Cotton (t/a Allmat Enterprises) v Rickard Metals Inc

On Tuesday 8 April 2008 I heard an appeal, which lasted the full day, against an order of Master Rose dated 8 November 2007. He had granted summary judgment on part of the claim against the First Defendant, Mr Daniel Cotton, in respect of the allegation that titanium he had supplied to the Claimant, Rickard Metals Inc, did not correspond to the contractual specification. Mr Ritchie, on behalf the First Defendant, argues that the Master’s brief judgment was flawed in a number of respects, to which I shall turn in due course, and that the Claimant has simply not discharged the considerable burden imposed upon it by the requirements of CPR Part 24. At the conclusion of the hearing, I reserved judgment.

To put the matter in context, the Claimant corporation has made three claims against Mr Cotton. First, it is said that he made a fraudulent misrepresentation as to the identity of the manufacturer of the titanium. Secondly, there is the allegation which forms the subject-matter of the application for summary judgment, namely that the titanium was not in accordance with the contractual specification. Thirdly, it is alleged against both Mr Cotton and his wife that a transfer of two flats from joint names into the sole name of the wife is liable to be set aside in accordance with s.423 of the Insolvency Act 1986. The application for summary judgment was made only in respect of one of the claims and only against Mr Cotton.

It is important to emphasise also that the summary judgment application is narrow in scope, being confined to the issue of whether or not the goods corresponded with description for the purpose of assessing whether there was a breach of the implied term under s.13 of the Sale of Goods Act 1979. The relevant contractual description stipulated “Titanium cut plates Ti-6Al-4V grade 5 to ASTM B265 and AMS 4911, ultrasonically tested to AMS 2631 class A1 for items indicated”. I was told that the designation AMS signifies “Aerospace Material Specification”. There is no claim relating to quality or fitness for purpose.

In granting summary judgment in relation to that limited issue, the Master ordered an inquiry as to damages.

Permission was refused on paper to appeal the Master’s order but, on an oral application, permission was granted by Cox J on 19 February 2008. On that occasion, reliance was placed by the First Defendant on new evidence which had not been before the Master. At the outset of the hearing before me, therefore, the first issue was whether or not the new evidence should be admitted in accordance with CPR 52.11(2). For this purpose, I heard submissions based on Al-Koronky v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123, in which the Court of Appeal confirmed, in the context of the modern CPR regime, that the guidance contained in the earlier decision of the Court of Appeal in Ladd v Marshall [1954] 1 WLR 1489 remained powerfully persuasive authority.

I was also invited to take into account, in this context, the acceptance in the House of Lords in Three Rivers DC v Bank of England [2001] 2 All ER 513 of the principle that, in relation to an application for summary judgment, the court needs to be satisfied that the relevant party’s case (in this instance that of Mr Cotton) is bound to fail on the material at present available and, secondly, that there is no reasonable possibility of evidence becoming available to him, whether by further investigation, disclosure, cross-examination or otherwise, sufficiently to support his case and give it some prospect of success.

Having considered these authorities, I decided to admit the evidence, which consisted of material showing that the titanium had been returned to the Chinese manufacturer intact and, secondly, certificates from China purporting to show that the material did indeed comply with specification. This involved the admission of evidence from both sides going to these issues.

As is the norm nowadays, the appeal was conducted on the basis of a review rather than a rehearing.

The Claimant corporation is a metals trader, manufacturer and engineer of metal products, based in California. Mr Cotton is a metals trader based in London. He uses the business name “Allmat Enterprises”. The contract of purchase between the parties was dated 30 September 2005. Mr Cotton purchased the titanium from Baoji Import & Export, a manufacturer operating in the Chinese city of Baoji. It was sold on by the Claimant to Embraer, a Brazilian aircraft manufacturer.

The Claimant was obviously aware that Mr Cotton was not the manufacturer of the titanium, that he was acquiring it from China and that it would be shipped directly from China to California. In accordance with the contract, certificates of quality were supplied in respect of all the material and were accepted by the Claimant. They are now in evidence before the court. In due course, between 30 September 2005 and 29 March 2006, the Claimant paid Mr Cotton a total price of 2,776,855 US dollars. So far, Mr Cotton has paid back only 164,975 US dollars.

It is submitted on Mr Cotton’s behalf that it is necessary for the Claimant, to justify an order for summary judgment, to demonstrate inter alia that those certificates were plainly wrong. It is further submitted that the Claimant cannot, on the present state of the evidence, surmount that hurdle, although it is to be noted that the Claimant’s witness, Mr Rowe, goes so far as to suggest that those certificates might not relate to genuine tests. This is a significant part of the background to the dispute between the parties, although it was not relied upon before the Master.

I have already recorded that part of the Claimant’s case is based upon fraudulent misrepresentation as to the identity of the manufacturer. Even though these serious allegations have not been pursued on the application for summary judgment, since it is confined to the issue of compliance with description, that wider context is relevant for the court to take into account on an application under CPR Part 24, which requires that the court be satisfied not only that there is no realistic prospect of success, but also that “there is no other compelling reason why the case or issue should be disposed of at a trial”.

It is true that there are some puzzling features about the history of these transactions, although Mr Anderson QC, appearing for the Claimant, submits that they are something of a distraction from the central issue (i.e. whether his client is able to establish non-compliance). Nonetheless, where there are unexplained features in a case, which could only be satisfactorily resolved following disclosure and cross-examination, it is important to consider whether they throw doubt on evidence which would otherwise appear to be clear-cut and/or whether they might provide “other compelling reasons” to justify the case being tried.

Some of the puzzling features which have been drawn to my attention by Mr Ritchie, on Mr Cotton’s behalf, are not directly concerned with the contractual relations between the parties to this litigation, but rather with the transaction between the Claimant and Embraer. Nevertheless, since the Claimant and Embraer played a role in arranging for the testing of the titanium, it is argued that these matters may be relevant to determining whether the evidence of non-compliance is as clear-cut as the Master thought; or whether, on the other hand, there are questions to be answered before it can be unreservedly accepted.

One of the unexplained factors relied upon by Mr Ritchie concerns a test piece, accompanied by eight manufactured plates, which Mr Cotton arranged to be sent by Baoji I & E to the Claimant for testing. The Claimant had the material tested by Dickson Testing Co Inc, and it was found to be compliant. It was also passed by the Claimant to Embraer, so that it could have the opportunity of testing it for itself. It was sent in about November 2005, but it is unclear what happened to it afterwards. Embraer did not carry out any testing until late March or April 2006. Mr Ritchie points to the dearth of disclosure in relation to documents passing between the Claimant and Embraer. On the face of it, it might be thought that such disclosure would throw little light on the apparently simple question of whether the titanium complied with description. On the other hand, part of the evidence relied upon by the Claimant is the testing carried out by Embraer itself. Mr Cotton is therefore entitled, he argues, to be satisfied that the right material was tested and that the testing was satisfactory. It is difficult to find fault with that argument.

Another puzzling feature is the way in which the contractual specifications, as between Embraer and the Claimant, seemed to be in a state of flux at this time. Furthermore, the grounds on which Embraer chose to reject the titanium appeared to be somewhat fluid. Again, this might not seem to have much to do with the issue of non-compliance as between the Claimant and Mr Cotton, but Mr Ritchie suggests that Mr Cotton in these circumstances should not be forced to accept what he is told about testing at the Claimant’s behest, and at Embraer’s behest, without having the opportunity to check what was going on.

The matter needs, therefore, some further explanation. The contractual stipulations by Embraer appear to have changed fairly fundamentally (after the date of the contract between Mr Cotton and the Claimant). For example, instead of there being provided a list of specified manufacturers as was originally the case (of which Baoji I & E was not one), the position changed in November 2005 so that the titanium was required to come from one and one only specified manufacturer, namely Baoji Titanium Industry Company Limited (“Bao Ti”). It is true that it was also a term of the contract that the titanium had to comply with AMS 4911. But it would appear, to the casual observer, that the Claimant found itself in the position of not being able, in any event, to comply with its obligation to Embraer by supplying the titanium which forms the subject-matter of these proceedings.

It is important to stress, however, that the court has an incomplete picture. This is no doubt in part because of the lack of disclosure of the documents on this subject as between the parties to the present litigation. We know, in general terms, that of the four tranches of titanium shipped to California, three had been shipped onwards to Brazil by the time Embraer notified rejection. There is, however, little or no disclosure to enable Mr Cotton to trace through the shipping of the titanium by the Claimant to Embraer, and thus to complete the chain of evidence in relation to the material tested.

The Master’s approach to the evidence of non-compliance was brief and to the point:

“The evidence before me is virtually all one way on the point. Such evidence as the Defendant puts forward is so thin that I cannot say that he would have a real prospect of success in defending the claim. In his third and fourth witness statements, Mr Cotton denies, by way of assertion, that he is in breach but I can’t help but notice he has put no real evidence before the court to gainsay the extremely strong evidence on the Claimant’s side that these goods didn’t correspond with description.

….

Embraer conducted tests on some of these goods and the results showed overwhelmingly that the goods did not conform to AMS4911 or AMS4911J … The Defendant could have applied for the appointment of an expert, for a stay pending adjudication or to institute tests. None of this was done. In short, there was silence from the Defendant as to the actual quality of the goods.

But this is not a judgment on quality but on correspondence with description only. The Claimant decided, perfectly properly, to have the material tested and so commissioned a reputable, independent testing company, Dickson whom I hold to be an independent laboratory of the highest repute. Their CV shows they are people of the highest quality. The heat lot numbers show what went to Dickson and they had the material tested. There is no question of any mistake having been made. They found that many of these tests showed that the material did not conform to specification.

Mr Ritchie says there is a lot of material that has not been tested – this is perfectly true but normal in many commercial cases e.g. tons of wheat. Here it is titanium but I am quite satisfied on the evidence that it is overwhelming to say by reason of the tests that there was non-correspondence with description … ”

It is argued by Mr Ritchie that the Master’s approach was somewhat simplistic in the circumstances and that he was, in effect, conducting a mini-trial on incomplete evidence. If he did so, of course, that would be impermissible. That is clear from many authorities.

It is to be remembered that the Master was not dealing with expert evidence – still less evidence which was agreed. He chose to accept evidence from Dickson (instructed by the Claimant) and from Embraer (one of the parties intimately involved in this chain of transactions). I am not in a position to criticise the testing or the reports now in evidence. Nor is Mr Ritchie. We have only an incomplete picture. What is clear, on the other hand, is that this is not independent evidence, and Mr Cotton would be entitled to explore the background and, if appropriate, to pursue the matter in cross-examination. The evidence would seem, therefore, not to be entirely satisfactory for the purpose of basing a summary judgment application upon it.

After the titanium had been rejected, the parties entered into another agreement, on 1 September 2006, intended to achieve a pragmatic solution. This was known as the Reprocessing Agreement, to which Baoji I & E was also a party. The plan was that it would reprocess the returned titanium for onward sale to third parties. Any proceeds would be paid into a joint account in the names of the Claimant and Embraer. In the light of this, the Claimant argues, it is clear that it was being accepted by Mr Cotton and Baoji I & E that the titanium had been defective. There were indeed certain recitals at the beginning of the Reprocessing Agreement which, in themselves, would appear to support this. The matter is not unarguable, however, since there is an express reservation of rights contained in the body of the Agreement, especially Clause 8(d), which would appear to be inconsistent with making any admission for the purposes of litigation.

Moreover, argues the Claimant, it makes no sense for Mr Cotton to make any repayment to the Claimant, at all, if he was denying non-compliance. Yet, as I have said, he did make two payments (on 29 December 2006 and 13 June 2007) totalling 167,975 US dollars. However inadequate, these are said to be in recognition of his liability to repay the Claimant.

Reference was also made to Mr Cotton’s fax of 27 June 2006, prior to the issue of the present proceedings, in which it appeared to be accepted that the testing had demonstrated non-compliance, and that the titanium was to be shipped back to Baoji I & E “for refund”. It is hardly surprising that the Claimant places reliance on this, but it may be of significance that this was at a time when the parties were trying to reach the “pragmatic” solution later embodied in the Reprocessing Agreement. Once the Claimant chose, in July 2007, to go down the route of litigation, Mr Cotton apparently felt free (pursuant to the reservation of rights contained in that Agreement) to resist the claim on a formal basis.

The Claimant also submits that the “defence” now put forward on Mr Cotton’s behalf can be characterised as no more than “picking holes” in the evidence put forward in support of summary judgment. There is said to be nothing of real substance to set against it. The Claimant’s general manager, Mr Rowe, has gone through the criticisms at length and sought to demonstrate that there is nothing in them. I remind myself, once more, that resolving contested issues by preferring one account, convincing though it may appear on its face, comes close to conducting a mini-trial.

The new evidence which I decided to admit, and which Cox J took into account in giving permission to appeal in February, would seem to fall into the category, contemplated in the Three Rivers case, of supporting Mr Cotton’s case and giving it “some prospect of success”. There was a third witness statement from Gina Serre, a solicitor acting on Mr Cotton’s behalf, in which she takes a number of points. Especially important are the following two paragraphs:

“Further evidence from Baoji

18

Reference is made to communications received by Mr Cai Longyang of Baoji I & E in which he confirms that there were no deficiencies in the returned material and that all of the titanium complied with contractual description in the Allmat Contract.

19

In addition, Baoji I & E has faxed to us the survey results of the tests (see GS12) that Baoji I & E caused to be undertaken for each heat lot of the returned titanium. The test reports are in Chinese but Baoji I & E have provided English translations of the same in accordance with usual trade practice. These reports confirm compliance of the titanium with contractual description and confirm the statement made by Mr Cotton … that Baoji I & E found no deficiencies in the returned material.”

In considering the introduction of this material, by reference to Ladd v Marshall principles, I was invited by Mr Anderson to treat these results as not being on their face credible. I did not see how I was in a position to do so. It may be, ultimately, that these documents, together with the certificates originally supplied to the Claimant in accordance with the contract, will prove to be unreliable or false. I cannot tell.

In paragraph 11 of his third witness statement, Mr Rowe makes a series of cogent points about the quality of the new evidence. At sub-paragraph (a) he asserts that there are “serious questions over the authenticity” of the reports. At sub-paragraph (b) he refers to the ad hoc approach “raising doubts”. He suggests at sub-paragraph (d) that certain terminology (“squareness form billet”) demonstrates that different materials were actually tested. Mr Ritchie responds by saying that this can be explained merely as a matter of terminological difference. At sub-paragraph (e) Mr Rowe declares himself to be “far from convinced”.

What does seem to me to be clear, however, is that inconsistencies of this kind cannot simply be ironed out on a summary judgment application. It is not open to me to conduct a mini-trial, any more than it was open to the Master. I now have more material than was available to the Master, and it serves to confirm the impression I formed on the original evidence that, though it may be strong as things stand at the moment, the Claimant’s case is not so clearly made out that it can be said, at this stage, that Mr Cotton has no realistic prospect of success in resisting the non-compliance claim.

In these circumstances, I feel bound to allow the appeal and to set aside the order for summary judgment.