England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
Judge Geddes (sitting as a Judge of the High Court)

		Royal Courts of Justice Strand, London, WC2A 2LL
		24th July 2003

Mr Justice Holman :

BACKGROUND

1. Compensation Claims Service Limited (CCSL) are the defendants to the claim and the appellants to this court. As their name suggests, they are a company which, as franchisors operating through franchisees, provides a service for people wishing to pursue claims for compensation for personal injury. CCSL are based in Bournemouth. They appoint franchisees in different areas of the country. Each franchisee has his own territory. The role and task of the franchisees is to identify clients who live in their territory who wish to pursue compensation claims. The franchisee engages the client upon the terms of a Letter of Terms and Conditions of Acting, to which I will later refer. The franchisee undertakes preparatory work on the case in the locality, such as obtaining witness statements, and offers continuing "client care", to which I will also later refer. A solicitor is instructed. This can be a solicitor of the client's own choice, but will usually be a solicitor appointed by CCSL. The service is offered to the client on a no win, no fee basis. Until April 2000 the fee was paid from the damages recovered. An insurance policy ensures that in any event no expense falls on the client personally.
2. The second to fourth claimants (whom I will call the individual claimants) and respondents to this appeal are three franchisees who each had an exclusive territory in different parts of Kent, defined by reference to post codes. Mr Corry's franchise agreement was dated 16^th February 1999 and endured for an initial period of ten years. In consideration of the grant of the right and licence to operate the business, he paid to CCSL an "initial fee" of £7950 plus VAT. Mr Wright's agreement was dated 9^th June 1998, for an initial period of five years and an initial fee of £7950 plus VAT. Mr Chapman's agreement (jointly with his wife) was dated 16^th February 1999, for an initial period of ten years and an initial fee of £7950 plus VAT. Save as to length of the initial term, the franchise agreements between CCSL and each of the franchisees were in the same or substantially the same terms. Subject to the franchisee properly performing his obligations and various other conditions, each franchise agreement was renewable for a further term on payment of a renewal fee.
3. The agreements defined CCSL's distinctive "System" for operating the business and, by clause 8.2, required the franchisee "to operate the business strictly in accordance with the provisions of the operating manual and to conform in all respects and at all times with the system …..".
4. Clause 7 provided that CCSL would:

"…..account for and pay commission due to the franchisee at the agreed rate of 65% of the charge for the service to the franchisee's clients on any and all interim payments and settlements or awards received by the said franchisee's clients …..".

5. After entering into their respective agreements, all three individual claimants began operating their franchises and generating business for themselves and CCSL.
6. Parts of the Access to Justice Act 1999 came into force on 1^st April 2000. CCSL and the individual claimants all considered that that Act had the effect that CCSL could no longer lawfully pay a percentage commission to their franchisees which was deducted from the damages recovered by the client. However, they could not agree long term alternative bases of remuneration until Regulations and approved forms of Conditional Fee Agreements under the 1999 Act were made and published and their implications understood, which was not expected until the autumn of 2000. Clearly, however, CCSL and their franchisees necessarily faced a major change in their relationship with effect from April 2000, imposed, as they considered, by statute.
7. At about the same time there was another major change in relation to the individual claimants, although it was unrelated to the 1999 Act and its timing was, we were told, coincidental. The territories of the individual claimants, together with that of a franchisee called Mr Ashton, comprised in total most of the county of Kent. The individual claimants and Mr Ashton considered that they might work more profitably and with various economies if they grouped together under a company which became known as Compensation Specialists Limited. This company became the first claimant and I will call it the company. In due course its territory extended over the whole of Kent. It began to operate on or about 1^st April 2000. One of the issues at trial, and on this appeal, is whether, after 1^st April 2000, the franchise contracts continued to be with the individual claimants or became a contract with the company in substitution; and if so, what were the terms.
8. Whatever the contractual arrangements, the individual claimants continued to generate business. An interim agreement was reached that CCSL would pay a flat fee of £550 in respect of each new client who was engaged. Towards the end of 2000 Mr Ashton reverted to his original franchise territory. There were also strains in the working relationship between CCSL, and in particular the managing director Mrs Anne Miles, on the one hand, and the individual claimants on the other. This partly had to do with choice of solicitors, and a suspicion by Mrs Miles that one or more of the claimants had effectively siphoned off work directly to a solicitor without using the CCSL scheme.
9. There was strain, too, because the individual claimants began to feel increasingly exposed in that there was no contractual document incorporating new terms after the coming into force of the 1999 Act and the setting up of the company.
10. Matters came to a head in February 2001 when, by a letter dated 22^nd February, the individual claimants wrote to CCSL saying that in their opinion CCSL had broken the franchise agreement that they had signed; that they believed the old agreement [viz their respective original signed Franchise Agreements] was dead; and that they had not been given the opportunity to consider a new agreement. The letter concluded "we cannot continue to operate in this manner. We believe that you have treated us so badly that all trust and belief between us is dead. We believe that the unreasonable behaviour of CCSL goes to the very heart of the former agreement. We will forthwith cease working for CCSL".
11. On 8^th March 2003, solicitors for CCSL wrote to the individual claimants stating:

"In view of the breaches of the franchise agreements by the franchisees and the company, and the clear wish on their part to trade other than in accordance with the franchise agreements but in competition with our client, our client accepts the repudiatory breach of contract. The franchise agreements are therefore at an end".

THE ISSUES

12. By their Amended Particulars of Claim, the claimants put in issue that any of them had repudiated whatever agreements were then in force. Their contention was, and is, that any agreement still subsisting by February 2001 was terminable at will and had, accordingly, been lawfully terminated by the letter of 22^nd February 2001. They alleged that substantial sums were owing and unpaid by CCSL in respect of work actually done up to that date; and claimed an enquiry as to how much was due and unpaid, and damages. At trial, the judge gave judgment for the claimants on their claim, with directions for damages to be assessed. That process has not yet taken place, but there has been no appeal from that part of the judgment and order as to liability.
13. By their Re-amended Defence and Counterclaim, CCSL contended that the old Franchise Agreements had continued in full force and effect after 1^st April 2000 save for the modification to the fee, and save that CCSL had "consented to business after 1^st April 2000 being conducted through [the company] (rather than by the [individual claimants] personally) ……". They contended that the position of the company was subject to an "interim agreement" and that this interim agreement was for five years from 1^st April 2000 or, at the least, five years from 9^th June 1998 (being the term and date of Mr Wright's original Franchise Agreement). They contended that in a range of ways the claimants had acted in breach of the agreements and, of particular relevance to this appeal, counterclaimed or set-off damages for (i) "the loss of profits attributable to the business presently being conducted by the company that ought to have been conducted with CCSL down to five years from 1^st April 2000 or, at least, five years from 9^th June 1998, alternatively being conducted by the individual claimants through the vehicle of the company" (see paragraph 21(1) of the Re-amended Defence and Counterclaim); and (ii) "the additional costs incurred by CCSL in supporting the existing client base after the claimants' repudiatory breaches". CCSL alleged that "in order to minimise its loss attributable to the claimants' wrongful conduct they had been obliged to support the training costs of staff …." (paragraph 21(2) of the Re-amended Defence and Counterclaim). As shorthand, I will call these two heads of counterclaim respectively the counterclaim for loss of profits and the counterclaim for client care costs.
14. At trial, the judge dismissed the whole counterclaim. Insofar as the counterclaim was for present and future loss of profits, his reason was that the claimants had been entitled to cease working for and through CCSL in February 2001 and that any subsequent trading on their own account was not in breach of any contract with CCSL. Insofar as the counterclaim was for client care costs, the judge, although dismissing the whole counterclaim, said at paragraph 46 of his judgment:

"It follows from the above that the defendant's defence and counterclaim against the first claimant must also fail, and it must pay to the first claimant such sums as may be found owing to it in respect of claims referred to the defendant under the interim agreement. For the avoidance of doubt it will be open to the defendant to adduce evidence and to argue, that from the sums found due to each of the claimants there should be deducted such sums as it may prove that it had to expend in processing the claims concerned, and which expenditure was properly the responsibility of the claimant concerned."

15. At this stage I emphasise the second sentence of that paragraph, which does not lie easily with wholesale dismissal of the set-off element of the counterclaim. To "deduct sums" which were properly the responsibility of the claimant concerned is to set them off.
16. CCSL now appeal, with the permission of this court, from the dismissal of their counterclaim. Permission was granted on two points only, and it was indeed on these two points that the argument centred.
17. The first point is that, whatever the precise governing contractual arrangements after April 2000, the claimants could not simply terminate them at will and without notice in February 2001; and, accordingly, that the counterclaim for loss of profits for some period should have succeeded, with quantum to be assessed.
18. The second point is that, even if the contracts were terminable at will in February 2001 with respect to any new business thereafter, the claimants still remained bound to give continuing "client care" to all existing clients at that date until their claims had been concluded; and, accordingly, that insofar as the claimants (whether individually or through the company) failed to do so, CCSL is entitled to counterclaim for (or, at the very least, set off) client care costs.

THE FIRST POINT – DURATION/TERMINATION

(i) The governing contracts and parties after April 2000.

19. It seems clear that during 2000 and until their working relationship began to deteriorate, none of the parties concentrated on what was their precise contractual relationship at any given stage. They all knew there had been the changes due to the Access to Justice Act 1999 and that in some way the involvement of the company was a new development. They all knew, too, or anticipated that eventually a new formal agreement or agreements would have to be signed. But meantime all parties were eager to maintain the momentum of the business and their respective roles within it. In these circumstances it is perhaps not surprising that there was much uncertainty both in the pleadings and at trial as to the true contractual relationships post April 2000.
20. At paragraphs 6 and 7 of his judgment (following a heading "The relevant facts appear to me to be as follows") the judge held that:

"6. Shortly before 1^st April 2000 the lay claimants together with another Kent franchisee Mr Ashton, approached the defendant and suggested that they merge their territories and trade with the defendant through the first claimant rather than individually from 1^st April 2000, but that the parties also preserve the financial arrangements already agreed in relation to any claims which had been handled by any of the lay claimants prior to that date. The defendant through its managing director Mrs Miles agreed. The parties also agreed that in the light of the [Access to Justice] Act 1999 which came into force on April 1^st 2000 that as from that date commission would be paid by way of a lump sum on introduction of a client (instead of by way of a percentage of the damages once recovered), such sum to be agreed. That sum was announced and agreed at £550 in late April 2000. It was accepted by all that in due course a new franchise agreement would be offered to all franchisees, incorporating these and other changes which the defendant wished to introduce.

7. Thereafter the first claimant and the defendant continued to conduct themselves on the same terms and procedures (save as aforesaid) as set out in the individual franchise agreements."

21. At paragraph 32 (under a heading "On these facts I find as follows") the judge said:

"In my judgment, save as to payments accrued thereunder, the old franchise agreements were impliedly terminated by consent on 1^st April 2000 and the lay claimants thereupon ceased to be franchisees of the defendant. Thereafter as evidenced by their conduct, the first claimant and the defendant entered into a new contract ("the interim agreement") whose terms were identical (insofar as is relevant to these proceedings) to those contained in the old franchise agreements, save that the franchise area was the whole of Kent, and the term as to payment to the first claimant was as finally agreed in April 2000. The duration of that interim contract was impliedly agreed to be until the proposed new franchise agreement was either accepted or rejected by the first claimant."

22. On behalf of the appellants, Mr John Martin QC submits that the judge's conclusion within paragraph 32 that "the old franchise agreements were impliedly terminated by consent on 1^st April 2000 and the lay claimants thereupon ceased to be franchisees of CCSL" is wrong, and is not correctly founded on his findings of fact as recorded in paragraphs 6 and 7. He submits that within paragraph 6 there is ambiguity and that the reference to merging their territories and trading "through" the company rather than individually is equally consistent with the original individual franchise agreements remaining in place, so as to govern relations between the individual claimants on the one hand and CCSL on the other.
23. It is, perhaps, worth noting that the language used by the judge in his paragraph 6 very closely mirrors that used by the claimants in paragraph 7 of their Particulars of Claim and admitted by CCSL in paragraph 7(1) of their Re-amended Defence and Counterclaim. The parties agreed in the choice of language in their pleadings, but now disagree as to what that language meant.
24. I, for my part, do not accept that the conclusion in paragraph 32 is inconsistent with, nor even that it is not properly founded upon, the findings in paragraphs 6 and 7. It is true that the judge had not said in terms within paragraphs 6 and 7 that the old individual franchise agreements had actually been terminated in April 2000, but the words "trade with the defendant through the first claimant rather than individually" come close to saying so. Paragraph 7 referred in terms to the first claimant (viz the company) and the defendant conducting themselves "on the same terms and procedures" which points strongly to the existence of some contractual relationship between them. When the judge later referred in paragraph 32 to termination of the old franchise agreements, he said that they were "impliedly terminated". Termination by implication is a conclusion of law and one which, in my view, was entirely open to the judge on his earlier findings as to the facts.
25. But Mr Martin submitted that, even if there is no inconsistency between the two paragraphs, the judge's conclusion was nevertheless wrong. At the hearing of the appeal he contended (his "candidate 3") that even after April 2000 the old individual franchise agreements continued to govern not only work outstanding for clients already engaged before that date, but also new business with new clients engaged after that date; and that although the individual claimants would conduct their business through the company as a trading company, there was no contract between the company and CCSL at all. So far as I am aware, this had never previously been contended by or on behalf of CCSL. Indeed at paragraph 7(2) of their Re-amended Defence and Counterclaim CCSL had pleaded that "Pending the acceptance of such new franchise agreement [viz one to be agreed in due course once the new Regulations were made and published] it is averred that the contractual relationship between the [company] and [CCSL] was impliedly governed by all the terms of the old franchise agreement …..". At paragraph 9 of the "Written Closing Argument of Counsel for the Defendant" at trial, counsel had contended that "…. the party to the contractual arrangement is plainly the First Claimant, a private limited company". In Ground 1 of the Grounds of Appeal, CCSL refer to "the fact that the [company] and [CCSL] had entered into a new franchise agreement governing their relationship after 1^st April 2000." In my view it simply is not open to CCSL now to suggest that there was no contract at all between CCSL and the company after April 2000.
26. Mr Martin submitted that nevertheless the old individual franchise agreements must have continued to subsist. He points out that each agreement was for an initial period of 10, or in one case, 5, years and that even the shortest (Mr Wright's) would endure until June 2003. Further, each agreement contained, in clause 4, a right on the part of the franchisee to renew it. Each franchisee had paid a substantial sum of money as the initial fee for the grant of the franchise, and clause 6 of the agreements made provision enabling the franchisee to sell his business. Clause 18 made provision for the franchisor in various circumstances to terminate the agreement, but with no corresponding right in the franchisee to do so. He submits, therefore, that none of the franchisees would have expected that their valuable individual agreements would or could have terminated save in one of the circumstances in clause 18.
27. That would not, however, prevent both or all parties terminating these agreements by consent, in particular if they desired to substitute new agreements. In answer to a question in cross examination (transcript B, 29^th May 2002, page 3B) Mr Corry said:

"Q. Well, suppose Mrs Miles decides, as you say, that this is an ad hoc arrangement and she concluded that is the case and terminates the arrangements – you expect that Compensation Claims, my client, can keep the full amount of the franchise fee you paid in 1999?

A. I think that was the risk, and we said that we wanted to change – I was of the view that I was handing in, if you like, transferring/swapping."

28. On behalf of the claimants, Mr Campbell submitted that all parties considered that the effect of the Access to Justice Act 1999 was to render a fundamental provision of the original agreements (namely, as to terms of payment) illegal and arguably to frustrate them. Further, it was fundamental to the original agreements that each franchisee had an exclusive territory. That could not exist side by side with the company having a right to operate in the whole of Kent. Further, all parties were envisaging after April 2000 that they were in an interim period until a new written contract was negotiated, and all contemplated that that would be between CCSL and the company alone.
29. In my view these considerations amply justified the judge in his conclusion that from April 2000 the old individual franchise agreements had, by consent, been impliedly terminated and that in their place was an interim agreement with the company alone.

(ii) Terms as to duration/termination

30. But was that interim agreement only terminable upon reasonable notice, as CCSL contended, or was it terminable after the company rejected a new agreement or if, after a reasonable period of time, no such agreement was offered, as the claimants now contend?
31. The judge had held in paragraph 32 that "The duration of that interim contract was impliedly agreed to be until the proposed new franchise agreement was either accepted or rejected by the first claimant". At paragraph 40 he held that the letter of 22^nd February 2001 amounted to a termination of the interim agreement and "It also in my judgment amounted to a clear statement from the first claimant that it rejected the defendant's offer of the new franchise agreement". At paragraph 42 he said "…. the interim agreement came to an end because of the first claimant's termination of it. It also at the same time came to an end because the first claimant, as it was entitled to do, refused to enter into the new franchise agreement."
32. Mr Martin points out, with force, that earlier within paragraph 32 the judge had said that the terms of the interim agreement "were identical (insofar as relevant to these proceedings) to those contained in the old franchise agreements, save that the franchise area was the whole of Kent, and the term as to payment to the first claimant was as finally agreed in April 2000." The old franchise agreements contained no provisions entitling the franchisees to terminate them, and only limited provisions entitling the franchisors to do so. They were certainly not terminable at will; and so if the terms of the interim agreement "were identical" save in respect of area and payment, the interim agreement could not have been effectively terminable at will either.
33. Mr Martin submits that if the parties had accepted and agreed a new written contract, then the interim arrangement would have been terminated by being replaced. But he submits that a failure to agree new terms would not of itself and without more operate to determine, with immediate effect, some existing contractual commitment between them. With that, I agree.
34. However, the question for the judge was what were the terms of this particular interim agreement or arrangement, as to duration and termination. The view of Mrs Miles is clearly not determinative, but it is still relevant that she said (transcript D, 30^th May 2002 at 23A):

"Q. Would you accept this, Mrs Miles, that if the franchisee refused to accept the new arrangement, that would be the end of the relationship?

A. Well, that would always be the case if someone would not accept a new agreement.

Q. Yes, but they are free to walk away if they did not accept the new agreement?

A. I am not sure about that. I had not thought about that until his Lordship raised that point."

35. Mr Campbell submits that Mrs Miles' first answer accurately reflected the commercial reality. All parties were operating in an "interim" situation, in part due to the desire of the individual claimants to operate in future through the company rather than individually, and in part due to the effect of the 1999 Act. The old individual franchise agreements had ended. If a new formal agreement was not proffered (and it appears that by February 2001 one never had been, even if this was due to an administrative error) or if one was proffered but rejected, the interim arrangements necessarily came to an end, for after such an impasse any continuing cooperation would be unworkable.
36. I find these arguments finely balanced. It does seem to me that there is ample room for implying a term that even the interim agreement or arrangement was only terminable on reasonable notice by either side. It is not self evident that the parties could not continue to work cooperatively during a period of notice; and indeed if it had been CCSL who abruptly gave notice of termination in February 2001, the claimants (whether individually or by the company) might have protested loudly that they were entitled, at the very least, to a reasonable period of notice.
37. But I have come to the conclusion that the alternative view, namely that expressed by the judge in the last sentence of paragraph 32, is also a tenable one. It was open to the judge to imply a term that insofar as it related to soliciting and engaging new clients the interim contract would endure only until a new formal agreement was accepted or rejected by the first claimant. As that outcome was open to the judge, and as it was he who had the advantage of hearing the evidence of all parties as a whole, we should not now interfere with it. I agree that there is the tension between the second and third sentences of paragraph 32 to which Mr Martin referred (see paragraph 32 above). But paragraph 32 needs to be read as a whole. Since the judge reached an express conclusion in the third sentence as to duration, that must necessarily be seen as a third respect (in addition to area and payment) in which the terms of the interim agreement were not identical with those of the old franchise agreements.
38. For these reasons, I would dismiss this appeal insofar as it relates to the first point referred to in paragraph 17 above. On his findings as to duration and termination, the judge correctly dismissed the counterclaim for loss of profits. However it is important to stress that there is a clear distinction between the interim contact being terminable in relation to soliciting and engaging new clients, and being terminable insofar as it related to continuing to provide client care to existing clients to whom a service was already being provided.

THE SECOND POINT – CONTINUING CLIENT CARE

39. The old individual franchise agreements defined the Operating Manual as

"…. the written specification of the methods, processes, techniques, systems and schemes devised and compiled by the Franchisor to be observed and implemented by the Franchisee in operating the Business …"

40. By clause 8.2, the franchisee agreed "To operate the Business strictly in accordance with the provisions of the Operating Manual ….". By clause 8.3 he agreed "To ensure that the Business conforms in accordance with the System with regard to quality, service, care and conduct, the Franchisee acknowledging that such conformity is of the utmost importance to the successful operation of the Business …."
41. The Operating Manual itself included the following provisions:

"Client care and attention

2.1 Franchisees should make it clear to all clients that on-going local help and assistance is readily available throughout the life of the claim, even where the claim is in the hands of panel solicitors.

….

Updating clients

9.1 Clients should be kept fully updated regarding all developments in their claims and consulted before committing them to any course of action.

….

CLIENT CARE

13.3 "Client Care" is not a slogan; it is an attitude to clients which is demonstrated by your attention to them, their claims and their individual circumstances.

….

31.14 The Franchisee should encourage the Client to maintain contact with him throughout the conduct of the claim, and to address general queries to him ….. This kind of contact will keep the Franchisee in touch with his Clients in the interest of building good, local relationships …."

42. Paragraph 6.1 required the franchisee to engage a client on the terms of the Letter of Terms and Conditions of Acting. This itself was prescribed by the Operating Manual and included an explanation that the CCSL service is composed of "three elements". The first of these is:

"the services of a local Compensation Claims Personal Injury Specialist/Advisor (myself) who will undertake the collation of all the initial evidence on your behalf and will, during the life of the claim, remain at your disposal to deal with any queries that may arise, as well as liaising with the solicitors on your behalf, should you so wish."

43. The other elements were a complete indemnity against all costs, and the services of a solicitor.
44. On behalf of the claimants, Mr Campbell stressed that the relevant paragraphs of the Operating Manual, quoted above, employ the word "should" rather than "must". So he submitted that these are, in effect, targets of good practice to which the franchisee should strive rather than actual contractual obligations and duties. But I do not agree.
45. In my view, these provisions, considered as a whole, clearly bound the franchisee, by his contract with CCSL, to provide continuing "client care" "during the life of the claim". The Letter of Terms and Conditions of Acting created a contract between the client and CCSL of which provision of the services of the local specialist/advisor (the franchisee) during the life of the claim was a fundamental obligation on CCSL.
46. The franchisor and franchisee could not possibly have intended or contemplated other than that the franchisee was bound to provide that service.
47. It is, in my view, obvious, too, that a franchisor must remain bound to continue to provide that client care to existing clients even after termination of the franchise agreement itself. The obligation to the client was to provide care "during the life of the claim", not for so long as the franchisee continued to accept new clients. The franchisee's fee (whether under the old or the interim agreements) was a single fee for the provision of the service to the client as a whole. If the franchisee only provides part of that service, then, in my view, he must credit to the franchisor the cost of providing that service in substitution.
48. This was clearly the view of the judge in the light of the second sentence of paragraph 46 of his judgment; but he ought to have given effect to it by giving judgment on the counterclaim to that extent.
49. The judge held in paragraph 32 that the terms of the interim agreement with the company were (save in the specified respects) "identical" with those of the old franchise agreements. There was no reason why the terms as to client care should not be incorporated into the interim agreement, and every reason why they should be, since continuing client care is fundamental to the Business and the System.
50. Accordingly, in my view, the individual claimants remained bound to provide continuing client care to those clients who had been engaged by them before April 2000 but whose cases had not been concluded; and the company remained bound to provide continuing client care to those clients who had been engaged by it after April 2000 but whose cases had not been concluded.
51. I would accordingly allow the appeal on the second point, identified in paragraph 18 above. I would give judgment for the defendant on paragraph 21(2) of its Re-amended Defence and Counterclaim against all four claimants, with damages to be assessed.

Lord Justice Jonathan Parker:

52. I agree.

Lord Justice Brooke:

53. I also agree.