England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT CHANCERY DIVISION
Mr Peter Prescott QC (Sitting as a Deputy High Court Judge )
HC06C00374

		Royal Courts of Justice Strand, London, WC2A 2LL
		19/07/2006

Lord Justice Jonathan Parker:

1. This is the judgment of the court.

INTRODUCTION

2. This is an appeal by MAN ERF UK Ltd ("MAN ERF"), the defendant in the action, against an order made on 31 March 2006 by Mr Peter Prescott QC, sitting as a deputy High Court Judge in the Chancery Division, granting interim injunctive relief to Wootton Trucks Ltd and an associated company Wootton Trucks (Reading) Ltd, the claimants in the action. We will refer to the claimants together as "Wootton".
3. MAN ERF is the product of an amalgamation in 2003 between ERF Ltd ("ERF"), an English company, and MAN Aktiengesellschaft ("MAN"), a German company. ERF carried on business as a supplier of goods vehicles, and since the amalgamation with MAN its business has been carried on by MAN ERF. Wootton had, since its incorporation in 1984, been one of ERF's authorised servicing agents, and on the amalgamation it continued as an authorised servicing agent of MAN ERF.
4. The principal issue in the action is whether an agreement ("the Interim Agreement") made in correspondence between MAN ERF and Wootton in September 2003 regulating their trading relationship from 1 October 2003 until revised contractual arrangements were in place was validly terminated by notice given by MAN ERF.
5. The Interim Agreement provided for termination by either party on one week's notice, save that no notice of termination could be served until at least two months after MAN ERF had supplied Wootton with revised contractual documents (which it did in early December 2003). By letter dated 18 November 2005 MAN ERF gave Wootton notice of termination of the Interim Agreement on 28 February 2006 (i.e. more than three months' notice). In the action, Wootton claims that the notice was ineffective to terminate the Interim Agreement. Its pleaded case (and the case advanced to the deputy judge on its application for interim relief) was that the provision for one week's notice of termination conflicts with European competition law and is accordingly illegal; that in order to render the Interim Agreement compliant with European competition law the notice provision fell to be severed and replaced by a provision for two years' notice of termination; and that in consequence MAN ERF's notice was short notice. It accordingly seeks final relief in the form of a declaration that the Interim Agreement remains on foot, coupled with injunctive relief (including mandatory relief). It also claims an inquiry as to damages on the basis that MAN ERF has operated the Interim Agreement in an illegal manner, but that aspect of the claim is of no relevance for present purposes.
6. MAN ERF contends that the notice took effect according to its terms and that the Interim Agreement came to an end on the expiry of the notice period (28 February 2006). Alternatively, if (which it denies) the Interim Agreement breached European competition law, the consequence would be that the Interim Agreement was void ab initio. Accordingly (it contends) one way or the other the Interim Agreement was not on foot after 28 February 2006 and Wootton has no cause of action for final injunctive relief at trial.
7. On the commencement of the action on 2 February 2006, Wootton applied for injunctive relief until trial or further order in the same terms as the final injunctive relief sought. The application was resisted by MAN ERF on the basis (among others) that there was no arguable case that the Interim Agreement remained on foot after 28 February 2006.
8. The substantive hearing of Wootton's application took place before the deputy judge on 31 March 2006. In the result, the judge concluded that it was "well arguable" that the Interim Agreement remained on foot notwithstanding the notice of termination, and that the balance of convenience lay in favour of granting interim relief. However, he concluded that it would not be appropriate to grant relief for the full period until trial or further order. By his order (the subject of the present appeal) he granted relief in the terms of the injunctions sought, but only until 5 pm on 14 June 2006 – a period of some two and a half months.
9. The injunctions have been extended by consent until the disposal of this appeal.
10. Permission to appeal was granted on paper by Neuberger LJ on 16 May 2006. Neuberger LJ also directed an expedited hearing of the appeal.
11. On the hearing of this appeal, Mr David Parry (for Wootton) abandoned any argument based upon an alleged breach of European competition law and argued instead that, notwithstanding the express provision for termination by notice contained in the Interim Agreement, on the true construction of the Interim Agreement it provided for a two-year period of notice of termination.
12. At the conclusion of the hearing of the appeal we informed the parties that the appeal would be allowed, and that we would give our reasons in writing in due course. These are our reasons for allowing the appeal.

THE RELEVANT COMMUNITY LEGISLATION

13. In order to explain the basis for Mr Parry's argument on construction, and to set the Interim Agreement in its legislative context, it is first necessary to turn briefly to the relevant Community legislation.
14. Article 81(1) (formerly Article 85) of the EC Treaty prohibits agreements "which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market". Article 81(2) provides that agreements prohibited by Article 81(1) are "automatically void". Article 81(3) provides that the provisions of Article 81(1) may be declared inapplicable in the case of various categories of agreement.
15. Pursuant to Article 81(3) the European Commission has issued regulations exempting particular categories of agreement (block exemptions). Agreements which would otherwise be caught by Article 81(1) but which fall within a block exemption are accordingly not "automatically void" under Article 81(2).
16. One such block exemption was Commission Regulation (EC) No 1475/1995 of 28 June 1995 ("the 1995 block exemption"), which disapplied Article 81(1) in relation to certain categories of motor vehicle distribution and servicing agreements. The 1995 block exemption was replaced by Commission Regulation (EC) 1400/2002 of 31 July 2002 ("the 2002 block exemption"), which is in different and stricter terms. The 2002 block exemption came into force on 1 October 2002, but Article 10 of the exemption provided for a transitional period of one year, until 30 September 2003.
17. Article 3 of the 2002 block exemption lists a number of general conditions for the application of the exemption. Article 3.5(b) provides that in the case of an agreement of indefinite duration (such as the Interim Agreement) the period of notice must be "at least two years for both parties".

THE FACTUAL BACKGROUND

18. We turn next to the factual background.
19. Prior to the introduction of the 2002 block exemption ERF and Wootton had been operating under contractual arrangements designed to fall within the 1995 block exemption. However, ERF considered that the introduction of the 2002 block exemption necessitated a restructuring of those arrangements as from 1 October 2003 (allowing, that is, for the transitional period of one year provided by Article 10 of the exemption). Accordingly, on 25 September 2002 ERF sent to its authorised agents (including Wootton) a standard form letter giving notice of termination of the current contractual arrangements on 30 September 2003. (It is common ground that this notice of termination was effective according to its terms.) The letter concluded:

"As it is our intention to continue working with you after 30^th September 2003, we shall be sending you a new agreement reflecting the terms of the [2002 block exemption] in due course."

20. On 26 September 2003 (i.e. four days before the deadline of 1 October 2003) MAN ERF (as ERF had by then become) wrote to its authorised agents (including Wootton) offering varied terms to take effect during an 'Interim Period' from 1 October 2003 until revised contractual arrangements could be put in place. We set out the proposed terms in full, as follows:

"Interim arrangements – Regarding the New Block Exemption Issues

We refer to previous correspondence in respect of the above issue and in particular the letter dated 25^th September 2002 terminating your [Business Partner Agreement] [Distributor Agreement] with effect from 30^th September 2003.

As you are aware we have experienced certain difficulties regarding the revised provisions to comply with the new regulations. We will shortly be issuing you with a revised draft agreement and the relevant service standards and operating criteria and other appendices.

For the avoidance of doubt, in the interim period between 1^st October 2003 and the signing of the new agreement ('Interim Period') we propose that we continue to do business on the terms set out in the [Business Partner Agreement] [Distributor Agreement], save that the [Business Partner Agreement] [Distributor Agreement] be varied in each respect necessary to ensure that there is no conflict with the new Block Exemption Regulations. We can then be satisfied that until the new agreements are signed neither of us will be in breach of European competition law.

We confirm that you will be entitled to use the dual brand "MAN ERF" from 1^st October 2003 during the Interim Period providing that you have achieved the service standards contained in the Franchise Pack sent to you in [sic] the letter dated 3^rd March, 2003 ('Interim Standards'). Please be aware that you dual brand at your own financial risk. Compliance with the Interim Standards does not guarantee compliance with the revised draft agreement and its attached standards and appendices. MAN ERF cannot be responsible for the costs you incur in dual branding.

It is our intention that this arrangement will remain in place until the new agreement is signed but in any event it will be terminable on one week's written notice by either party at any time provided that no notice shall be served until 2 months has elapsed from the date upon which we supply you with the revised documents referred to above."

21. We make the following comments on the letter, by way of explanation of its contents. First, references in the letter to the new block exemption regulations are of course references to the 2002 block exemption. Second, the expression "dual branding" refers to the use of the brand names and trademarks of both MAN and ERF (the amalgamation between them having only recently taken place). Third, it is common ground that the "Franchise Pack" containing the "Interim Standards" was sent to Wootton in about March 2003.
22. It is also common ground that Wootton accepted the terms offered in ERF's letter of 26 September 2003, thereby concluding the Interim Agreement.
23. At about that time, as envisaged by the Interim Agreement, Wootton's depots (at Reading and Abingdon) were the subject of audit inspections by MAN ERF based on the Interim Standards. Both depots passed these audits and were thus permitted to commence "dual branding".
24. In early December 2003 a draft of a new contract was supplied by MAN ERF to Wootton. The contract had been drafted by MAN in Germany, and was intended to take effect throughout the European Union. It provided for higher standards for service centres than had hitherto been required by ERF in the UK (we will refer to these standards as "the Revised Standards"). The covering letter enclosing the draft contract made it clear that it was (as it remains) MAN ERF's policy to appoint as its servicing agents any undertaking which applies for such an appointment, provided that it meets the Revised Standards.
25. Further audits of both of Wootton's depots were carried out in December 2004. They revealed that, as Wootton acknowledged, in a number of respects neither depot had as yet conformed to the Revised Standards. On 18 November 2005, following a number of inconclusive meetings, Mr Latham of MAN ERF wrote to Mr Boseley of Wootton terminating the Interim Agreement on 28 February 2006. In the course the letter, Mr Latham said this:

"This company is required to operate a qualitative selective distribution system to benefit from the new Block Exemption. Accordingly, as you do not meet the criteria [i.e. the Revised Standards], we must now take steps to end the current interim arrangements. You are aware that the interim arrangements can be ended by one week's written notice by either party. However, we propose an extension of the notice period, and confirm that the proposed date of termination is 28 February 2006 …"

26. It is common ground that as at November 2005 neither of Wootton's depots met the Revised Standards, and that they still do not do so – although Wootton maintains that it will in due course be able to achieve compliance with them. Mr Parry informed us that Wootton has already incurred substantial expenditure in upgrading its depots so as to meet the Revised Standards.

THE PARTIES' PLEADED CASES

27. Wootton's pleaded case as to the alleged invalidity of MAN ERF's notice of termination of the Interim Agreement is as follows:

(1) the Interim Agreement "was made subject to the conditions for the application of the [2002 block] exemption" (paragraph 14 of the Particulars of Claim); and accordingly

(2) "… if which is denied [MAN ERF] was entitled to determine the Interim Agreement it was bound to give notice of termination in accordance with [Article 3.5(b) of the 2002 block exemption], that is to say by giving at least two years' notice" (paragraph 25 of the Particulars of Claim).

28. On that basis, Wootton seeks declaratory and injunctive relief on the footing that the Interim Agreement remains on foot.
29. By its Defence and Counterclaim, MAN ERF asserts that its notice of termination was valid and effective to terminate the Interim Agreement. It denies that the Interim Agreement is caught by Article 81(1). In any event, it contends that the provision for termination on notice in the Interim Agreement is not "subject to" Article 3.5(b) of the 2002 block exemption and is not severable. It counterclaims for a declaration that the Interim Agreement was validly terminated in accordance with its terms.

WOOTTON'S APPLICATION FOR INTERIM RELIEF

30. By its application notice dated 1 February 2006 Wootton applied for injunctive relief in terms of the final relief claimed in the Particulars of Claim. Although the draft order sought does not say so in terms, it was plainly intended that the injunctive relief should be of an interim nature, limited to continue until trial or further order (the application notice itself refers to an "interim application").
31. The application was listed before Park J on 13 February 2006. He adjourned it to a substantive hearing on undertakings by MAN ERF, with the usual cross-undertaking in damages by Wootton. As already noted, the substantive hearing took place before the deputy judge on 31 March 2006, when he made the order which is now under appeal.

THE ARGUMENTS BEFORE THE DEPUTY JUDGE

32. In support of its application for interim injunctive relief Wootton contended that there was a serious issue to be tried as to whether the Interim Agreement remained on foot notwithstanding ERF's notice of termination; and that the balance of convenience lay in favour of maintaining the status quo (i.e. of granting interim relief on the assumption that the Interim Agreement remained on foot).
33. In support of Wootton's contention that there was a serious issue to be tried as to whether the Interim Agreement remained on foot, Mr Parry submitted as follows:

1. the Interim Agreement falls within the terms of Article 81(1) and is thus automatically void pursuant to Article 81(2) unless it falls within the terms of the 2002 block exemption;

2. the provision in the Interim Agreement for termination of the agreement on notice falls foul of the condition in Article 3.5(b) of the 2002 block exemption that the notice period for termination of an agreement of indefinite duration (such as the Interim Agreement) must be at least two years;

3. that provision must therefore be severed, so as to render the Interim Agreement compliant with that condition and hence bring it within the terms of the 2002 exemption;

4. what is left is an Interim Agreement which is expressed to last for an indefinite period but which is shorn of the provision for termination on one week's notice;

5. to fill that lacuna there must be implied into the Interim Agreement a provision for two years' notice by either party, as provided by Article 3.5(b);

6. the notice given by ERF's letter dated 26 September 2003 was thus short notice and as such was ineffective to terminate the Interim Agreement, which accordingly remained on foot.

34. As already noted, on the hearing of the appeal Mr Parry abandoned the above argument, advancing instead an argument as to the true construction of the Interim Agreement the nature of which we will attempt to describe in due course.
35. MAN ERF's straightforward position before the deputy judge (as advanced by Mr Christopher Vajda QC) was that even if (which MAN ERF denies) the Interim Agreement falls within Article 81(1), then it was "automatically void" under Article 81(2) since it did not comply with one of the conditions for the application of the 2002 block exemption (namely the condition as to notice in Article 3.5(b)). As the deputy judge put it in paragraph 35 of his judgment, when summarising Mr Vajda's argument: "The result is no contract at all and therefore nothing on which Wootton can sue for relief."

THE DEPUTY JUDGE'S JUDGMENT

36. In paragraph 34 of his judgment the deputy judge appears to reject Mr Parry's submission that, given the terms of Article 3.5(b) of the 2002 block exemption, a provision for termination on two years' notice must be substituted for the provision for termination on notice in the Interim Agreement, saying this:

"34. That may be a possible view, but I am not entirely persuaded by it. I put myself back in the position of the man in the garage office: he sees paragraph 5 in black and white, and that it one week's notice, albeit he is being led to believe that it is likely to lead to a new contract and not being cast into outer darkness."

37. However, in the following paragraph (paragraph 35) the deputy judge agreed with Mr Parry that it was "well arguable" that the provision for termination on notice in the Interim Agreement should be severed, on the basis that it was "contrary to" Article 3.5(b) of the 2002 block exemption. He went on:

"There being then no express period of notice, reasonable notice would have to be given. What would be reasonable would depend on the surrounding circumstances, including the relevant competition laws."

38. In paragraph 39 of his judgment, the deputy judge said this:

"39. In my judgment it is well arguable that whatever else the parties intended, they intended an arrangement that complied with the new block exemption regulations."

39. Turning to the question of severance, the deputy judge said this (in paragraph 45 of his judgment):

"45. Paragraph 5 of the crucial letter [i.e. the Interim Agreement], the one which purports to make it terminable on a week's notice, can I think be thought of as a salient that may be able to be nipped off, leaving the rest of the territory in sound condition. If that is arguable, as I certainly believe it is, it would follow that the parties might still be operating under those interim arrangements to this day. I do not actually have to decide that."

40. Having thus concluded that there was a serious issue to be tried, the deputy judge turned to the facts in order to determine where the balance of convenience lay. In the result, after balancing various factors, he decided that it would be appropriate to grant the injunctive relief sought, albeit not until trial or further order (as Wootton had sought), but limited to a period of some two and a half months. He chose this length of time as being "just about enough time" for Wootton to comply with the Revised Standards (see para 56 of his judgment). As noted earlier, under the terms of the deputy judge's order the injunction expired at 5 pm on 14 June 2006.

MAN ERF'S GROUNDS OF APPEAL

41. MAN ERF's grounds of appeal are directed primarily at the deputy judge's conclusion that there is a serious issue to be tried as to whether the Interim Agreement remains on foot on the basis that it is "well arguable" that the provision for termination on notice in the Interim Agreement is in breach of Article 3.5(b) of the 2002 block exemption and should accordingly be severed and replaced by a provision for termination on reasonable (sc. longer) notice. However, in view of Mr Parry's abandonment of the argument based on an alleged breach of Article 3.5(b) it is unnecessary to refer further to these grounds.
42. MAN ERF's grounds of appeal go on to challenge the manner in which the deputy judge dealt with the balance of convenience. It contends that he erred in principle in concluding that the balance of convenience lay in favour of granting injunctive relief, in that (a) he did not take proper account of the fact that the effect of the injunctions was to compel MAN ERF to recognise as authorised dealers undertakings which failed to meet its standards, and (b) he did not give proper weight to the considerable delay on the part Wootton in taking steps to meet the Revised Standards.

WOOTTON'S RESPONDENT'S NOTICE

43. Wootton requires, and it applied for, permission to serve its Respondent's Notice out of time. Mr Vajda did not offer any strong opposition to that application, although he took issue with certain aspects of Wootton's evidence in support of it. In the circumstances, we consider that permission should be granted.
44. By its Respondent's Notice, Wootton contends that, the parties to the Interim Agreement having expressly agreed that it should include all such variations as were required to ensure that it did not conflict with the 2002 block exemption, the deputy judge could have granted the injunctive relief sought on the alternative ground that there was "a high degree of assurance that [Wootton] would establish at trial that MAN ERF was not entitled to terminate the Interim Agreement otherwise than in accordance with Article 3.5(b) …".
45. Wootton further contends that the deputy judge ought to have granted injunctive relief until trial of the action or further order.

THE ARGUMENTS ON THIS APPEAL

The arguments for MAN ERF

46. In opening the appeal, Mr Vajda addressed to us the same argument as he addressed, unsuccessfully, to the deputy judge as to the validity of MAN ERF's notice of termination, viz. either that the notice took effect according to its terms, or, if (which MAN ERF denies) the Interim Agreement fell within the terms of Article 81(1), that it did not meet the conditions of the 2002 block exemption and was accordingly void ab initio pursuant to Article 81(2). So, either way, the Interim Agreement was not on foot after 28 February 2006, and there was no legal basis for the grant of interim relief. On that basis, no question of balance of convenience arises.
47. In the alternative, he submits that the deputy judge erred in principle in addressing the balance of convenience.

The arguments for Wootton

48. As indicated earlier, Mr Parry began his submissions in this court by abandoning Wootton's pleaded case based on a "breach" of Article 3.5(b) of the 2002 block exemption, and by accepting that the judge was wrong to conclude that such a case was "well arguable". Instead, he argued (pursuant to the Respondent's Notice) that purely as a matter of construction the Interim Agreement provided for termination on two years' notice, by reference to Article 3.5(b).
49. Mr Parry framed his argument on construction in two ways. His primary version of the argument (as we understood it) was that the third paragraph of the letter of 26 September 2003 (see paragraph 20 above) was inconsistent with and repugnant to the fifth paragraph of that letter; and that as a matter of construction the third paragraph must prevail over the fifth. His alternative version of the argument was that the inconsistency/repugnancy between the two paragraphs means that the fifth paragraph – or some part of it – is "void" (albeit not illegal by virtue of Article 81(2)) and must accordingly be "severed". On either version of the argument, the end result (he submits) is that in order to give the Interim Agreement business efficacy a provision for termination on two years' notice is to be implied or substituted, by reference to Article 3.5(b) of the 2002 block exemption.
50. As to the balance of convenience, Mr Parry seeks to uphold the deputy judge's conclusion that interim relief should be granted, save that he submits that the deputy judge ought to have granted relief until trial or further order.

CONCLUSIONS

51. With respect to Mr Parry, we regard his argument on construction (we refer to it in the singular because we cannot distinguish between the two versions of it) as completely unsustainable.
52. In our judgment, there are no grounds whatever for ignoring or "severing" the express provision for termination on notice; still less for implying or substituting a provision which is, of necessity, directly inconsistent with it.
53. In the first place, it is important to recognise that the Interim Agreement does not provide simply for termination by either party on one week's notice: it goes on to provide expressly that no notice of termination is to be given until two months has elapsed from the date on which revised documents were supplied to Wootton by MAN ERF. The parties' plain intention in including such a proviso was that Wootton should be allowed a period of two months in which to consider whether to accept the new terms and for compliance with the Revised Standards, but that thereafter the Interim Agreement should be terminable by either party on short notice. Such a provision for termination is entirely consistent with, and a reflection of, the 'interim' nature of the Interim Agreement. To imply or substitute a provision for termination on two years' notice would not only be contrary to the parties' expressed intention; it would also, in the circumstances, make commercial nonsense.
54. Moreover, it is also to be noted that Article 3.5(b) refers to a notice period of "at least" two years, thereby leaving the precise length of the notice period at large provided only that it is not less than two years.
55. In the course of argument we invited Mr Parry to formulate the new provision for termination which was to be implied/substituted in place of the existing provision. His attempts to do so were, if we may say so, entirely unpersuasive. In particular, he was unable to offer any formulation which we regarded as dealing satisfactorily with the important proviso in the fifth paragraph of the Interim Agreement that no notice of termination should be given within two months of MAN ERF supplying Wootton with copies of the revised contractual documentation.
56. True it is that in the third paragraph of the letter MAN ERF proffered the varied terms "to ensure that there is no conflict with the [2002 block exemption]", but it did so in the contemplation (as stated by ERF in its letter of 25 September 2002: see paragraph 19 above) that the parties would continue to do business with each other and that the Interim Agreement would in due course be superseded by a revised agreement which met the conditions for the application of the exemption, with the consequence that the 'Interim Period' would thereupon expire and the Interim Agreement would fall away without the need for termination by notice.
57. In response to Mr Parry's argument on construction, Mr Vajda referred us to Chitty on Contracts (29^th edn.), Vol 1 para 12-079, where the learned editors state the general rule that, in the ordinary way, where a clause which is incorporated by reference conflicts with an express clause in the agreement itself, the latter will prevail. We fully recognise that general rule; however, for the reasons we have given, Mr Parry's argument on construction falls to the ground long before the point at which recourse need be had to it.
58. We accordingly conclude that on the true construction of the Interim Agreement the express provision for termination on notice took effect according to its terms, and that MAN ERF's notice of termination was effective to terminate the Interim Agreement on 28 February 2006. It follows that there is, in our judgment, no serious issue to be tried as to whether the Interim Agreement remained on foot thereafter, and hence no question arises as to the balance of convenience. In our judgment, therefore, the application for interim relief ought to have been refused.
59. For those reasons, we allow the appeal.