England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE BRIGHTON COUNTY COURT
Her Honour Judge Jakens
OHM00980

		Royal Courts of Justice Strand, London, WC2A 2LL
		10/07/2012

Lord Justice McFarlane :

1. This appeal relates to proceedings in the Brighton County Court arising out of the hire and eventual sale of a lorry. The lorry was originally the subject of a lease agreement between a finance house, Paccar Financial Plc ('Paccar'), on the one hand and the hirer, Mr Christopher Waite, on the other. The lease agreement was entered into on 21^st October 2003 and related to the hire of a Foden A3-6M lorry. Exercising rights under the agreement, and after the conclusion of the initial period of hire, it was agreed between the parties that the lorry would be sold. Mr Waite identified a potential buyer, but the sale was in fact executed between Paccar and another finance house, Private and Commercial Finance Company Ltd ("Private") who were facilitating the purchase for the ultimate use of the buyer identified by Mr Waite.
2. Soon after taking delivery of the lorry the new user, a Mr Jones, complained as to the fitness of the vehicle in that it seemed to lack acceptable pulling power in the course of his use of it as the tractor unit for a loaded milk tanker. Mr Jones issued proceedings against Private and, in turn, Private notified Paccar of the dispute, but did not go so far as to issue proceedings against Paccar. Paccar, Private and Mr Jones, through their lawyers, eventually negotiated a settlement in which Paccar contributed £7,000. The proceedings that have been progressing in the Brighton County Court, and now form the subject of this appeal, relate to Paccar's claim against Mr Waite for reimbursement of their £7,000 contribution to the "Jones" settlement together with ancillary costs, including legal fees, relating to it.
3. The action was heard by Deputy District Judge Mills on 17^th May 2011 and concluded with the dismissal of Paccar's claim against Mr Waite. Paccar appealed and, on 29^th October 2011, that appeal was allowed by Her Honour Judge Jakens, liability was found to be established against Mr Waite and the question of quantum was remitted to the District Judge for determination. We have now heard Mr Waite's appeal against HHJ Jakens' decision which comes to us pursuant to permission to appeal granted by Lord Justice Gross on 1^st February 2012.

The lease agreement

4. The lease agreement between Paccar and Mr Waite, dated 21^st October 2003, is on a pro forma produced by Paccar and contains some thirteen substantial clauses of which the following are particularly relevant to this appeal:

"4. YOUR [i.e. Mr Waite's] OBLIGATIONS

You will

i) as an obligation surviving termination of this Agreement, indemnify us against any loss, damage, or other expense we incur, (including legal costs on a full indemnity basis and as a result of any third party claim or otherwise), arising directly or indirectly out of the state, condition or use of the Vehicle or in any way arising out of our having entered in this Agreement, (except in the case of death or personal injury caused by our negligence);

….

iii) be responsible, at your own cost, for keeping the vehicle in good condition (allowing for fair wear and tear) and in full working order and for arranging all servicing, maintenance and repairs that may be required at any time, in accordance with the manufacturer's instructions and recommendations and that all replacement parts are of good industry standard. You must make good all damage to the Vehicle, other than fair wear and tear;…."

8. RENEWAL OPTION AND DISPOSAL

a) [Renewal option]

b) If you are not in default of any of your obligations then, on expiry of the hiring of the Vehicle, we may at our discretion appoint you as our sales agent for the Vehicle on the following terms:

i) the vehicle shall be sold at not less than the open market value to a person who is not a connected person for a price first approved by us in writing (a "connected person" being either you or a person who is in our opinion connected with you);

ii) title shall pass on full payment of the purchase price, inclusive of Value Added Tax, to us;

iii) the vehicle must be sold for business use without the benefit of any warranty, representation or condition on our part (save that we can pass good title);

iv) you must indemnify us against all losses, damage, costs, claims and expense arising out of the sale (including legal fees) on a full indemnity basis in connection with any proceedings against us brought by any purchaser; and

v) on receipt of the proceeds of sale, we shall pay to you a sum equal to the Sales Proceeds Percentage (net of VAT) as rebate of Rentals, subject to the amount of such sum not exceeding the total Rentals paid. If the vehicle is not sold within three months, we reserve the right to terminate this agency. "

First instance hearing

5. Before Deputy District Judge Mills most of the background factual material was agreed. In addition to the terms of the leasing agreement to which I have already made reference, it was established that by June 2007 Mr Waite was looking to dispose of the vehicle which was by then some four years old with approximately 460,000 kilometres on the clock. The sale of the lorry, which eventually took place between Paccar and Private, was by written agreement date 15^th June 2007. It was an express term of the agreement that the lorry was "sold as seen" for £15,000 plus VAT. Mr Jones subsequently claimed that the vehicle was defective, and in March 2009 issued proceedings against Private for breach of his contract with them, seeking £42,000 and/or damages for breach of Sale of Goods Act 1979 s 14. Paccar were drawn into discussions with Private and Mr Jones. Paccar claim that they sought to make contact with Mr Waite in order to engage him in negotiations, but the Deputy District Judge accepted that Mr Waite probably did not receive any of the relevant communications. The "Jones" proceedings were settled in May 2010 with a Tomlin Order reflecting an agreement by which Private was to pay Mr Jones £8,000 made up of £7,000 from Paccar and £1,000 from Private. It was also agreed that the vehicle would be restored to good working order and Mr Jones would pay Private's legal costs of £10,000 as well as entering into some altered form of hire agreement with them.
6. In its action against Mr Waite, Paccar claimed £18,918.51 made up of the £7,000 contribution to Mr Jones' case, expert fees of £140.18 and £95.83 and legal costs in relation to the "Jones" dispute of £11,682.00.
7. During the course of the Jones proceedings and wider negotiations, some expert opinion had been obtained as to the condition of the lorry. Various written reports from these experts were available before the Deputy District Judge, but Paccar's counsel made clear at the start of the hearing that these documents were not relied upon as expert opinion evidence in the present proceedings, but merely as part of the factual background.
8. The Deputy District Judge heard evidence from Mr Prescott on behalf of Paccar and also, on the other side, from Mr Waite.
9. In summary the case for Paccar before the Deputy District Judge, as indeed it has remained before the Circuit Judge and before us, is based upon clauses 4 and 8 of the leasing agreement. In particular Paccar claims that:

a) the state of the vehicle that led Mr Jones to make his complaint must establish a breach of clause 4(iii), being Mr Waite's obligation to keep the vehicle in good condition and in good working order;

b) Mr Waite had breached his obligation under clause 4(i) to indemnify Paccar on a full indemnity basis in relation to loss, damage or expense, including legal costs, as a result of any claim arising directly or indirectly out of the state, condition or use of the vehicle; and

c) Mr Waite must indemnify Paccar under clause 8(b)(iv) against all losses, damage, costs, claims and expenses arising out of the sale of the vehicle on a full indemnity basis in connection with any proceedings brought against Paccar as a result of the "Jones" sale.

10. The Deputy District Judge heard evidence about the state of the vehicle during the final months of Mr Waite's use of it. Mr Waite described how a water leak was detected in January 2007. The relevant manufacturer for this vehicle is DAF and Mr Waite took the vehicle to the local manufacturer's agent. They identified a leak in the head gasket which they purported to repair. Thereafter Mr Waite thought he detected some loss of pulling power in the vehicle's performance. He took it back to the DAF agency on two subsequent occasions but, despite analysing the vehicle's performance with technical equipment, they advised him that no loss of power could be identified. In his oral evidence Mr Waite sought to quantify the extent to which he noticed a lack of pulling power by describing it as "just slightly intermittent – from personally driving the vehicle before to afterwards, I could just tell there was just the slight drop of power from when it came back out from" the DAF agency. Later he said "it was minimum; the vehicle to me just didn't run as efficiently as it had done before the head gasket". Mr Waite described being told "there is nothing wrong with it" on the two occasions that he took the lorry back to the agency. The following exchange then took place between counsel and the witness:

"Q: But they said there was nothing wrong with it?

A: Yes

Q: But presumably you knew that was wrong because you were experiencing the loss of performance?

A: Yes but I take it back to people who strip engines down daily; if they say the vehicle is performing on their diagnostic correctly, I cannot take the case any further, can I?

Q: It is not a very satisfactory situation, is it, Mr Waite?
A: No

Q: You take the vehicle to a garage knowing full well that it is not performing as it should do, the garage is saying there is nothing wrong with it; it is not normal just to take their word for it and just say "well, I must be imagining the loss of power", is it?
A: Well, what else could I do after I had had it back; the vehicle was still serviceable, the vehicle was still there working. We had lost nothing on the fuel to say it was pulling fault; the fuel was still doing adequate MPG, so……

Q: So in your mind it was not a sufficiently big problem to say the vehicle is not serviceable or performing to standard?

A: No; no."

11. It was agreed evidence that soon after the sale Mr Jones telephoned Mr Waite to complain about a lack of pulling power in the tractor unit. Thereafter Mr Waite had no further communication from Mr Jones. The court had no direct evidence from Mr Jones, but did have an account of his complaints in the documents provided from the "Jones" proceedings.
12. In his shortly stated conclusions the Deputy District Judge dealt first with the claims under clause 8(b)(iv). The focus of his consideration, encouraged as he seems to have been by the advocates, was upon the phrase "any proceedings brought against us by the purchaser". The Deputy District Judge found that the only proceedings that had been issued were by Mr Jones against Private. Paccar were never a party to those proceedings. The proceedings were compromised by agreement. The Deputy District Judge was plain that as no proceedings had been issued against Paccar, it was not open to Paccar to rely upon this clause to recover damages against Mr Waite.
13. In relation to clause 4, the Deputy District Judge held that the burden was on Paccar to show that Mr Waite was in breach of this clause. He concluded:

"from the documents produced to me, it seems that we cannot be clear as to why this vehicle failed. There are comments that there is some form of defect in the vehicle making it prone to head gasket failure. No report is actually clear as to what is wrong with the vehicle. In these specific proceedings there is no expert evidence; all we have are the documents which have been produced within the bundle. Applying the civil test of the balance of probabilities, I cannot find that the defendant is in breach of [clause 4(i)]."

14. In relation to clause 4(iii) (responsibility to keep the vehicle in good condition and in good working order) the Deputy District Judge recited the history given by Mr Waite of his involvement with the DAF dealership and, in his judgment, asks rhetorically "what more could he do?". The judge rejected Paccar's submission that this was an obligation of strict liability and Mr Waite was obliged to carry on his investigation of the power loss. The judge rejected that submission and concluded:

"We do not know what the ultimate problem was with the vehicle. It seems to have been prone to gasket problems. I find that [Mr Waite] did keep it in good condition and in accordance with the lease, and on the balance of probabilities the defect was due to factors which could be said to be fair wear and tear, age, mileage and prone to conditions associated with power loss. "

15. In consequence of these specific decisions, the ultimate conclusion of the judgment was to dismiss Paccar's claim in its entirety.

First appeal

16. Paccar appealed to the Circuit Judge, having been given permission to do so by the Deputy District Judge. The argument on appeal was based upon the same three sub clauses of the leasing agreement with the invitation for the judge to hold that the first instance decision was erroneous in each respect.
17. In relation to the clause 8(b)(iv) "proceedings" point, HHJ Jakens reviewed the various authorities placed before her by the parties, but held that each of those decisions was applicable in a discrete and narrow way to the facts and substance of the relevant disputes. In my view she was right to do so and it is not necessary for me to make reference now to those authorities. Having fully considered the matter the judge rejected the "proceedings" argument on the basis that the wording of the clause did not incorporate any steps prior to or short of the issue of court proceedings. She held that the meaning of the phrase "any proceedings brought against us by the purchaser" was clear and, as that event did not occur in the context of this dispute, this sub-clause did not apply. She therefore upheld the Deputy District Judge in this regard.
18. In relation to clause 4(i) (indemnity for loss etc. relating to state or condition of vehicle) the judge held as follows:

a) This was a far reaching clause which survived the termination of the agreement

b) Paccar had suffered loss as a result of a "third party claim or otherwise" being threatened against them by Private;

c) That claim arose as a result of the state or condition of the vehicle;

d) There is a direct connective line between the loss suffered by Paccar and the terms of the agreement and that line is not severed as a result of the fact that the vehicle was "sold as seen" to Private.

19. Consequently the judge held that the District Judge was in error to conclude that, in the absence of cogent evidence to demonstrate why the vehicle failed, this clause would not bite. She held that this was a strict liability clause with no need for Paccar to demonstrate the nature of the fault with the vehicle. In any event, the judge held that there was sufficient evidence on Mr Waite's testimony as to the lack of power in the vehicle, to substantiate Paccar's case which was that the loss incurred resulted from the state or condition of the lorry. The appeal before her therefore succeeded on that point.
20. In relation to clause 4(iii) (responsibility for good condition and full working order) the judge emphasised the high level of responsibility which flowed from the obligation to maintain the vehicle in "full working order". The judge considered that Mr Waite was under a duty to "make good all damage" but had failed to do so. She further held that the pulling power of a lorry was such a fundamental part of the vehicle's condition and performance that "it flies in the face of logic to say that it falls into the category of the kind of cosmetic disrepair or minor mechanical faults that one would normally associate as fair wear and tear. Fair wear and tear is not, in my judgment, full working order"
21. The judge finally held that the requirement under clause 4 (iii) was one of strict liability. For those various reasons she therefore found that Mr Waite had been in breach of clause 4 (iii). The appeal was therefore allowed.

The arguments on appeal to the Court of Appeal

22. We have heard argument from Miss Scott on behalf of the Appellant to the effect that the judge was in error in reversing the first instance decision relating to clause 4(i) and 4(iii). In addition she sought to establish that the contract between Mr Waite and Paccar contained an implied term requiring Paccar, if it sold the vehicle, to do so on the basis that no warranty as to fitness was given. Mr Bell on behalf of Paccar sought to uphold the circuit judge's decision and also to reverse the conclusion of both previous judges on the question of whether clause 8(b)(iv) applied, notwithstanding the absence of formal 'proceedings' against Paccar.
23. Counsels' helpful and clear submissions travelled over ground which had, by and large, been the focus of the two earlier judgments. As a result it is not necessary for me to reproduce much of the detail of their respective arguments here. In relation to clause 4(iii), Miss Scott submitted that there was no basis upon which the judge could substitute her view for that of the Deputy District Judge: the judge's finding that Mr Waite's own evidence established a breach was in error; there was no expert evidence in the proceedings and the judge was therefore wrong to rely upon the expert material from the "Jones" dispute; assessment of the condition of the vehicle must take account of its age and mileage; and the judge had misconstrued the clause by holding that it was one of strict liability.
24. In relation to clause 4(i), Miss Scott's case is that the clause can only apply to acts and/or omissions by Mr Waite whilst the vehicle is in his care during the term of the agreement. Whilst the wording of the clause permitted Paccar to claim damages after the termination of the agreement, the causation of the loss must relate to time during which the vehicle was in Mr Waite's possession and control.
25. In relation to clause 8(b)(iv), despite the fact that no formal proceedings were issued against Paccar either by Private or Mr Jones, Mr Bell referred to case law (Solomon v Cromwell Group plc [2011] EWCA Civ 1584 and Crosbie v Munroe [2003] EWCA Civ 350) in support of his submission that the word 'proceedings' in this context includes pre-action proceedings.
26. At an early stage in the hearing, the court raised a matter which had not been in the contemplation of either side regarding the syntax within clause 8(b)(iv). It will be recalled that the printed clause reads as follows:

" (iv) you must indemnify us against all losses, damage, costs, claims and expense arising out of the sale (including legal fees) on a full indemnity basis in connection with any proceedings against us brought by any purchaser;"

The court questioned whether the closing bracket should in fact be placed at the end of the clause, after "purchaser", rather than in its present location after "legal fees". Some support for that suggestion was gained from the reference to 'full indemnity basis' and the fact that a similar, wider bracket was deployed in clause 4(i). The effect of such a redrafting of the clause would be to diminish the impact of the word 'proceedings' so that it would only qualify a claim for legal fees, and not govern the entire clause. It was common ground that the court had jurisdiction, if the facts justified it, to modify a clause by moving a bracket in this manner. Predictably, Mr Bell agreed with the suggestion, but it was firmly contested by Miss Scott. In the event, we have not found it necessary to pursue this point to a conclusion.

Discussion and conclusions

27. It is, in my view, necessary to read the hire agreement as a whole in order to determine, not only the internal construction of each clause, but also the inter-relation of each clause with every other in so far as they may overlap.
28. Clause 8 as a whole deals with 'Renewal Option and Disposal'. Clause 8(b) presents as a complete code which covers the circumstances in which the hirer sells the vehicle acting as the agent of the finance company. If there is a sale by the hirer as agent, then each of the sub-sub-clauses within sub-clause 8(b) will apply. It cannot be permissible for the hirer to pick and choose amongst these provisions and seek to rely, for example, on clause 8(b)(iv), without having to accept that any sale to which that provision relates must also be governed by cl 8(b)(iii).
29. Whilst, on the facts of this case, the sale was not, in the event, concluded by Mr Waite acting as agent for Paccar Financial Plc, both parties conducted themselves as if it had been. In accordance with the 8(b) code Mr Waite provided the name of Mr Jones as a willing purchaser, the sale of the lorry was 'as seen', Mr Waite was paid 95% of the proceeds as provided by clause 8(b)(v) and, initially, the only claim made against him was under clause 8(b)(iv). Thus, although this was not a sale to which the provisions of clause 8(b) applied, both parties treated it as if it was and would now be estopped by convention from contending otherwise. It follows that Paccar are able to rely upon clause 8(b)(iv) as against Mr Waite, but he in turn is entitled to rely on clause 8(b)(iii) against Paccar.
30. In any event consideration of what requirement as to contract terms was placed upon the finance company by clause 8(b)(iii) in the event of a direct sale is academic as Paccar did in fact sell the lorry on a 'sold as seen' basis. Once it became apparent that there was a dispute as to the condition of the vehicle and proceedings had been issued between Mr Jones and Private, Paccar, for reasons of its own, opted to make a payment to Private in settlement of any potential claim. That payment was made without any finding or concession as to the condition of the vehicle. Any payment that Paccar have made, or any expense that they have incurred in relation to the dispute with Private and Mr Jones, has occurred outside the terms of the contract with Mr Waite as a result of a free-standing decision by Paccar.
31. In the alternative, any liability that is to fall on Mr Waite must be limited to that which is determined under clause 8(b) when read as a whole. As a result, any sale would be deemed to have been in accordance with clause 8(b)(iii) and no liability would impact on Mr Waite.
32. My central conclusion, therefore, is that the code in clause 8(b) governed this sale, it was a sale without warranty as to the lorry's condition, any payment made by Paccar to Private or Mr Jones did not, and could not as a matter of law, have arisen out of such a sale with the result that there is no liability under clause 8(b) upon Mr Waite in these proceedings.
33. In view of the approach that I consider should be taken to clause 8 as a whole, the question of the position of the bracket in clause 8(b)(iv) does not arise and neither does the need to interpret the definition of 'proceedings'. In like manner, the implied term argued for by Miss Scott is unnecessary as the protection that she seeks for her client is provided by the requirement that clause 8(b)(iii) applies to the sale and he is entitled to the protection that the express terms that are therein provided.
34. In the light of my conclusions in relation to clause 8 it is not strictly necessary to go on to consider the points raised in relation to clause 4 on the basis that it is clause 8 which provides the code in this agreement to govern the event of a sale of the vehicle, if no liability upon Mr Waite arises under clause 8 then it cannot be open to Paccar to establish liability in relation to a sale under clause 4.
35. If it were necessary to do so, I would agree with Miss Scott's submissions that:

a) Clause 4 applies only to acts and omissions by Mr Waite during the period of his hire of the lorry and not thereafter;

b) It was not open, on the evidence, for HHJ Jakens to rely upon the reports filed in the "Jones" dispute as expert evidence in the present proceedings;

c) The district judge's findings were properly open to him on the evidence and HHJ Jakens was in error in overturning his decision and substituting her own findings.

36. Further, within the internal provisions of clause 4, if a hirer complies with the requirements of clause 4(iii), which the Deputy District Judge found that he had, there can be no separate liability arising from clause 4(i).
37. In the light of these conclusions, I hold that the circuit judge was in error in allowing the appeal from the deputy district judge and that his decision is to be upheld and restored, albeit for the expanded reasons that I have described. I would therefore allow the appeal and restore the original order.

Lord Justice Patten

38. I agree

The Chancellor of the High Court

39. I also agree.