England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
The Hon Mr Justice Sullivan
CO/1859/2005

		Royal Courts of Justice Strand, London, WC2A 2LL
		07 March 2007

Lord Justice Laws:

INTRODUCTORY

1. This is an appeal, brought with permission granted by Richards LJ on 9 May 2006, against the judgment of Sullivan J given in the Administrative Court on 19 December 2005. Sullivan J allowed the application by the present respondent ("Postwatch") for judicial review of a decision by the first defendant ("Postcomm") not to take enforcement proceedings under s.22 of the Postal Services Act 2000 ("the Act") against the present appellant ("Royal Mail") for alleged breaches of Royal Mail's licence conditions. The alleged breaches consisted in failure by Royal Mail to comply with what is called the Standards of Service Compensation Scheme ("the Scheme") which had been determined by Postcomm on 7 October 2003.
2. Royal Mail appeared by counsel before Sullivan J only as an interested party. They were not impleaded in the judicial review. However after giving judgment Sullivan J directed that they be joined as second defendant so as to have standing to pursue an appeal. Postcomm, the substantive defendant before Sullivan J, have played no part in these appeal proceedings.
3. The appeal concerns two questions of construction of clause 20(b) of the Scheme. It will make for clarity if I set out clause 20(b) and identify the questions at this stage, though there is a good deal of ground to cover before I can engage with them. Paragraph 20 is headed "Bulk services – exclusions". Then this follows:

"20. Royal Mail shall be under no obligation to provide compensation –

...

(b) where a sender is in default of credit terms, without reasonable excuse..."

The first question is whether clause 20(b) entitles Royal Mail to refuse compensation altogether to a customer who is in default of credit terms without reasonable excuse, or only to "net off" the compensation due against the customer's debt, thus reducing the former only to the extent of the latter. I will call this the "net-off issue". The second question is whether the fact and extent of the customer's default is to be ascertained by reference to a particular point in time or a period of time. I will call this the "time issue". The judge below found in favour of Postwatch on both issues.

BACKGROUND

4. I must explain the background against which the dispute arises, and the context in which clause 20 (and the Scheme generally) came into existence.
5. Postwatch is an independent consumer organisation established by s.2 of the Act to represent the interests of users of postal services. Postcomm was established by s.1. It is the independent regulatory body for the postal services industry in the United Kingdom and the national regulatory authority for the Postal Sector pursuant to the European Postal Services Directive 97/67/EC as amended ("the Directive"). By force of s.6 of the Act, the provision of postal services is prohibited absent a licence, and by s.11 it is one of Postcomm's functions to grant such licences. A licence may include conditions specified by Postcomm: s.13.
6. By a s.11 licence granted to it by Postcomm on 23 March 2001 and amended on 1 April 2003, Royal Mail is designated as the provider of a universal postal service in the United Kingdom. It is also the universal postal service provider for the purposes of Article 4 of the Directive. Article 16 of the Directive requires the setting of quality of service standards for universal postal service providers in the Member States. I should at this stage set out part of Article 19 of the Directive:

"Member States shall ensure that transparent, simple and inexpensive procedures are drawn up for dealing with users' complaints, particularly in cases involving... non-compliance with service quality standards.

Member States shall adopt measures to ensure that those procedures enable disputes to be settled fairly and promptly with provision, where warranted, for a system of reimbursement and/or compensation."

7. Condition 4 set out in Schedule 2 to Royal Mail's licence is headed "Service standards of service and compensation". Part 1 of Condition 4 deals with standards of service and among other things provides for targets to be met by Royal Mail. Thus (to use the example given by the judge at paragraph 6 of his judgment) for the year to the end of March 2004 92.5% of first class mail should have been delivered the next working day.
8. Part 2 of Condition 4 is headed "Compensation Scheme". Paragraph 10 provides:

"The Licensee shall establish and at all times thereafter maintain a scheme to be known as the 'standards of service compensation scheme' for compensating users of postal services affected by failure to meet the quality standards applicable in accordance with the scheduled standards to any postal packet."

And I should read paragraph 12(a):

"The standards of the service compensation scheme shall –

(a) provide for the Licensee paying to any such person as is mentioned in paragraph 10 such compensation as may be specified in the scheme as being appropriate..."

Paragraph 13 provides that if no terms for the compensation scheme have been agreed between Postwatch and Royal Mail, the scheme "shall be in such terms as may be determined by Postcomm".

9. And that, in the event, is what happened. Royal Mail and Postwatch were unable to agree terms. Accordingly after a substantial consultation exercise Postcomm determined the Scheme, as I have said on 7 October 2003. In light of the issues we have to decide it is necessary to review some of the documents, passing between Royal Mail and Postcomm in the year to October 2003, which may be said to trace the evolution of the disputed clause 20(b). I do so at this stage without prejudice to the arguments joined between the parties as to what materials are, and are not, properly receivable as aids to construction of the clause. I will come to those.
10. As I understand it Postcomm first produced a draft for a compensation scheme in October 2002. The words used included nothing which resembled the terms of what was to become clause 20(b). Indeed the draft made no provision at all for "exclusions" from the right to compensation. It did, however, draw a distinction which it is convenient to explain at this stage, since it remained a feature of the Scheme in its final form. The distinction is between "retail services", whose most familiar example is the ordinary letter post, pre-paid by the purchase of postage stamps, and "bulk mail services", typically large numbers of postal packets whose sender maintains an account with Royal Mail and enjoys credit terms. Clause 20 as it was finally drawn is only concerned with the latter, as its heading "Bulk services – exclusions" demonstrates.
11. Royal Mail responded to Postcomm's October 2002 draft in December 2002. Under a heading "Exclusions" this was said (the document we have seems to be Postcomm's report or record of the responses of Royal Mail and others, but there is no issue as to its accuracy):

"Exclusions

There are no exclusions allowed under the proposed Postcomm scheme. Whilst some are not relevant, some allowance for force majeure and other exclusions should be made. Consideration also needs to be given to the state of the customer's account.

It is proposed that the exclusions would include (but not be limited to) the following..."

There follow four bullet points. The first addresses "force majeure". That was ultimately catered for by clause 20(a), which I will set out in due course. I need not trouble with the third and fourth. The second is in these terms:

"Where an account customer was in default of credit terms, Royal Mail would retain the discretion to either (a) delay payment of the credit until such time as the account was in order, or (b) refuse the credit due to ongoing issues with the account."

The "credit" there referred to as being delayed or refused means, plainly, the compensation to which the customer was on the face of it entitled in the events that had happened.

12. At the same time, December 2002, Royal Mail proposed their own draft scheme to Postcomm. Above paragraphs 26 – 29 of the draft appears the heading "Exclusions – industry services only". I take it that this shows the exclusion provisions were intended to apply to bulk mail services customers only. Paragraph 27 deals with what had been referred to in Royal Mail's representations as "force majeure", and I need not read it. Paragraph 28 is concerned with cases "[w]here an account customer is in default of credit terms". It deploys the same language as that used in the representations under "Exclusions" at the second bullet point, which I have just set out.
13. In February 2003 Postcomm produced a substantial response to Royal Mail's suggestions. There are two material paragraphs:

"9.50 Royal Mail has proposed an exclusion where account customers are in default of credit terms. The fact that an account customer is in default does not necessarily justify withholding compensation. Much will depend on the circumstances of the particular situation and these need to be assessed when making the decision.

...

9.93. The consultation document [viz. Postcomm's October 2002 document] did not list exclusions for bulk users. Royal Mail has suggested (and Postcomm agrees, subject to some modifications) with [sic] the following exclusions..."

There follow, again, four bullet points, and again I need not trouble with the third and fourth. The first puts forward a revised proposal relating to force majeure (Postcomm did not agree with Royal Mail's suggestion that industrial action be excluded). The second bullet point anticipates almost exactly the language of what was to become clause 20(b). It reads:

"where an account customer is in default of credit terms, without reasonable excuse".

14. Then on 23 April 2003 Postcomm produced a further consultation document with a revised draft compensation scheme. In light of the arguments addressed to us I should notice that paragraph 17 of the draft would have required payment of compensation to be "made by way of credit against future expenditure or, if requested by the user, by cheque..." Then at paragraph 21 under the heading "Exclusions – bulk services" the draft contained provisions at (a) and (b) which were identical to the terms of clause 20(a) and (b) of the Scheme as finally arrived at, save for the omission of some words appearing at the end of clause 20(a). The omission touches nothing we have to decide. And I should record (with a note of regret) the fact that the ingenuity of counsel has made nothing of the Delphic, or perhaps Byzantine, change in the heading's wording from "Exclusions – bulk services" to "Bulk services – exclusions".
15. Mr Beloff QC for Royal Mail places much reliance on his client's response to this document of April 2003. It was given in June 2003. It contains these paragraphs:

"2.2 Method of Payment for bulk mail scheme

Postcomm proposes in paragraph 17 of the draft determination that payment to the customer will be by credit to their account unless they request a cheque. Royal Mail requires that all payments to its customers will be by a credit to their account... This is in order to mitigate Royal Mail's debt exposure to a customer. Royal Mail will not pay cheques to customers who are already in debt to Royal Mail; any amount due will be used to offset any outstanding debt. We are concerned that payment by cheque to a large number of customers could also raise serious cash flow problems for Royal Mail. The option for payment by cheque should be removed from the determination, or at the very least, reworded to say, 'or by cheque in exceptional circumstances (at Royal Mail's discretion)'.

Postcomm have said at paragraph 21b of the draft determination that Royal Mail will not pay compensation to those customers who have not paid their accounts in accordance with applicable payment terms, unless they have a 'reasonable excuse'. This phrase leaves Royal Mail open to all sorts of interpretations as to what is and is not considered 'reasonable'. For the sake of certainty, Royal Mail would intend to fix a policy on this issue in advance of operating the scheme."

16. There followed a meeting of Postcomm on 17 July 2003 for which a paper was prepared by a Postcomm official, Mr Perlstrom, on 8 July. I should note these paragraphs, which appear under the heading "Method of payment to bulk mailers in arrears":

"47. Royal Mail requested that it should be able to 'net off' payments to bulk mailers against their accounts with Royal Mail if the bulk mailer were in debit. Royal Mail has also said they would wish to provide us with a definition of what would constitute a 'reasonable excuse' for arrears, to provide a measure of certainty.

Recommendation: We understand that this would fit with general commercial practice and would not have an impact on the customer's right to dispute Royal Mail's claim against it. On that basis, we recommend that the scheme be amended accordingly..."

THE DECISION DOCUMENT

17. At length on 7 October 2003 Postcomm came to determine the Scheme pursuant to paragraph 13 in Part 2 of Condition 4 set out in Schedule 2 to Royal Mail's licence, there having been no terms agreed between Postwatch and Royal Mail. The determination was conveyed in the "Decision Document" of that date. The Scheme itself takes the form of an Annex to the Decision Document.
18. Paragraph 5.1 of the Decision Document is material to an argument advanced by Mr Pannick QC for Postwatch as to the scope or extent of the documentary material which the court should properly take into account when it comes to construe paragraph 20(b) of the Scheme. It reads:

"Many responses raised arguments discussed earlier in the consultation process. Where minor suggestions have been accepted, these have been incorporated into the final scheme for determination (attached). Where material points were raised, these are discussed below."

Mr Pannick's argument is essentially to the effect that this paragraph was intended to demonstrate that the contents of the Decision Document constituted Postcomm's definitive understanding of, and response to, all earlier representations; and for this reason it would be wrong for the court to take those earlier representations (in particular paragraph 2.2 of Royal Mail's June 2003 response) into account in construing clause 20(b). In reply Mr Beloff QC for Royal Mail points to paragraph 1.9 of the Decision Document, which reads in part:

"Seven substantive responses were received and these respondents are listed below. Full published responses can be viewed on Postcomm's website... These are summarised later in this document, under related headings, and material points raised are assessed."

Royal Mail is, of course, named as one of the seven respondents. I shall deal with the merits of Mr Pannick's and Mr Beloff's rival contentions relating to these excerpts from the Decision Document when I address the correct approach to the construction of clause 20(b) of the Scheme. I may say at once that it is common ground that the terms of the Decision Document itself, so far as material, are proper to be taken into account in construing the Scheme: they are, as it were, the very matrix in which the Scheme was brought into existence.

19. Two paragraphs in the Decision Document have in particular figured very large in the construction arguments:

"Method of payment to bulk mailers in arrears

5.41 Royal Mail requested that it should be able to 'net off' payments to bulk mailers against their accounts with Royal Mail if the bulk mailer were in debit.

Postcomm's response

5.42 Because this proposal fits with general commercial practice, Royal Mail will not be obliged to pay compensation where a sender is in default of credit terms, without reasonable excuse. Postcomm considers that a default outside a suitable industry standard, such as Royal Mail's suggestion of payment to terms 80% of the time, would fall into this category as it should cover all issues which could be considered as a 'reasonable excuse' such [as] delays in receipt of an invoice, queries on the invoice and disputed services. Postcomm also considers it reasonable for Royal Mail to 'net off' any payments to bulk mailers against their accounts where a bulk mailer owes them money."

THE SCHEME

20. As I have said the Scheme is set out as an Annex to the Decision Document. Clause 2 states:

"This Scheme is intended to ensure that users of postal services receive compensation for delay in the conveyance of postal packets by Royal Mail."

There follow provisions dealing with the procedures for payment of compensation to users of retail services and bulk mail services respectively. I should notice two features of those relating to retail services. First, the retail services user, unsurprisingly enough, has to put in a claim for compensation (clause 4 ff.); Royal Mail's liability to such a user only arises against a submitted claim. This is in contrast to the position relating to bulk mail users, as I shall show. Secondly, clause 13(b) (under the general heading to clause 13 "Retail services – exclusions") is in identical terms to clause 20(a), which I shall shortly set out. It refers to a "claim"; one would expect as much in the context of the provisions relating to retail services users, but this language has been re-deployed in clause 20(a) dealing with bulk mail users, where as I shall show the customer is not required to put in a claim at all. I will explain later how this impinges on the construction arguments.

21. Under the heading "Bulk mail services – calculation and payment of compensation" these following clauses appear (they include clause 20(b), which I will repeat for convenience):

"14. Compensation in accordance with paragraphs 14 to 17 of this scheme shall be payable by Royal Mail to senders of postal packets using the bulk mail services in respect of failure by Royal Mail to achieve the required standards of service for any of those services in any of the target years as set out in the Annex to Condition 4 of the Licence, by 1% or more.

15. The level of compensation to be paid to each user of each of the bulk mail services shall be calculated at the rate of 0.1% of their annual expenditure on that service in the year in question for each 0.1% failure by Royal Mail to achieve the standard for that service in that year, provided that compensation for any user for any service shall not exceed 5% of the user's expenditure on that service in that year.

...

17. Compensation payable for delays to bulk mail services shall be announced by Royal Mail no later than the end of a three month period after the date at which final adjusted and audited quality of service performance figures for the year to which the minimum target percentages apply are accepted by Postcomm.

18. Payment will be made by way of credit against future expenditure or, if requested by the user, by cheque and arrangements for payment shall be made (and cheques issued if required) within one month of the announcement of compensation payments.

19. Decisions made by Royal Mail in relation to compensation for bulk mail services that users find unsatisfactory shall be reviewed within Royal Mail and disputes that are not satisfied under Royal Mail's procedures within three months of receipt of a claim may be referred to Postwatch for consideration.

Bulk services – exclusions

20. Royal Mail shall be under no obligation to provide compensation –

(a) where the event giving rise to the claim was caused by circumstances outside Royal Mail's control, including exceptionally severe weather conditions, acts of terrorism and vandalism and acts of third parties with whom Royal Mail has no contractual relationship, but excluding the failure of the employees, sub-contractors or agents of Royal Mail, to provide services to or for Royal Mail as a result of industrial action by them,

(b) where a sender is in default of credit terms, without reasonable excuse..."

22. Thus, as I have foreshadowed, no claim is required to be put forward by bulk mail services users. Indeed such a user does not have to show any loss whatever; once it is demonstrated, by an annual audit, that Royal Mail have failed to meet specified performance targets, compensation is due across the board to all bulk mail services users (subject to clause 20) according to the formula specified in clause 15.

LATER EVIDENCE

23. Mr Sprigge, Chief Legal Adviser to Postcomm, has made two witness statements respectively dated 16 June 2005 and 20 October 2005. He drafted Royal Mail's licence and the Scheme. He gives evidence of what he says was the purpose of clause 20(b):

"The exclusion for customers in default of credit terms was always intended to be an absolute exclusion." (first statement, paragraph 66)

Mr Sprigge gives reasons to support the fairness of that approach as he would have it. I do not set them out, since for reasons I will give I consider that this testimony is irrelevant and inadmissible on the question of the clause's true construction. Indeed in his oral submissions (in contrast to his skeleton argument) Mr Beloff did not greatly press the distinct suggestion that Mr Sprigge's evidence of Postcomm's subjective intentions as to the purpose of the clause was of any legitimate assistance. Rather he submitted that it could be taken into account in any consideration of the reasonableness of one interpretation over another. That is a beguiling suggestion. Where there is a question of a provision's reasonableness, it is the court's view, not that of witnesses, that matters; the role of evidence is to inform the court of the facts against which the judgment of reasonableness has to be made. Mr Sprigge's views of the merits of Royal Mail's construction of clause 20(b) do not, with respect to him, advance that enterprise.

24. Mr Sprigge also has some observations (first statement, paragraph 52) about paragraph 2.2 of Royal Mail's representations made in June 2003, which I have set out. Again, what Mr Sprigge believes is shown by this material is not relevant evidence.
25. I would not wish to seem dismissive of what Mr Sprigge has to say; I have no doubt his testimony is put forward in an endeavour to assist the court. But it cannot, I think, colour our judgment on the questions we have to decide. Finally, however, I should note that Mr Beloff adopted part of Mr Sprigge's testimony as argument. That he was of course entitled to do, and I shall come to it.

THE CORRECT APPROACH TO CONSTRUCTION

26. The judge below explained his approach to the exercise of interpretation as follows:

"15. ... The parties were agreed, and I accept, that the Determination [sc. of the Scheme] must be read as a whole, that it should be remembered that it is a scheme produced by an industry regulator and not an enactment, and that it should be construed in a common-sense and straightforward way and not in a legalistic or pedantic manner. It is important to bear in mind that the determination is not a private agreement between Postcomm and Royal Mail, it is a public document which confers rights to compensation upon ordinary members of the public – the users of retail services – as well as the users of bulk mail services."

In the next paragraph the judge discusses a submission made by Mr Beloff to the effect that "Postcomm should be allowed some latitude in the way in which it interpreted its own regulatory scheme". Mr Beloff had relied on certain observations of Sir John Donaldson MR in Ex parte Datafin plc [1987] QB 815, 841D-E. Datafin was to some extent a special case. I need not, however, take time with it since at the hearing Mr Beloff did not press an argument anchored to that authority. He was content to abide by the common position described by the judge at paragraph 15, which I have just set out.

27. In general I have no difficulty with that common position. I have one reservation, though it will not, I think, drive the decision in the appeal. I am not sure that the judge's distinction between a scheme produced by an industry regulator on the one hand and an enactment on the other goes anywhere, at least in circumstances like those of this case. What is to my mind important is the judge's emphasis on the fact that the Scheme is not a private agreement but a public measure which confers rights on third parties. The fact that the very purpose of the Scheme is to confer such rights on persons who on the one hand are strangers to the Scheme's making and to the antecedent negotiations, but on the other possess a direct and pressing interest in the Scheme's correct interpretation, tells loudly in favour of the view that reference for the purpose of interpretation to documents outside the Scheme itself, to which such third parties may not have easy or regular access, should be at a minimum. And this approach, I think, goes with the grain of the Directive: "transparent, simple and inexpensive procedures".
28. Moreover the judge's reasoning in paragraph 15 manifestly does not enjoin reliance on evidence of what either party thought the document meant, such as was given by Mr Sprigge. Evidence of that kind is in principle inadmissible upon a question of construction, because – and I recognise this is a bare summary of the effect of much learning – the meaning of any instrument is to be ascertained from its words, informed by objective evidence of the circumstances in which it was made, including as necessary the aims and concerns of its makers. But this is a fundamentally different exercise from an examination of what either party thought the document meant.
29. In this case the Decision Document is undoubtedly admissible, and so much is common ground. I would also admit Royal Mail's observations of June 2003 so far as they elucidate the matters to which the Decision Document was responding at paragraph 5.42. (I would have allowed in paragraphs 47 and 48 of Mr Perlstrom's paper of 8 July 2003 if I considered that they served the same purpose; but as I shall show I do not.) In my judgment there is nothing in Mr Pannick's submission that by force of what was said at paragraph 5.1, the Decision Document drew a line below all previous exchanges or other documents which were thus somehow rendered immaterial to any question as to what the Decision Document, or the Scheme, meant. However given the proper strictures, to which I have referred, against the admissibility of extraneous documents in aid of the Scheme's construction, I would not allow in any materials beyond those I have mentioned.
30. I should make one other point before I address the questions of construction directly. Mr Beloff accepted that if Postwatch were successful on the net-off issue, as they were before the judge, they must necessarily also succeed on the time issue. This is simply a matter of logic: the process of netting-off could only be carried out by reference to a fixed point in time. I should note also that in the court below Postcomm accepted that if they (and therefore also Royal Mail) were wrong on the time issue, they were likely also to be wrong on the net-off issue (see paragraph 81 of the skeleton argument prepared below by Mr Crow of counsel). This, however, is not common ground, and for my part I do not agree with it.

THE FIRST QUESTION OF CONSTRUCTION: THE NET-OFF ISSUE

31. I turn, then, to the questions we have to decide. I will deal with the net-off issue first. Mr Beloff made three linked submissions on the language of the clause. First, the ordinary and natural meaning of the expression "Royal Mail shall be under no obligation to provide compensation..." is that, in circumstances in which the rule applies, there is no obligation to provide any compensation. Secondly, the adoption of that meaning is supported by the heading – Bulk services – exclusions" (my emphasis). Thirdly, the meaning of the conjunction "where" in the expression "where a sender is in default..." is more naturally "in cases where" rather than "to the extent that". Mr Beloff suggested that this third submission is supported by some of the reasoning in Ex p. Bowden [1996] AC 261 in their Lordships' House. I need not with great respect cite the text: the question in hand is as to the right interpretation of an ordinary English word or phrase not being used as a term of art.
32. In my judgment there is considerable force in these submissions on the language of the clause. What principally persuaded Sullivan J to hold that clause 20(b) provided only for netting-off was (as I shall show) not the words used but the impact of paragraph 5.42 of the Decision Document. But it is convenient first to deal with Mr Pannick's riposte on the linguistic points. First, he submits that in its place in the phrase "where a sender is in default of credit terms", the conjunction "where" naturally bears the meaning "to the extent that" (rather than "in cases where" or "in circumstances where"). Secondly, he draws attention to the terms of paragraph 20(a), dealing with "force majeure". It is common ground that this provision does not, certainly not in every case, provide for a total exclusion of compensation. There will be situations (a real example was given of a fire at a depot) where only part of Royal Mail's default is attributable to the incident of force majeure in question. Yet clause 20(a) begins with the same word as 20(b) – "where". It cannot, says Mr Pannick, mean "to the extent that" in one case and "in cases where" in the other.
33. This argument, however, is in my judgment weakened by the consideration that there are in any event problems as to the operation of clause 20(a). I have already indicated that clause 20(a) uses the same language as clause 13(b), which is the force majeure exclusion clause in relation to retail services users, who in order to obtain compensation must put in a claim; whereas bulk services users need not, and indeed should not: their entitlement to compensation is as I have shown automatic. Yet the word "claim" appears in 20(a) ("event giving rise to the claim") as surely as in 13(b). Thus in any event the drafting of clause 20(a) is inexact, and there has to be some manipulation of its terms in order to make it work.
34. Mr Beloff has another point on the relation between 20(a) and (b). It is that the word "where" appears twice, at the beginning of 20(a) and the beginning of 20(b): had it appeared once only, after the words "no obligation to provide compensation" at the opening of clause 20, Mr Pannick's argument as to the oddity of the word's bearing two meanings in the same clause would have been much stronger. I think the point has force, albeit as something of a makeweight.
35. Overall Mr Beloff's submissions as to the language of clause 20 are in my judgment markedly stronger than those going the other way. The natural meaning of 20(b) is that Royal Mail is not obliged to provide any compensation to bulk mail senders who are in default of credit terms. But as I have foreshadowed there are further arguments. Before coming to paragraph 5.42 of the Decision Document, which is critical to the judge's approach and to Mr Pannick's argument, I should briefly refer to some other points.
36. Mr Pannick submits that there are policy considerations which militate in his favour. The thrust of this submission is encapsulated in the reasoning of the judge below at paragraph 42 of the judgment:

"Postwatch's interpretation of the scheme is also supported by the scheme's avowed intention (see paragraph 2 of the Decision Document): to ensure that users of postal services receive compensation in recompense for Royal Mail's poor performance, not to penalise Royal Mail's account customers for their poor credit performance."

In addressing this part of the case in his oral submissions Mr Pannick also placed some reliance on paragraph 12(a) of Part 2 of Condition 4 of Royal Mail's statutory licence, which I have read.

37. I am not sure that "policy" is a very apt expression to describe what is involved in this part of the case. The judge does not use the term. What we are concerned with is the aim or purpose of the Scheme. But in any event, as I see the matter, the "policy" considerations in the case do not go all one way. Mr Beloff adopted as argument certain observations of Mr Sprigge in paragraph 66 of his first statement. It is asserted there that it seemed "entirely fair" that a customer who is "stringing Royal Mail along on payment" should be excluded from the benefit of any compensation, and such an approach promoted the aim of simplicity. This is, in my judgment, just as viable a point of view in the context of the aim or purpose of the Scheme as that urged by Mr Pannick.
38. In the result these subsidiary arguments are quite insufficient to displace what (as I have said) is in my view the natural meaning of clause 20(b), namely that Royal Mail is not obliged to provide any compensation to bulk mail senders who are in default of credit terms.
39. I turn then, on the net-off issue, to the arguments as to paragraph 5.42 of the Decision Document. The judge considered, and Mr Pannick submits, that 5.42 deals only with an enquiry from Royal Mail as to their right to net-off, which enquiry was itself recorded at 5.41. Mr Beloff submits by contrast that 5.42 deals with the whole of paragraph 2.2 of Royal Mail's representations of June 2003 which was only partly concerned with netting-off. 5.41, he accepts, does not summarise the whole paragraph; on its face it only raises netting-off. But Mr Beloff says that 5.41 must be regarded as incomplete, since a fair reading of the text of 5.42 leads inevitably to the conclusion that (whatever the apparent scope of 5.41) the content of 5.42 is not limited to netting-off.
40. The debate may seem a narrow one, but its importance is demonstrated by the way in which the judge deployed his acceptance of Mr Pannick's position:

"38. I readily accept Postcomm and Royal Mail's submission that absent the explanation in paragraph 5.42, 'where' in paragraph 20(b) would be interpreted as meaning 'in circumstances where' rather than 'to the extent that'. But the latter is a possible meaning of 'where', and not to adopt it would fly in the face of the explanation in paragraph 5.42, particularly when it is remembered that if paragraph 20(b) is not a netting off provision, there is no such provision in the Determination, despite the fact that Postcomm considered that such a provision both fitted with normal commercial practice and was reasonable."

It seems clear from this passage that but for paragraph 5.42 and Mr Pannick's interpretation of it which he accepted, the judge would have construed clause 20(b) of the Scheme as providing for a total exclusion of compensation and not merely a right of net-off.

41. In my judgment Mr Beloff was right to submit that paragraph 5.42 is a response to the whole of paragraph 2.2 of Royal Mail's June representations. The points here are a little intricate, and I will set out the paragraph again:

"2.2 Method of Payment for bulk mail scheme

Postcomm proposes in paragraph 17 of the draft determination that payment to the customer will be by credit to their account unless they request a cheque. Royal Mail requires that all payments to its customers will be by a credit to their account... This is in order to mitigate Royal Mail's debt exposure to a customer. Royal Mail will not pay cheques to customers who are already in debt to Royal Mail; any amount due will be used to offset any outstanding debt. We are concerned that payment by cheque to a large number of customers could also raise serious cash flow problems for Royal Mail. The option for payment by cheque should be removed from the determination, or at the very least, reworded to say, 'or by cheque in exceptional circumstances (at Royal Mail's discretion)'.

Postcomm have said at paragraph 21b of the draft determination that Royal Mail will not pay compensation to those customers who have not paid their accounts in accordance with applicable payment terms, unless they have a 'reasonable excuse'. This phrase leaves Royal Mail open to all sorts of interpretations as to what is and is not considered 'reasonable'. For the sake of certainty, Royal Mail would intend to fix a policy on this issue in advance of operating the scheme."

42. It is in my judgment critical to a proper understanding of this paragraph, and indeed of paragraph 5.42 itself, to appreciate that on any view the scope of clause 20(b) of the Scheme was limited to defaulters who lacked a reasonable excuse for their default. Paragraph 2.2 draws a distinction between customers who are simply in arrears, and those who are in default without reasonable excuse. As regards the first category, Royal Mail seek to insist (first sub-paragraph) that they will offset compensation due against any outstanding debt. As regards the second (second sub-paragraph) they seek to crystallise the meaning of "reasonable excuse" by the adoption of "a policy on this issue in advance of operating the scheme".
43. As Mr Beloff submitted, Royal Mail would by the general law enjoy a right to offset money owed to a customer (whether by way of compensation or anything else) against a debt owed to it by the customer. There would in the ordinary way be no need for the inclusion in the Scheme of a special right to that effect. And indeed the first sub-paragraph of 2.2 is not cast in terms of a request to Postcomm that any such right should be conferred; it is rather expressed as a statement of Royal Mail's intent. It was plainly prompted by Postcomm's draft paragraph 17, referred to in the first sentence of 2.2. That is the provision to which the first sub-paragraph of 2.2 is a response. In insisting that they would offset compensation against customers in debt to them, Royal Mail were not referring to defaulters who lacked reasonable excuse, but to other debtors, presumed to enjoy a reasonable excuse. Thus the first sub-paragraph of 2.2 is simply not addressing the exclusion of compensation. That is dealt with in the second sub-paragraph, which responds to Postcomm's draft paragraph 21(b) (which became clause 20(b) of the Scheme). And the terms of the second sub-paragraph, which are concerned to fix the meaning of "reasonable excuse", are wholly consistent with Mr Beloff's construction of clause 20(b) as providing for a total exclusion of compensation.
44. One can see that this approach to the two sub-paragraphs of paragraph 2.2 of Royal Mail's June representations is broadly reflected in the content of paragraph 5.42 of the Decision Document, though I have to say that 5.41 and 5.42 taken together are lamentably confused and confusing. I will set them out again:

"Method of payment to bulk mailers in arrears

5.41 Royal Mail requested that it should be able to 'net off' payments to bulk mailers against their accounts with Royal Mail if the bulk mailer were in debit.

Postcomm's response

5.42 Because this proposal fits with general commercial practice, Royal Mail will not be obliged to pay compensation where a sender is in default of credit terms, without reasonable excuse. Postcomm considers that a default outside a suitable industry standard, such as Royal Mail's suggestion of payment to terms 80% of the time, would fall into this category as it should cover all issues which could be considered as a 'reasonable excuse' such [as] delays in receipt of an invoice, queries on the invoice and disputed services. Postcomm also considers it reasonable for Royal Mail to 'net off' any payments to bulk mailers against their accounts where a bulk mailer owes them money."

45. Clearly 5.41 on its face is only dealing with net-off. Even in relation to that, it mis-states Royal Mail's representation. They had not "requested" that they should be able to net off; they had asserted a right to do so. Turning to 5.42, one would have supposed that the first sentence, starting as it does with the words "because this proposal fits with...", was intended by use of the term "this proposal" to refer to what had just been recited at 5.41; but it seems to me that so reading it makes a nonsense. Net-off is dealt with quite separately in the third sentence ("Postcomm also considers it reasonable for Royal Mail to 'net off'..." [my emphasis]). Despite the inapt and I think mysterious use of the term "this proposal", the first two sentences can I think only be read as referring to the proposal, in what was then the draft Scheme, for exclusion of compensation in the case of defaulters without reasonable excuse (as opposed to Royal Mail's insistence on a right of net-off (or set-off) of compensation as against other debtors). Clearly that is the subject-matter of the second sentence, which refers to a proposal for a rule of thumb by which defaulters who met their credit terms "80% of the time" would be treated as having a reasonable excuse for the other 20%. This addresses the express concern of the second sub-paragraph of 2.2, to fix the meaning of "reasonable excuse" by the adoption of "a policy on this issue in advance of operating the scheme". And the use in the second sentence of 5.42 of the expression "this category" must cross-refer to the first sentence: the "category" is the class of "[senders] in default of credit terms" there referred to.
46. I have considered whether 5.42, and thus ultimately clause 20(b), are elucidated by the terms of paragraphs 47 and 48 of Mr Perlstrom's paper of 8 July 2003, which I have set out. The phrase in paragraph 48 "general commercial practice" is of course also used in the first sentence of 5.42, and so one might have expected paragraph 48 to furnish a clue, however modest, to that sentence's intended reference. But I have concluded there is no help to be had from that quarter. Paragraph 47 refers both to what had been said by Royal Mail about net-off (and, like 5.41, mis-states it as a request) and to what had been said as to the need for a definition of "reasonable excuse". The response in paragraph 48 to these two quite different points conflates them and serves only to confuse.
47. However that may be, and despite the re-construction work required to make sense of 5.42, in the end I am clear for the reasons I have given that its best interpretation is that the first two sentences are referring to the exclusion provision mentioned in the second sub-paragraph of 2.2 of the June representations, and the third sentence to the net-off contentions advanced in the first sub-paragraph; and as I have said these two things involve quite different and separate considerations.
48. In the result, then, paragraph 5.42 of the Decision Document presents no obstacle to the adoption of the natural meaning of clause 20(b) of the Scheme in relation to the net-off issue. More generally I would hold that if the clause only provides for a right of net-off, then (a) it would appear to add nothing to the general law, and (b) it purports to make a distinction between defaulters who possess a reasonable excuse and those who do not, but in fact draws no such distinction since Royal Mail's right of net-off must apply to both indiscriminately.
49. For all these reasons I would respectfully hold in relation to the net-off issue that the learned judge below was mistaken. Clause 20(b) of the Scheme provides for an exclusion of all compensation in cases to which it applies.

THE SECOND QUESTION OF CONSTRUCTION: THE TIME ISSUE

50. Upon this issue, the natural meaning of clause 20(b) favours Mr Pannick. The words are "where a sender is in default of credit terms" (my emphasis). That points very strongly to a construction according to which the default is to be ascertained by reference to a particular point in time, rather than a period of time. But Mr Beloff relies on the fact that the clause nowhere identifies what point in time is meant. He made considerable forensic play with the fact that Postwatch have at different stages apparently suggested four different candidates for the point of time said to be intended by the Scheme.
51. However this argument is much diminished by the plain fact that there has to be some re-construction to make sense of the clause in any event: it no more identifies the period of time that might be intended as the touchstone for default without reasonable excuse than it does a point in time. Mr Beloff submits that the clause best makes sense if it is construed as requiring an examination of the customer's credit history over the year in which compensation under the Scheme is also assessed. This, he says, is consistent with the 80% rule of thumb, which can only be applied by reference to a period of time, not a point in time. And calculation of compensation is on an annualised basis: see paragraphs 14 and 15 of the Scheme, which I have set out. Overall Mr Beloff submits that an annualised assessment is an appropriate and proportionate means of applying the exclusion provision given by clause 20(b).
52. Mr Beloff's submissions cannot, to my mind, overcome the force of the clause's language. I do not accept that the 80%/20% rule of thumb for the ascertainment of reasonable excuse cannot sensibly be operated in conjunction with a point in time approach. In my judgment the clause looks to the point in time at which compensation would otherwise fall to be paid. By clause 17 of the Scheme assessed compensation for delays to bulk mail services "shall be announced by Royal Mail no later than the end of a three month period after the date at which final adjusted and audited quality of service performance figures for the year to which the minimum target percentages apply are accepted by Postcomm". Payment is presumably then due. Clearly the due date is to an extent in Royal Mail's hands, but Royal Mail is subject to the discipline of clause 19, which gives customers the right to refer Royal Mail's decisions to Postwatch for its consideration.
53. Those customers who are in default of credit terms will thus be identified by reference to the date at which, in light of clause 17, compensation would otherwise fall to be paid. Whether any given defaulter has a reasonable excuse for his default may then be ascertained by applying the 80%/20% rule to his credit record over the same year (last expired) as has been taken for the assessment of compensation. Even if he falls foul of the rule, it will still be open to him to demonstrate that in fact he had a reasonable excuse at the identified time of default.
54. I should have thought that clause 20(b) might reasonably be operated in the way I have described. But if there were any difficulty, given that the Scheme is silent as to the date by reference to which customers' default without reasonable excuse is to be ascertained, it would in any case be open to Royal Mail and Postwatch by agreement to refine the date's identification. The judge below (see paragraphs 29 – 30 of the judgment) rightly thought there would be no substantial difficulty in operating clause 20(b) on the basis that customers' default without reasonable excuse would be ascertained by reference to a fixed point in time.
55. There is a further point I should mention, although the judge (paragraph 43) did "not attach much significance" to it. The Scheme was, as I have shown, determined by Postcomm on 7 October 2003. However it was applied retrospectively from 1 April 2003. In dealing with the time issue the judge said (paragraph 43):

"It would be surprising if a sender was to be deprived of compensation, to which he would otherwise be entitled, by reference to an examination of his credit performance over a period, a substantial part of which was prior to the making of the Determination."

I doubt whether the judge should have attached any significance to this point. It appears that the Scheme was given effect as from 1 April 2003 by Royal Mail's goodwill. As Mr Beloff submits (paragraph 39 of his skeleton argument):

"If Royal Mail had simply stood on its legal rights and declined to pay compensation for any periods prior to promulgation of the Scheme the learned Judge's retrospectivity point would not have arisen."

56. However for the other reasons which I have given I consider that the judge was right on the time issue. The bulk services customer's default is to be ascertained for the purposes of clause 20(b) by reference to a particular point in time.

CONCLUSION

57. In the result, if my Lords agree, Royal Mail succeed on the net-off issue, but fail on the time issue. Counsel will no doubt have submissions (which the court hopes can be made in writing) as to what orders it will be appropriate to make.

Lord Justice Sedley :

58. That this court, like the court below, has spent two days hearing argument from leading counsel on the meaning of the words "is" and "where" might be thought either an indictment or a vindication of our system of oral advocacy. But if ever there was proof of Lord Steyn's dictum^[1] that context is everything, it is this case: for the context is a scheme, made under statutory powers, which uses the two words so porously that either side's meaning, and other meanings too, can be readily injected into them. Any confidence the reader might have in there being a single intended meaning is eroded by the use in the Scheme of the phrase "in default of", which means "in the absence of", to mean "in breach of". The present Scheme would have benefited by something that I have suggested in the past^[2] the parties to major contractual documents ought to do, namely employ an experienced contract lawyer as an editor.
59. Royal Mail's perfectly plausible interpretation of the Scheme means that an amount which is in many instances more nearly a penalty than compensation will not be payable by them in whole or in part to a customer with an inexcusably poor payment record. Postwatch's no less plausible interpretation means that Royal Mail is entitled, when calculating what it owes a bulk customer for its own poor performance, to set off anything the customer at that moment owes Royal Mail. Each, however, throws up questions which the Scheme simply does not address. To address them, Royal Mail has had to devise its 80/20 rule of thumb and to pick a year as the period over which to apply it, while Postwatch has had to select a moment of time with no overt foundation in the Scheme at which its computation is to be made.
60. It is important in this situation to restate what the court's task is not. Unless one interpretation makes sense and the other nonsense – and that is not the case here – it is not for the court to choose its preferred meaning. Nor, however, given an ambiguity, is it for the court to allow one party to inject its own preferred meaning into the Scheme. The court's task is to assume, perhaps counterfactually, that the maker or makers of the document had a specific end in view, and that this can be discerned by sufficiently minute analysis.
61. In this situation it is less surprising that such massive resources have been deployed in trying to give a contextual meaning to two of the commonest words in the English language. For the reasons I have given I am in respectful agreement with the approach of Lord Justice Laws to this task, and with his conclusions on it.

Lord Justice Maurice Kay:

62. I entirely agree with the judgment of Laws LJ. I confess that the lack of clarity in the drafting of the scheme made the task of construction on the net-off issue very difficult. For my part however, I found the resolution of the time issue to be almost self-evident.

Note 1     R (Daly) v Home Secretary [2001] 2 AC 532, 548.    [Back]

Note 2     Petromec Inc v Petroleo Brasilero SA Petrobras [2004] EWCA Civ, 156, §22.    [Back]