England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON COUNTY COURT
His Honour Judge McMullen QC

		Royal Courts of Justice Strand, London, WC2A 2LL
		17/11/2011

Lord Justice Stanley Burnton :

Introduction

1. The claimant respondent, Sofia Dionissiou-Moussaoui, to whom I shall refer as Ms Moussaoui, is a solicitor. In February 2005 she left her employment with the firm of Moss Beachley and went to work for the defendant appellant solicitors. She was to be paid a salary and commission on the fees resulting from her work for the firm. She worked for the defendant as an employed solicitor until 25 August 2006, when she resigned. She claimed that there was commission due to her under her contract of employment. The defendant denied liability.
2. In August 2007 Ms Moussaoui issued proceedings in the County Court claiming outstanding commission. The defendant disputed that the terms of her contract were as she alleged, and denied liability. It counterclaimed the sum of £10,000 alleged to be due under her contract of employment for her failure to bill fees to the minimum specified in her contract. Her claim, and the defendant's counterclaim, came before His Honour Judge McMullen QC and were tried over a period of 4 days in April 2008.
3. In his judgment the judge made findings as to the terms of Ms Moussaoui's contract relating to commission and salary, and in his order dated 9 Sept 2008 gave directions as to the basis on which the claimant's claim against the defendant Appellant for commission was to be determined. He dismissed the counterclaim.
4. This is my judgment on the defendant's appeal against the order made by His Honour Judge McMullen QC.

The facts

5. The relevant communications relating to the making of the agreement between the parties took place in January 2005. They consisted of telephone calls, emails, and a letter typed by Dr Mireskandari of the defendant in the presence of the claimant and signed by both of them. Ms Moussaoui made a note of one of their telephone conversations that the judge found to be contemporaneous and accurate. It reads:

"Dean & Dean

£55,000 ... base

3½ times salary

30% of own billing of own clients

150,000 ... of xxxx firm's clients

5%

Guarantee 100,000

Includes my trainee

Billable hours cant by

Trainee I get credit for

£100 - £140 ph + trainee

Billing

When we go to court trainee comes too

For 1^st year

Then review ... what

Better they can offer

Wd arrange for me to do

PR work for networking

Drive

Lunches

Sean 07957491747"

6. On 19 January 2005 Ms Moussaoui sent the following email to Dr Mireskandari:

"Dear Sean,

Further to our telephone conversation please let me have your letter of offer as a reply to this email.

I will phone you on Monday and let you have my final decision."

7. Dr Mireskandari replied:

"As discussed I set out below the terms of our offer of employment to your good self.

Basic Salary of £55,000 (fifty five thousand pounds) 10% of your billing of your own clients after billing three and one half times your salary from those clients. 5% of your billing of our clients after billing three and one half times your salary.

Your guarantee of £100,000 of billing from your own clients.

The above terms are for a one year period after which both parties will negotiate a new contract if necessary.

You will have a minimum of a one year contract with this firm (we hope you stay forever).

Also usual statutory employment terms i.e. holidays etc.

In any event I hope that this clarifies our offer.

We hope that you will agree and join us."

8. Ms Moussaoui responded:

"I have a few queries in respect of the terms you have set out and for the sake of completeness and certainty I would be grateful if you could clarify these matters for me:

1. On Tuesday you offered 30% commission on my own clients after billing three and a half times my salary. This offer is for 10%. Please explain.

2. The terms state that I guarantee that I will bill a minimum of £100,000 from my own clients but you do not set out what the consequences are if I do not; (although very unlikely to be applicable)

3. The terms state that this offer is for a one year period. Are you offering me a one year fixed term contract of employment or are you saying that I am employed in the normal sense with a review of the terms from both sides once I have completed a years service.

4. Depending on the answer to point 3 above I will need to know that notice period you require from me if I wish to leave the practice during this first one year period. Will you be applying statutory terms (i.e. one week per year of service)? I am unsure whether or not you are saying that I am unable to leave the firm in my first year.

Whilst I also hope that I will want to stay forever and am confident that we will make an unbeatable team I would be grateful if you could clarify the above matters. "

9. Dr Mireskandari replied on 24 January:

"1. I am sorry it should read 30%. But so there are no misunderstandings it is 30% after you have billed and the office has collected the fees.

2. a deduction from your salary of an amount of 15,000

3. the offer of one year relates to the terms so that both parties are fixed to the said agreement for at least one year i.e. you and jami. Contract to be a normal contract with the terms to be reviewed after a year.

4. I think that 30 days notice would be appropriate for both parties. I personally prefer that both parties agree a minimum of one year as you are leaving a secure job. Its up to you, let me know.

I hope that clarifies the position."

According to Ms Moussaoui, this email was not received by her until 31 January. In the meantime, she and Dr Mireskandari met on 27 January. Dr Mireskandari typed out the following letter in her presence:

"Dear Sofia,

Please find below the terms agreed between Dean & Dean Solicitors and your self for your employment.

The terms do not set out the standard contract terms which will be with your contract.

You will let us know the date you will commence within the next few days but you anticipate to be within 30 days if not sooner.

Please sign below to acknowledge acceptance of the terms.

Terms of agreement

Salary £55,000.00 (fifty five thousand)

After three and one half times your collected billings of your own clients you will receive 30% (thirty percent) of your billing.

After three and one half times your collected billing of the clients of Dean and Dean you will receive 5% of your billing.

Both parties to review the above terms after one year.

Notice period for the first year to be 3 months.

You will bill a minimum of at least £100,000 for the first year.

In the event that you are unable to bill £100,000 you will agree to reduce your salary of the first year by £10,000."

It is obvious, and common ground, that given their previous communications the reference to "three and one half times" was, and was understood by both Ms Moussaoui and Dr Mireskandari, to be three and one half times her salary. At the trial, it was common ground that the words in the last sentence "In the event that you are unable to bill £100,000 …" was intended and understood to be "In the event that you are unable to bill and to collect £100,000 …"

10. Both Ms Moussaoui and Dr Mireskandari signed the letter.
11. There was a further inconsequential email from Ms Moussaoui to Dr Mireskandari on 31 January 2005. That was the entire documentation relating to the contract of employment.
12. Ms Moussaoui's employment began on 28 February 2005. In October 2005 she was given written employment particulars for the purposes of section 1 of the Employment Rights Act 1996, but they were deficient, stating in relation to her remuneration only that "You will be paid £55,000 plus agreed bonus per annum".
13. After completion of her first year's employment, Ms Moussaoui continued to be employed by the defendant on the same terms, save that her salary was increased to £65,000 a year and the threshold to 3 times her salary, i.e., £195,000.

The contractual issues between the parties

14. Ms Moussaoui's particulars of claim pleaded that the agreement between the parties had been made orally on or around Wednesday 26 January 2005, and that "The Agreement was subsequently recorded in a one page document that was signed by the parties prior to the commencement of the Claimant's employment", i.e., in the letter of 27 January.
15. In paragraph 3(ii) of its defence, the defendant pleaded that "the Claimant and Dr Mireskandari made an oral agreement as to commission contained partly in a telephone conversation on or about 26 January 2005, and contained partly in alternatively evidenced by emails passing between [them] between 19 January 2005 and 24 January 2005 and a letter dated 27 January 2005 …"
16. Although this is an allegation of "an oral agreement", that is inconsistent with the immediately following averment that it was "contained partly" in the emails and letter. The confusion as to whether in part at least the agreement was oral or written was, as we shall see, not confined to the defence.
17. Before the first day of the trial, the principal issues as to the terms of the contract were:

(1) Was the £100,000 minimum of her billings to be based on fees for her work for her own clients only, or on all the fees for her work, for both her clients and the firm's clients?

(2) Was the threshold of £192,500 reached when Ms Moussaoui billed fees to that sum, or was in reached only when fees to that sum had been both billed and received?

(3) Once the threshold was passed, was her commission payable on fees billed or only on fees billed and received?

(4) Were fees billed for the work of Ms Moussaoui's trainee to count for the purposes of calculating her commission and to determine whether there should be a deduction from her salary?

18. Until the beginning of the trial, it appeared to be common ground that there was one threshold for Ms Moussaoui's billings to meet before she became entitled to commission. However, on the first day of the trial, the defendant applied for, and despite the opposition of Mr Joseph on behalf of Ms Moussaoui obtained, permission to amend the defence to plead that there were two thresholds, each of 3½ times Ms Moussaoui's salary, one for her bills for work done for her own clients and the other for the firm's clients. The defence was amended in manuscript, but either no copy was provided to those acting for Ms Moussaoui or it was mislaid, and Mr Power does not have a copy. The result is that we do not know how the amendment was pleaded.
19. During the trial, both Ms Moussaoui and Dr Mireskandari gave evidence, as did Mr Tehrani, who had been the sole principal of the defendant in January 2005. Dr Mireskandari became his partner later in 2005, and subsequently Mr Tehrani retired as a partner and became a consultant with the firm.

Analysis of the contract issues

20. It is trite law that there is a crucial difference between a contractual document and a document the contents of which are only evidence of a contract concluded orally. If a document is contractual, then in the absence of a plea of rectification, or an allegation that it has been replaced or revoked by a subsequent agreement, the role of the court is to construe the document. If it is alleged that the written agreement mistakenly failed to reflect an anterior oral agreement, so that the written agreement falls to be rectified, that earlier oral agreement must be clearly pleaded and proved. In the absence of a plea of rectification, communications preceding the written agreement may provide context and background, but they cannot be substituted for the terms of the written agreement itself.
21. The letter of 27 January 2005 was clearly intended to be contractual. It requested Ms Moussaoui to sign it "to acknowledge acceptance of the terms". She did sign it. So did Dr Mireskandari. It unambiguously provides for 2 thresholds, one for billing of Ms Moussaoui's own clients and one for the firm's clients. In both cases, the threshold required fees to be both billed and collected, i.e., paid to the firm. Ms Moussaoui's own particulars of claim averred that the agreement was "recorded" in the letter, i.e., that the letter correctly set out what had been previously agreed. It follows that if she was going to allege that the letter did not accurately record their agreement, and that it fell to be rectified, she had to amend her particulars of claim. That did not happen. Frankly, I think that Ms Moussaoui should have sought an adjournment, if only for an hour or two, to consider the consequences of the defendant's amended case and any amendment to the pleadings.
22. I can now turn to the relevant parts of the judge's judgment.

The judgment below

23. The judge summarised the principles of the interpretation of contracts in 5 numbered paragraphs. His summary is unexceptionable. He continued:

"Generally speaking it is not permissible to look at the negotiations leading up to a contract to find the meaning of the words used the in the document but in this case it is the joint submission of counsel that I should engage in this form of archaeology. That means that words spoken and written in the run-up to the contract are relevant and the contract itself is incomplete. The contract is said to be partly oral and partly written. What is also unusual about this case is that both parties criticise the agreement which they themselves rely on. The defendant typed it, in his office, in the presence of the Claimant, each contributing to it. They are both lawyers. It is a mess."

24. The judge then referred to the contract, as follows:

"It is necessary to set out the contract itself and then to analyse each part of it. So far as is relevant, the contract provides as follows - "

He then set out the terms of the letter of 27 January 2005, and continued:

"The other documents which are relevant to the meaning of these terms are …"

The judge then referred to Ms Moussaoui's note of the telephone call and to the emails to which I have referred.

25. The judge addressed the issues of the £100,000 guarantee and the thresholds in a passage that I shall set out in full:

"The guarantee and thresholds

The counterclaim by the Defendant is for £10,000 since it is said the Claimant failed to achieve billings in respect of her own clients exceeding £100,000. The document itself says this: In the event you are unable to bill £100,000 you will agree to reduce your salary of the first year by £10,000.

Both sides agree this is inaccurate. They at least agree that the words 'and collect' should be inserted, so that this represented fees received. There is an important distinction between billing and collecting. Both parties agree that I should insert the words 'and collect' into the final paragraph. What they do not agree on is whether or not that is targeted upon the Claimant's own clients or all her billings.

I agree looking at the documents in the lead up to the negotiations, that the words 'your own clients' appear frequently. Had I looked only at the documents, it would be clear that the parties agree that the £100,000 related to billings from the Claimant's own clients (that is those coming over from Moss Beachley or, as it is put, clients introduced by the Claimant). However, reliance is placed upon the phone call where the Claimant said it was unfair to expect that, and she did not agree to it, and that is why the words 'your own clients' do not appear in the final paragraph of the contract. I accept that submission. I accept her evidence as to what occurred and it is not appropriate to record (in an amendment to the contract which I would figuratively put in) the words 'your own clients'. She was to bill £100,000 and have fees received of £100,000 for the first year in which case she would not be liable to pay the penalty. That is the correct construction of the penalty clause.

The next issue relates to whether or not there were two thresholds before commission would be accrued. The contract itself, at first sight, indicated that, but I do not consider it is correct that the joint intention of the parties was that the Claimant should have to make £192,500 on one or other of the types of account. At its extreme, it would involve the Claimant billing hours of over £400,000 before she would be entitled to any commission on the excess. It must be borne in mind that commission is not payable until the threshold is reached and then only on the excess over the threshold. The language of the clause does not make sense. It does not make sense grammatically and it does not reflect what the parties were discussing. What it means is this: after £192,500 of your collected billing of your clients and of Dean & Dean you will receive 30% and 5% respectively. The difficulty therefore is the word 'collected'.

In my judgement this, too, did not express the intention of the parties. The word 'collected' appears twice. These are very strong words and yet they do not reflect the intention of the parties. Let us examine what the purpose of this agreement was. It was to ensure, as a minimum, that Claimant brought in enough to cover her funding of £100,000. At the other end it was to give her an incentive to bring in more work. Thus between £100,000 actually received and £192,500 billed was a grey area where neither party would pay the other but, after £192,500 of work done, the Claimant would be entitled when the money came in, to her commission upon it. In my judgement this is a very sensible payment by results system. It gives the Claimant an incentive – she does not get paid for everything that she does, she has to do a minimum amount of work to cross the threshold and then she would become commissionable.

So I hold that there were not two thresholds required here. The Claimant was required to bill, but not to have collected, fees to the extent of £192.500. This aspect of the case was the subject of an Application to Amend. It is a new case. There is no evidence of it at all in the evidence of Mr Tehrani or the Defendant, except for a citation from the contract itself. In my judgement the intention of the parties was not reflected in this aspect of the contract relating to thresholds. I do not accept that the arrangement is impractical. The Claimant's own clients brought in by her can easily be distinguished from the firm's and it is not saved by treating these two thresholds as disjunctive.

Collection

The second issue relates to whether uncollected billings count for the threshold. I do not accept, as urged by the Defendant that this is a new case, nor so I accept that this is a bizarre hybrid system. The purpose which I have described of incentivising the Claimant is achieved by this threshold. She bills. It is assumed that the bills she sends are properly rendered and collection is, I hold, in the hands of the administrators and so long as it is billed (and in this case I have seen evidence of internal audit by the proprietor, Mr Tehrani, of ticking the bills), then the collection of that is left to others. So the £192,500 is made up of fees billed."

26. In relation to the so-called penalty clause, it was clearly open to the judge to construe the reference to billing £100,000 as including bills for work for both Ms Moussaoui's and the firm's clients. However, he seems to have arrived at "the correct construction of the penalty clause" by reference to what was either negotiation or an anterior agreement. If the former, it was inadmissible; if the latter, the process was not one of construction but of rectification.
27. More importantly, the judge then departed from the clear words of the letter of 27 January, which he had held to be "the contract", not by reference to any preceding oral or written agreement but by reference to his view as to "the purpose of the agreement" and what would be "a very sensible payment by results system". He then rejected the clear words of the letter requiring the threshold to be of "collected billing", apparently because since the defendant was responsible for collecting fees it would be unfair to Ms Moussaoui for her entitlement to commission on fees to depend on their collection.

The contentions of the parties

28. The grounds of appeal complain that the judge wrongly ignored the evidence of "the contractual memorandum signed by both parties and dated 27 January 2005". In my judgment, this contention, examined in isolation, is unanswerable. The judge treated the letter of 27 January as a contractual document. In relation to the question whether there was one threshold or two, and on the question whether the thresholds related to fees both billed and collected, he departed from the clear words of the document in favour of what he considered fair. In effect, the judge rewrote the contract for the parties.
29. Mr Joseph's response was two-fold. He told us that it was common ground before the judge that the letter of 27 January was not a contractual document in the sense that I have used that expression. Secondly, he submitted that there was evidence before the judge, apart of course from the letter of 27 January, on the basis of which he would have been justified in finding that the agreement between the parties was in the terms he found.
30. I regret that I cannot accept these points. As to the first, such an important forensic agreement should be recorded in writing. It involved a departure by Ms Moussaoui from her own pleading. It flew in the face of the clear statement in the letter of 27 January that she was to sign it "to acknowledge acceptance of the terms". It is essential that any agreement between the parties such as that suggested by Mr Joseph be recorded in writing so that it is clear to the parties, the judge at first instance, and this Court in the event of an appeal. Otherwise there is obvious room for misunderstanding. In any event, as has been seen the judge treated the letter as a contractual document in his judgment. He did not proceed on the basis suggested by Mr Joseph. Lastly, the grounds of appeal drafted by Mr Croally, who represented the defendant before the judge, repeatedly refer to the letter as "the contractual memorandum". That is inconsistent with his having conceded that it was not such.
31. As to Mr Joseph's second point, his insuperable difficulty is that the judge did not make the findings of fact that his case requires. He dealt with the questions as to the number of thresholds and whether fees had to be collected not on the basis of his findings as to oral agreements, but as issues of, it seems, interpretation. In so doing, he reached conclusions that are unsustainable as a matter of law.

Conclusion

32. The judge said that the agreement between the parties was a mess. I regret that this Court is faced with a mess. We have findings as to the terms of the contract between the parties that are not based on findings of primary fact and are unsustainable on the basis of what, in the absence of appropriate findings, is clearly a contractual document containing the relevant terms.
33. To allow this appeal would be to treat the letter of 27 January as binding even though it may not have accorded with the prior agreement of the parties. To dismiss the appeal would require this Court to accept the rewriting of the terms of that letter when there may have been no justification for doing so.
34. In these circumstances, I see no alternative but to allow the appeal to the extent of remitting the claim and counterclaim to be retried by a different judge. This is a result that I would avoid if it were at all possible. The sums involved in this case are not huge. The Law Society has intervened in the defendant's practice, and there is a question as to Dr Mireskandari's ability to meet any liability that Ms Moussaoui may establish, apart from any liability for costs. But I see no alternative.
35. There is a lesson in this. It is the responsibility of the advocates for the parties, but also of the trial judge, to ensure that the trial proceeds on the basis of allegations and issues that are identified in writing. That identification is the function of the pleadings. If the pleadings do not represent the parties' cases, they must be amended or the basis on which the trial is to proceed set out in an agreed document. These basic, essential, requirements were not met in this case, and that has led to the situation faced by this Court.
36. We have not had any submissions as to the costs of this appeal. My provisional view is that both parties were in part responsible for the confusion as to the status of the letter of 27 January. Subject to any written submissions the parties may make when they have considered the draft of this judgment, I would set aside the order made by the judge, remit the claim and counterclaim to be tried by a different judge, and order the costs of the proceedings so far, including the costs of the appeal to the Court of Appeal, to be in the discretion of the judge hearing the retrial. I would determine the amounts of both parties' costs in the Court of Appeal by summary assessment on the basis of schedules of their costs to be exchanged and submitted to the Court within 7 days and written submissions to be exchanged and submitted to the Court within 14 days.

Lord Justice Patten;

37. I agree.

Lord Justice Mummery

38. I also agree.