amount of business carried out by the Claimant. In other words, as the business increases, so the service charges increase, and the recoverable damages follow suit. I agree that those consequences are not in any sense unreasonable and, as I pointed out during the course of argument, this form of limitation of liability by reference to an amount received under a contract by a party seeking to limit liability is, in my experience, quite common under various types of commercial contract, and there is nothing inherently unreasonable in this form of limitation.

For all those reasons, I am satisfied that clause 14.2 is an effective answer to the Claimant’s claim and that, as a consequence, that claim has no real prospect of success. The Defendant is entitled to summary judgment, dismissing the claim.