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
(His Honour Judge Hedley QC: sitting as a Deputy High Court Judge)

		Royal Courts of Justice Strand London WC2 Friday, 16th November 2001

Friday, 16th November 2001

1. LORD JUSTICE CHADWICK: I will ask Harrison J to give the first judgment.
2. MR JUSTICE HARRISON: This is an appeal against the decision of His Honour Judge Hedley, sitting as a Deputy High Court Judge, on 19th June 2001 when he held that the defendant should pay the claimant a sum of US $434,274.59, being the amount due, together with interest, for 20,000 cartons of clingfilm sold by the claimant to the defendant.
3. The claimant, Linpac Plastics Limited, trading as Filmco, the respondent in these proceedings, whom I will refer to as "Linpac", is an English company with a factory at Sedgefield, County Durham where it manufactures clingfilm. The defendant, Europlast H Mudder GmbH, the appellant in these proceeding, whom I will refer to as "Europlast", is a German company which supplies artificial casings and skins. Eurofilm is a Russian company, to whom Europlast supplied clingfilm which it purchased from Linpac.
4. The trading relationship between the three companies began at the end of 1997 when Linpac and Europlast entered into a sole distribution agreement for three years, subject to certain targets, whereby Linpac would supply Europlast with clingfilm for which Europlast would have the sole distribution rights in Russia which they exercised by selling the clingfilm to Eurofilm. The goods would be despatched by Linpac directly to Eurofilm in Russia at the request of Europlast, and Europlast would pay Linpac for the goods.
5. The arrangement was that Europlast would fax an order to Linpac who would acknowledge receipt by fax and send by post an order acknowledgement and packing list. Europlast would prepare and forward the customs invoice to Linpac by post so that it could be despatched with the goods. Europlast would then send their full invoice to Eurofilm directly.
6. Between the end of 1997 and April 1998 there were 14 orders for clingfilm which were dealt with in that manner, the only variation being an agreed change in March 1998 to avoid the delay in receiving by post the details of Europlast's invoice to Eurofilm to accompany the goods. It was arranged that Europlast would fax the customs invoice to Linpac who would then transfer the invoice details onto a blank Europlast letter headed invoice previously supplied to Linpac, which would then accompany the goods.
7. A further variation was agreed at a meeting on 28 April 1998 at which all parties were present, including Miss Savtchenko for Eurofilm, whereby Eurofilm would place orders direct with Linpac who would then fax order acknowledgments and copies of the invoices to Eurofilm and Europlast. Europlast still produced the customs invoice for those goods.
8. There were 26 orders placed with Linpac. Orders 1-14 were placed by Europlast prior to 28 April 1998, and orders 15-26 were placed by Eurofilm after 28 April 1998 under the variation that I have described. Orders 15-19 were placed on 7 May 1998, orders 20-23 were placed on 6th June 1998 and orders 24-26 were placed on 29 June 1998.
9. Europlast paid Linpac for the goods delivered under order 1-14 and they paid Linpac for the goods delivered under orders 15 and 16 pursuant to the varied arrangement. There is, therefore, no dispute about those orders. The dispute relates to those goods delivered under orders 17-26. Europlast did not dispute their liability under those orders - indeed, they acknowledged their liability on a number of occasions. However, they were not being paid by Eurofilm who were in financial difficulty, and so they, Europlast, were not meeting the demands for payment made on them by Linpac.
10. Linpac therefore brought these proceedings against Europlast on 4 August 1999 to recover the unpaid balance relating to those orders. Although there is now only one issue remaining in dispute, Europlast previously raised a number of points. Firstly, on 20 January 2000 they applied to stay the proceedings on jurisdictional grounds. That application was dismissed on 2 March 2000 and an appeal against that decision was dismissed by Buckley J on 5 April 2000. Secondly, on 18 February 2001 they applied to amend their defence to allege non-delivery of the goods. That application was dismissed by Master Ungley on 18 March 2001. Application for permission to appeal against that decision was withdrawn at the beginning of the hearing before His Honour Judge Hedley. Thirdly, on 2 April 2001 Europlast applied for leave to amend their defence to allege illegality. That application was dismissed by Garland J on 26 April 2001. Fourthly, paragraph 7 of Europlast's defence had alleged that they acted as Linpac's agent in receiving Eurofilm's payments, but that allegation was abandoned shortly before the hearing before His Honour Judge Hedley.
11. At the hearing of the trial, there was only one remaining issue, namely whether it was Europlast or Eurofilm who had contracted as the purchaser to buy the goods from Linpac which were the subject of orders 17-26. Evidence was given on behalf of Linpac by Mr McGovern, Linpac's general manager, Miss Gibson, Linpac's export administrator, and Mr Westbury, Linpac's export sales manager. No evidence was called by Europlast. They simply put Linpac to proof that Europlast was the purchaser of the goods.
12. Europlast's case centred on paragraph 1(i) of Linpac's general conditions of sale, which states:

"Any quotation by seller is not an offer for sale. It shall merely be an invitation to treat and no order for seller's goods whether pursuant to a quotation by seller or otherwise is binding on seller until accepted by seller."

13. It was submitted on behalf of Europlast at trial that, pursuant to that paragraph of the general conditions of sale, the placing of an order is the offer which becomes binding when it is accepted by Linpac. It was therefore submitted that, as orders 1-14 were placed by Europlast and accepted by Linpac, the contracts were between those parties for those orders, and that, as orders 15-26 were placed by Eurofilm and accepted by Linpac, those contracts were made between Linpac and Eurofilm, not between Linpac and Europlast.
14. It was submitted on behalf of Linpac at trial that the original distribution agreement between Linpac and Europlast remained in existence and that the agreement in April 1998 was a variation, for the benefit of Europlast, whereby Eurofilm was authorised to notify Europlast's requirements to Linpac without changing the status of the parties so that when Linpac accepted the offer they were in effect accepting an offer made by Europlast.
15. The judge, having referred to the fundamental requirements of offer, acceptance and consideration, all of which were present in this case, referred to the terms of the contract intended by the parties. He said:

"But because it is intention that is crucial, and at the heart of the law of contract, it is quite impossible to ignore the repeated acknowledgements of debt. Of course evidence of belief is not relevant to the question of analysis, but acknowledgement goes beyond that. Acknowledgement is evidence of an original intention to enter into contractual relationships and evidence of an intention to remain in them, and it seems to me that the repeated acknowledgements in this case must be treated as evidence of an original intention to enter into a contract, and of an intention that those contractual relationships remain in place - not decisive, merely relevant."

16. The judge went on to say that the fallacy of the argument put forward on behalf of Linpac was that it extracted one part of the evidence supporting a contract, namely paragraph 1(i) of the general conditions of sale, and treated it as if it were the entirety of the contract itself. He continued:

"The essential contract in this case, however, is the original sole distribution agreement. That is clearly the contract the parties entered into, and there is not a shred of evidence that that contract was brought to an end before the delivery of order No. 26. No doubt it was varied by new ordering arrangements, but there is no basis to conclude, and I do not conclude, that those new ordering arrangements were intended fundamentally to re-write the original contract. Accordingly, in my judgment, the court must construe the contract and the dealings pursuant to the contract in the context of the agreed sole distribution contract of 1997. In my view, the evidence clearly demonstrates that the parties saw themselves in a continuing contractual relationship, and, in my view, they were right to do so because they understood their relationship as continuing to be regulated by the 1997 contract as varied. That means that the Eurofilm orders were merely a short-cut of going direct to the claimants rather than having to place their orders via the defendants. It was an administrative convenience and not a wholly different trading relationship."

17. The judge therefore held that at all material times Linpac and Europlast intended to be, and were, parties to a continuing contractual relationship under the original 1997 contract, as varied, so that Europlast were liable for the unpaid price on the goods delivered pursuant to orders 17-26.
18. Mr Kinsky submits to this court on behalf of the appellant, Europlast, that the judge was wrong to conclude that the disputed orders did not constitute the separate contracts with Eurofilm. He points out that in the pleadings Linpac had not pleaded that Eurofilm was authorised to act as Europlast's agents. He submits there was no evidence relating to the question of agency arising out of the meeting on 28 April 1998 but that the judge had nevertheless effectively held that Eurofilm had contracted as Europlast's agent. In the case of each order, the offer to buy was made by Eurofilm so that, says Mr Kinsky, unless Eurofilm was acting as Europlast's agent, there could not have been a contract for sale of the goods that bound Europlast, yet no case of agency had been advanced by Linpac.
19. Finally, Mr Kinsky accepts that Eurofilm had on several occasions acknowledged liability to pay for the goods delivered under orders 17-26, but he submits that the acknowledgements were after delivery of the goods and that, in the absence of any case by Linpac that Eurofilm acted as Europlast's agent in placing the orders, the acknowledgments are irrelevant.
20. Mr Samek, on the other hand, in his helpful skeleton argument submits on behalf of the respondent, Linpac, that the fallacy of Mr Kinsky's agency argument is the assumption that, for Linpac to succeed, the judge had necessarily to adopt Europlast's contractual analysis that each contract only came into being when Linpac accepted Eurofilm's written offer. That approach had been rejected by the judge who had held that the contractual position was still governed by the original distribution agreement in 1997 and that the new ordering procedure was simply a new way, for the sake of administrative convenience, to effect performance of the existing distribution agreement. Mr Samek submits that the judge had not found that Eurofilm had contracted, in effect, as agent for Europlast, nor had Linpac so contended. The orders placed by Eurofilm were merely administrative notification of what goods Linpac was to sell to Europlast under the distribution agreement. Mr Samek accepts that the position would have been different if there had been no umbrella distribution agreement and if the orders 17-26 had stood alone without evidence of any other contract.
21. Mr Samek also submits that Europlast's repeated acknowledgements of liability to Linpac are relevant and that the judge was correct in treating them as evidence of Europlast's intention to remain in the 1997 distribution agreement for the sale of clingfilm subject to the new ordering procedure or, to put it another way, the acknowledgements of liability confirmed that the new ordering procedure was of an administrative nature only and was not intended to alter the original 1997 contractual relationship.
22. Mr Samek seeks to draw further support for the judge's conclusion by reference to a number of matters contained in a Respondent's Notice. I mention some, but not all, of them. Firstly, Europlast paid for orders 15 and 16, but it has not been explained why Europlast considered itself liable as the purchaser of those orders but not liable as the purchaser of orders 17-26. Secondly, it was not until 12 October 1999 that Europlast first alleged that it was not liable on orders 17-26. Thirdly, there is no logical explanation for Europlast's continued involvement with orders 17-26 following abandonment of their agency explanation in paragraph 7 of the defence. It is submitted therefore, that money can only have been received from Eurofilm by Europlast in its capacity as the onward seller to Eurofilm. Fourthly, Europlast never suggested that Eurofilm's orders to Linpac constituted a repudiatory breach of the 1997 distribution agreement which still had two years to run. Fifthly, the clingfilm was despatched accompanied by invoices which, to Europlast's knowledge, show Europlast as the seller to Eurofilm. Sixthly, if the new ordering procedure required a finding that Eurofilm was, in a formal sense, Europlast's agent for placing the orders, there was more than sufficient evidence from which such an agency could be inferred or implied, particularly in the light of the findings by the judge about the contractual position. Finally, the history of the matter showed, it was said, that Europlast was shopping around for defences to try and avoid liability.
23. In my view, the judge's analysis of the contractual position was correct. Despite the attractiveness of Mr Kinsky's "order by order" contractual analysis based on paragraph 1(i) of Linpac's general conditions of sale, it ignores the 1997 distribution agreement. There was no evidence that the original distribution agreement had been terminated. Indeed, the evidence was to the contrary. The customs invoices despatched with the goods were still showing Europlast as the seller of the goods to Eurofilm, order acknowledgments were still being sent to Linpac by Europlast, and Europlast had already paid for the goods which were the subject of orders 15 and 16, which post-dated the April 1998 variation. If the appellant's arguments were correct, there would be no need for Europlast to be involved any more, but the evidence was that they were still involved and, in my judgment, that involvement was directly attributable to the continued existence of the original distribution agreement. Furthermore, the judge was correct, in my view, to treat Europlast's repeated acknowledgments of liability relating to orders 17-26 as being relevant to their intention to continue to be bound by the 1997 distribution agreement.
24. It was open to the judge, on the evidence before him, to treat the new ordering procedure under the April 1998 variation as being an administrative convenience which was not intended to alter the original contractual relationship. In those circumstances, no formal finding of agency was necessary. It was only necessary to determine who was the seller and who was the purchaser of the goods which were the subject of orders 17-26. In my view, the judge was correct in concluding that Linpac and Europlast were the seller and purchaser respectively of those goods pursuant to the 1997 distribution agreement as varied in April 1998.
25. For those reasons therefore I would dismiss this appeal.
26. LORD JUSTICE CHADWICK: I agree that this appeal must be dismissed for the reasons given by Mr Justice Harrison.
27. The trading arrangements set up between Linpac Plastics Ltd and Europlast H Mudder GmbH on 24th December 1997 are recorded in a fax message sent by Mr Westbury of Linpac to Mr Bouquin of Europlast on 30 December 1997. Those arrangements had four principal features. First, Europlast was to have a sole distributorship in Russia in respect of Filmco PVC shrink and stretch film produced by Linpac in Sedgefield for a period of three years. Second, that sole distributorship was terminable on failure to achieve annual targets - in particular on failure to achieve target sales of 600 tonnes in the year 1998. Third, the prices at which goods would be supplied were as set out in a schedule attached to the fax, and could be changed only on one month's clear notice by Linpac. Fourth, Linpac were not to deal directly with Europlast's customers in Russia.
28. The pattern of trading between December 1997 and April 1998 developed in the way described by Harrison J. It became plain that the principal customer in Russia for the goods was an organisation trading as Eurofilm. As trading developed, a change in the method of operation was agreed between the three parties. the invoice, requiring payment by Eurofilm for goods despatched by Linpac was prepared by Linpac in Sedgefield on Europlast's stationery and was despatched direct by Linpac to Eurofilm. That was done with the knowledge and authority of Europlast, who supplied invoice stationery to Linpac for that purpose. That feature preserved the essential nature of the relationship: namely that Eurofilm was Europlast's customer, liable to pay Europlast on a Europlast invoice. Europlast was Linpac's customer and was invoiced direct by Linpac.
29. A further variation of the arrangements was agreed at a meeting on 28 April 1998, held at Sedgefield and attended by representatives of Eurofilm and Europlast as well as representatives of Linpac. That was a tripartite meeting in order to determine the future course of the trading in which the three parties were engaged. Clearly it was necessary to consider at that meeting whether the trading relationships should continue to compromise two bi-lateral contracts - the one between Linpac and Europlast and the other between Europlast and Eurofilm - or whether there was to be a change in the existing scheme; so that trading would be direct as between Eurofilm and Linpac.
30. This appeal turns on what was agreed at that meeting. The meeting has to be seen against the then existing commercial background. In particular it is important to keep in mind that Eurofilm was Europlast's customer; and that, consistently with the agreement of December 1997, Linpac could not trade directly with Eurofilm without Europlast's consent. Any arrangement which enabled Eurofilm to trade directly with Linpac could be expected to contain some provision for financial compensation to Europlast. An arrangement which enabled Eurofilm to trade directly with Linpac would deprive Europlast of the return that it would otherwise have made as the intermediate party. Further, unless the deliveries made by Linpac to Eurofilm were included in the targets set out in the December 1997 agreement, Europlast would fail to meet those targets and its sole distributorship would be brought to an end.
31. Against that background it seems to me overwhelmingly probable that, whatever arrangements were made at the meeting on 28 April 1998, those arrangements would have been intended by all three parties - Linpac, Europlast and Eurofilm - to preserve the existing scheme of the trading relationship: namely that there should be two bi-lateral contracts, one between Linpac and Europlast and the other between Europlast and Eurofilm. The possibility that the parties would agree to continue to trade under contractual arrangements made directly between Linpac and Eurofilm appears to me very unlikely. And, not only is it very unlikely that that would have been the new arrangement made by the parties, such an arrangement would be inconsistent with the way in which trading in fact continued. Trading continued on the basis that invoices to Eurofilm were prepared on Europlast stationery, as they had been before the meeting on 28 April; invoices continued to be submitted by Linpac to Europlast; and those invoices were made by Europlast. The change that took place as a result of the new arrangement was that orders were received direct from Eurofilm.
32. The effect of the new arrangements was set out in a fax sent by Linpac to both Europlast and Eurofilm on 1 May 1998. That fax confirmed, by way of summary, the main points agreed at the meeting on 28 April 1998. The first of those points was that Customer Service - that is to say, the Customer Service Department of Linpac - would fax "order acknowledgements" to both Eurofilm and Europlast. Second, Customer Service would fax a copy of the Europlast-Eurofilm invoice to both Eurofilm and Europlast. Rolling forecasts would be supplied by Eurofilm for a six-month period at the end of each month.
33. What the fax message sent on 1 May does not mention, in terms, is the fact that orders would be sent direct from Eurofilm in Russia to Linpac in Sedgefield without passing through the offices of Europlast in Osnabruck, Germany. But, as soon as an order was received by Linpac in Sedgefield, an acknowledgement of that order would be faxed to both Eurofilm and Europlast. There was no opportunity for an order to be acted upon without the knowledge and assent of Europlast. As might be expected, orders by Eurofilm were for future delivery. No doubt, the product had to be manufactured. It can be seen from an order dated 7 May 1998 that shipment was for a series of dates running from 28 May to 22 June. Linpac's response to an order was to send an order acknowledgement. That was despatched before the first of the order dates. Indeed, as can be seen from the documents, the order acknowledgement was printed on 18 May 1998. No doubt that followed the pattern which had built up over the previous months; namely that there was an inevitable time lag between (i) receipt of the order and acknowledgement of the order and (ii) the delivery date. During that period there was an opportunity for Europlast to disclaim the order.
34. I would not, myself, analyse the position in terms of Eurofilm making an order as agent for Europlast. I am not persuaded that Europlast would be bound to pay in respect of an order which it had itself disclaimed before delivery. I acknowledge the force of the submission that agency would expose Europlast to liabilities over which it had no control. But the true arrangement, as it seems to me, was that Europlast did have control over its credit risk; because the time lag was such that it was always open to Europlast to disclaim responsibility for an order made by Eurofilm. The arrangement was simply one of convenience; in that, rather than transmitting orders through Europlast's offices in Osnabruck, they were sent by Eurofilm direct to Sedgefield, and an acknowledgement of the order was sent to Osnabruck.
35. Mr Kinsky (for the appellant) seeks to rely on the standard conditions of sale under which Linpac was prepared to trade. Standard condition 1(1), which Mr Justice Harrison has set out, provides that any quotation by the seller is not an offer for sale but merely an invitation to treat. No order for seller's goods, whether pursuant to a quotation by the seller or otherwise, is binding on seller until accepted by the seller. The obvious purpose of that standard condition is to avoid a position in which the seller (in this context Linpac) becomes bound by a contract into which it does not choose to enter. But, in the context of the trading arrangements under the agreement of December 1997, it is plain that literal effect cannot be given to that standard condition. It would not be open, as it seems to me, for Linpac to refuse to accept an order, at the prices which it had quoted and for a quantity which it was able to supply, in the context of the targets under the distribution agreement. If it were otherwise, then, by refusing to accept orders, Linpac could frustrate the distribution agreement by preventing the targets from being met. It was plainly the intention of the parties that Linpac would accept orders made by Europlast notwithstanding standard condition in 1(1).
36. Further, standard condition 1(i) is intended to prevent the seller's liability from arising out of a quotation. The condition says nothing about the point at which the buyer will become liable. If, as I have pointed out, the variation made at the end of April 1998 enabled orders to be transmitted by Eurofilm - subject to disclaimer by Europlast on receipt of the acknowledgement by Linpac - then there is nothing in that arrangement inconsistent with paragraph 1(1) of the standard conditions. The seller's responsibility arose when it, Linpac, acknowledged the order. The buyer's liability arose (subject to disclaimer) when Europlast received the acknowledgment. Paragraph 1(1) of the standard conditions must be read in a way which gives effect to the overriding commercial relationships into which these parties have entered.
37. For those reasons, I am not persuaded that the orders transmitted by Eurofilm to Linpac gave rise to any contractual relationship between Linpac, on the one hand, and Euro film, on the other. What they did was to give rise to a contractual relationship between Linpac and Europlast conditional upon a disclaimer by Europlast prior to delivery. There being no such disclaimer, Europlast was bound by the obligation to pay for the goods ordered and delivered.
38. Accordingly, Mr Kinsky's submissions, attractively presented as they were, have failed to persuade me that this is an appeal which should succeed. The appeal is dismissed.
Order: Appeal dismissed. The Appellant is to pay the Respondent's costs of the appeal and the Respondent's Notice. Interim payment of £10,000 within 14 days.