England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
(MR JUSTICE HART)

		Royal Courts of Justice Strand London WC2
		Friday 13 July 2001

1. LORD JUSTICE ROBERT WALKER:This is an application for permission to appeal, with appeal to follow if permission is granted, from an order of Hart J made on 12 July 2001. By that order Hart J refused to continue an injunction which he had granted on a not on notice application made on 6 July 2001. That injunction, which was not continued, restrained HFC Bank Plc ("HFC") from sending to Goldfish cardholders communications of a specified type (consisting of a letter and a separate piece of text accompanying a new credit card) or any communication in similar terms.
2. The orders of 6 and 12 July had been made in the context first, of an order of Lightman J made on 29 June 2001 in these proceedings; second, an application for permission to appeal from the order of Lightman J which I adjourned to be heard on notice with the appeal to follow if permission was granted, the intention being that that appeal should be heard during the third week in August; and, third, of the prospective date of termination of the joint venture agreement which was the subject of the litigation, that date being 3 September 2001.
3. The background to this complex litigation has been well summarised, both by Lloyd J in a judgment which he gave on 24 April 2001 refusing applications by both sides for summary judgment under Part 24, and then in the judgment of Lightman J handed down on 29 June. I need give only the barest sketch.
4. At the centre of the litigation is what is known as the Receivables Purchase Agreement ("RPA"). That was one of a number of complex commercial agreements which were entered into on 14 June 1996 between companies in what is now the Centrica (formerly British Gas) group of companies and companies in what has been referred to as the Household Group, the holding company of which is Household Global Funding Inc ("HGF"), a Delaware company.
5. The purpose of the main joint venture agreement and its associated agreements was to establish and regulate a joint venture in the consumer credit business based on a credit card known as the Goldfish card and an associated loyalty scheme. The joint venture was to be run through an English company, initially called Golden Eagle Limited but now renamed Goldbrand Developments ("Goldbrand").
6. On the British Gas side the company most closely involved is British Gas Trading Limited ("BGT"), a subsidiary of what is now Centrica Plc. Another subsidiary, GB Gas Holdings Limited, was also involved but only as a party to two trademark licensing agreements which were entered into some time later. On the Household side the companies principally involved were HGF and two English subsidiaries, Household International (UK) Ltd, and HFC.
7. HFC was at all material times an authorised institution under the Banking Act 1987. Goldbrand obtained a licence to act as a credit broker under the Consumer Credit Act 1974. This reflects the fact that, although the joint venture was to be centred on Goldbrand, that company did not have all the assets, nor did it have all the resources, necessary to the success of the venture. It had a very modest issued and paid up capital of only £25,000, and it was to be financed by loans made by BGT, to whom it was to issue up to almost £50 million of loan notes. Furthermore, Goldbrand did not own the Goldfish trademarks, nor did it have the resources for handling what was expected to become, and did in fact become, a very large scale credit card business.
8. The principal aim of the joint venture was that British Gas would, with its huge consumer base and by means of the loyalty scheme linked to the Goldfish card, deliver large numbers of account holders. The Household side would deliver the resources and expertise for handling the accounts. The joint venture was to continue for only five years from its practical commencement, which occurred on 3 September 1996, unless BGT gave at least nine months written notice to extend the term of the agreement until either the sixth, seventh or eighth anniversary of the commencement.
9. On 1 December 2000 BGT and HFC both gave notices, one under the RPA and the other under what was known as the card agreement. From that time it was perfectly clear that the joint venture was not going to be extended and was going to come to an end on 3 September 2001. It is apparent that by then there were already differing views on the two sides as to just how the joint venture agreement, and in particular the RPA, were going to work when the venture came to an end. That appears in particular from a without prejudice letter dated 9 November 2000, on which privilege was waived, and which was in the trial bundle.
10. By the end of 2000 the Goldfish card had become, as Lightman J put it in his judgment, "a popular and successful product". In February 2001 there were nearly three quarters of a million accounts and, allowing for holders of second cards, over a million cardholders. The total sum due from cardholders to HFC at any one time was of the order of £600 million.
11. The dispute which began to emerge towards the end of last year, and which has resulted in this litigation, can be reduced, with a great deal of oversimplification, to the question whether the RPA meant what it said (although that is a tendentious way of putting it), that is whether it gave the British Gas side the right to acquire an aggregate of debts with a face value of the order of £600 million but not any business as a going concern, or whether it entitled the British Gas side also to acquire the other assets which constituted the business as a going concern, that is the portfolio of over three quarters of a million accounts and the benefit of the cardholder agreements which back each of those accounts. (The Goldfish trademarks are already owned within the British Gas group).
12. In order to arrive at that construction it would be necessary to adopt a fairly broad approach to certain linguistic difficulties. The case on the British Gas side has always been that that was permissible and necessary in order to make commercial sense of the agreement. Lightman J decided, in the same tendentious way of putting it, that the RPA meant what it said. He held that it did not entitle the British Gas side to acquire the business as a going concern. He did not, therefore, have to consider any question of what specific relief would be appropriate to give effect to that construction of the complex agreements.
13. It is not clear how far the issue of specific performance will feature at the forthcoming appeal. I note that in his reply Mr Christopher Carr QC, appearing with Mr Lenon, on the British Gas side drew attention to what Mr David Mildon QC had said to Lloyd J when the Part 24 applications were heard. I quote the approximate if not the exact words:

"If British Gas succeeds on the issue of construction, HFC will, subject to appeal, perform in accordance with the court's interpretation."

14. I draw attention to that without deciding anything about it. I find it quite impossible to take that point further today but counsel will, no doubt, cooperate as far as necessary in ensuring that at the hearing of appeal, for which only limited time is available, the real issues are presented in the most useful way.
15. Hart J was asked to grant an injunction prohibiting the distribution of letters and new credit cards with associated text on the basis that those would indicate to existing Goldfish holders that the new card, (that is the Marbles card which HFC already runs in parallel with the Goldfish scheme) was to replace the Goldfish card, and that the message conveyed by these communications is "Goldfish is dead". Against that HFC reply that it is necessary to send a communication of that sort to their customers is essential and, because of the logistics of sending out such a large number of communications to over three quarters of a million account holders, is necessary to start almost immediately in order to comply with the 30-day period of notice which is required under banking regulation requirements.
16. HFC's position is that they must act immediately (indeed they say they should have started a few days ago) if they are to be able to achieve the logistical feat of giving all necessary notices 30 days before 3 September 2001. That is, however, all contingent on the assumption basic to Mr Mildon's case, that the change must take place on 3 September in order to avoid a hiatus which would cause huge commercial damage to both sides.
17. To that, British Gas riposte that it is not essential for the change to take place on 3 September 2001, albeit that is the purchase date which has been known for many months. An open offer has been made by British Gas' solicitors, Linklaters & Alliance, to continue all the present arrangements in force for 40 days from the hearing of the appeal in order to enable the position to be regularised, and for whatever changes are eventually found to be appropriate to take place with the minimum damage to commercial interests on both sides. But, HFC's position is that it is not bound, and cannot be compelled, to enter into a new agreement or to be required contractually do to do anything after 3 September next. That is the basis for Mr Mildon's scenario of what he called mutual self-destruction, which he says is one of the two alternatives starkly facing the court.
18. Hart J approached the matter on classic American Cyanamid lines (see American Cyanamid v Ethicon [1975] AC 396). Before approaching the various stages of that process, he made some preliminary observations showing that he identified HFC as what he called the "incumbent" who had the cardholders. That is undoubtedly right. HFC is in possession of all the information, however held. No doubt the most important information is held in electronic form, which is necessary to the running of this huge credit card operation.
19. Hart J told himself, correctly, that he had to address his mind to the likely consequences to one side or the other of various courses which might be followed. He referred to the open offer made by British Gas' solicitors in a letter dated 9 July 2001. It was promptly replied to and rejected in a letter dated 10 July 2001 from Simmons & Simmons, HFC's solicitors, who insisted that HFC had the contractual right to operate its portfolio as it thought fit from 3 September next.
20. Having covered these matters in his judgment, Hart J said about the open offer:

"Recognising that, the Defendants have indicated to the Claimants and to the Court that they would be content to deal with the matter in such a way as to avoid the necessity for any communication at all with the cardholders, and that this could be achieved by an agreement between the parties extending the purchase date until the result of the application for permission to appeal is known and a sufficient period thereafter to allow any necessary notices to be given.

It is not suggested that the Court should, or indeed could, order the parties to agree any such extension of the purchase date. What is submitted is that the fact of the offer being made by way of a solution to the problems which now arise is something that the Court should take into account in deciding whether or not to order by way of injunctive relief that the Claimants should not communicate with the cardholders otherwise than to tell them about the termination of the Goldfish card."

21. When he approached the American Cyanamid check list, the judge assumed that there was an arguable case for an appeal. He did so partly on the basis of the directions which I gave on the application for permission to appeal. The judge took that into account, and it has not been suggested that he was wrong to do so. I do note, however, from the transcript of Hart J's judgment that counsel then appearing for HFC (who was not counsel appearing today) conceded that there was an arguable case on construction but did not concede that there was an arguable case on specific performance. That raises again this somewhat intractable question of how far that is going to be an issue on the appeal. I note only that there was very little discussion of the issue as to specific performance in the judgment of Lightman J or in the notice of appeal. However, I do not think I can usefully take that aspect further at the moment.
22. The judge then considered the relative damage likely to be caused to one side or the other by the different courses which he might take. It seems to me that that is at the heart of what he had to decide and what I have to decide. The judge said that, if no injunction was granted, then there would be some inevitable damage to the Goldfish brand. He observed that there would also be an uncovenanted advantage to HFC in obtaining a start more quickly than would otherwise be possible. As to the position which would obtain if an injunction were granted, the judge said:

"On the other side of the scales if the only communications which HFC is permitted to make are those which are strictly required by its obligations under the banking code, the consequence will be that HFC will lose the whole of what it has apparently achieved as a result of Lightman J's construction of the agreement; that is to continue to be the provider of credit cards under the cardholder agreements.

The effect will be, as I have already indicated, to render practically valueless the whole of the portfolio, which under that judgment the agreement assumes to enure for the benefit of HFC.

Both those matters are capable of being compensated for in damages, although I accept that in both cases the process of quantification may raise very great difficulties."

23. The judge then went on to consider the status quo. That is often a very difficult concept in applications for injunctive relief, especially in situations where change, and indeed drastic change, of some sort is more or less inevitable. Whether one speaks of a dynamic status quo or simply observes that the concept is not at all an easy one is open to debate. It seems to me that the point of overriding importance was to preserve, not the status quo, but the value of the business as a going concern to whomsoever it was ultimately held to belong.
24. Hart J then considered the construction and effect of clause 5(9)(D)(3) of the card agreement. I need not say anything about that since, sensibly, neither side has relied on that in the hearing before me. It is questionable whether a single part of a subclause pulled out of a complex of commercial agreements is likely to be decisive or even helpful on an application such as this. The judge concluded as follows:

"Taking all those matters into account the conclusion at which I have arrived is that the lesser of what may be two evils is marginally not to make an order in the terms sought by the Defendants, which would have the effect which I have indicated.

It seems to me, in the final analysis, that the choice is one between making an order which will necessarily have the effect of completely destroying the fruits of the existing judgment, or making an order which may damage the fruits of a future judgment of the Court of Appeal in favour of the Defendants."

25. In resisting this application, Mr Mildon has submitted that Hart J's judgment represents an entirely proper exercise of judicial discretion with which the court should not interfere. He says that it is not based on any wrong view of the law or on a wrong principle, nor is it obviously wrong. He seeks to support that main submission by two subsidiary submissions, the first of which is, in substance, that it is the British Gas side's fault that the matter is now still unresolved within a matter of weeks of 3 September 2001.
26. That submission is not wholly without force but it seems to me that the matter is by no means as simple as that. It may be that the British Gas side have at a relatively early stage of the matter (that is about 6 to 8 months ago) failed to act decisively. However, I see no failure to act expeditiously since the proceedings were launched on 9 February 2001.
27. The second subsidiary point which Mr Mildon relies on is that British Gas should have made this application to Lightman J, who knew all about the matter, when he handed down judgment on 29 June. At first I was attracted by that submission, but Mr Carr has persuaded me that, again, it is not as simple as that. It is almost certain that Lightman J would on that occasion have required the matter to proceed with due formality by a notice of application and by the filing of evidence. The fact that the matter came before Hart J, who knew less about it than Lightman J, is unfortunate, but I do not see that there was any lack of diligence on the part of the British Gas side in not launching an immediate application on 29 June.
28. At this hearing time is limited. Counsel have been admirably concise in their submissions and I must try now to go to what seems to be the essential point of this matter. What really matters to my mind is the preservation of the goodwill of the credit card business and all its other intangible assets intact for a few weeks.
29. I have come to the conclusion that the judge seriously over estimated the damage likely to be caused to HFC from a short delay. Catastrophic damage would occur only if the cardholders were left without any card that they can use on 3 September. That result would follow if HFC declined to accept the open offer which has been made to them and ended in a position where they were not handling any more Goldfish cards after 3 September and had not given the requisite 30-day notice required by banking regulation. It seems to me that the open offer made was a reasonable one which would have ensured, and may still ensure, that that would not happen.
30. Mr Mildon submitted correctly that his side could not be compelled to enter into a new agreement; that is undoubtedly so. However, if on its true construction the RPA does provide for the portfolio of credit card agreements to be sold and to be part of the package which passes under the RPA, then the seller could be required to take care of the subject matter of the sale until it is completed. That would not be compelling the seller to enter into a new agreement; the seller would be bound under and by force of the existing agreement, assuming for present purposes that it is specifically enforceable.
31. Although the judge referred to the open offer at an earlier stage in his judgment, in my view he failed to give it sufficient weight in trying to form a view as to the assessment of what he referred to as the lesser of the two evils. He found those to be closely balanced. In my respectful view the two evils are not to be equiparated if HFC chooses to accept that offer. One would then be seen to be much smaller than the other.
32. I shall therefore grant permission to appeal, allow the appeal and grant an injunction in terms which will require further discussion. I would only add that it must be clearly understood, and I am sure it is clearly understood on the British Gas side, that the undertaking as to damages which will accompany that injunction is by no means a formality. It may result in quite a heavy liability if the British Gas side are ultimately unsuccessful on the appeal.
Order: Permission to appeal allowed. Appeal allowed. Injunction granted until conclusion of forthcoming appeal. Terms of injunction on which there were further submissions to be approved by Robert Walker LJ. (The terms were notified to counsel at 9am on Monday 16 July 2001) (Order does not form part of approved judgment)