England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MANCHESTER DISTRICT REGISTRY
(MR JUSTICE MITTING)

		Royal Courts of Justice Strand London WC2 Friday, 8th March 2002

Friday, 8th March 2002

1. LORD JUSTICE SCHIEMANN: I will ask Lord Justice Sedley to deliver the first judgment.
2. LORD JUSTICE SEDLEY: This is an interlocutory appeal against the refusal of Mitting J, sitting in Manchester on 11th July 2001, to give summary judgment for the defendants, World Online, for something over £1,200,000 on their counterclaim. It is also the claimant's, I-Way's, cross-appeal against the judge's striking out of their claims for misrepresentation and negligent misstatement without at the same time considering the amendments by which they proposed to cure the defects. The further appeal issue about the judge's allocation of costs before him is contingent on the outcome of the appeal and the cross-appeal.
3. I-Way is an Internet service provider. In April 1999 it reached a written agreement with Localtel to provide a hardware platform to afford Internet access to Loacaltel's customers in return for 20 per cent of the rebate from the telephone operator, the 80 per cent balance being passed on to the present appellant, World Online, who took over Localtel and became contractually substituted for it. I-Way contend that as early as May 1999 it was realised that additional equipment was going to be necessary at a cost which was not realistic in the absence of renegotiation of the rebate split. Their case is that an oral agreement was reached to give them 30 per cent instead of 20 per cent. This is denied by World Online. They say that their subsequent parting with a further 10 per cent of their share was a temporary and gratuitous gesture and no more. They also deny I-Way's allegation that they have subsequently used their superior power, and used it actionably, to siphon off the revenues it was intended that had I-Way should earn from the contract.
4. I-way's action as claimants against World Online included a claim for damages for misrepresentation or negligent misstatement of the number of likely users of the service and of the times of day when they were likely to use it. The measure of damage, however, was accepted as being inappropriately pleaded. The claimants, recognising this, had at a late stage before the hearing put forward a draft amendment. On 11th July Mitting J found himself without sufficient time to consider it; so he struck out the material part of the pleading, giving liberty to amend so as to renew the claims with a tenable prayer for damages. Other elements which he struck out have not been cross-appealed.
5. It is now submitted on the cross-appeal that the judge ought to have adjourned the application to strike out the misstatement and misrepresentation claims so that he could consider it in the context of the claimant's application to amend. Nothing concrete, however, has been lost by his proceeding as he did. Mr Freedman QC, who has appeared for the claimants, fears that an issue estoppel may now be pleaded in bar of his proposed amendment - but it seems to me that by the terms of his decision the judge has precluded this. Any objection to the sustainability of the amendment is not for us but, if and only if it is raised, for the judge of the Queen's Bench. The only appreciable materiality of the issue therefore is as to costs, since it was on the basis of his decision to strike out that the judge, in effect, declared a draw on costs. I do not think the respondents can reason backwards from that; nor do I think the attempt to do so is sound. More was struck out than was capable of being cured by amendment, and in any event the ordinary practice would be that a party which can only save its pleading by amendment bears the costs of doing so. I do not think the cross-appeal can succeed. Nevertheless, it will be necessary to return to it and the disposal of it in relation to the judge's costs order.
6. This leaves the real and difficult issue on which Rix LJ gave permission to appeal. The pleaded oral agreement to alter the split faced the major obstacle that clause 21.1 of the contract provided:

"... no addition, amendment or modification of this Agreement shall be effective unless it is in writing and signed by and on behalf of both parties."

7. The modification relied on by I-Way was purely oral and or by conduct. Mitting J nevertheless held that the issue deserved to go to a full trial. What he said was this:

"It is plainly arguable and, if the claimants are right in their assertions about non-receipt of that letter, an argument that has a real prospect of success, that the agreement was thus varied. If it was orally varied and acted upon, as it seems, at least, arguable as it was, then I am satisfied there is a real prospect of the claimants establishing that such a variation was effective, notwithstanding the second limb of clause 21.1...

The reason is straight forward; the parties are free to conduct themselves as they wish. If they entered into an agreement that involved the redistribution of the income from Telecom companies, then they were free to do so, orally or by conduct, for that matter, if they chose. That agreement can either be treated as an oral agreement varying the original agreement, or as a free-standing contract, and I know nothing in case law that prevents such an event having effect.

As regards the further argument that there would have been no consideration for that variation, I need only refer to 'Williams v Brophy Brothers [1991] 1 Queen's Bench, 15H to 16A for it to be manifest that there is an argument with a real prospect of success on that issue."

8. The reference to non-receipt of a letter concerns a letter which the claimants sent setting out what they now rely on as the variation, and an immediate response produced in the action by the defendants denying any such agreement which was, according to the claimants, never received by them. It is not a question that falls to be further addressed here. In passing, however, it is possible to accept Mr Nasir's submission that whatever else it may have been the agreement relied on by the respondent cannot have been a free-standing one operating by rescission. Conceptually, however - and this is what the judge I think was driving at - a separate contract to withhold a further 10 per cent of the rebate is not impossible, and the critique which Mr Nasir advances on the appellant's behalf of the phrase "or as a free-standing contract" is accordingly, in my view, misdirected.
9. Rix LJ, giving World Online permission to appeal, wrote:

"The question is one of law, a very short question of construction worth over £1,000,000, and there is a reasonable prospect of success. The judge's conclusion is a familiar response to the problem, but authority is scarce, and none was cited."

10. Mr Colin Nasir, World Online's solicitor/advocate, to whose skeleton argument and oral submissions I would like for my part to pay tribute, has spelt out grounds of principle for giving literal effect to a clause such as the present clause 21.1. He has sought also to rely on authority which depends upon the operation of the Statute of Frauds. I doubt whether any such authority could afford a true analogy. In Statute of Frauds cases, the court will be concerned with the law which Parliament has made for everyone. In a case like the present the parties have made their own law by contracting, and can in principle unmake or remake it. Among other things, far from fettering their freedom of contract, Mr Nasir can legitimately say that a preclusive clause like clause 21.1 gives effect to that freedom. But as he also recognises in his argument no firm authority in this country closes the door upon fact-based arguments to the contrary. One reason may be that the principle itself is neither simple nor unitary. A consensual oral variation, after all, is also an exercise of freedom of contract. In his skeleton argument Mr Nasir has relied on the United States Uniform Commercial Code, section 2-209(2), which provides:

"A signed agreement which excludes modification or rescission except by signed writing cannot otherwise be modified or rescinded."

11. The previous position at common law in the United States, we are told, did allow the informal overriding of a written clause excluding any unwritten modification. Although this appears in its time to have been an American and not an English doctrine, it does to my mind illustrate well enough, in the absence of decisive English authority, that there is room for debate and movement on the question. Indeed, Mr Freedman QC in his skeleton argument, has been able to deploy both textbook and judicial support for a markedly more flexible approach than that taken by United States code.
12. In my judgment it was a sufficient justification of the refusal of Mitting J to give summary judgment on the counterclaim that the law on the topic is not settled. Mr Nasir's invitation to this court on what is an interlocutory appeal to declare the law of England and Wales to be the same as that of the United States is an essay in optimism which is doomed, I am afraid, to disappointment. It is of no assistance to him, beyond that point, to show us the inconclusive correspondence about the revision of the 80/20 split. The appellant says this was neither evidence of a variation, nor did it amount to an unequivocal course of conduct. The respondent says that it was part, though not necessarily the whole, of both things. These are issues which plainly have to be tried out. They cannot be short-circuited by Mr Nasir's submission, powerful though it is, that to countenance any variation by parole or by conduct is to render any clause like clause 21.1 a dead letter.
13. The reasons go further than this. I-Way have pleaded that World Online is estopped from relying on the prohibitory clause. No doubt because he did not need to do so the judge did not deal with that submission. But unless World Online can show it too to be an untenable pleading it affords a separate ground for letting their defence to the counterclaim go to trial. It may be that it should not have been pleaded in the claim, since one cannot sue on an estoppel; but it was certainly available in answer to World Online's counterclaim. Although Mr Nasir now argues that the evidence cannot sustain an estoppel by conduct, the fact that in their written argument in support of summary judgment World Online had to rely on a considerable body of contested evidence again demonstrates the unsuitability of the issue for summary disposal. Both issues - construction and estoppel - are capable in one measure or another of being fact-sensitive, the former in relation at least to the factual matrix of the contract, the latter in relation to transaction and reliance. I do not accept Mr Nasir's fall-back submission that on the evidence I-Way simply cannot establish either a written variation or an estoppel by convention. The evidence is contested; its impact is debateable.
14. One further reason for upholding Mitting J's decision is this. Against the counterclaim on which judgment is sought, the claimants have pleaded a setoff of the unliquidated damages claimed by them. One would want to be confident that making them pay well over £1,000,000 at a time when their cross-entitlement to damages had not been tried or ascertained was not going to be financially ruinous to them. From the (I stress) relatively little we know about the two parties, I do not think one could at present be confident of any such thing.
15. It follows in my judgment that both the appeal and the cross-appeal fail. Mitting J in this situation ordered the costs to lie where they fell. I would accept I-Way's submission that this was (to put it in my words, not Mr Freedman's) more nearly a judgment of Solomon than a true exercise of discretion. The substantial outcome was that World Online had failed in their announced attempts to stifle the claim and to carry off the counterclaim in a single summary blow. I-Way have come out of the fray tattered, it is true, but otherwise intact, and I think that they should have had one half of their costs before the judge. To that extent, but to that extent only, I would allow the cross-appeal in relation to costs, but dismiss both it and the appeal in all other respects.
16. MR JUSTICE CHARLES: I agree
17. LORD JUSTICE SCHIEMANN: I also agree both with my Lord's conclusion and his reasoning. I have been impressed by Mr Nasir's submission that the purpose of a clause such as clause 21 is not to prevent the recognition of oral variations, but rather, casual and unfounded allegations of such variations being made. His submission that if in cases such as the present we allow something going to trial, precisely that is allowed against which the parties may be regarded as having sought to safeguard themselves. I see a good deal of force in that submission; but for the reasons given by my Lord this appeal must be dismissed, save that it will be ordered that I-Way will have one half of their costs below paid by World Online television.
(Defendant's appeal dismissed; Claimant's cross-appeal allowed on costs issue; Claimants do pay Defendant's costs in the court below, summarily assessed at £20,000; Defendants do pay Claimant's costs of the appeal summarily assessed at £20,271.35, to be paid within 21 days).