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 ORDER OF HIS HONOUR JUDGE CRAWFORD

		Royal Courts of Justice Strand London WC2 Thursday, 27th June 2002

1. LORD JUSTICE RIX: There are two issues in this appeal, one relating to misrepresentation and the other relating to damages for breach of contract. In the event, it has only been necessary for the court to hear the first point on misrepresentation.
2. This appeal arises out of a license agreement between Pulse Entertainment Ltd ("Pulse"), the appellant in this court and defendant below, as licensor, and Eurovideo Bildprogramm GMBH ("Eurovideo"), the respondent in this court and claimant below, as licensee. The agreement was ultimately concluded on 10th February 1998 when Eurovideo signed the contractual document; it was called a video distribution license agreement. It provided for the licensing of videos in the German speaking parts of Europe, that is to say Germany, Austria, Liechtenstein and German-speaking Switzerland, for a period of seven years. The videos in question were animated classics dubbed in the German language. Nineteen videos were involved at a license fee of $9,000 per video. The agreement specified a license fee totalling $171,000 with a 10 per cent royalty. That fee was to be paid in four instalments, 20 per cent upon signature of contract and then in three further tranches of 25 per cent depending on the delivery dates of certain of the titles.
3. There was an exclusivity clause in these terms:

"Exclusive right for the first exploitation in the licensed media and language in the Territory, during the Term."

4. That was one of the so called "basic provisions" of the contract. There were a series of "General Terms and Conditions", clause 1A of which spoke of -

"the exclusive right for the first exploitation and the license to manufacture, sell rent and advertise video devices, whether tape or disc or other contrivance, reproducing the Programmes for supply to the public for private home use by means of a playback device and to distribute same throughout the Territory and to grant sub-licenses to do the same ..... "

5. Clause 8 was headed "Representation and Warranties" and read for material purposes as follows:

"Licensor represents and warrants to Licensee as follows:

.....

C That Licensor has not entered into any agreement which conflicts with the rights granted herein to Licensee. Licensee has the exclusive first exploitation right in the licensed territory."

6. There was an entire agreement clause but no argument has been raised concerning that.
7. The issue concerning misrepresentation arises in the following circumstances. After some earlier meetings there came a point, after the exchange of a first draft of what later became the contract, when on 16th December 1997 Eurovideo wrote to Pulse to request what were referred to in the letter as a few minor amendments to the current draft. Amongst other requests there was a request repeated in a number of places to include wording to the effect that Eurovideo was to receive both exclusive rights for the exploitation of these videos within the media territory concerned and a right of first exploitation. Thus in three places where as I have already indicated there is in the ultimate contract a reference to the language of "exclusive right for the first exploitation", that is to say in the exclusivity clause of the basic provisions, and in clauses 1A and 8C of the General Terms and Conditions, Eurovideo requested the wording concerned. Thus the letter said with relation to the exclusivity clause:

"Please amend to read `Exclusive right for the first exploitation in the licensed media' ..... "

and in relation to clause 1A the letter proposed:

"Please amend to read `Exclusive right for first exploitation and the license right to manufacture' ..... "

8. In relation to clause 8C the letter requested:

"Please specify that the licensee has the exclusive first exploitation right (in the designated Territories)."

9. The reply to that letter came by fax a few days later on 18th December 1997 from Pulse to Eurovideo and said in relation to each of those three proposals, as well as to others which are not relevant, "Accepted and amended". The letter concluded:

"I attach a new version of the agreement including all of the above, I hope that this will be acceptable to you. If you have no further comments, please sign and fax back."

10. That letter indicated that the fax attached a redraft of the agreement as a whole ready for signature. It appears that there was, in the first instance, some difficulty with the fax because the copy of the letter of 18th December included in the files contains on it the manuscript under the date 30th December 1997 - "Please re-fax as we did not receive the complete amended contract. Thank you."
11. It appears that it may not have been until the middle of January 1998 that there was a further transmission of the redraft for signature because what ultimately happened was that that further draft was sent forward already signed, on behalf of Pulse, by Miss Christelle Cuenca and dated January 15th 1998. It was that draft which was signed on behalf of Eurovideo on 10th February 1998 thereby creating the final binding agreement. Therefore the draft that was sent forward, perhaps only in part, with Pulse's letter of 18th December 1997 and which was re-sent in full form in January 1998 was in the terms which finally became the contract, to which I have already referred.
12. Unfortunately for the relations between these contracting parties, these licensed rights had in fact been previously granted to other parties in the past. This came to the attention of Eurovideo later in June or July 1998, after the first three instalments of the license fee amounting to $130,350 had been paid and after Eurovideo had, to some limited extent, begun to exploit the licensed rights. That information led in due course to Eurovideo terminating the contract on 25th August 1998.
13. It is not in dispute that Pulse was thereby in breach of the contract. I should say it is no longer in dispute that that was so because there was a point of construction in the court below as to the significance of the wording relating to the promised exclusive right of first exploitation. That issue does not survive on appeal into this court. So it is no longer in dispute at this point that there was a breach of the contract entitling Eurovideo to damages for breach of contract. Pulse's argument however below and on appeal is that those damages are very small or even nominal. It is said that Eurovideo is unable to prove any loss in the form of damages for breach of contract, either in the form of loss of profits or in any ability to show that the license rights actually granted, despite the previous distribution rights given to third parties, were worth any less than the rights which had been promised.
14. The judge found that not only was there a breach of contract but that there had also been a misrepresentation of fact, to be found in the pre-contract exchange letters, to which I have referred, and also in the terms of the draft contract proffered for signature, to the effect that these license rights had not been previously granted to other distributors. The judge found that this was a misrepresentation of fact entitling Eurovideo to damages in misrepresentation or, alternatively, rights of restitution. The judge found that the quantum of such a remedy in misrepresentation included, most importantly, the sum of $130,350 paid by way of the greater portion of the agreed license fee and also included a deficit on account of expenses of exploitation less receipts in the balancing sum of DM6,011.34. The judge also found that the same amounts were available as damages for breach of contract in the form of wasted expenditure. The argument on appeal is that there was no misrepresentation, and thus no right to any remedy in misrepresentation, and that damages on such a restitutionary or tortious basis are not available in contract. As I indicated at the beginning of this judgment, it has not been necessary in the event to hear any submissions on the question of damages for breach of contract.
15. Mr Philip Flower, who appears on behalf of Pulse, accepts that unless he can succeed in showing that there was no misrepresentation, there is no need to go on to deal with the question of damages in breach of contract. He also accepts that if there was an actionable misrepresentation then there is no issue as to the quantum of the relief granted by the judge on that basis.
16. On the question of misrepresentation, His Honour Judge Crawford QC said this:

"The reply" -

he is referring to the letter of 18th December 1997 -

"from the Defendant uses the phrase in reply to each request `Accepted and amended'. Despite its somewhat perfunctory nature, I have no difficulty in finding that this phrase, used in reply to requests made by the Claimant, is capable of amounting to a misrepresentation. It amounts to a statement of fact ..... I find that the Defendants' replies to the Claimant's requested amendments were capable of being representations, notwithstanding that it was contemplated they would be incorporated into the written agreement."

17. He continued by way of an amendment to the draft judgment originally distributed:

"The fact that the written agreement describes the words used as both a representation and a warranty only strengthens my view. I find not only that Mr Czaika relied on these representations but that the words contained in paragraph 8 of the draft agreement before it was signed also constituted a representation and was one on which he relied. I have heard Mr Flower's argument about the difficulty of such a finding, but I am satisfied that given the way this is set out, using the word `Representations', it is a finding I am entitled to make."

18. On this appeal Mr Flower has, in essence, made two submissions, a broader and more general one, a narrower one related to the particular facts of this case. His broad submission is that where language is proffered as to what is intended to become a term of the contract under negotiation it cannot be relied upon as a representation of fact. It can only be relied upon as a term of the contract in the form of a warranty such as can give rise to a breach of contract if the warranty is broken but which cannot give rise on such facts to a misrepresentation. Mr Flower sought to support that submission by pointing out that if it were otherwise there might well be huge numbers of contracts which would be susceptible to attack on the ground of misrepresentation, thereby giving rise to rights of rescission and to tortious remedies in damages, just because of breaches of the terms of the agreement and because it was said that those terms contained within them misrepresentations of fact.
19. His narrower submission was confined to the facts of this case to the effect that at any rate where amendments to the language of the contract were proposed and accepted in the way that had occurred in this case, and where if such amendments proceed from the brief language of negotiation ("accepted and amended") to the form of being written out in a fresh draft of the contract, they cannot readily be found to contain, and should not be regarded as containing, representations as distinct from warranties. As I understood the submission, it was based in part upon the concept that, whatever the precise language of the terms under negotiation, the exchange of letters should be understood as containing terms intended only as contractual warranties and not intended to be representations of fact; and in part on the submission that the language actually used should not be read as amounting to or inherently or implicitly containing anything that could be described as a representation of fact.
20. At certain stages of his submission it seemed to me that Mr Flower was jockeying backwards and forwards between his wider and narrower submissions and seeking to support the one by reference to the other and vice versa. At the end of the day I think it is fair to say that Mr Flower accepted that his wider submission went too far and that language found in negotiations or in a draft contract can, depending upon the particular wording involved, amount to a representation of fact. Thus ultimately he came to rely upon his narrower submission in its two forms. Thus the first part of that narrower submission was, in effect, that the exchange of letters was asking Pulse: Will you agree to this proposed language as a warranty only and not as a representation of fact? It seems to me that Mr Flower's submission is not sustained by anything in the letter. The letter was a typical exchange of negotiating correspondence, using the brief words of commercial men. When the words are unpacked, what Eurovideo was asking Pulse was: Are you agreeable to assure to us an exclusive right of distribution and rights of first distribution? To which the answer was, Yes. The question becomes what does that exchange amount to, and ultimately becomes what do the words written into the draft contract, which represents the result of that question and answer, mean. That takes one directly to the second part of Mr Flower's narrower submission.
21. Since therefore the amended draft agreement was proffered by reference to that exchange of correspondence, and the negotiated emendments were intended to be fitted into the draft contract already in existence, I can go directly to the language of that amended draft. Indeed, I can go most usefully to clause 8C where that language is given its most extensive expression. I will quote clause 8C again, reminding myself that it appears under the heading "Representation and Warranties":

"Licensor represents and warrants to Licensee as follows .....

That Licensor has not entered into any agreement which conflicts with the rights granted herein to Licensee. Licensee has the exclusive first exploitation right in the licensed territory."

22. It seems to me the judge was perfectly right to regard that language as containing representations of fact. The introductory language emphasises that the parties are concerned in the representations as well as warranties. As for sub-clause C, its first sentence is plainly a representation of fact relating to what the licensor has done up to the time of the contract, that is to say, a representation that the licensor "has not entered into any agreement" which conflicts with the rights granted to the licensee. One of the rights granted to the licensee, even assuming for the moment that that is purely a right of warranty and nothing more, is a right of first exploitation. In fact, the licensor had already entered into agreements which conflicted with that right of first exploitation because he had already granted rights of exploitation within the licensed territory in the relevant medium. So there was a misrepresentation of fact there.
23. In my judgment, however, there was also a misrepresentation of fact involved inherently in the language of "first exploitation". I can illustrate the matter perhaps by reference to the word "exclusive" which was joined to that expression, the phrase being "exclusive first exploitation". If a contractor promises a right of exclusive exploitation he is of course, whatever else he is doing, promising for the future that he will not grant a right of exploitation to others which impinges on that promise of exclusivity. If he has not previously granted a conflicting right of exploitation that promise operates only to govern the future. If then the licensor grants a conflicting licence in the future that is simply a question of a breach of warranty; no question of misrepresentation occurs. If however he has already granted a conflicting right of exploitation which is still subsisting at the date of the contract, then, as of that very moment, the moment both before the contract is made and the moment as of making that contract, that promise of exclusivity contains within it a false representation that there is no existing grant of the relevant exploitation rights to others which would prevent the contractual grant being exclusive. That is an example of how - the possibility of which in theory, Mr Flower now accepts - contractual language can exist both as a term and as a representation. Indeed, Section 6 (1) (a) of the Misrepresentation Act 1967 confirms that possibility. When now one comes to the word "first" in the phrase "first exploitation", that is not a word that has content for the future. There is nothing that can occur in the future that is going either to confirm or undermine the promise of a right of first exploitation. If that promise is going to turn out to be disappointed at all, it is because something has happened in the past to prejudice that expectation and promise. Thus a promise of first exploitation necessarily, in my judgment, contains within it a representation of fact that the relevant exploitation rights have not previously been granted. That was a representation of fact which was implicit in the language of the contract. It is not surprising therefore that the clause is headed "Representation and Warranties". It is accurately so called, even though, as Mr Flower rightly submits, the label by itself cannot be conclusive or determinate.
24. The question then arises whether that representation of fact was a pre-contractual representation on the basis of which the contract was entered into. It seems to me to be perfectly plain that it was. It is a representation of fact which was bargained for in the letters to which I have referred, which Pulse agreed to give in its letter of 18th December by saying it accepted the amendment and which was duly set out inthe amended draft contract proffered for signature together with that letter and also in the complete form of contract re-sent in the following January.
25. In my judgment, the judge was entitled to say that there was here a pre-contractual representation which, in the event, was shown to be a misrepresentation, and indeed was right to do so.
26. I would therefore dismiss this appeal.
27. LORD JUSTICE JONATHAN PARKER: I agree.
28. THE VICE-CHANCELLOR: I also agree.
Order: Appeal dismissed with a summary assessment of costs of £6000