E-Nik Ltd v Department for Communities And Local Government

The Claimant is an information technology services company, which entered into a contract with the Defendant dated 1 April 2009 (“the Contract”); this was itself an Appendix 1 to an agreement between the Defendant and Fujitsu Services Ltd (“the Fujitsu Agreement”). The latter at the outset of the arrangements was acting as an intermediary, but soon thereafter dropped out of the picture and does not feature as relevant in these proceedings. It was not the first relationship between the parties, since the Claimant appears to have gained and retained the confidence of the Defendant in providing its consultancy services on a number of occasions previously: by 2008, the Defendant was purchasing approximately 800 days of consultancy work from the Claimant in each year, at rates of between £750 and £1200 per day: the rate varied according to the seniority of the consultant and the work done, and the rates charged by the Claimant were at or slightly below the industry norm.

The Contract provided, by a recital, that its “Purpose or Meaning” was to “purchase Consultancy to provide Project Work, including Project Management, Scoping/Analysis and Systems Development for” Government information technology systems. The term of the Contract was 2½ years, commencing on 1 April 2009 until 30 September 2011, but terminable (by Clause 8.1 of the Contract) by “12 months written notice with 12 months cancellation from the date of notice received by either party”. It was, in the event, never terminated by either side. The Contract was not drafted by lawyers, and its language is not always elegant or apt.

The dispute relates to the Claimant’s unpaid invoices, dated 9 May 2011 and 25 October 2011 and the sum in issue is £760,920 (inclusive of VAT). At the hearing before me I have had to resolve a summons brought by the Claimant pursuant to CPR Part 24 for summary judgment against the Defendant on all issues, and cross-summonses by the Defendant seeking permission to amend its Defence (not opposed save as to costs, and save by reference to the Claimant’s argument that the amendment will not avail the Defendant to avoid summary judgment) and for summary judgment against the Claimant on some issues (see below). Counsel for the parties, Mr Gerard Rothschild for the Claimant and Mr Mathew Gullick for the Defendant, have argued the matters before me clearly and succinctly.

The relevant terms of the Contract in issue before me are as follows (the Authority being the Defendant and the Supplierbeing theClaimant):

“2.

AUTHORITY’S OBLIGATIONS

2.1

The Authority hereby undertakes to purchase minimum of 500 days of Consultancy from the Supplier per year based on project requirement, additional days will be required once the purchased days have been exhausted.

2.2

The Authority shall issue an Assignment Note to requisition Services from the Supplier.

2.3

The Authority shall pay the Supplier fees at the rate of not less than £850 per day but subject to mutually agreed assignment notes for each change request. This rate may be revised upward at the time of issue of an Assignment Note to reflect the complexity of the Services requisitioned or the level of skill required for the provision of the Services.

2.4

Payment of the fees shall be made within 30 days of the date of a valid invoice from the Supplier.

3.

SUPPLIER’S OBLIGATIONS

…

3.7

To comply with all the requirements of VAT legislation and the Companies Act.

3.8

Supplier is obliged to provide concise accounts of resources used on a monthly basis as an excel document which shows work priorities, days used, days remaining and days purchased.”

The only other relevant provision not referred to above is in fact contained in Appendix 2 to the Fujitsu Agreement, and it provides:

“Process for Raising Purchase Orders, Invoicing and Payment

•

The Customer will raise a PO on Fujitsu for the full amount for the services including the paying agent fee.

•

Fujitsu will raise a PO upon the Supplier for the full service charges.

•

Fujitsu will raise an invoice upon the Customer yearly in advance.

•

The Supplier will raise an invoice upon Fujitsu yearly in advance.”

The issues as set out by the Claimant in its skeleton argument (by reference to the Agreed List of Issues) are as follows:

The Claimant seeks summary judgment on each of the issues in its favour. The Defendant contends that it should have (after amendment of its Defence) summary judgment in its favour in respect of Issues 3 and 4, which Mr Gullick submits will be sufficient for it to have the claim as presently formulated dismissed. I apply the ordinary principles of summary judgment in respect of each party and each issue.

The Claimant relies upon the evidence of Ms Dawett, a 50% shareholder of the company, who describes the communications and arrangements between the parties up to and beyond the signing of the Contract, in which she was personally involved. The Defendant relies only upon the evidence of its Head of Procurement, Mr Culver. Although he has occupied that post since July 2008, he had no involvement in any relevant respect until the parties came into dispute in or about April 2011. Ms Dawett was the person who was responsible for negotiating the Contract on the Claimant’s behalf, although it was her husband and fellow shareholder who signed the Contract on 20 May 2009. It was Mr Bentley who was the relevant representative of the Defendant who negotiated the contract and signed it on the Defendant’s behalf on 21 May 2009. According to Mr Culver, Mr Bentley ceased employment with the Department on 31 March 2010, and no information is supplied as to his present employment or whereabouts or as to any attempts to obtain evidence from him. This is significant because he is the author of an email dated 15 May 2009 (responsive to Ms Dawett’s email to him of 12 May), six days before he signed the contract on the Defendant’s behalf, to which I refer below.

The Claimant submits that Clauses 2.1 and 2.3 of the Contract (set out in paragraph 4 above) constitute an express agreed obligation upon the Defendant to purchase and pay for a minimum of 500 days of consultancy services from the Claimant per year. The Defendant relies upon the words “based on project requirement”, and submits that its obligation is based on – namely dependent upon – project requirement. So, submits Mr Gullick, if the project (undefined) does not require 500 days per year, the Defendant need neither purchase nor pay for them. This means:

Mr Gullick accepts (indeed asserts) that there is no room for any implication of any implied term, whether as to reasonableness of decision-making or reasonableness of requirements of the project (insofar as identified), so as to inhibit the absolute obligation of the Defendant to purchase and pay for the minimum 500 days per year, and indeed, if such be the case, to reduce them to nil in any given year, or indeed throughout the contract. It is plain that, on Mr Gullick’s interpretation this renders nugatory the undertaking expressed in Clause 2.1 to purchase a minimum of 500 days of consultancy.

The Claimant points out the following:-

As to paragraph 10 (iii) above, the Defendant submits that Clause 3.8 only relates to the giving of what Mr Gullick calls ‘information’ by reference to the 500 days, without any obligation for the days to be taken up or paid for if requirements change. As to (iv), Mr Gullick points out that in the event the Claimant did not invoice up front. It invoiced as it went along, and then only invoiced in respect of the balance of the 500 days unused in its two invoices now sued upon. He accepts however the well established legal proposition that it is not possible to construe a contract by reference to what happened afterwards (Wickman Machine Tool Sales Ltd v L. Schuler AG [1974] AC 235).

The Claimant submits that if, contrary to its contention, there is ambiguity in the construction, it can rely on oral evidence, and this is where Mr Rothschild relies upon the exchange of emails referred to in paragraph 7 above. By email of 12 May 2009 Ms Dawett asked Mr Bentley: “Please could you confirm that the minimum 500 days will be purchased per year for the duration of the contract”. Mr Bentley replied on 15 May 2009: “Yes the 500 days would be purchased at a minimum per year to secure enik’s engagement for work.” This would appear to put the matter beyond doubt. However Mr Gullick submits (though without any evidence from Mr Bentley) that the words “based on project requirement” may have only come into the agreement after 15 May and thus not have been addressed by Mr Bentley.

The Claimant submits in the alternative a case for rectification (only to be pleaded and relied upon if necessary) but accepts that, not least by virtue of the absence of pleading, that could not entitle it to summary judgment at this stage, and in any event the Claimant has not adduced any evidence from the draftsman of the Contract (said to have been its accountant).

The oral evidence does seem to me to be very powerful, but shadowy though the Defendant’s case might be, particularly without Mr Bentley, the argument put forward above might well qualify, if the Defendant were not a Government department, for leave to defend conditional on bringing into court the whole sum, if the whole sum were otherwise due. But if I am to give summary judgment, I must decide this as a matter of construction:

I answer the first issue in the negative and hence favourably to the Claimant. Although there was some suggestion that, by virtue of the way in which the hours were invoiced, there was an estoppel or variation, I am quite satisfied that (in the absence of any evidence of consideration, reliance or detriment) such propositions are unarguable.

As set out above, the Contract was to last (and did last, as no notice was given by either party) 2½ years. The issue is whether, as the Defendant contends, that means two years with 500 days minimum in each year (in the light of my finding on Issue 1) and then nothing after 1 April 2011 until termination on 30 September 2011, as it is not a full year and there is no provision for pro-rating, or whether the 500 days per year is to be pro-rated in the third six-month period.

I can see that it might be the position if there were not a fixed term 2½-year contract, but a three-year contract with provision for termination on six months’ notice after 2½ years, that it could then be argued (on the basis of the ‘minimumperformance’ concept) that all the 500 days could have been allocated to the second half of the year. But that is not the case here. Indeed the provision for 12 months’ notice under Clause 8.1 only supports the Claimant’s case.

Both sides point to two other contracts between the parties, exhibited by Mr Culver, a VMware Support Agreement (the “VM Agreement”) and an eDesk Software Maintenance and Support Agreement (the “eDesk Agreement”), both effective from 1 April 2009 to 30 September 2011, which in each case expressly provided for Support Fees/Costs payable in advance for years one and two, with a figure of, in one case, half of such amount and, in the other case, slightly less than half, allocated as the fees/costs payable in advance in respect of the last six months. The Defendant points out that there is no such express pro-rating provision in this Contract. The Claimant relies on the slightly different format in those contracts, but submits the effect is the same. I gain no particular benefit from those other two contracts.

I have no doubt whatever that, even in the absence of an express arrangement for pro-rating, the Claimant’s construction is correct, and that the undertaking to purchase and pay for consultancy services on the basis of a minimum of 500 days per year means that in the third period, the half year, a minimum of half the 500 days per year is required to be purchased and paid for. This suggestion that no sums fall to be paid in the first half of the year is again uncommercial, by reference to Antaios, given the purpose of the contract to ensure and pay for the availability of the Claimant’s services.

I take these together, because the question whether such services had to be “specifically demanded” or simply had to be made and remain available underlies both issues, namely whether the claim is properly framed (i) in debt rather than damages and (ii) as a debt such as to attract the provisions of the 1998 Act. The Defendant plainly undertook to purchase and pay for a minimum of 500 days of consultancy services (as I have found). Can the Claimant simply claim the unpaid balance of the 500 days per year x £850? The other two Agreements, referred to in paragraph 18 above, were differently framed, as above appears: they both plainly entitle the Claimant to annual lump sums by way of Support Fees/Costs, and Mr Gullick differentiates them from this Contract. He submits that, if the Defendant was obliged to purchase and pay for the services, that obligation only arises upon request, and insofar as the Defendant fails to request the services, they are in breach of contract and liable in damages: and this is the subject of the Defendant’s amendment and cross-application for summary judgment on this issue. In any event the Defendant puts the Claimant to proof that its consultancy services were and remained available to be called on.

The Claimant’s case is as follows:

It is plain on the evidence that the Claimant continued to keep services available, not only until 15 April 2011 but thereafter until the termination of the Contract, and that it was entitled to do so: White & Carter (Council) Ltd v McGregor [1962] AC 413 plainly applies:

Accordingly I resolve these two issues in favour of the Claimant, and dismiss the Defendant’s cross-Application in that regard.

Mr Gullick submits that Clauses 2.1 and 2.3, as construed by me in answer to Issues 1, 3 and 5 above, constitute a penalty clause because they compel the Defendant to pay for the minimum amount of the services throughout the contract, whether they are supplied or not. Mr Rothschild relies upon Jervis v Harris [1996] Ch 195 in support of the proposition that the doctrine of penalties does not apply to a claim for debt (as I have found the claim to be).

Mr Gullick, however, relies upon my decision in M & J Polymers Ltd v Imerys Minerals Ltd [2008] 1 AER (Comm) 893, in which, notwithstanding that the claim in that case, pursuant to a ‘take or pay’ clause, whereby the purchasers agreed to pay for minimum quantities of products even if not ordered, was a claim in debt, I concluded that in principle a take or pay clause might qualify as a penalty clause, but that there was in that case plainly commercial justification for it, that the court should not be “astute to descry a penalty clause” and I was satisfied that it was not a penalty clause. I am entirely satisfied that in the context where, as appears in paragraph 21 above, the Claimant had to, and did, keep available the wherewithal to provide the consultancy services as called off throughout the entire term, at rates which (see paragraph 1 above) were at or below the rates regularly charged by the Claimant to the Defendant, these clauses (to adopt paragraph 46 of M & J Polymers) were commercially justifiable, did not amount to oppression, were negotiated and freely entered into between parties of comparable bargaining power and did not amount to a provision in terrorem. The Defendant has not produced any evidence to support a converse proposition. On the contrary, the contemporaneous documentation referred to in paragraph 21(iii)(a) and (b) above (though inadmissible to construe the contract) is entirely consistent with such conclusion.

I resolve Issue 6 in favour of the Claimant.

The Claimant claims VAT in addition to the £850 daily rate and submits that it is entitled to summary judgment pursuant to Part 24. The Defendant relies upon the following:

Mr Rothschild responds that:

It seemed to me that, since there were effectively cross-applications for summary judgment in respect of Issue 4, if there were any evidence which the Defendant could adduce, provided it could be done without waste of time (and in the event, as the hearing took most of the day, I would be likely to have reserved judgment in any event), I should permit a short period in which any evidence to make good Mr Rothschild’s assertions as to the at least arguable existence of such an implied custom by reference to earlier dealings between the parties could be produced. In the event the Claimant adduced a short further witness statement from Ms Dawett and one further contract said to be relevant, this being between the GOR and a company called Methods Consulting Ltd, for whom Ms Dawett acted (and the Claimant is said by Mr Rothschild to have stood in the shoes of Methods Consulting). That contract defined the Fee at Clause 1.8 as a figure of “£840 to 940 … depending on project” and then by Clause 6.2 there was the provision:

“6.2

The fees shall include the accommodation and travelling expenses of the Consultant to and from the normal place of work. All other travelling and subsistence approved in advance by the Client shall be payable to the Company additionally to the fees stated hereto plus VAT at the applicable rate.”

There is also produced for the first time a document (not a witness statement), being an email, emanating from the accountant referred to in paragraph 13 above, who states:

“I can confirm that [the Claimant] always quoted the chargeable rate exclusive of VAT. It follows the commercial practice of quoting a rate exclusive of VAT. With regard to the contract with [the Defendant] I recall that the contract was settled after extensive discussions with and scrutiny by [the Defendant]. [The Defendant] was pressing for a standard day rate and at no time did the question of a rate inclusive of VAT was raised [sic] by [the Defendant].”

Mr Rothschild submits as follows in the light of that:

Notwithstanding paragraph 29 of Ms Dawett’s first witness statement and the recent email from the accountant, no case of rectification is pleaded or suggested.

I accept the submissions of Mr Gullick as set out in paragraph 27 above. I agree with him that the new evidence and submissions

I have already resolved in respect of Issues 3 and 5 that the claim is in debt and hence that prima facie the 1998 Act applies. However, the invoices rendered included VAT, which I have now found not to be due. Mr Gullick submits that this disengages the 1998 Act. He refers to Ruttle Plant Hire Ltd v Secretary of State for the Environment (No. 2) [2010] 1 AER (Comm) 444, in which some of the invoices were incorrect as referring to, and calculated upon the basis of, wrong rates. However, it must be noted that, even in that case, it was held that the Act still applied.

He seeks to refer to the provisions of Clause 2.4, set out in paragraph 4 above, with the reference to payment being due “within 30 days of the date of a valid invoice”, and submits that here there was no valid invoice because the total was incorrect, as VAT was included by addition to the claim for the Fees. He refers to dicta of Jacob LJ, at paragraph 41 of Ruttle, where he says that “things might have been different if the contract had expressly said nothing was owing unless and until a correct invoice was supplied, but that is not this case”.

The decision in Ruttle, like that before me, rests upon the requirements under s4(5) of the 1998 Act whereby statutory interest runs in relation to a qualifying debt (as defined by s3, not in issue before me) from the last day of the period of 30 days “beginning with … (b) the day on which the purchaser has notice of the amount of the debt or (where that amount is unascertained) the sum which the supplier claims is the amount of the debt”. The Court of Appeal in Ruttle concluded, as I have said, that the inaccuracy in the invoice did not prevent there having been such notice:

“29.

… Does “notice of the amount of the debt” require that the invoice be correct? Is any error, howsoever small enough to exclude the Act? Mr Acton Davis eventually found that he had to so contend – an earlier suggestion that somehow an error in the rate for plant hire did not amount to such notice whereas an error in the periods of plant hire did fell away in the course of argument. According to Mr Acton Davis the only kind of error which would not take a case outside the 1988 Act was one where, on the face of the invoice, the reasonable reader could see the error and also understand what was really meant – something like an obviously misplaced decimal point or error of addition.

30.

I do not so read the section …

31.

Moreover, the section needs to be read in context and in the light of the policy of the Act. As to context it is vital to bear in mind that mistakes in the supplier's invoice can be dealt with by way of remission pursuant to the s.5 powers. Because a wrong invoice may lead to remission of interest rather than none at all there is no need to read “amount” so strictly as “the true amount, the whole true amount and nothing but the true amount”. Nor to confine the second half of the provision to cases where for some reason one cannot calculate the sum due.

32.

And as to policy it makes no sense to suppose that the Act requires the invoice to be perfect before interest can run. If it did, it would lead an employer looking for the smallest detail of error in an invoice. If he found one he could delay payment of the whole sum due and avoid payment of the statutory interest. The purpose of the Act would be frustrated.

33.

Mr Acton Davis submitted that the policy of the Act was more limited: that the supplier should get the statutory rate only if he played his part properly by getting his invoice right. But I can see no factual or rational basis in such a limited purpose. There is nothing in the 2003 Law Commission Report about Pre-Judgment Interest on Debts and Damages (Law Com No.287) suggesting such a limited purpose. The report is not actually about cases within the 1998 Act, but the Commissioners considered the Act in some detail and observed no more than that “the late payment legislation has a deterrent purpose” and that it “ventures towards imposing penalties for socially damaging behaviour.” That behaviour would be more likely if errors in invoices were enough to take a case otherwise within the Act outside its ambit altogether. In the real world errors in invoices are common. That is indeed why, as in this case, they are often accompanied by the underlying documentation so that the paying party can check.

…

41.

Mr Acton Davis submits that only a correct invoice creates an obligation under the contract to pay. I just do not accept that. Ruttle had done the work for and supplied the plant to DEFRA. To say that there was no obligation whatsoever to pay anything at all unless a correct invoice had been submitted is untenable. An invoice is a two-fold statement by the supplier “this is what I think you owe” and “pay me now”. Getting the former wrong does not mean that nothing is owing …”

As for Mr Gullick’s reference to Clause 2.4, particularly against the background of the Court of Appeal’s conclusion above, I have no doubt that this makes no difference. The invoice was valid, but then included an extra sum (the VAT) which was not due.

I resolve Issue 7 in favour of the Claimant.

Section 5(4) of the 1998 Act reads as follows:

“Remission of statutory interest under this section may be required –

(a)

by reason of conduct at any time (whether before or after the time at which the debt is created); and

(b)

for the whole period for which statutory interest would otherwise run or for one or more parts of that period.”

The only conduct upon which the Defendant relies is alleged delay or inactivity. As Mr Gullick conceded in the course of argument, no such delay or inactivity can be shown in this case, save, he submitted, as to a two-month period in early 2012 prior to the issue of proceedings on 30 May 2012 in respect of the unpaid invoices dated 9 May and 25 October 2011. My immediate reaction would be that, even if such were so, that would not be the kind of conduct which would attract the impact of s5(4), in the sense of being a de minimis reduction and in the context of the need to discourage what would otherwise involve almost a trial within a trial of the precise activities of legal advisers in the lead-up to proceedings or thereafter. But in the event, it became common ground that there were without prejudice discussions even during that period, and I gave Mr Gullick the opportunity during the same period as referred to in paragraph 29 above to challenge the position that in fact such negotiations did not come to an end until correspondence in April 2012. He did not take up that opportunity. I make no reduction to the interest under s5(4).

Accordingly I give summary judgment for the Claimant for the sum claimed, save in respect of VAT, where I give summary judgment for the Defendant and dismiss the Claimant’s claim in that regard.