England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE No CHANF 97/0082/3

Royal Courts of Justice

Strand

London WC2

Thursday, 9th July 1998

B e f o r e:

LORD JUSTICE KENNEDY

LORD JUSTICE MORRITT

LORD JUSTICE THORPE

JOHN DEE GROUP LTD and Another

Respondents

- v -

WMH (21) LTD (formerly Magnet Ltd )

Appellant

(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

MISS E GLOSTER QC and MR DAVID MARKS (Instructed by Gouldens of London) appeared on behalf of the Appellant

MR G MOSS QC and MR R HANTUSCH (Instructed by Robert Muckle of Newcastle upon Tyne) appeared on behalf of the Respondent

J U D G M E N T

(As Approved by the Court)

(Crown Copyright)

LORD JUSTICE MORRITT: This is an appeal of the defendant, WMH (No 21) Ltd ("Magnet Ltd"); its former name was Magnet. It appeals from the order of Neuberger J made on 5th December 1996. By that order the judge declared that Magnet was not entitled to set off against sums it owed to the plaintiff ("Group Ltd") in respect of

both pre- and post-receivership trading, amounting in all to some £1,106,347 odd two specific cross-claims. The first was in respect of contractual pre-payments totalling the sum of £879,905. The second was the amount of a credit note in the sum of £204,224.

The plaintiffs, John Dee Group Ltd and John Dee Transport Ltd, provided transport services to the defendant, Magnet, pursuant to a number of contracts in 1988 and subsequent years. The relevant contract was known as Contract No 3. It was entered into on 6th June 1988. The parties to the contract were Group, on the one hand, and Magnet on the other. The contract provided by Clause 4 that Group should provide to Magnet specified vehicles for commercial purposes only and carry the goods of Magnet in such manner and within the time scales agreed between them from time to time. By clause 2 it was provided that the agreement should continue for three years certain and then from year to year until determined by either party on three months notice.

The agreement provided for three types of charge to be paid by Magnet to Group. The first was called the standing charge which was defined as the basic sum payable in advance by Magnet to Group, as set out in Part 1 of the 3rd Schedule, and was, in short, in respect of hire charges for specified vehicles and the basic weekly wage of their drivers. Thirteen weeks' standing charges were to be paid in advance, and thereafter individual weekly standing charges were to be paid 4 weeks in advance. The second type of charge was called the running charge. That was defined as the sum set out in Part 2 of the 3rd Schedule which, in broad terms, was calculated by reference to the distance covered by the respective vehicles for the week in question. This was to be paid within four weeks of the receipt of Group's invoice. The third, described as Additional Charges, was that set out in Part 3 of the 3rd Schedule as varied from time to time by the parties. In summary, it represented overtime rates and subsistence payments to the drivers which could only be ascertained after the various journeys had been carried out. Those charges were to be paid within four weeks of Group's account for them being rendered to Magnet.

Clause 5.1.1.5 and 5.1.2 are in the following terms:

"5.1.1.5 Liability for Payment

Without prejudice to sub-clause 5.1.2 all sums due to the contractor hereunder and unpaid for four weeks after the rendering of the said account shall as from invoice date and until payment bear interest at 3% above the Base lending rate of Barclays Bank Plc then prevailing.

5.1.2 All amounts payable by the hirer [Magnet] hereunder shall be paid in full on due date for payment without any deduction

(except as may be required by law) and without any set-off or abatement on any occasion whatsoever."

Clause 10.2 provided for variations and stipulated that -

"No variation, modification, rectification or amendment to this agreement shall have effect unless agreed in writing by the parties hereto or their duly authorised representatives."

The pre-payments in respect of the standing charges for thirteen

weeks were duly made by Magnet to Group from the period December 1987 to November 1989. On 11th May 1989, Group and its subsidiary company, Transport, granted a debenture to Lloyds Bank Plc giving as security for the sums owed fixed and floating charges on all its book debts. The credit note to which I have referred was issued on 25th January 1990. It is on Group headed paper. It is dated 25th June 1990. The narrative is:

"Order no: 1194 Dated 25/06/90 credit for vehicles taken out of service reference standing charges for weeks commencing 2/7/90. 9/7/90. 16/7/90, 23/7/90. See attached sheets for details."

The invoice total, or the credit note total, was £204,224. It is common ground that the invoices in respect of those weeks had been paid before the writ was issued and are not invoices sued on in this action.

On 2nd January 1991 Lloyds Bank Plc demanded repayment from Group of all sums due. Those sums not having been paid, on the following day Lloyds Bank appointed Mr Middleton and Mr Goldie as receivers over the assets of Group in respect of the assets charged by the debenture.

The accounting position as between Group and Magnet was then as

follows: the payments of standing charges made in advance by Magnet totalled £879,905 odd. The sums due to Group by Magnet for unpaid invoices was some £940,040. The credit note in favour of Magnet issued by Group was £204,224.

On 4th January 1991 there was a meeting at Magnet's offices in

Darlington between the receivers and two representatives of Magnet. They considered the basis on which Group and Magnet might continue to trade. There was a dispute as to the terms which does not now arise, but it is relevant to note that it was agreed between them that the standing charges should no longer be paid four weeks in advance but on the Friday before the Monday of the week in question.

On 10th or perhaps 13th March 1991 trading between Group and Magnet ceased. The contracts determined. The reason for such determination is not agreed and has not been determined by the court. The debt then due by Magnet to Group for post-receivership trading was £202,306. Thus, the overall balances were as I indicated at the beginning of this judgment. The debts due by Magnet to Group for pre- and post-receivership trading was £1,106,347. The pre-payments of standing charges made by Magnet to Group were £879,905. The credit note issued by Group to Magnet was £204,224.

These proceedings were commenced by writ issued on 28th November 1991, and Group thereby seeks to recover the outstanding charges

due in respect of both pre- and post-receivership trading. The claim is made by reference to unpaid invoices and gives no credit in respect of the prepayments of standing charges or for the amount of the credit note.

The original defence of Magnet was served in February 1992 and has

subsequently been amended. Magnet claims to be entitled to the

benefit of the prepayments of standing charges and the amount of the credit note in ascertaining the liability of Magnet to Group on a number of grounds.

The matter came before Neuberger J. He gave judgment on 5th

December 1996. He decided that Magnet was not entitled to deduct the amount of the prepayments or the credit note in computing the liability of Magnet to Group, nor to set them off against such liability. He also decided a number of other issues which do not now arise.

Magnet contends on this appeal that he was wrong in both respects. It is convenient to deal with the two points in turn. I shall deal first with the question of the prepayments of standing charges. In that respect Magnet contends that it is entitled to the benefit of those payments either as a deduction to be made before ascertaining the amount payable by Magnet to Group or, alternatively, by way of set-off which has not been excluded, so it is contended, by clause 5.1.2 at the stage when the set-off is claimed. The judge dealt with the first contention at pages 10 to 15 of his judgment. In summary, he concluded that the prepayments of standing charges could not be treated as payments in advance of the running and additional charges for that would be contrary to the terms of the contract. So far as the standing charges are concerned, he held that, as a matter of construction, the prepayments were not down payments against that liability. At page 14 he continued:

" ..... the initial down payment is not stated to be a payment of, or even on account of , standing charges. It is a payment of money whose status is not identified, and the reference to ´standing charge' is simply to identify the quantum of the initial down payment. In the absence of any stipulation to the contrary, it seems to me that the purpose of the initial down payment was to give Group some sort of security; the natural inference, at least in the absence of any indication to the contrary, is that that security was to be afforded to Group throughout the term of the contract. To put the point slightly differently, if it had been intended that the initial down payment was capable of being reduced during the term of the contract (and in this connection it is Magnet's contention that it effectively can be reduced during the last thirteen weeks of the contract) one would have expected the parties so to stipulate expressly."

Magnet contends that the judge was wrong. It maintains that the pre-payments were made on account of all three types of charge and must be brought into account at the end of the day in quantifying the liability of Magnet. By "the end of the day" counsel

explained that she meant that as being the point of time when it

became apparent that the contract had or would come to an end, and

it could be seen that the amount of the prepayments would exceed the liability of Magnet for the three types of charge. In summary, the submission is that the amount payable for the purposes of Clause 5.1.2 is the amount reduced by the prepayments but before that clause is to be applied.

I do not accept this submission. It is clear from the terms of the contract that the three types of charge became due on different dates. Thus, the standing charge was payable four weeks in advance, the running charge four weeks after invoice and the additional charges four weeks after the rendering of the account. The three types of charge were not amalgamated into

a single account. There is nothing in the contract to appropriate the prepayments to any one of the types of charge, nor to any overall balance due for the time being. As the judge observed, there is nothing in the contract which provided how the prepayments were to be taken into account. Further, it would be contrary to the apparent intention of the parties in providing for prepayments to be made if they could be used by deduction during the performance of the contract.

For these reasons it seems to me to be clear that the "amounts payable" for the purposes of clause 5.1.2 are the separate amounts of each charge computed in accordance with the 3rd Schedule and

without any deduction by reference to any prepayment. This, to my mind, is confirmed by the provisions for payment of interest in clause 5.1.1.5. Accordingly, it seems to me that the first argument must fail.

Accordingly, I pass to the second submission. This is to the

effect that by the time the contract is determined, or at an earlier stage if it is clear that it will be determined leaving a balance due to Magnet, clause 5.1.2 is not operative. Counsel was at pains to point out that she was not contending that the clause ceased to operate at that stage, but that on its true construction it never would be operable in that event. This was necessary so as to avoid the riposte that the debenture holder took, subject to and with the benefit of the provisions of clause 5.1.2. and was entitled to rely on them as against Magnet (cf Rother Iron Works v Canterbury Precision Engineering [1974] QB 1, 5.

That submission appears to me to be inconsistent with the clause itself. A deduction of the prepayments is obviously not required by law, though the contrary was faintly argued at one stage. It appears to me that the process for which Magnet contends must give rise to either a deduction or a set-off. That is exactly what the clause prevents. The concluding words "on any occasion whatsoever" prevent such a process, both during the operation of the contract and thereafter. Clause 5.2 expressly recognises that a sum may be "payable hereunder" notwithstanding the termination of the contract.

The fact is that an anti set-off clause such as this becomes of crucial importance in the context of the grant of debentures. If both Group and Magnet were fully solvent the existence of the clause would be of no consequence for the cross-claims could be paid in full if it were necessary to do so. In such circumstances it would not be to the advantage of either party to rely on it. Likewise, if Group had gone into liquidation the provisions of Insolvency Rule 4.90 would have overridden the clause so as to require a set-off of the cross-claims. (cf Stein v Blake [1996] 1 AC 243). But where, as here, a debenture is granted by one party

and, in consequence, one of the cross-claims cannot be paid because the debtor has parted with the assets needed for that purpose then the anti set-off provision serves to protect the debenture-holder to whom the benefit of the other obligation has been thereby assigned.

Emphasis was placed by counsel for Magnet on the normal practice of the court to allow execution to issue only for the balance of two cross-claims, subject to judgments. But I am not satisfied that where the beneficial ownership of the cross-claims is in different hands in consequence of an assignment of one of them and set-off is excluded by a provision such as clause 5.1.2, that practice is necessarily applicable. (cf Stumore v Campbell [1892] 1 QB 314 and Coca Cola Financial v Finsat [1998] QB 43, 55.) It is not necessary to pursue the point further as that is not this case.

In my view, the judge came to the right conclusion on the issue of the prepayments.

I turn to the question of the credit note. I have already referred to its form. It is not disputed that the invoices referred to in the note were paid in full, and were not invoices in respect of which Group sued. The judge held as follows:

"Magnet also seeks to rely upon a specific credit note dated June 1990 in relation to a sum of over £200,000, which was never in fact set off by Magnet against payments which it made. Magnet contends that, even if it fails (as I have concluded that it does) on the other arguments on this second issue, it is nonetheless entitled to the benefit of a set off in relation to all or some of the money contained in this credit note. I do not accept that argument. First, the fact that Magnet did not at once take advantage of the credit note and claim a set off is, if anything, an indication that the parties did not in fact have a clear and consistent course of conduct of the sort which Magnet alleges. Secondly, the mere fact that Group accepted that Magnet was entitled to a credit does not mean that Magnet would have been entitled to set off some or all of the money contained in the credit note. If, as I have held, there is no course of dealing which entitles Magnet to defeat Group's reliance on the anti set off provisions contained in Clause 5.1.2, then all that the credit note achieves for Magnet's purposes, in my judgment, is to show that there is some sort of admission on Group's part that the amount contained in the credit note is owing. It does not, however, provide any assistance for Magnet's contention that it is entitled to rely on the credit note to support a claim for set off."

Magnet submits that the judge was wrong. It is contended that the credit note was a contract or acknowledgment that Magnet was entitled to set off the specified amount so as to override clause 5.1.2 or, alternatively, was a waiver of Group's entitlement to rely on clause 5.1.2 to that extent.

But these submissions seem to me to take no account of the form of the note or of the actions of the parties. The note was an admission by Group of a debt. Magnet did not then seek to have the debt paid. There is no evidence that it acted in reliance on the credit note in any particular way.

In these circumstances I reject the submission that it gave rise to an agreement whether in compliance with clause 10.2 of the contract or otherwise. Likewise, it is not an acknowledgment of anything more than the debt itself. In particular, it says nothing about a set-off for the amount thereof and makes no reference to clause 5.1.2. In these circumstances I do not see how it can override or amount to a waiver of the benefit of clause 5.1.2. In my view, the judge was right in respect of the credit note also.

It was common ground that if this court came to the conclusion that the appeal failed on these two points then the other points raised in the notice of appeal and respondent's notice would not arise.

In those circumstances I would dismiss the appeal.

LORD JUSTICE THORPE: I agree.

LORD JUSTICE KENNEDY: I also agree.

Order: Appeal dismissed with costs. No award as to cross-appeal. Leave to appeal was refused