A L Challis Ltd v British Gas Trading Ltd

The Claimant (“Challis”) is an English company specialising in the design, manufacture and distribution across the United Kingdom and Europe of a range of water saving products aimed at reducing water and energy consumption and consumer cost. The Defendant, British Gas (“British Gas”), is the well known licensed supplier of gas and electricity.

The Defendant applies by notice dated 15 September 2014 to strike out the particulars of claim and/or for summary judgment.

The dispute arises under two agreements between the parties relating to a product developed by Challis known as a water widget. The water widget is a device designed to be inserted into shower heads to regulate the flow of water by aerating it, thereby reducing the flow and saving energy.

The agreements were made against the background of the Government’s Carbon Emission Reduction Target (“CERT”) to give effect to a reduction in carbon emissions pursuant to the Kyoto Protocol. The CERT scheme originally covered the period between April 2008 and April 2011, but was later extended to 31 December 2012. It was administered on behalf of the Gas and Electricity Markets Authority by the Office of Gas and Electricity Markets (“Ofgem”). British Gas was subject to obligations to deliver schemes in domestic households which achieved carbon emissions reductions. The agreements between the parties provided for Challis to supply water widgets directly or indirectly to consumers in a way which enabled British Gas to obtain carbon credits in respect thereof to count towards its obligations.

Under the CERT scheme, products which achieved a requisite degree of innovation qualified for a market transformation uplift (“MTU”) such that an additional 50% of carbon savings could be attributed to them for the purposes of the supplier’s CERT target. The water widgets qualified as such innovative products. The dispute between the parties is, in essence, whether on a true construction of the agreements, or by reason of terms to be implied therein, British Gas was obliged to claim the MTU in respect of the water widgets and to pay to Challis an additional 50% to reflect the uplift in the carbon credit. Challis claims that it was entitled to be paid by reference to the MTU uplift claimed or claimable by British Gas from Ofgem in relation to the water widgets. British Gas contends that the agreements contained a fixed price formula which provided for defined payments irrespective of the carbon credits ultimately awarded by Ofgem to British Gas or the application of the MTU uplift.

The application to strike out the particulars of claim is made pursuant to CPR Rule 3.4(2)(a) on the grounds that it discloses no reasonable grounds for bringing the claim. The application for summary judgment is made under CPR Rule 24.2(a) on the ground that the claim has no real prospect of success. The former adds nothing to the latter.

The principles to be applied on applications for summary judgment are well established. In respect of defendants’ applications, they were summarised by Lewison J, as he then was, in Easyair Limited v Opal Telecom Limited [2009] EWHC 339 (Ch), in a formulation approved in a number of subsequent cases at appellate level, including AC Ward & Sons v Catlin (Five) Limited [2010] Lloyd's Rep. I.R. 301and Mellor v Partridge [2013] EWCA Civ 477:

The principles applicable to the exercise of construction of contractual documents are also well established by decisions which include Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896, Chartbrook v Persimmon Homes Limited [2009] 1 AC 1101, Rainy Sky v Kookmin Bank [2011] 1 WLR 2900 and Napier Park European Credit Opportunities Fund Limited v Harbourmaster Pro-Rata CLO 2 BV and Others [2014] EWCA Civ 984. In particular the Court must consider the language used and ascertain what a reasonable person, having all the background knowledge which was reasonably available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. The content of such background knowledge is what is commonly referred to as the factual matrix. It is not necessary to find some ambiguity in the language before having regard to the factual matrix, and a consideration of the factual matrix may indicate that the meaning which the parties would reasonably be taken to have intended can be given effect despite the fact that it was not, according to conventional usage, an “available” meaning of the words or syntax which they had actually used: per Lord Hoffmann in Chartbrook at paragraph 37. In Investec Bank (Channel Islands Limited) v The Retail Group plc [2009] EWHC 476 (Ch) Sales J, as he then was, remarked that:

“In interpreting a contract, regard may be had to the content of the parties’ negotiations to establish “the genesis and object” of a provision. This seems to me to be a relevant part of the factual matrix, since if the parties in the course of their negotiations are agreed on a general objective which is to be achieved by inclusion of a provision in their contract, that objective would naturally inform the way in which a reasonable person in the position of the parties would approach the task of interpreting the provision in question.”

The approach to contractual construction is what Lord Neuberger MR in Re Sigma Finance Corp [2009] B.C.C. 393 described as “an iterative process” which involves “checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences”, an observation endorsed by Lord Mance in the Supreme Court in that case ([2010] 1 All ER 571) at paragraph [12].

The Electricity and Gas (Carbons Emissions Reduction) Order 2008 (“the Order”) required Ofgem to impose obligations on British Gas to deliver schemes achieving carbon emission reductions in domestic households. Under the Order each large energy supplier was set a carbon emissions reduction obligation by reference to its share of the domestic market (articles 6(1) and 7), which it was obliged to meet by promoting qualifying actions to domestic energy users (article 9). The qualifying actions were divided into four categories, namely demonstration actions, market transformation actions, priority group flexibility actions, and standard actions (article 2(2)). The Order also set out various sub-targets and contained mechanisms to oblige or encourage suppliers to meet their overall targets in particular ways. One of the sub-targets was that 40% of each supplier’s overall carbon obligations should be met by actions carried out in a “priority group” (article 13) which consisted of domestic consumers in receipt of certain benefits or aged over 70 (article 2(1)). On 31 July 2010 the Order was amended to include a “super priority group obligation”, requiring suppliers to offer measures to a sub-set of the priority group (article 13A).

Market transformation actions had to be different from existing measures and significantly more effective in reducing carbon emissions (articles 2(3)(b) and 12(3)(b)). To encourage the use of such measures, the MTU could be applied to them if the supplier so elected, increasing by a uniform 50% the reduction in carbon emission attributed to such actions (articles 15(3)(b) and 19(4)). There was a cap of 10% of a supplier’s overall carbon emissions reduction obligation which was permitted to be met by market transformation actions, applicable across all categories of heating, lighting and insulation (article 9(3)). Market transformation actions which exceeded the 10% cap could still be useful to a supplier as standard actions generating the relevant reduction in CO₂, but there would be no MTU available in respect of them.

Suppliers were obliged to notify Ofgem of any scheme they intended to use to meet their carbon emissions reduction obligations (article 11). The notification had to include sufficient information to show how the supplier intended the action to be within one of the four categories. Under article 12 Ofgem was then obliged to determine whether it approved the action within the particular category and notify the supplier of the decision. It was also obliged under article 15 to provide an estimate of the reduction in carbon emissions for an action it approved as a qualifying action. Article 15(3) provided for the MTU for market transformation actions in the following terms:

“(3)

To estimate the reduction for a market transformation action, [except a market transformation action which is the provision of a real-time display or a home energy advice package,] the Authority must—

(a)

apply to that action the appropriate carbon co-efficient values set out in Schedule 3; and

(b)

increase the reduction in carbon emissions expected to be achieved by that action by 50%.”

Once approved, suppliers were encouraged to report the interim progress of the schemes. Ofgem would then record the interim estimates of resulting carbon emission reductions, in a process known as “banking”. Suppliers also had to submit quarterly progress reports.

Following the end of the scheme period on 31 December 2012 (as extended), under article 19 of the Order suppliers had to notify Ofgem not later than 31 January 2013 of the number and type of qualifying actions which it had completed in the priority group and outside the priority group. On receipt of that notification Ofgem had to determine the reduction in carbon emissions to be attributed to those actions, and notify the supplier by 30 April 2013 (articles 19 and 22(1)). In making such final determination, the 50% MTU was provided for in article 19(4) in terms materially identical to article 15(3). Suppliers who failed to meet the targets were susceptible to fines.

Before the parties entered into any written agreement, the water widget had already achieved CERT Scheme accreditation on 26 January 2010. The parties therefore knew that it would qualify as market transformation activity, which was one of its attractions to British Gas in seeking to meet its obligations under the scheme.

The first agreement between the parties was dated 29 June 2010 (“the 2010 Agreement”). Its title was “AGREEMENT FOR CERT CREDITS”. British Gas was defined as “the Company” and Challis as “the Supplier”. The 2010 agreement provided amongst other things:

“WHEREAS

(A)

The Company is a licensed supplier of gas and electricity in the United Kingdom to a range of domestic and commercial customers;

(B)

The supplier specialises in the design, manufacture and distribution across the UK and Europe of a range of water saving products aimed at reducing water & energy consumption and bills;

(C)

The Company holds gas and electricity supplier licences and is subject to a Carbon Emissions Reduction Target (“CERT Target”), pursuant to which it is obliged to provide, install or subsidise energy efficiency measures in homes across Great Britain;

(D)

as part of meeting the CERT Target, the Company is willing to pay the Payment (as defined below) to the Supplier on the terms set out in this Agreement.

(E)

The Parties wish to enter into this Agreement to record the terms governing the relationship between each of them and in respect of the promotion of certain energy efficient products in order to partially fulfil the Company’s obligations under CERT and to operate a scheme acceptab1e to Ofgem in order to allow the Company to claim credits from Ofgem which count towards the CERT Target.

1.

DEFINITIONS AND INTERPRETATION

1.1

In this Agreement unless the context otherwise requires the following words shall have the following meanings:

…

“CERT” means the Carbon Emissions Reduction Target under the Electricity and Gas (Carbon Emissions Reduction) Order 2008, as amended from time to time, or any replacement scheme;

“Credits” means carbon emissions credits that arise from the carbon savings derived from the Products, and which the Company use to count towards its CERT obligation;

“Payment” means the amounts to be paid by the Company to the Supplier under this Agreement as set out in Schedule 4;

“Products” means those products listed in Schedule 1;

“Scheme” means the scheme relating to the Products operated by the Company and approved by Ofgem for the receipt of Credits as modified, amended or replaced from time to time;

2.

TERM

2.1

This Agreement shall commence on the Commencement Date and shall continue for the entire period that the Product continues to be an eligible product (for the purposes of the Company’s CERT Target) under CERT, unless terminated earlier in accordance with its terms.

6.

CALCULATION OF PAYMENT

6.1

The Company shall pay the Payment to the Supplier.

6.2

The Payment is calculated as set out in Schedule 4 and is a fixed amount based on the carbon savings for the Products as agreed between Ofgem and the Company under the Scheme provided that the Supplier shall only be entitled to claim or receive payment:

6.2.1

in respect of one Product per Consumer household as per Ofgem guidance from time to time (unless the regulations of the Scheme and applicable under CERT from time to time enable the Company to claim Credits in respect of more than one Product per Consumer household) but ignoring for these purposes any Products distributed by or at the direction of the Company otherwise than under this Agreement; and

6.2.2

for so long as the Supplier and the Products are compliant with the regulations of the Scheme and applicable under CERT from time to time, provided that this Clause 6.2.2 shall only entitle the Company to recover any Payments already made to the Supplier where the provisions of Clause 17.3 apply.

6.3

The Parties agree that the maximum aggregate amount of Payments by the Company under this Agreement and any amounts payable by the Company under Clauses 12.6 or 12.7 shall not exceed £4,000,000 (excluding VAT).

6.4

The Parties acknowledge that the carbon savings may be recalculated by Ofgem during the Term. If Ofgem do recalculate the carbon savings, the Parties shall use reasonable endeavours (without financial obligation) to agree and implement a mutually acceptable method of mitigating the effect of the recalculation on the terms of this Agreement provided that if the parties (each acting reasonably and in good faith) shall not be able to reach agreement on such mitigation within 20 working days of notification of the recalculation by Ofgem, such obligation to agree and implement a method of mitigation shall cease. Notwithstanding any steps that the parties may agree to take to mitigate the effect of a recalculation by Ofgem of carbon savings, (and without prejudice to the foregoing) the Parties acknowledge that the Payment may change as a result of a recalculation by Ofgem of the carbon savings. Any change to the Payment shall be directly proportionate and in relation to the recalculation by Ofgem of the carbon savings. The Supplier agrees to act bona fide and in good faith in giving all reasonable consideration to accepting the new Payment provided that the Supplier receives 4 weeks’ prior written notice of the change or, if Ofgem implement a change to the savings which will take effect before the expiry of such 4 week period, that the Company promptly notifies the Supplier upon the Company becoming aware. If the Supplier is unwilling to agree the new Payment either Party shall be entitled to terminate the Agreement under clause l2.4.

7.

PAYMENT

7.1.

During the first 4 months of the Term, the Supplier shall submit an invoice with the Weekly Report setting out the Payment claimed in respect of that week and thereafter the Supplier shall submit invoices on a monthly basis setting out the Payment claims in respect of that month in each case pursuant to this Agreement.

7.2

The Company shall, unless the parties otherwise agree, pay the amount of any invoice submitted by the Supplier within 28 days of the date on which the Company receives the invoice or is deemed to have received the invoice pursuant to the provisions of Clause 20 (whichever is the earlier).

17.

LIABILITY AND INDEMNITY

…

17.3

The Supplier will not be entitled to retain Payments in circumstances where Ofgem refuses to grant the Credits relating to such Payments due entirely to the negligent act or negligent omission of the Supplier or of any subcontractor of the Supplier.

18.

ENTIRE AGREEMENT

18.1

This Agreement contains all the provisions which the parties have agreed in relation to the subject matter of this Agreement and supersedes any prior written or oral agree-meats, representations or understanding between the parties relating to such subject matter. Neither party to this Agreement has been induced to enter into this Agreement by a statement or promise which it does not contain, save that this Clause shall not exclude any liability which one party would otherwise have to the other party in respect of any statement made fraudulently by that party.

SCHEDULE 4 – PAYMENT CALCULATION

The Company shall pay the Supplier the Payment as calculated below:

1.

For each tonne of CO₂ deemed to have been claimed by the Company (as set out in the Supplier’s invoice):

1.1

£6.70 per tonne of attributable to Consumers other than Priority Group Consumers

1.2

£8.70 per tonne of CO₂ attributable to Priority Group Consumers.

2.

The Parties agree that the supply of 1 Product by the Supplier (or retailer or other third party supplied by the Supplier) to a Consumer household shall equate to 1.018 tonne of CO₂ savings.

3.

Without prejudice to the provisions of Clause 6.3 (as the same may be varied pursuant to Clauses 9.2 and 9.3) the Payment shall remain as set out in paragraph 1 for up to the first 5 million Products and thereafter the price will be agreed from time to time between the Parties but in the absence of such agreement the payments shall continue at the levels set out at paragraph 1.

4.

For the avoidance of doubt VAT shall be added to the above in order to calculate the full amount due to the Supplier under each and any invoice raised pursuant to this Agreement.”

The 1.018 tonne figure in the last line of paragraph 2 of Schedule 4 arose from the widget’s CERT rating, which provided for a CO₂ saving of 84.8 kg per year and a life time of 12 years.

The 2010 Agreement was renegotiated and replaced with an agreement dated 3 March 2011 (“the 2011 Agreement”). It had the same title as an agreement for CERT Credits, with materially the same recitals and definitions as set out above. So far as payment was concerned, clauses 6.2 and 6.4 were in materially identical terms as in the 2010 Agreement. The maximum amount in clause 6.3 was raised to £21.2 million. A new clause 6.5 was added providing that British Gas would be entitled to withhold payment where it had reasonable grounds to suspect that Challis or the products had not complied with the Scheme. The payment calculation set out in schedule 4 to the 2011 Agreement was substantially more complicated than its 2010 counterpart. It distinguished between widgets distributed as a result of marketing through Sainsbury’s and those sold as a result of other marketing activities. In respect of the Sainsbury’s marketing activity there were 3 bands of payment depending on the number of widgets sold. The payment was again calculated by reference to a price in respect of the tonnes of CO₂ savings which were calculated on the basis of 1.018 tonnes per widget. Schedule 4 provided as follows:

“PAYMENT CALCULATION

Definitions for the purpose of this Schedule 4:

“Total Products” shall mean the total number Products distributed pursuant to the Marketing Activity in excess of 176,000 units of Product and the Sainsbury’s Marketing Activity.

Subject to the provisions of this Agreement, including the maximum amount payable pursuant to clause 6.3, the Company shall pay the Supplier the Payments as calculated below in accordance with the bandings set out in paragraph 1.1-1.3 (inclusive) and 2.2.1-2.2.3 (inclusive) (each a “Banding”):

1.

In respect of Sainsbury’s Marketing Activity

1.1

if the number of Total Products distributed is between 1 and 999,999 (inclusive) then the Payment shall be £3.70 per tonne of CO₂ attributable to the Products distributed to Consumers pursuant to the Sainsbury’s Marketing Activity;

1.2

if the number of Total Products distributed is between 1,000,000 and 1,999,999 (inclusive) then the Payment shall be £4.70 per tonne of CO₂ attributable to the Products distributed to Consumers pursuant to the Sainsbury’s Marketing Activity; and

1.3

if the number of Total Products distributed is above 2,000,000 then the Payment shall be £5.70 per tonne of CO₂ attributable to the Products distributed to Consumers pursuant to the Sainsbury’s Marketing Activity..

The parties acknowledge that the Company will make a separate payment to Sainsbury’s in the amount of £1 for each Product which the Supplier distributes to Consumers via the Sainsbury’s Marketing Activity in accordance with the terms of an agreement between the Company and Sainsbury’s.

Notwithstanding the payment terms set out in clause 7, any payments due to the Supplier which are calculated pursuant to paragraphs 1.1, 1.2, or 1.3 above shall be paid to the Supplier in accordance with this Agreement and the Supplier shall invoice the Company for Payment in respect of the total volumes of Products distributed to Consumers pursuant to the Sainsbury’s Marketing Activity as soon as reasonably practicable after conclusion of the Promotion (but in any event before the end of April 2011) to help ensure that the CO₂ can be successfully submitted towards the Company’s CERT obligations in line with Ofgem guidelines.

2.

In respect of all other Marketing Activity

2.1

up to a maximum of 176,000 Products distributed pursuant to the Marketing Activity:

- £6.70 per tonne of CO₂ attributable to Products distributed to Non-Priority Consumers; and

- £8.70 per tonne of CO₂ attributable to Products distributed to Priority Consumers,

For the avoidance of doubt, the number of Products distributed pursuant to the Sainsbury’s Marketing Activity shall not be included in the calculation of the number of Products distributed pursuant to this paragraph 2.1.

2.2

for Products distributed in excess of 176,000:

2.2.1

if the number of Total Products distributed is between 1 and 999,999 (inclusive) then the Payment shall be £4.70 per tonne of CO₂ attributable to the Products distributed to Consumers pursuant to the Marketing Activity;

2.2.2

if the number of Total Products distributed is between 1,000,000 and 1,999.999 (inclusive) then the Payment shall be £5.70 per tonne of CO₂ attributable to the Products distributed to Consumers pursuant to the Marketing Activity; and

2.2.3

if the number of Total Products distributed is above 2,000,000 then the Payment shall be £6.70 per tome of CO₂ attributable to the Products distributed to Consumers pursuant to the Marketing Activity.

Any payments which are payable pursuant to this paragraph 2 shall be payable in accordance with clause 7 of this Agreement.

4.

(sic) The number of Total Products distributed pursuant to this Agreement shall be recalculated by the Company throughout the Term and, if following such re-calculation the volume of Total Products distributed results in a change to the applicable payment Banding, any further payment due (subject to such Products still eligible for Credits) in excess of the amount already paid to the Supplier pursuant to this Agreement shall be payable to the Supplier in accordance with the provisions of clause 7.

5.

The Parties agree that the supply of 1 Product by the Supplier (or retailer or other third party supplied by the Supplier) to a Consumer household shall equate to 1.018 tonne of CO₂ savings.

6.

For the avoidance of doubt VAT shall be added to the above in order to calculate the full amount due to the Supplier under each and any invoice raised pursuant to this Agreement.”

There was a variation agreement entered into on 20 May 2011 whose terms are not material to the present dispute.

Challis invoiced for, and was paid, a total of £14,349,380.85 in respect of water widgets distributed directly or indirectly to consumers. Part, but not all, of such activity was treated as market transformation activity by British Gas attracting the MTU credited towards its carbon emissions target.

Challis contends that the price under clause 6 of the 2010 and 2011 Agreements falls to be calculated by reference to the amount of credit that British Gas could claim from Ofgem in relation to the widgets, including in particular the 50% MTU uplift: in substance, British Gas agreed to pay Challis by reference to the entire amount of the carbon savings which Ofgem deemed to have been achieved as a result of the distribution of the water widgets. It further claims that as a matter of construction of the agreements and/or terms to be implied therein, British Gas was obliged to claim from Ofgem the MTU in relation to the water widgets. It claims an account of the amount of such credits, alternatively damages insofar as British Gas failed to claim such credits. British Gas contends that the wording of clause 6 and schedule 4 in each of the Agreements clearly establishes that payment is to be of a fixed price amount, irrespective of what credits were sought by British Gas from Ofgem in relation to the water widgets.

British Gas’ principal arguments in support of its construction can be summarised as follows. The Agreements make no reference to market transformation activity or market transformation uplift. Had the parties intended that Challis be paid by reference to MTU they would have said so. Clause 7 provides for weekly and monthly invoicing, which supposes that the sums due can then be determined, and does not contemplate the later adjustment which would be necessary if payment had to take account of the MTU which is only finally determined by Ofgem in 2013; Paragraph 4 of Schedule 4 of the 2011 Agreement contains an express provision for retrospective updating as the only circumstance in which it was intended. Challis has no rights to information from British Gas about the claims for MTU made by the latter to Ofgem, by contrast with the information rights conferred on British Gas by clause 5. The allocation of risk is that British Gas bears the downside of any adverse Ofgem determination, subject to the limited exception provided for by clause 17.3. Clause 6.2 provides that the payment is to be calculated as set out in Schedule 4 and is expressed to be for “a fixed amount”. Schedule 4 provides for a price per tonne of CO₂ savings and an agreed volume of CO₂ savings per widget, enabling a simple and fixed amount calculation. The fact that the fixed amount is expressed to be based on the carbon savings for the products as agreed between Ofgem and British Gas under the scheme does not detract from the clear statement that the payment is to be of a fixed amount; it is merely a statement as to how, as a matter of fact, the fixed amount was arrived at. Clause 6.4 indicates that MTU cannot amount to “carbon savings” because carbon savings are identified as something which may be recalculated by Ofgem during the term, whereas MTU is not a matter for Ofgem recalculation being fixed at 50% by the terms of the Order, and in any event not calculated until after the “Term”. Clause 6.4 acknowledges that the carbon savings may be recalculated by Ofgem during the term and provides a mechanism for the parties to attempt to reach agreement to mitigate that fact, if necessary by a change to the payment, but Challis was not obliged to agree to any change to the payment. Clause 6.4 only operates if there is a revision downwards by Ofgem, in which case Challis can terminate the agreement if they do not wish to continue to supply with lower rates applying. MTU is not “carbon savings”, but a fixed uplift applied to savings, which is by definition 50% more than the relevant carbon savings. It is in effect a reward for promoting innovation in the form of a uniform 50% uplift in the grant of emissions. If Challis were entitled to be paid by reference to MTU, it is unclear how such payment would be calculated if only some widgets were treated as market transformation activity because they attract differential pricing under Schedule 4. The Agreements do not contain the relevant contract mechanics which it would be necessary to have in place if there were intended to be adjustments to the pricing formula by reference to the application of MTU. The risk that Ofgem might not contribute the anticipated amount of emissions reductions was imposed on British Gas alone except where the refusal to grant the credits was due entirely to the negligent act or negligent omission of Challis or any subcontractor of Challis (clause 16.3 of the 2011 agreement). That a clawback by British Gas was provided for only in these specific circumstances, shows that the parties agreed that otherwise payment would not depend on whether Ofgem attributed the expected emissions reductions to the widgets. Challis’ argument also cuts across the cap of £4 million imposed by clause 6.3 of the 2010 Agreement and the raised cap of £21.2 million in the 2011 Agreement. It is neither obvious, nor necessary to give the agreement business efficacy, to imply an obligation that British Gas should have to apply for all available MTU in respect of the widgets. Such an obligation would have severely hampered British Gas’ commercial flexibility in meeting its emissions reductions obligations, because British Gas could only claim MTU in respect of a maximum of 10% of its obligations but had numerous qualifying actions available to it and inevitably would have needed to have used many different measures. British Gas is unlikely to have agreed to commit in advance to the water widgets as the foundation for its MTU claims or to commit to exploiting the widgets in preference to other qualifying actions which might prove more advantageous in the changing circumstances over the lifetime of the scheme.

Challis’ principal arguments in support of its construction and/or implication can be summarised as follows. The Agreements are not concerned with payments by British Gas for widgets, but with payment by British Gas for the credits it gets under the CERT scheme, as is reflected in the title to the Agreements. Credits are defined as the carbon emissions credits which arise from the carbon savings derived from the products which British Gas actually use to count towards its CERT obligation, which includes MTU. The provisions are therefore naturally to be read as requiring payment where British Gas is entitled to a credit under the CERT scheme as a result of sale of the widgets, and it would require express language to exclude any such credit entitlement from the scope of the Agreements; the absence of any reference to market transformation activity or MTU in the Agreements therefore supports Challis’ construction. MTU as defined in articles 15(3) and 19(4) of the Order is a “carbon emission reduction” and so a carbon saving within the meaning of clause 6.2. Clause 6.2 is for a fixed amount “based on” such carbon savings and therefore includes MTU. Paragraph 2 of Schedule 4 of the 2010 Agreement, and its counterpart in paragraph 5 of Schedule 4 of the 2011 Agreement, are to be read as if the reference to 1.018 tonnes was a reference to such figure before uplift, which was how the widget’s accreditation was referred to in British Gas’ scheme query log dating from May 2010. If, as British Gas contends, the effect of clause 6.2 and Schedule 4 is to provide for a fixed sum per widget, there would be no reason to refer to carbon savings in either clause 6.2 or Schedule 4 as part of the pricing mechanism. If this were simply a fixed price contract, there would be no need to refer to a price per tonne of CO₂ or to link the product to 1.108 tonnes of CO₂ savings. The important feature is that the price is to be based on the carbon savings as agreed between Ofgem and British Gas, which will include the savings by way of MTU. Clause 6.4 reinforces this interpretation (although the claim is not brought under clause 6.4) by making clear that even in the absence of an agreed renegotiation, the parties acknowledge that the payment may change as a result of recalculation by Ofgem of the carbon savings, and there is to be a consequent change to the payment which is directly proportionate and in relation to the recalculation by Ofgem of the carbon savings. The fact that the policy behind the grant of MTU by awarding the 50% uplift may have been to encourage novel carbon saving devices does not detract from this construction/implication. The formula in Schedule 4 of the 2010 agreement for calculating the amount “deemed to have been claimed by [British Gas]” indicates that the price was to be calculated by reference to what British Gas was entitled to claim under the scheme, even if it did not make such a claim. There is no difficulty in calculating the 50% MTU uplift on each of the differentially priced supplies of widgets which had been invoiced under clause 7. The cap is the cap.

I am not persuaded that it is appropriate for the Court to decide the issues of construction and implication without a consideration of the detailed background to the Agreements, and the commercial consequences for each party of the rival contentions, which are matters which are not suitable for determination on a summary application. The witness evidence indicates a number of disputes of fact as to the common assumptions and discussions between the parties when negotiating the contract. It also reveals disputes as to what the known commercial consequences of the rival contentions would be for Challis and for British Gas. By way of example, Challis contends that it was a shared assumption between Challis and British Gas that British Gas would maximise its claims under the CERT Scheme by claiming MTU in respect of all the widgets. Whilst subjective intentions are not admissible as an aid to construction, shared common objectives are. The evidence of Mr Christopher Challis supports that case, including reference to at least one discussion between the parties to that effect, at paragraphs 7, 10, 22 and 33 of his first witness statement and paragraphs 4 & 5 of his second witness statement. That evidence is disputed. Mr Rogers, on behalf of British Gas, denies that there was ever any discussion of MTU in any of the pre-contract negotiations and advances arguments why British Gas would not have made that assumption or agreed to it. Challis alleges in paragraphs 5, 7, 8 and 9 (iv) of the Reply that the parties entered into the agreements on the basis that the widgets were the most cost effective and highly penetrative products for carbon savings, that no other product came close, and that they were far and away the best product for British Gas in relation to claiming carbon emission reductions. Their obvious attraction and success for these purposes was what caused the cap to be increased from £4 million to £21.2 million. This case is supported by Mr Christopher Challis in paragraphs 35, 37 and 52 of his first witness statement and disputed by Mr Rogers at paragraphs 20, 21 and 25 of his witness statement. In essence it is Challis’ evidence, disputed by British Gas, that the common view at the time of the Agreements was that the products were so attractive to British Gas for claiming credits as market transformation activity that it was a given that they would all earn the MTU uplift for British Gas. There are also a number of disputes about the known commercial consequences of the rival contentions, and in particular whether it would have made commercial sense for British Gas to have reached an agreement which had the effect for which Challis contends, against which the arguments of construction must be tested as part of the iterative process. These arguments might also be informed by a consideration of what the parties knew or could reasonably predict as to how much of the 10% cap might be utilised by credits derived from the widgets, it being common ground that they fell within the “heating” category of savings under the scheme, which was a smaller proportion of the savings than lighting and insulation, all of which would potentially contribute towards the 10% cap on claimable market transformation activity.

These are all matters which cannot be resolved on a summary judgment application and which may have a bearing on the proper construction of the Agreements and/or the implication of terms. That is an exercise best conducted at a trial in the light of all the evidence. Accordingly the application will be dismissed.