England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE KNOWLES

		Royal Courts of Justice Strand, London, WC2A 2LL
		23/03/2017

Lord Justice Longmore:

Introduction

1. The defendant and respondent ("Perkins") is a company incorporated in England which engages in the business of designing, manufacturing and supplying a range of engines for use in various sectors of commerce.
2. Perkins and the first claimant entered into a distributor agreement ("the agreement") with Perkins on 1^st May 2000. The first claimant is a Turkish company and acted as distributor of Perkins products in Turkey. The second claimant is a wholly owned subsidiary of the first claimant which claims to have been specifically created in order to replace the first claimant as distributor or, at least, to improve the service offered by the first claimant. The first claimant claims that the second claimant became a party to the agreement but this is denied by Perkins.
3. Perkins has now given 6 months notice of termination and the claimants allege that the notice is ineffective and have sued for wrongful termination. Knowles J has given summary judgment in favour of Perkins.
4. The important terms of the agreement are:-

"2 Appointment and duration

2.1 Subject to the terms hereof [Perkins] appoints the Distributor as one of its distributors for the Territory and the Distributor accepts such appointment.

2.2 The Distributor's appointment shall be deemed to have commenced on the Commencing Date.

2.3 Unless sooner terminated under the provision of Article 19 hereof, this Agreement shall remain in force for an initial period of 3 years from the Commencing Date. It shall continue in force thereafter until terminated by either party giving to the other at least 6 months prior written notice of termination to expire at the end of such initial period or at any time thereafter.

3.2 The Distributor shall perform its obligations hereunder in accordance with the business plan agreed by the parties. The plan shall include the following information for a projected one-year period:

(i) the Distributor's marketing objectives, including sales and penetrations;

(ii) the resources and facilities required to achieve its objectives;

3.3 The parties shall review the plan at least annually and agree a revised plan following each such review.

13 Changes to Agreement

For any amendment to this Agreement or any part thereof to be valid and binding on the Parties, it must be reduced to writing and signed by authorised representatives of each party.

19 Termination

19.1 In addition to any other rights to terminate contained herein, [Perkins] may by written notice to the Distributor terminate this Agreement forthwith upon:

19.1.1 any attempted assignment or transfer without Perkins' prior approval by the Distributor of this Agreement or any part thereof or any rights or obligations thereunder; or

19.1.2 the commencement or happening of any occurrence connected with insolvency, bankruptcy, dissolution, administration, receivership or liquidation (or the national equivalent of any of the above within the Territory or any part thereof) of the Distributor; or

19.1.3 a breach of any of the terms of any payment guarantee referenced in Schedule 1 by any party giving that guarantee to the Company.

19.2 Subject to Article 19.3 relating specifically to deficient performance, if the Distributor is in breach of any of its obligations hereunder, [Perkins] may serve written notice on the Distributor requiring it to remedy the same within 45 days thereof. Where the Distributor fails, in [Perkins'] opinion, to so remedy, the Company may serve a written notice on the Distributor forthwith terminating this Agreement.

19.3If during the term hereof, [Perkins] is in its absolute discretion dissatisfied with the Distributor's performance, including without limitation, the Distributor's failure to perform in accordance with the agreed business plan, it may notify the Distributor in writing, detailing the required remedial actions that must be taken within the following 3 months. If [Perkins] remains dissatisfied at the end of the 3 months period, it may thereafter terminate this Agreement by serving not less than 3 months written notice of termination on the Distributor.

19.4 [Perkins] may terminate this Agreement by 6 months written notice to the Distributor if there is any change after the Commencing Date in the management, constitution or circumstances of the Distributor which [Perkins] in its absolute discretion deems materially detrimental to its interests hereunder.

22.4 The Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes and replaces any prior communications, representations or agreements (whether oral or in writing).

22.5 This agreement shall be deemed to be an agreement made in England and shall be read and construed and take effect in all respects in accordance with the Laws of England and the parties hereby submit to the jurisdiction of the English Courts."

5. On 21^st September 2012 Perkins gave notice of its intention to terminate under Article 2.3 of the agreement which would take effect from 31^st March 2013. By a claim form issued on 29^th April 2014 the claimants disputed the effectiveness of the termination notice and argued that (i) Perkins had been dissatisfied with the claimants' performance and should have given them the opportunity to take remedial action under clause 19.3 rather than serving notice under Article 2.3 (ii) the agreement had been impliedly varied having regard to an alteration in the circumstances of the parties (iii) Perkins were in breach of an implied term of good faith or fair dealing by giving notice when they did.
6. The circumstances on which the claimants rely as constituting a variation of the agreement by conduct were that Perkins in 2010 requested the first claimant to implement a strategic plan up to the end of 2013 rather than for one year only as contemplated by Article 3.2 the agreement. This is referred to as "Strategy and Cascade" or the S & C plan.
7. In 2011/12 Perkins then further requested that the second claimant replace or join with the first claimant as distributor. The claimants were also asked to agree a plan with the defendant known as the Multi Generation Project Plan ("MGPP") which ran to the end of 2015 and required the claimants to make long term investments in their business. The claimants say that they agreed these proposals and as a result invested some 6.37m Euros in implementing these plans. The appellants contend that it follows from this that the variation achieved by conduct was an agreement that the agreement would last to the end of 2015 or at least could only be terminated on reasonable notice which should have to take the claimants investment and the need to recoup it into account.

The judgment

8. Knowles J's view on the first matter was that both parties had a right after three years to terminate on six months notice. That was the "plain construction" of Article 2.3. The judge rejected the argument that this construction of Article 2.3 would render Article 19.3 nugatory. While Article 19.3 was available from the commencement of the agreement, after three years had passed the defendant could use either provision.
9. As for the variation issue, the judge described the argument as "impossible". The parties had agreed termination arrangements in 2000 and these had applied for 10 years or more before the supposed variation. The fact of business plans running for longer than the termination period had always been a feature. The contention of the claimants lacked commercial reality. Even assuming that the second claimant became a party to the contract, without an explicit change of the agreement this would not improve the suggestion that Article 2.3 was varied.
10. On the fair dealing issue, the judge rejected both terms which it was suggested by the claimants ought to be implied, since they overlapped with Article 19 in circumstances of termination for breach or underperformance. He went on to consider a less ambitious formulation that required good faith. The claimants argued that Perkins had been considering whether to appoint another distributor but did not tell the claimants and even made misleadingly positive comments about the claimants' performance. At paragraph 25 he said that there was not even a prima facie case of conduct that lacked good faith. At paragraph 26 he ruled out the contention that there had been any dishonesty by the defendant.

Grounds of Appeal

11. The grounds of appeal are:-

i) The judge's construction of the agreement was wrong because the parties cannot have intended that the defendant would have a choice as to whether to terminate under Article 2.3 or 19.3.

ii) The judge was wrong to conclude that the claimants' case on variation was impossible:

a) The judge gave undue weight to the fact that the agreement anticipated one year business plans and a six month notice period and did not refer at all to the evidence that the plans agreed in 2010 and 2012 were wholly different.

b) The judge was wrong to conclude that, even if the second claimant had become a party, such fact had no effect on the argument that the agreement was varied. He implicitly accepted that this would demonstrate that the parties were prepared to make legally effective changes without expressly putting them in writing as envisaged by Article 13.

iii) The judge was wrong to conclude that the material provided by the claimants did not amount to a prima facie case of conduct which lacked good faith. The judge elided the concepts of good faith and dishonesty.

Ground 1: Construction

12. Mr Andrew Sutcliffe QC for the claimants submitted that, if Perkins terminated as a result of its dissatisfaction with the service provided by the claimants, then it must utilise the provision in Article 19.3. This provision specifically contemplates the case in which termination is desired because of dissatisfaction with the service provided. It allows for a three month remedial period during which the claimants can attempt to address any concerns. It caters for a special situation which takes precedence over the general situation envisaged by Article 2.3.
13. For the purpose of this summary judgment application, I accept that Perkins were, in fact, dissatisfied with the claimants' performance but I agree with the judge (para 9) that the proposition that Perkins was not entitled to use Article 2.3 if it was dissatisfied with the claimants' performance is not arguable. Article 2.3 and 19.3 fit perfectly well together because the agreement was to run for 3 years in the first instance which, no doubt, seemed a reasonably long time to the parties when they originally made the agreement on 1^st May 2000. During that time, neither side could give notice of termination; it was therefore necessary for Perkins to reserve to itself some opportunity for extricating itself if the first claimant's services were unsatisfactory; not unnaturally it agreed that in those circumstances the first claimant, should have the opportunity of putting things right.
14. It may, in any event, be in the interest of Perkins, even after the first 3 years has elapsed, to invoke Article 19.3 instead of Article 2.3 if it does not want to terminate the relationship. Remedial action is often a first port of call which a principal to a distributorship agreement will wish to invoke rather than outright termination. Article 19.3 still continues to have an effective life, therefore, after the first 3 years. As the judge pointed out, each term could be said to be specific, rather than one general and one specific. The maxim, which (if the parties will forgive me) is expressed so much more forcibly and concisely in Latin than in English as "Generalia non specialibus derogant", does not therefore apply.

Ground 2: Variation

15. Here too the facts must be taken to be as the claimants allege them to be namely:-

i) that the agreement was varied so as to make the second claimant a party;

ii) that the agreement was further varied so as to require the claimants to adopt longer term plans than envisaged by Article 3.2;

iii) that such longer term plans, in particular the MGPP which was to be effective for the years 2013, 2014 and 2015, required the claimants to make substantial investment in their business as set out in para 26 of the amended points of claim, including building a new head office in Istanbul at a cost of €1,700,000, training new dealers at a cost of €1,065,000, a marketing campaign costing €645,000 and new software costing €505,000.

16. The claimants assert that, in the light of the undoubted fact that the agreement was varied in this way, it follows that the agreement was further varied to provide that notice to terminate could not be given to take effect sooner than the end of 2015 or (if earlier) when the claimants had recouped the substance of their investment. Article 13 is no impediment to this construction since it must be read in the light of this court's decision in Globe Motors Inc v TRV Lucas [2016] EWCA Civ 396 paras 101 ff per Beatson LJ.
17. Although the parties could find no exact authority on the principles to be applied when assessing whether an express variation of some terms in a contract can result in an implied variation of another term of a contract, they agreed that it was appropriate to apply the principles adopted by the court in determining whether an implied contract arises as a result of the conduct of the parties.
18. The matter was put in this way by Bingham LJ in The Aramis [1989] 1 Lloyds Rep at page 274:-

"… it would, in my view, be contrary to principle to countenance the implication of a contract from conduct if the conduct relied upon is no more consistent with an intention to contract than with an intention not to contract. It must, surely, be necessary to identify conduct referable to the contract contended for or, at the very least, conduct inconsistent with there being no contract made between the parties to the effect contended for. Put another way, I think it must be fatal to the implications of a contract if the parties would or might have acted exactly as they did in the absence of a contract."

This was echoed by Staughton LJ in The Gudermes [1993] 1 Lloyds Rep at page 320:-

"… it is not enough to show that the parties have done something more than, or something different from, what they were already bound to do under obligations owed to others. What they do must be consistent only with there being a new contract implied, and inconsistent with there being no such contract. The paradigm cases of the shipowner giving up his lien, or the receiver paying the freight, illustrate that."

19. One must therefore ask oneself whether the asserted variations as set out in para 15 above are inconsistent with there being no variation of the right to terminate on six months notice and consistent only with an alteration such that notice to terminate could only be given at the end of 2015 or when the claimants had had the opportunity to recoup their investment.
20. Unguided by any reference to authority, the judge said that the claimants' case was impossible and (para 16) that the proposition that the parties must have intended to amend their termination provisions, when the subject was not addressed, lacks any commercial reality on the materials in this case. Despite the fact that it was I that gave permission to appeal in this case so that this second ground of appeal, in particular, could be argued before the full court, I can only say that after such argument I agree with the judge.
21. In the first place the contract always contemplated that, once the initial 3 year period had elapsed, notice could be given to terminate after 6 months which could cut across any one year plan that might be in operation.
22. Secondly, although one has a natural sympathy with a distributor who has spent much time energy and money in developing his distributorship as his principal has required, if no discussion has occurred about any change to the termination provisions, it is impossible to say what the necessary terms of any new termination should be. A specific date such as the end of 2015 is quite different from the unamended term; the date when the claimants' investment could have been (or was) recouped is impossibly vague. Neither of these proposals is the only way forward consistent with the variations that were agreed.
23. The only sensible conclusion is that in the absence of a request for an alteration to the notice provisions it is impossible to conclude that there was such a variation. If such request has been made, it is impossible to know whether it would be agreed or not and, if it was, what the actual termination provision would be.
24. Even on the claimants' case as to the new term, it is unclear, as my Lord pointed out in argument, whether the lengthier term was to be mutual so that the claimants would be locked in until the end of 2015 whether they liked it or not.
25. It may be that the proposed new term would not be inconsistent with the variations that were made but that is not enough. The variations must be consistent only with the existence of the new term and, on no view, is that the case.

Ground 3: Implied Terms

26. The terms which the claimants submit should be implied into the contract are

"(1) That each party would provide the other with accurate and honest appraisals for the prospects from time to time of the relationship continuing, and on no account to give any misleading impression of those prospects.

(2) That each party would, before terminating the Agreement, warn the other party in clear terms of the reasons which had led it to consider termination, and provide the other party with an opportunity to alter its conduct and/or make representations prior to any termination notice being issued."

27. The judge gave short shift to these suggested terms and so would I. The second term is inconsistent with the proper construction of the contract since it seeks to elevate what is already in Article 19.3 to the exclusion of Article 2.3. That is just not the correct construction of the contract. The first part of the first term requires appraisals to be carried out, which is an entirely new concept coming into the contract. The second part of the first term is either unnecessary because a misleading representation gives rise to liability in any event or because any attempt to water that down by giving legal liability to a misleading "impression" is hopelessly vague.
28. Mr Sutcliffe relied on dicta of Leggatt J in Yam Seng Pte v International Trade Corporation [2013] 1 All ER (Comm) 1321 at paras 142-143:-

"[142] In some contractual contexts the relevant background expectations may extend further to an expectation that the parties will share information relevant to the performance of the contract such that a deliberate omission to disclose such information may amount to bad faith. English law has traditionally drawn a sharp distinction between certain relationships – such as partnership, trusteeship and other fiduciary relationships – on the one hand, in which the parties owe onerous obligations of disclosure to each other, and other contractual relationships in which no duty of disclosure is supposed to operate. Arguably at least, that dichotomy is too simplistic. While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer-term relationship between the parties to which they make a substantial commitment. Such "relational" contracts, as they are sometimes called, may require a high degree of communication, co-operation and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties' understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long-term distributorship agreements.

[143] The agreement in this case was a distributorship agreement which required the parties to communicate effectively and co-operate with each other in its performance …."

29. Interesting and informative as these comments are they do not support the terms proposed by Mr Sutcliffe in the present case. Moreover, as Mr Charles Hollander QC for Perkins pointed out, Leggatt J is expressly talking in para 143 of requirements in the contract for communication and co-operation "in its performance". Requirements for communication and co-operation in relation to termination would take one into a different realm altogether.
30. The judge was prepared to contemplate the possibility of a general good faith term but even that which he identified would not be broken in the present case if it existed. Since Mr Sutcliffe took his stand on his pleaded implied terms and did not seek to rely on the lesser term contemplated by the judge I need say no more about this save that I see no reason why the judge's decision was wrong.

Conclusion

31. Although therefore this is a case decided on an application for summary judgment, there is, in my view, no prospect of a successful claim and, essentially for the reasons given by the judge, I would dismiss this appeal.

Lord Justice Briggs:

32. I agree.