England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION) Peter Smith J

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/05/2010

Lady Justice Arden :

1. This is an appeal from the order dated 31 July 2009 of Peter Smith J in so far as (1) he refused permission to the appellant, Mr Alan Hughes, to amend his re-amended defence in terms of paragraphs 31, 32, 33 and 50 of his draft re-amended defence and (2) ordered Mr Hughes to pay 50% of the costs of the hearing assessed at £10,000. The action concerns the entitlement to the proceeds of sale of a substantial development at a former quarry known as Cawdor Quarry, Matlock, Derbyshire ("the Quarry"). The Quarry was originally owned by Mr Hughes. Since no major change had been made to the Quarry following the cessation of mining operations, it was necessary to incur major costs in providing infrastructure and acquiring additional land before the Quarry could be developed. Mr Hughes sold part of the site to a developer, Chelverton Limited ("Chelverton"), pursuant to an agreement dated 9 April 1998 ("the Hughes/Chelverton Agreement"), on terms that he would receive overage payments of up to £5m. The respondent, Groveholt Ltd ("Groveholt"), is a successor in title to Chelverton. The dispute in these proceedings centres round whether (1) under the complex web of agreements surrounding the development, (2) in the events which have happened and (3) following earlier judicial decisions on the effect of the agreements, certain infrastructure and site assembly costs fall to be deducted. The amendments that the judge rejected reflect a new way in which Mr Hughes wishes to put his case for resisting their deductibility. The amendments are set out in appendix 1, and they are explained below.

BACKGROUND

(1) The complex web of agreements surrounding the development of the Quarry

2. In 1996, Mr Hughes sold part of the Quarry to J Sainsbury plc ("Sainsbury") for development as a supermarket. Under an agreement for sale, dated 23 December 1996, as varied by a loan agreement dated 10 March 1998 (which agreement, as so varied, is referred to below as "the Sainsbury Agreement"), Mr Hughes became entitled to receive in addition to the price a further sum called "the balancing payment". Provision was made for an account to be taken on completion of the costs of the Site Assembly Process and Infrastructure Works as defined (together "the Costs"). The balancing payment was the difference between £5m and the amount of the Costs (if less than £5m). However, Mr Hughes was obliged to indemnify Sainsbury against costs in excess of this sum. The loan agreement also provided for the substitution as obligor of another company in the Sainsbury group but that substitution can be disregarded for the purposes of this appeal.
3. The Sainsbury Agreement plays a crucial part in the argument on this appeal. Its provisions are important. The Costs are defined in some detail: I have summarised those provisions in appendix 2 to this judgment. Clause 15 prescribes a detailed procedure for regulating how the Costs were to be incurred. For example, the site assembly process was to be jointly managed and controlled by Sainsbury and Mr Hughes, both parties using due expedition and all reasonable endeavours to obtain the best practicable terms. Thus the procedure in clause 15 safeguarded the interest of Mr Hughes in ensuring that excessive costs were not incurred.
4. There were a number of further agreements and novations between Mr Hughes, Sainsbury and Chelverton. On 9 April 1998, Mr Hughes sold the remainder of the Quarry to Chelverton. Under clause 5 of the Hughes/Chelverton agreement, Mr Hughes became entitled to receive overage payments from Chelverton if various planning approvals were given (which condition was fulfilled): these are the payments which give rise to the present dispute. The overage provisions gave Mr Hughes a share of the development in the form of a series of fixed sums.
5. Clause 5 of the Hughes/Chelverton Agreement did not make any express general provision for the deduction of the costs of putting the Quarry into a condition whereby the value of the land with the planning permissions could be realised. There was a special clause (clause 8) dealing with the Sainsbury Agreement. Clause 8.1 recorded that Chelverton had not seen the Sainsbury Agreement, which was confidential. Clause 8.2 recorded that Sainsbury was obliged to pay up to £5m towards the Costs, with any balance to be released to Mr Hughes. Mr Hughes undertook that Sainsbury would comply with that obligation (Clause 8.3.1), and that the site assembly and infrastructure costs (as defined in the Hughes/Chelverton Agreement) would not exceed £4.5m. Mr Hughes was obliged to pay Chelverton the costs over £4.5m, which could be paid direct to Chelverton rather than to Sainsbury in accordance with the Sainsbury Agreement (Clause 8.3.2). Mr Hughes also agreed to pay the balancing payment to Chelverton (Clause 8.3.3).
6. The definitions of infrastructure works and site assembly works in the Sainsbury Agreement and the Hughes/Chelverton Agreement are not identical, but as Mr John Martin QC, for Mr Hughes, submits they appear largely to cover the same ground.  Mr Neil Kitchener QC, for Groveholt, submits that there is at least one material difference, that is that the definitions in the Sainsbury Agreement are materially more generous since they allow the deduction of all professional fees and not just reasonable professional fees. These differences do not seem to me to be fundamental and thus I would accept Mr Martin's submission that there was no significant difference between the infrastructure costs and site assembly costs referred to in each agreement. Accordingly, I will use the term "Costs" to refer to site assembly costs and infrastructure costs arising under the Sainsbury Agreement or the Hughes/Chelverton Agreement, as the case may be.
7. Clauses 9 and 10 of the Hughes/Chelverton Agreement set out obligations of Chelverton in respect of site assembly and infrastructure. By clause 9, Chelverton assumed an obligation to use its best endeavours to organise and effect the infrastructure works and to agree site assembly agreements. Under clause 10 it agreed to use its best endeavours to acquire land belonging to Railtrack which formed part of the land needed to develop the Quarry.
8. Chelverton agreed to charge the land sold to it in favour of Mr Hughes to secure the overage payments (Clause 11). Clause 11 provided that the overage payments should not become payable until:

"11.1 the Site Assembly Costs are known and certain by exchange of all Site Assembly Agreements and the Infrastructure Costs are known and certain to the extent that tenders for the carrying out of the works within a practicable timescale have been received and accepted and the costs thereof (including any fees) thus calculated

11.2 (in the event that clause 10 has effect) the payment due from the Vendor under clause 10.2 is known and at such time when such costs are so identified and known, then any further payments then due and payable to the Vendor under the said clauses 5.1.2 to 5.1.5 hereof after deducting amounts due to the Purchaser under clause 8.3 and 10 hereof shall be payable to the Vendor such payment being made within ten days thereof "

9. One of the events for which the parties to the Hughes/Chelverton Agreement did not provide was the liquidation of Chelverton. That in due course occurred, as explained below. The parties also failed to provide a procedure for the ascertainment of the costs of the infrastructure and site assembly works.
10. Chelverton executed a deed of charge dated 16 September 1998 ("the Charge") to secure the overage payments. This contains a promise to make the overage payments but there is no material difference between the obligations to make the overage payments in the Charge and those in the Hughes/Chelverton Agreement.
11. Pursuant to a Novation Agreement also dated 16 September 1998, the Sainsbury Agreement was novated and Chelverton became bound in place of Mr Hughes. Essentially, Chelverton stepped into Mr Hughes' shoes as developer but he remained entitled to the overage payments under clause 5 of the Hughes/Chelverton Agreement and liable to make payments under clause 8 of that Agreement. By a Supplemental Agreement, likewise dated 16 September 1998, between Mr Hughes and Chelverton, Chelverton agreed to use its reasonable endeavours to obtain the compliance by Sainsbury with its obligations with respect to the Costs, and not to agree any variation to those obligations without the prior consent of Mr Hughes.
12. By a deed dated 21 December 2000, Groveholt acquired the land from Chelverton and agreed to perform Chelverton's obligations under the Hughes/Chelverton Agreement. It is to be noted that Groveholt and Mr Hughes were not at any time in any direct contractual relationship. On 2 April 2004, by agreement between Sainsbury and Groveholt ("the Groveholt /Sainsbury Agreement"), Sainsbury agreed to complete the site assembly process and to carry out the infrastructure costs at its own expense. Groveholt undertook to make further payments to Sainsbury upon completion of the Infrastructure Works (£500,000) and on the opening of the supermarket on the Quarry (£1.9m).

(2) The events which have happened

13. On 15 October 2002, Chelverton went into creditors' voluntary liquidation. Its liquidator disclaimed the Hughes/Chelverton Agreement and the Novation Agreement pursuant to section 178 of the Insolvency Act 1986. At that date overage payments totalling £3m had accrued on the happening of the various events set out in clause 5 of the Hughes/Chelverton Agreement. Mr Hughes then contended that the disclaimer meant that the charge became immediately enforceable by him but Mr Nicolas Underhill QC, as he then was, sitting as a Deputy Judge of the High Court of Justice, Chancery Division, resolved this dispute in favour of Groveholt. The reasoning on the disclaimer point does not affect any issue in this appeal and so I need not explain how the judge reached his conclusion.
14. Under the Groveholt/Sainsbury Agreement, Sainsbury undertook to complete the site assembly process and infrastructure works as defined in the Sainsbury Agreement. The whole of the site assembly works and infrastructure works were in the event completed by Sainsbury. Sainsbury entered into agreements with contractors. Mr Hughes contends that these contracts were entered into otherwise than "under the auspices of" the Hughes/Chelverton Agreement, and do not therefore constitute costs available for deduction from the overage payments. Mr Hughes also contends that Sainsbury's conduct of the works has caused him loss.
15. Groveholt has agreed to sell part of the property charged to secure the overage payments. Groveholt has paid £3.4m into court under section 50 of the Law of Property Act 1925 as security for the sums secured by the charge pursuant to an order of Mr Christopher Nugee QC sitting as a Deputy Judge of the High Court dated 10 June 2004.
16. In completing the development, Sainsbury (or so Mr Hughes contends) did not follow the procedure in the Sainsbury Agreement. The Costs incurred by Sainsbury, Chelverton and Groveholt exceeded £13m. It follows that Mr Hughes' claim to overage must fail unless he can show that the Costs were not deductible or should be allowed in an aggregate sum of less than £7.5m.

(3) Earlier decisions on the effect of the agreements

17. On 12 March 2004, Groveholt commenced proceedings against Mr Hughes, claiming redemption of the charge and an account of sums due. There was an issue as to whether Groveholt could deduct the Costs from the overage payments to which Mr Hughes was entitled. Mr Hughes applied for summary judgment for the amount of the overage payments, arguing that no deductions were possible. That application was rejected by Mr Nicholas Underhill QC ([2005] EWHC 48 Ch). He observed that there was no procedure in the Hughes/Chelverton Agreement for the ascertainment of costs such as appeared in the Sainsbury Agreement. Under clause 11 (set out above), deductions to overage payments were to be made when the costs were "known" or "known and certain". He also noted that the Hughes/Chelverton Agreement did not specify who had to incur the costs. In his judgment, the costs would reduce the commercial value of the Quarry whether Chelverton or Sainsbury paid them. He rejected the argument that, as a result of the disclaimer, the overage payments were immediately due and payable. He also rejected the argument that the Costs could not be deducted from them. On that point he held (so far as material) as follows:

"Here completion has occurred and the land has been conveyed. The subsequent payments provided for by clause 5 cannot be treated in isolation as simple, unpaid instalments of the purchase price of the land. In every case of this kind it is necessary to analyse carefully what the real consideration for the payment in question is (cf Hyundai Heavy Industries Ltd v Papadopoulos [1980] 1 WLR 1129). What the [Hughes/Chelverton Agreement] provided for was for Mr Hughes to receive a net sum calculated by the interaction of clause 5 on one hand and clauses 8.3 and 10 on the other. The netting off was not a mere matter of convenience. It reflected the commercial reality that the increased value of the land by reason of the grant of permission was conditional on the costs of effecting the development remaining within viable limits. If Mr Hughes were to be entitled to receive the overage payment without any reference to the level of [the Costs] he would be getting something for which the contract did not provide. "

18. The order of Mr Nicholas Underhill QC dated 20 January 2005 included a declaration that:

"[Mr Hughes] does not, by reason of the disclaimer of the [Hughes/Chelverton] Agreement by the liquidator of Chelverton or otherwise, have any right to the payment as debts of the sums of money referred to in clauses 5.1.2, 5.1.3 and 5.1.5 of the [Hughes/Chelverton] Agreement and accordingly such sums are not secured by the Charge".

19. This does not deal with the possibility that if the Costs were less than £4.5m they would not, under clause 8 of the Hughes/Chelverton Agreement, be for Mr Hughes' account but it has to be read with the provisions of the Sainsbury Agreement in that regard.
20. The judgment of Mr Nicolas Underhill QC was affirmed on appeal by this court ([2005] EWCA Civ 897), though the declaration was varied to exclude the words "and accordingly such sums are not secured by the Charge" for the reason that those sums were secured by the Charge even if not presently due. The first judgment was given by Jonathan Parker LJ with whom Auld and Dyson LJJ agreed. Jonathan Parker LJ rejected the submission by Mr Purle on behalf of Mr Hughes that the right to deduct the Costs was conditional on Chelverton having performed its obligations under clauses 9 and 10 of the Hughes/Chelverton Agreement. In his judgment, it would "fly in the face of business common sense" for Mr Hughes to be able to claim the overage payments without deduction of the costs of putting the Quarry into a state where the development of the Quarry could be achieved (paragraph 97):

"[97] In any event, a construction of the [Hughes/Chelverton] agreement which had the effect of entitling Mr Hughes to additional purchase consideration in respect of the planning consents without taking full account of the costs of putting the site into a state where the development the subject of those planning consents could be implemented would, in my judgment, be to fly in the face of 'business common sense' (to use Lord Diplock's expression in The Antaios (see para [72] above)). The provision for additional purchase consideration in clause 5 reflects the fact that the grant of a relevant planning consent will increase the value of the Chelverton Land in the hands of Chelverton. But that increase in value must inevitably be dependent upon the amount of the preparatory costs which a developer will have to incur. So I can see no commercial sense in an additional purchase consideration which does not reflect the amount of those costs."

21. Accordingly there had to be a netting off process. Mr Hughes had no present right to any sum. Jonathan Parker LJ also held that the disclaimer had no effect on the position as between Mr Hughes and Groveholt, and that the damages to which Mr Hughes was entitled by virtue of the disclaimer under section 178(6) were not secured by the Charge. Mr Hughes' application for summary judgment thus failed.
22. On 24 April 2008 Groveholt applied for summary judgment on its claim for redemption. It claimed that no sums were due to Mr Hughes. Subsequently it amended its application to seek an order that Mr Hughes was obliged to deduct from any payment to which he would otherwise be entitled any expenditure by Groveholt or Sainsbury on site assembly or infrastructure. During argument it was conceded by Groveholt that Mr Hughes could not be in any worse position than under the original agreements he had entered into and that he might therefore be entitled to challenge particular items of costs on the grounds they fell outside the terms of those agreements. The application came before Peter Smith J and failed, and he gave judgment on 20 June 2008 dismissing the application. The judge held that there needed to be a trial in order to ascertain the amounts that could properly be deducted. The judge's conclusion is recorded in a declaration which he made on 24 June 2008:

"[Mr Hughes] is obliged to deduct from any payment to which he would otherwise be entitled under the agreement dated 9 April 1998 ("the Agreement") the amount of Infrastructure and Site Assembly costs incurred by Chelverton, Sainsbury and Groveholt provided that they are Infrastructure or Site Assembly costs within the meaning of the Agreement, save to the extent that [Mr Hughes] would have been entitled as against Chelverton to reduce the amount of the costs to be deducted under clause 11 of the Agreement by reason of a breach of contract by Chelverton or for any other reason."

23. The judgment of the judge handed down on 20 June 2008 contains a very full description of the background to this litigation. In the course of his judgment, the judge considers what Costs would be deductible from the overage payments under the Hughes/Chelverton Agreement. His conclusions appear in paragraphs 74 to 78 of his judgment. In those paragraphs, he concludes (1) that the question to be considered was what costs were deductible under the Hughes/Chelverton Agreement; (2) that Mr Hughes was able to take any argument open to him under the Hughes/Chelverton Agreement; (3) that the fact that the costs were incurred under the Groveholt/Sainsbury Agreement did not mean that those costs were not deductible under the Hughes/Chelverton Agreement; (4) that it may be that, if Chelverton might successfully have objected to the incurring of costs under the Sainsbury Agreement, it would not be able to deduct them under the Hughes/Chelverton Agreement if it failed do so; (5) that costs incurred by Groveholt as principal might not be deductible whereas those incurred by it as agent for Chelverton might be deductible; and (6) that it was arguable that there was an implied term that Chelverton should not cause the liability of Mr Hughes unreasonably to increase. Holdings (4) and (6) may be premised on the implication of some term as to reasonableness.
24. As regards the decision of this court, the judge held that there were only two matters clearly decided: (1) the point that it would be contrary to commercial sense if the Hughes/Chelverton Agreement did not provide for the Costs to be deducted and (2) that credit had to be given for any Costs which enabled an enhanced value of the Quarry to be achieved. So far as the latter point is concerned, while it is not material to this appeal, regard must be had to the precise words used in this court's judgment. However, as the judge said, this court gave no guidance as to how that exercise was to be conducted. The judge considered that it was possible that the Costs included costs incurred by Sainsbury under the Groveholt/Sainsbury Agreement or costs incurred by Sainsbury as agent for Chelverton. The Costs might include other costs which had the effect of enhancing the value. The court would also have to look at any claims which Mr Hughes had which reduced the amount of the Costs claimed.

THE JUDGMENT UNDER APPEAL

25. The judge dealt with the amendments in eight concise paragraphs, which must of course be read against the background of his detailed judgment of 20 June 2008. The judge refused permission to amend on two grounds: issue estoppel and non-arguability. He held that the amendments were an attempt to rerun issues decided against Mr Hughes by Mr Nicholas Underhill QC, this court and the judge himself. Those courts had held that the Costs had to be deducted from the overage payments due under the Hughes/Chelverton Agreement. By implication this court decided that it was simply a question of deciding which costs fell within the terms of that agreement. There was no suggestion that the Hughes/Chelverton Agreement could be rectified so as to refer to the Sainsbury Agreement or that there was any difficulty in working out the Costs. There was no need to import the Sainsbury Agreement into the Hughes/Chelverton Agreement. The Novation Agreement did not take the matter further: there had been a deliberate decision not to cross-refer to the Sainsbury Agreement. All that was needed was an account of the sums spent and of any claims in damages. It would be a matter for argument whether any expenditure by persons not party to the Hughes/Chelverton Agreement should be taken into account.

DISCUSSION

The amendments disallowed by the judge – an overview

26. At the heart of the problem for Mr Hughes in this litigation lies the fact that the parties to the Sainsbury Agreement agreed on institutional procedures for defining the Costs that were to be Mr Hughes' responsibility, and for settling any disputes in establishing those costs. These were contained in clause 15 of the former agreement as amended and I shall refer to them as "the Sainsbury procedure". Like provision was not made in the Hughes/Chelverton agreement, but Mr Hughes does not suggest that that Agreement does not represent what the parties to it agreed. Mr Hughes naturally seeks to capitalise on this deficiency of drafting in his dispute with Groveholt over the overage payments, which are charged on Groveholt's property, by asserting that, although not so stated, the Sainsbury procedure applied to the Hughes/Chelverton Agreement too. Non-compliance with that procedure leads on his case to the claims for avoidance of the liability for the deduction of Costs altogether or at least to cross-claims in damages. Clause 15 could not be followed once the Novation Agreement had been disclaimed.
27. The amendments disallowed by the judge are set out verbatim in appendix 1. Essentially, paragraph 31 raises "the condition precedent issue", as I shall refer to it, namely the argument that, on the true interpretation of the Hughes/Chelverton Agreement, there was a condition precedent that Costs could not be deducted unless the Sainsbury procedure had been followed. It is accepted that this machinery did not need to be scrupulously followed but it had to be substantially followed. There is a further condition precedent alleged in paragraph 31, namely that Sainsbury should first serve a demand under clause 15.9 of the Sainsbury Agreement (set out below) for the excess of the Costs over £5m. Paragraph 32 serves the same purpose as the first condition precedent alleged in paragraph 31, but is structured on the basis that there is an implied term that Chelverton would not seek to recover Costs over and above the aggregate costs specified in the Sainsbury Agreement ("the implied issue"). Paragraph 33 seeks to aver that the Sainsbury Agreement (as amended) by the loan agreement dated 10 March 1998, (which substituted a new clause 15 into the Sainsbury Agreement) became a part of the matrix of fact admissible on the interpretation of the Hughes/Chelverton Agreement following the conclusion of the Novation Agreement and the Supplemental Agreement ("the matrix issue"). I have placed the words "at least" in this paragraph in square brackets as Mr Martin was content to restrict his argument as I have just described it.
28. Paragraph 50 avers that there were serious discrepancies in compliance with the Sainsbury procedure in the way the Costs were incurred. I will call this "the non-Hughes/Chelverton Agreement Costs issue". The words in square brackets are words substituted with the reluctant agreement of Mr Martin in the course of argument. We have not been concerned with the detail of paragraph 50 and understand that the Infrastructure Works Contract and Site Assembly Agreements were entered into as part of the process of completing the infrastructure and site assembly works. The allegations in paragraph 50 are in whole or to a large extent disputed.

Paragraphs 31 and 32: "Rerunning" of issues already decided and abuse of process (respondent's notice)

29. The judge considered that the condition precedent issue and implied term issue were nothing more than an attempt to rerun issues already decided against Mr Hughes by Mr Nicholas Underhill QC, this court and himself. Mr Martin submits that this is not so, and Mr Kitchener seeks to uphold the judge. If the point is correct, it is the end of the appeal so far as these paragraphs are concerned.
30. It is convenient to deal with this point first and to take with it an argument raised by Groveholt in its respondent's notice. That argues that it was also an abuse of process and a violation of the CPR for Mr Hughes to raise these amendments now, given that he has had an opportunity to formulate his case on the two previous summary judgment applications. Mr Kitchener submits that this is the third occasion on which Mr Hughes has formulated his case and that it constitutes an abuse of process for him now to assert a condition precedent or implied term when that was not put before the court on either of the two previous occasions, and it is established by Woodhouse v Consignia plc [2002] 1 WLR 2558 at [55] to [57] that there can be an abuse of process even on interim applications. Mr Martin's riposte is that it is unnecessary for a party to raise its entire case on a summary judgment application.
31. I do not consider that the reference to the CPR adds anything to the point on abuse of process. There may have been a breach of a litigant's duty to co-operate with the court and the other party due to the piecemeal way in which Mr Hughes has formulated his case, but in my judgment to refuse to adjudicate on his application to amend on its merits would not be a proportionate sanction for that breach of that obligation alone, despite the importance which is to be attached to it. This is complicated litigation and I agree with Mr Martin that in the circumstances of this litigation the court should not expect a litigant necessarily to bring forward at an interim stage all his arguments on the way he puts his case. For the same reasons I would not disallow the amendment on that basis under the inherent jurisdiction of the court, especially as it did not occur to the judge with his considerable knowledge of this litigation to do so.
32. I add at this point in parenthesis that it is not necessary hereafter in this discussion to identify separately arguments put forward by Groveholt in its respondent's notice for upholding the judge's judgment, but those arguments have of course been taken into account.
33. Mr Martin sought to define what Mr Nicholas Underhill QC and this court had decided. He submits that both decisions have to be read in the light of the very different issues which were being addressed. This court went no further than to hold that the case for summary judgment was not made out. In each case the courts were only looking at the question whether clause 11 had to be taken into account when calling for the overage payments. It followed that when, in his decision under appeal, the judge concluded that this court in paragraph 97 of its judgment (set out above) decided that every possible cost was to be taken into account because otherwise it would flout common sense, he was in error. The declaration made by this court, when read in context, did not mean that the Costs were in all circumstances to be subject to deduction pursuant to clause 11. This court was only addressing whether you had to look at clause 11. This court failed to deal with the question of how the Costs were to be ascertained for the purpose of the accounting between the parties.
34. Mr Kitchener submits that the words "or otherwise" reflect the fact that this court decided the point against Mr Hughes on a wider principle than simply the limited principle that some costs had to be deducted by reason of the disclaimer or clause 11. It was thus barring any route for avoiding any deduction based on the express or implied terms of the Hughes/Chelverton Agreement. Mr Kitchener's argument is essentially that we should take both declarations according to their tenor. They are in the present tense and admit of no exception. The effect of the decision of this court was that Mr Hughes could not avoid deductions for the Costs. That would be circumvented by these amendments which would enable Mr Hughes to obtain a windfall.
35. Were it necessary to do so, I would reject Mr Kitchener's argument on abuse of process and issue estoppel in relation to paragraphs 31 and 32. I would also disagree with the judge if when he says that the present application is merely an attempt to rerun issues he was referring to the issues in paragraphs 31 and 32 (it is not clear to which issues he was referring). What has previously been decided is that Mr Hughes has no escape from the deduction of Costs under the disclaimer and no escape under the express terms of the Hughes/Chelverton Agreement. But I do not consider that we should read the decision of this court as going wider than the judgment itself states simply because the declaration, if read without reference to the judgment, might support that conclusion. As Mr Martin put it, what has been decided is whether costs can be deducted, not which costs can be deducted. Hence it could not have decided what consequences followed from certain Costs being outside the terms of the Hughes/Chelverton Agreement. Accordingly, in my judgment, the decision of this court was not inconsistent with the existence of an implied term or condition precedent now sought to be raised by paragraphs 31 and 32.

The condition precedent issue and the implied term issue

36. Paragraphs 31 and 32 are different ways of putting the same case and so I will take them together.
37. The right of Mr Hughes to the overage payments depends on the true meaning of the Hughes/Chelverton Agreement, and thus the argument centres on that, even though Groveholt is not a party to this agreement. What Mr Hughes has to show is that it is reasonably arguable that compliance with the detailed Sainsbury procedure was a condition precedent to the deduction of any Costs from the overage payments under the Hughes/Chelverton Agreement.
38. Mr Martin starts from the proposition that it is clear from the terms of clause 8 of the Hughes/Chelverton Agreement that Chelverton was well aware of the existence of the Sainsbury procedure, and that it was planned that there would be a novation of the obligations of Mr Hughes under the Sainsbury Agreement to Chelverton. It was not necessary that Chelverton should have known all the detailed terms of the Sainsbury Agreement. Clause 11 has to be approached with knowledge of how the Sainsbury procedure works. When that clause uses the words "known and certain" and "known", it means "known" or "certain" because of the operation of the Sainsbury procedure. Mr Martin also points out that it was accepted by Mr Nicholas Strauss QC, who represented Groveholt before the judge in June 2008, and in this court, that there was no difference between the Costs to be incurred under those two agreements. I would accept that, even if Mr Hughes and Chelverton did not agree that the same works should be carried out under the Hughes/Chelverton Agreement, it appears from clause 8 of that Agreement that both parties perceived that those costs would be the same. Mr Martin continues that it was an essential protection to Mr Hughes that the costs should be established by the Sainsbury procedure. Although he may have other remedies, it was of great importance to him that that procedure should be followed if he was fairly to be held liable for Costs over £4.5 million. Mr Martin further submits that it would have been known to Chelverton that the safeguards were to be operated for Mr Hughes' benefit and thereafter Chelverton's benefit. It was, therefore, on his submission a condition precedent that the Sainsbury procedure should be gone through.
39. Mr Martin reminds us that all he has to show is that paragraph 31 is reasonably arguable. As a matter of principle the only Costs that should be capable of being deducted from the overage payments are those permitted to be incurred by the Sainsbury procedure. The amount of Sainsbury's aggregate costs would pass down the line. The expectation of the parties was that the costs incurred by Sainsbury would be identified by their accounting exercise in accordance with clause 15 and that the amount of those costs would then be utilised for the purpose of the accounting exercised required by clause 8 of the Hughes/Chelverton Agreement.
40. Mr Martin accepted that the amendment to insert paragraph 31 would result in the calling of further evidence, but no one raises that as an objection to giving leave to amend.
41. Pausing there, it seems to me that the highest that this argument can be put on clauses 8 and 11 of the Hughes/Chelverton Agreement itself (and it is not put in any other way) is that Chelverton knew of the existence of the Sainsbury agreement, and that Sainsbury had accepted an obligation to pay £5m towards the Costs and to make the balancing payment to Mr Hughes. I do not accept that these clauses suggest that Chelverton knew about a detailed procedure for incurring those costs. It seems to me that the argument on the condition precedent breaks down at that stage though that is not the only reason for rejecting it.
42. Mr Martin goes on to suggest that the position for which he contends is confirmed by the fact that the Supplemental Agreement provided that clause 15 could not be amended without Mr Hughes' consent. The assumption in that agreement is that clause 15 will be operated. The Supplemental Agreement was concluded because it was vital to ensure that costs were controlled. I do not consider that that helps Mr Martin unless he succeeds on his argument on the matrix issue considered below. But more fundamentally if the Supplemental Agreement can be used to interpret the Hughes/Chelverton Agreement, Mr Martin has to overcome Mr Kitchener's argument on it, which is set out below. Mr Martin has his own argument on the Supplemental Agreement, namely that the provision that Chelverton undertook not to amend the Sainsbury procedure without Mr Hughes' consent underscores his proposition that the expectation of the parties was that the Sainsbury procedure would be followed unless otherwise agreed.
43. As to paragraph 32 Mr Martin was inclined to accept that since paragraph 31 involves the implication of a condition precedent there is little that can be said in addition about paragraph 32 which also involves the implication of a term to a similar end. Paragraph 32 is predicated on the basis that, if some method was stipulated for incurring the Costs, the maximum costs that could be claimed was the amount of the Costs which would have been incurred under the Sainsbury procedure.
44. Mr Kitchener adopts an analytical approach. The new paragraph 31 is but an implied term in disguise. Thus paragraphs 31 and 32 involve the implication of terms and so the strict tests for the implication of terms into contracts apply. It is trite law that one of the basic requirements for any implied term of this kind is that it should be one which the parties would have unhesitatingly accepted: see, for example, per Lord Cross of Chelsea in Liverpool City Council v Irwin [1977] AC 239 at 257:

"When it implies a term in a contract the court is sometimes laying down a general rule that in all contracts of a certain type - sale of goods, master and servant, landlord and tenant and so on - some provision is to be implied unless the parties have expressly excluded it. In deciding whether or not to lay down such a prima facie rule the court will naturally ask itself whether in the general run of such cases the term in question would be one which it would be reasonable to insert. Sometimes, however, there is no question of laying down any prima facie rule applicable to all cases of a defined type but what the court is being in effect asked to do is to rectify a particular - often a very detailed - contract by inserting in it a term which the parties have not expressed. Here it is not enough for the court to say that the suggested term is a reasonable one the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give - as it is put - "business efficacy" to the contract and that if its absence had been pointed out at the time both parties - assuming them to have been reasonable men - would have agreed without hesitation to its insertion."

45. Counsel very properly took us to the speech of Lord Hoffmann in Attorney General of Belize and others v Belize Telecom Ltd [2009] 2 BCLC 148, in which Lord Hoffmann rebases the doctrine of implied terms within the principles of contractual interpretation, thus imposing what Mr Kitchener called the "superstructure of interpretation" on the conditions necessary for the implication of a terms on the grounds of business efficacy. However, in the light of the decision of this court in Mediterrranean Salvage and Towage Ltd v Seamar Trading & Commerce Inc [2010] I All ER (Comm) 1 that nothing in that approach affects those conditions, there is no need to go further into that authority.
46. Mr Kitchener's principal argument is that the test of necessity for implied terms cannot be met. It was not inevitable that the parties would have agreed to the Sainsbury procedure. For example, with respect to the third sentence of paragraph 31, which referred to one aspect of the procedure which was a demand by Sainsbury, Mr Kitchener took us to clause 15.9 of the Sainsbury Agreement. This provides:

"15.9 To the extent that the Actual Costs exceed £5 million plus VAT they shall be borne by the Seller and the Seller agrees to indemnify the Buyer On Demand against All Costs and Expenses in Excess of £5 Million Plus VAT Incurred by the Buyer in connection with the Infrastructure Works and/or the Site Assembly Process."

47. Mr Kitchener submits that there is no basis for requiring a demand by Sainsbury under the Hughes/Chelverton Agreement. Indeed in some circumstances Sainsbury was not entitled to make a demand when costs became deductible under the Hughes/Chelverton Agreement even if the arrangements had been implemented as planned. Under the Hughes/Chelverton Agreement Mr Hughes was liable to pay costs over £4.5 million. Under the Sainsbury Agreement, he was liable only if the costs exceeded £5 million. Sainsbury cannot be liable to make a demand when the costs are over £4.5m but less than £5 million because it has no contractual right to do so.
48. Furthermore, if the Hughes/Chelverton Agreement fell to be interpreted in the light of the Novation Agreement and the Supplemental Agreement, clause 1.1 of that Agreement, requiring Chelverton to use its best endeavours to obtain Sainsbury's compliance with the Sainsbury procedure, was inconsistent with the proposed implied terms.
49. Mr Kitchener also made a number of other submissions based on a comparison between the Hughes/Chelverton Agreement and the Sainsbury Agreement, but it is not necessary for me to deal with them in the light of my conclusion.
50. Attractively as Mr Martin developed his argument, I conclude that paragraphs 31 and 32 are not reasonably arguable. The asserted condition precedent can only be arrived at by implication of a term. This clearly does not meet the rigorous test of necessity. If the effect of non-compliance is, as Mr Hughes now suggests, that Chelverton became disentitled from deducting Costs, then it is a highly significant term and thus it is highly unlikely that the parties would have left it to implication. As Mr Kitchener pointed out, a small failure to comply with clause 15 could, if Mr Martin is right, have serious consequences. The court could not conclude that the parties would have unhesitatingly agreed it. The Hughes/Chelverton Agreement simply failed to deal with the possibility that the Sainsbury procedure might not be followed, just as it failed to deal with the consequences of Chelverton entering liquidation or its liquidator disclaiming the Hughes/Chelverton Agreement.
51. Moreover, as already explained, in my judgment, the Hughes/Chelverton Agreement does not bear out what must be an implicit proposition in these amendments that Chelverton knew that there was a detailed Sainsbury procedure. It would have known that by the time of the Novation Agreement, but, at the time it entered into that Agreement, it also entered into the Supplemental Agreement. As Mr Kitchener points out, the Supplemental Agreement expressly imposed an obligation on Chelverton to use its best endeavours to obtain compliance by Sainsbury with the Sainsbury procedure. That provision is inconsistent with the condition precedent sought to be alleged since under the Supplemental Agreement it is clear that the parties contemplated that there should be no absolute obligation on Chelverton to follow the Sainsbury procedure in clause 15 and that the remedy for any failure to follow it should be in damages, not that it should automatically preclude any deduction of the Costs. The fact that the clause imposed only a "best endeavours" obligation also completely undermines Mr Martin's argument that the Supplemental Agreement made it clear that the commercial purpose of that Agreement was that the Sainsbury procedure was to have a direct bearing on the calculation of the Costs. If Chelverton was obliged only to use its best endeavours, there could be little certainty about the extent to which Chelverton was able to ensure that the Sainsbury procedure was followed. Moreover it would have been paradoxical for Mr Hughes to exact an obligation in these terms if his interests would in fact have been best served by Chelverton's failure to comply with the Sainsbury procedure (because no Costs at all would then be deductible).
52. I would therefore uphold the judge's decision on the condition precedent issue and the implied term issue.

The matrix issue

53. As to paragraph 33, Mr Martin submits that when the parties entered into the Novation Agreement they entered into new arrangements and so the Sainsbury Agreement is part of the matrix of fact known to both parties at that date which is admissible for the purposes of interpreting the Hughes/Chelverton Agreement. If there had been a new agreement in terms of the Hughes/Chelverton Agreement at that point in time, then there would have been no doubt about that. But that did not happen and there is no evidence to show that the parties agreed that the Hughes/Chelverton Agreement should bear some different meaning from that date. If there is no such agreement, then on the face of it the Novation Agreement and Supplemental Agreement cannot alter the meaning of the Hughes/Chelverton Agreement, which had already been made: see National Grid plc v Mayes [2001] 1 WLR 864 at [64] to [67]. Mr Martin points out that Mr Kitchener accepts that the Sainsbury Agreement is admissible as an aid to the interpretation of the Supplemental Agreement where it is expressly referred to. That is of course a very different situation.
54. Mr Martin relies on a passage in Lewison, The Interpretation of Contracts, 3rd edition, para 303 which, while recognising that it is unlikely that the party would have wished to alter the meaning of a contractual provision without altering the words, offers the view that:

"On the other hand, it may then be argued that having taken the opportunity to renew their contract, the parties must be taken to have entered into a new contract on the date of the (last) variation to it. If the latter view is correct, it may also alter the nature of the factual matrix of fact which may be considered in considering the contract."

55. I accept that this passage contains a reasonably arguable point of law, and I accept that that there is at least one unreported case where the court has asked the question whether the meaning of a provision contained in an agreement had changed in the light of a subsequent deed of variation which repeated the same provision (St Martin's Property Investments Ltd v Cable & Wireless plc [2007] EWHC 582 (Ch), where the question was answered in the negative). However, the court has to be able to reach the conclusion that the parties have made a new agreement. In St Martin's there was a deed of variation which contained the relevant term. In this case, the Novation Agreement and the Supplemental Agreement did not repeat any relevant provision of the Hughes/Chelverton Agreement. Nothing is pleaded as a basis for that argument for interpreting the Hughes/Chelverton Agreement in the light of those later agreements: there is simply no substratum of fact to support it. The Supplemental Agreement and Novation Agreement cannot supply that as the first of those agreements adds to the Hughes/Chelverton Agreement, and the second of those agreements makes no reference to it. There is thus no evidential basis for the proposition that the parties intended the Hughes/Chelverton Agreement to bear some new meaning from the execution of the Supplemental Agreement and Novation Agreement. In those circumstances paragraph 50 is not reasonably arguable, and the judge was right to refuse permission to amend.

The non-Hughes/Chelverton Agreement Costs issue

56. Paragraph 50 contains an allegation that certain costs were not incurred "under the auspices of the Hughes/Chelverton Agreement". The phrase derives from paragraph 85 of the judge's judgment on 20 June 2008, where he held:

"The Court of Appeal clearly determined that Mr Hughes in claiming his entitlement to an enhanced price for the Property was subject to a requirement to give credit for the works that were carried out to enable that enhanced value to be achieved. What the Court of Appeal did not do was give any guidance as to how that exercise was to be decided. It arises under the Hughes/Chelverton Agreement but Chelverton of course is not a party to the current dispute. Self-evidently Groveholt is not a party to that Agreement. Equally the works do not appear to necessarily have been done under the auspices of the Hughes/Chelverton Agreement. I say necessarily because no disclosure has taken place and as I have set out above there are other contractual arrangements between different parties which were applicable to the work. In particular it is significant that whilst Chelverton disclaimed the Hughes/Chelverton Agreement it did not disclaim the benefit of the Chelverton/Groveholt Agreement and in particular the obligations on behalf of Groveholt to carry out the Infrastructure Works and its indemnity against the obligations arising under the Novation Deed."

57. I do not read the judge as saying that it would be a breach of the Hughes/Chelverton Agreement for any of the works to be carried out otherwise than, as he puts it, "under the auspices of" that Agreement. He is simply saying that the facts need to be investigated and established and accordingly there is a need for disclosure.
58. One looks in vain in the draft re-amended defence to find the significance which Mr Hughes attaches to the expression "under the auspices of" the Hughes/Chelverton Agreement. There are copious allegations of breaches of the Hughes/Chelverton Agreement pleaded under a heading to that effect starting at paragraph 51 of the draft re-amended defence but paragraph 50 is not among them. It appears under a heading which reads "Subsequent Events".
59. Mr Kitchener submits that paragraph 50 serves no purpose as no consequences are said to flow from the allegation. It is not said, for instance, that the costs to which paragraph 50 refers are not costs deductible under clause 11 of the Hughes/Chelverton Agreement. In any event any such allegation would be unsustainable because the Costs are defined in clause 1 of the Hughes/Chelverton Agreement without any restriction on their being incurred "under the auspices of" the Hughes/Chelverton Agreement.
60. I conclude that the judge was right to disallow paragraph 50. Paragraph 50 fails to set out Mr Hughes' defence based on it with the requisite clarity and hence lacks arguability. The context for this allegation is entirely missing. If it is intended to raise some further case as to the meaning of the Hughes/Chelverton Agreement, that should be clearly alleged so that the basis of it can be examined. If I had been in favour of Mr Hughes on paragraphs 31 and 32 of his draft re-amended defence, different considerations might have arisen as it would appear that paragraph 50 was intended to be read with them, but in the light of my conclusion on those paragraphs I do not need to consider that possibility.
61. There is an alternative route to the same conclusion which may explain why recourse has been had to the expression "under the auspices of" the Hughes/Chelverton Agreement. If what the pleader means is "under the Hughes/Chelverton Agreement" the allegation in paragraph 50 is precluded by the judge's judgment of 20 June 2008. The judge held:

"89. Mr Hughes has raised various arguments one of which is a matter of construction that no claims can be made if the work was done by Sainsburys but not under the Chelverton/Hughes Agreement. Such an argument in my view is not open to Mr Hughes as a result of the Court of Appeal decision which plainly decided that if work was done that enhanced the value then credit must in some way be given for that. It was the examination of that principle which led to the changes in stance of Groveholt during the Part 24 hearing as set out above. Disclosure in my view is necessary (not in all probability limited to the parties to this litigation) in order to see how the Infrastructure Works were carried out. This is not as Mr Strauss QC submitted seeking to look at ex post facto events as an aid to construction of the Hughes/Chelverton Agreement; it is more a question of finding out what actually happened. Subject to the overriding decision of the Court of Appeal it seems to me that all arguments remain open and cannot be finally determined at this stage. "

62. The first two sentences are significant. The argument rejected in the first two sentences is that the Costs can be challenged, not on the basis that there was a condition precedent as to compliance with the Sainsbury procedure (the argument raised in this appeal), but on the basis that the Costs were not incurred under the Hughes/Chelverton Agreement but under the Groveholt/Sainsbury Agreement. Mr Hughes did not appeal from this order. I do not accept Mr Martin's submission that in this judgment the judge left everything open. He did not. Rightly or wrongly he decided that Mr Hughes was precluded by the decision of this court from raising an argument to the effect that the Costs were not incurred "under" the Hughes/Chelverton Agreement. Thus, if the expression "under the auspices of" means nothing more than "under", the point has been decided against Mr Hughes and he is bound by the court's decision on this point and paragraph 50 fell to be disallowed on that basis too.

Disposal of this appeal

63. For the reasons given above I would dismiss the appeal against the judge's disallowance of the amendments to the re-amended defence and allow the respondent's notice in part. No separate argument was raised on the second ground of appeal on the judge's order for costs but, in the circumstances, if my Lords agree with the order I propose, there is no basis for interfering with his order as to costs.

Lord Justice Wilson:

64. I agree.

Mr Justice Henderson:

65. I also agree.
Appendix 1
Amendments disallowed by the Judge

"31. The operation of clause 8.3.2 of the Hughes/Chelverton Agreement, both before and after 16 September 1998, was dependent upon Sainsbury operating the machinery in clause 15 since only through operation of the accounting procedure in clause 15 could the aggregate costs be ascertained in relation to the Sainsbury land; in particular, only once the aggregate costs in relation to the Sainsbury land had been ascertained could it be ascertained whether and by what amount the Infrastructure Costs and costs of Site Assembly exceeded £4.5 million in accordance with clause 8.3.2. In the premises, it was a condition precedent to the liability of Mr Hughes under clause 8.3.2 that the machinery set out in clause 15 culminating in an account of aggregate costs should be operated by Sainsbury. Further or alternatively, it was a condition precedent that Sainsbury should serve a demand pursuant to clause 15.9.

32. Further, by reason of the interrelation of the Sainsbury and the Hughes/Chelverton Agreement, both before and after the Supplemental Agreement, there was an implied term in the Hughes/Chelverton Agreement as varied and supplemented by the Supplemental Agreement that in relation to the Infrastructure Works and Site Assembly, Chelverton would not seek to recover from Mr Hughes under clause 8.3.2 of the Hughes/Chelverton Agreement, in respect of the Sainsbury land more than the aggregate costs as specified under the Sainsbury Agreement.

33. Further [at least] following the changed arrangements entered into consequent upon conclusion of the Novation Deed and Supplemental Agreement, the Sainsbury Agreement is admissible as part of the factual matrix for the purpose of construing the provisions of the Hughes/Chelverton Agreement as varied and supplemented by the Supplemental Agreement.

…

50. The Infrastructure Works Contract and/or the Site Assembly Agreements were not one entered into under the auspices of the Hughes/Chelverton Agreement in that:

(i) Sainsbury did not operate the provisions of clause 15 in relation thereto and was not required to do so by Groveholt/Chelverton:

(ii) Pursuant to the provisions of the Sainsbury/Groveholt Agreement Sainsbury has borne the entire cost of the Infrastructure Works and Site Assembly. [Groveholt contributed £2.25m. Chelverton made no contribution;]

(iii) Neither Sainsbury nor Groveholt acted as the agent of Chelverton in relation to the performance of the Infrastructure Works and/or conclusion of the Site Assembly Agreements;

(iv) The Infrastructure Works Contract was not put out to tender by Sainsbury with five civil engineering contractors or at all contrary to the requirement of clause 15.1.3 of the Hughes/Sainsbury Agreement as substituted by the Loan Agreement;

(v) Sainsbury did not consult with Chelverton or Groveholt in relation to the performance of the Infrastructure Works and/or the conclusion of the Site Assembly Agreements;

(vi) Sainsbury has not prepared an account of the aggregate cost of the Infrastructure Works and Site Assembly contrary to the requirement of clause 15.7;

(vii) Sainsbury reached an agreement with the liquidator Chelverton at the time of entry into the Sainsbury/Groveholt Agreement in April 2004 not to make a claim against Chelverton in the liquidation."

Appendix 2
Definitions in the Sainsbury Agreement of Infrastructure Costs and Site Assembly Costs

"Infrastructure Works"	means the works relating to the Relief Road and construction of estate roadways and services and all such other works as may be necessary to provide fully levelled and serviced sites to enable the Sainsbury Development to be implemented upon the Property All such works being in accordance with the details set out in the Third Schedule hereto
"Site Assembly Costs"	means the costs or other consideration required to complete the Site Assembly Process and which is mentioned in paragraph G of the Fourth Schedule hereto

(extract) "THE THIRD SCHEDULE The Infrastructure Works shall include the following matters

Relief Road

The cost of design and construction of a road from Dale Road to Bakewell Road including traffic controlled signals at its junctions with Bakewell Road and Dale Road, the cost of bridges over the railway line and River Derwent and all professional fees relating to the design and implementation of such road and bridges. Further including the cost of all landscaping, demolitions and excavations. The road to be constructed to adoptable standards to the satisfaction of the relevant highway authority. The road to include gas, electricity, water, telecom and foul and surface water drainage of sufficient capacity to serve the Property.

The cost of design and construction of a pedestrian bridge or crossing over the railway line linking Plot A to the new public car park…"

(extract) THE FOURTH SCHEDULE The Site Assembly Process and Site Assembly Costs

(A) In order for the Parties to obtain and implement Planning Permission it is anticipated that various transactions will have to be negotiated and concluded with owners of adjoining land in order that the Infrastructure Works can take place in particular including the construction of the Matlock Inner Relief Road diverting the route of the current A6 Bakewell/Matlock Trunk Road that also there can be an extension of the railway track link of Peak Rail plc into the current British Rail Terminus at Matlock including the re-routing of such link and also the ancillary matters and works referred to in the S.106 Agreement are executed

(B) Accordingly it is anticipated that the following arrangements will (inter alia) need to be concluded:-

1. An agreement with Derbyshire Dales District Council for exchange of land in accordance with the Agreement reached in principle in a letter dated the 5^th August 1996 with the Council …"