England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE COUNTY COURT (sitting in Birmingham)
MR JUSTICE EDIS
A47YM324

		Royal Courts of Justice Strand, London, WC2A 2LL
		17 January 2018

Lord Justice David Richards:

1. This is an appeal against the decision of Edis J, sitting in the County Court at Birmingham, that the parties had entered into a contract settling a dispute concerning the supply by the appellant of a quantity of paper to the respondent and that in consequence the appellant owed a sum of £14,243.63 to the respondent in respect of agreed compensation for losses sustained by the respondent.
2. The grounds of appeal are, in short, that (i) the settlement agreement as found by the judge had not been pleaded by the respondent and differed radically from the agreement that had been pleaded, and that the appellant was prejudiced by the lack of opportunity to meet this unpleaded case; (ii) the settlement agreement as found by the judge was not advanced at any stage by the respondent but was the judge's own "construction", again with the result that the appellant was deprived of the opportunity of dealing with it; (iii) the settlement agreement as found by the judge was unsupported by his own findings of fact and was unsupported by any evidence; and (iv) the judge erred in finding an enforceable settlement agreement, because he made no finding of offer and acceptance or of any consideration moving from the respondent and the terms were insufficiently certain.
3. The underlying dispute concerning the supply of paper was summarised by the judge in his judgment at [2] (in which references to the claimant and the defendant are to the respondent and appellant respectively):

"The claimant is a printing company. The defendant is a paper merchant. The claimant used to buy paper from the defendant, and had a running account with a credit limit of £70,000 at the material time. That facility was granted subject to terms and conditions ("T&Cs") which it is now agreed were incorporated into every contract between the parties for the supply of paper. In May and June of 2010 two deliveries of paper caused the claimant problems with its best customers. The first order was for paper which the defendant sourced from Stora Enso UK and the second with paper sourced from Portucel Soporcel. The claimant, among other things, prints letterhead sheets for its customers who can then print letters on them using commercial laser printers. The paper must therefore be suitable to use in two printing processes, the offset lithography used to print the letterheads and the laser printing process by the end user. The claimant's case is that it always orders laser guaranteed paper from the defendant for this use, and that the Stora paper did conform to that specification whereas the Portucel did not. The Portucel paper was not laser guaranteed but laser compatible which I think means that it might work in laser printers but it might not and it is neither recommended nor guaranteed by the manufacturer for that purpose. The Portucel order was for 2m sheets of paper and was delivered in two tranches. The first tranche caused no problems, but the second set of paper when turned into letterhead paper failed to work properly in the customers' laser printers and caused immediate complaints. Since the Stora order had recently caused similar problems to the same customers this caused a major problem for the claimant's business. It was on the verge of losing its best customers".

4. It is not disputed that, so far as relevant to the supply of the Portucel paper, the a manager employed by the appellant issued in the name of the appellant three credit notes to the respondent. Credit notes for £8,770.14 and £9,780.56 were issued on 7 July 2011 and 31 May 2012 respectively, totalling £18,550.70 which was the price payable by the respondent for the paper. The appellant does not challenge the issue of these credit notes and has not suggested that the respondent remained liable to pay the purchase price for the paper.
5. The third credit note (the compensation credit note), for £19,381.59, was issued on 23 December 2012. The issue raised by the respondent's claim was whether the appellant was bound by this credit note and was therefore liable to pay the sum claimed of £14,243.63, after credit was given for the respondent's use of it to the extent of £5,147.44.
6. The respondent's case was that the compensation credit note was issued in fulfilment of the appellant's agreement to pay compensation for the losses sustained by the respondent in consequence of the supply of defective paper. The credit note, on its face, stated that it was "compensation" and gave as its reason "settlement of customer claim". It was preceded by an email from Mr Andy Armstrong, the appellant's local manager, to Mr Craig Douglas, a manager with the respondent, in which Mr Armstrong said: "Apologies for taking so long but I am pleased to confirm what we discussed in regard to settling the outstanding claim for Inaset. The value that we are still outstanding and due to credit is £19,470.18. I propose to pass the credit note on 23rd December and have issued the instructions for this to happen on that date."
7. The appellant denied that any agreement was reached for the payment of compensation and averred in its defence that the credit note was "unauthorised and illegitimate" and that it resulted from a conspiracy between the respondent and the appellant's local branch manager to defraud the appellant.
8. As the judge noted in his judgment at [1], at trial "[e]ach party has advanced a case radically different from its pleadings and each side has engaged in significant arguments based on the inadequacy of the other's pleadings".
9. The allegation of a fraudulent conspiracy was going to be a major issue at the trial but early in the hearing, counsel for the appellant announced that it would not be pursued and that the appellant's case would be confined to a denial of any settlement agreement and to its averment that the local branch manager lacked authority to agree on behalf of the appellant to pay compensation or to issue the credit note.
10. The judge held that the branch manager had the requisite authority, and there is no appeal against that finding. Before looking in detail at the issues raised by the grounds of appeal, it is important to appreciate the significance of this finding. The credit note was issued in good faith, the allegation of a fraudulent conspiracy having been abandoned, and with due authority. It was accepted by the respondent in settlement of its claim for compensation. It is difficult in these circumstances to see any grounds on which the credit note could be other than binding on the appellant. Whether the agreement on the part of the appellant to provide compensation was made, as pleaded by the respondent, in November 2010 or only shortly before the credit note was issued, or at any intervening date, is of no great significance once it is accepted that the credit note was issued with authority and accepted in settlement of the respondent's claim for compensation.
11. The respondent pleaded that a settlement agreement had been made orally in about November 2010 at a meeting at its trade premises attended by Mr Ken Buchanan and Mr Douglas of the respondent and by Mr Armstrong and Mr Martin McPhee of the appellants. The pleaded terms of the settlement agreement were that the appellant would refund the price paid by the respondent for the Portucel paper (£18,550.70) and would compensate the respondent for its additional losses in an agreed amount of £19,381.59, and that the respondent would accept these sums in settlement of its claim for breach of the supply contract. The respondent further pleaded that, in due performance of the settlement agreement, the appellant issued the two credit notes in July 2011 and May 2012, totalling £18,550.70, in respect of the price, and the credit note for £19,381.59 in respect of the agreed compensation.
12. The claim pleaded by the respondent was that, in breach of the settlement agreement, the appellant purported in May 2012 to cancel the compensation credit note by issuing an invoice for the same amount. The respondent had by then used the credit note to the extent of £5,147.44 and its claim was for the balance of £14,243.63, with an alternative claim for damages for breach of the supply contract.
13. Counsel for the respondent opened the case on the basis of the pleaded settlement agreement.
14. However, the pleaded case was not supported by the evidence, written or oral, of the respondent's witnesses. The departure from the respondent's pleaded case was clear from the witness statement of Mr Buchanan. He did not support the pleaded case but set out the essential features of its case at paragraph 27 of his statement:

"There was no doubt that very soon after the complaint Andy accepted liability and accepted that Premier Paper had to put this right. I accept that time did then drag on whilst Andy and Martin contacted the Mill. The manner of payment of the settlement sum was not concluded until much later as Martin was trying to claw back some sums in respect of the paper and to reduce Premier Paper's liability. However, it was agreed fairly early on that we would be compensated."

15. That the appellant appreciated that the respondent's evidence differed from its pleaded case is apparent from the cross-examination of Mr Buchanan. Counsel for the appellant took Mr Buchanan to paragraph 27 of his witness statement and drew attention to the fact that he did not state that there was an agreement in November 2010 for compensation in a particular figure or that the respondent would be credited with the price of the paper. Mr Buchanan answered: "Well, there was no agreement at that time. What had happened, we had complained about this. Mr Armstrong had gone in and actually visited our customer and witnessed it happening on his high speed laser printer...We entered into no monetary agreement as far as I can remember. There was no discussion of how much at that period…It was agreed fairly early on that we would be compensated, but there's no figure there." Mr Buchanan agreed with counsel's summary of his evidence that "there was an agreement that there would be some compensation, but there wasn't any agreement as to precise figures…in November 2010."
16. Following this evidence, counsel for the appellant said to the judge that "the evidence that this witness is giving is of a different case than the case pleaded in the particulars of claim. It is of a case that there was a settlement in principle in November 2010 and then that there was a later settlement or agreement as to figures I think in December 2011". As it was, he said, a new and unpleaded case, he asked for five minutes to take instructions. The judge agreed and, on the hearing resuming, counsel told the judge that "the way in which the evidence has been put does change this case quite considerably" and that "there are other points I will need to think about in my cross-examination because of that change in the case". The judge observed that it was a departure from the pleading, not the witness statement. Counsel said that he would come back to this topic after the short adjournment. At the start of the hearing in the afternoon, counsel told the judge that he had read the pleadings over the short adjournment and "following that review, I don't need to revisit the topic".
17. Counsel's statement that he did not need to revisit the topic might well be understood to mean that he was content to deal with the respondent's case on the basis of Mr Buchanan's evidence, but in his closing speech, he objected to the new case, saying that it was far too late to amend the particulars of claim and that the appellant would be "seriously prejudiced" by an amendment because the respondent was "presenting a case in his evidence that was fundamentally different and inconsistent with the pleaded case". He went on to say:

"So if this had been pleaded in the first place, my Lord, there wouldn't be a claim, because the only claim is for 19,000. The claimant has had 18,550 in credit notes and that's agreed. It's had £5,100 of goods that it hasn't paid for. It's had more than £19,381 already. So that is one of, I imagine, a number of defences the defendant would have pleaded if a different later settlement agreement on different terms had been pleaded by the claimant."

18. The judge asked counsel whether it was still alleged that Mr Armstrong lacked authority to agree a settlement on behalf of the appellant. He replied that it would apply to the pleaded agreement in November 2010, but a case based on that agreement could not succeed on the evidence. If another, later agreement had been pleaded, counsel said that he would have cross-examined differently.
19. In his judgment, the judge summarised the respondent's pleaded case but later, under the heading "The claimant's real case", the judge said at [9]:

"The claimant's case is, in fact, not as pleaded either. Their evidence shows that the complaint was quickly communicated to Mr. Armstrong who quickly accepted that it was correct and it was then assumed that it would be sorted out in due course. No figures were discussed, still less agreed in November 2010. There was no meeting between the four named men at the claimant's premises and no agreement was reached beyond that which I have just described. Everyone instead concentrated on resolving the Stora claim which was not achieved until May 2011 after the intervention of Mr. Gooderham, one of the Regional Directors of the defendant."

20. At [10], the judge summarised the issues:

"Now that it is no longer alleged that the December 2011 credit note was issued further to an agreement between Mr. Armstrong and the claimant which was a conspiracy to defraud the defendant the real issue is whether the claimant has proved that the credit note was issued further to any contract. If so, was it a contract on which the claimant is entitled to rely given its pleadings? If so, has the defendant established that Mr. Armstrong had no actual or ostensible authority to contract on behalf of the claimant which is not therefore bound by it. The agency issue remains live, therefore, if the claimant succeeds on the first two issues."

21. At [12] the judge concluded that Mr Armstrong had actual authority to issue the relevant credit notes, including the credit note issued in December 2011, and to conclude a settlement agreement on behalf of the appellant.
22. At [19], the judge addressed whether the credit note was issued further to an agreement by which the appellant was bound. Having referred to the evidence of Mr Buchanan, Mr McPhee and Mr Armstrong, the judge said:

"If I accept that evidence then it is evidence of a contract by which the parties compromised their dispute as to the losses caused to the claimant by the inferior quality paper which had been supplied. The issuing of the credit note in a particular sum is some evidence which supports that. It is clear that consideration was given by the claimant which accepted the credit note in settlement of its claim. I do accept the oral evidence which has been given on this issue."

23. At [20], the judge addressed the inconsistency between the evidence and the pleaded case:

"That finding is supported by the evidence of the claimant's witnesses and its inconsistency with the pleading has been explained above. It is a departure from the pleaded case which ought to say that there was an agreement in November 2010 that the defendant would refund the cost of the second batch of Portucel paper and pay a reasonable sum for losses caused by the failure to supply paper as per the contract. It ought to say that the cost of paper was recovered in part from the manufacturer in July 2011 which resulted in a part refund. Further sums were paid by false credit notes and uncharged supplies after that. That position was regularised by the issue of a credit note of 31^st May 2012 for the balance of the cost of the paper and the cancellation of the irregular transactions from the period August-December 2011. It ought to go on and say that the compensation element was quantified in December 2011 in the sum contained in the credit note. That case is set out (at least in part) in the witness statements but not the pleading. I have to decide whether to permit the claimant to advance its true case notwithstanding the defect in the pleading. In my judgment, the pleading does put the defendant on notice of the claim it faces in enough detail to ensure procedural fairness. In the end, the defendant had no evidence with which to dispute what happened between its Scottish regional office and the claimant in relation to the Portucel paper. That is why they sought to impugn the agreement as fraudulent (an averment which includes an acceptance that there was an agreement), or that it was concluded without authority. Having lost on those issues, there was really nothing for them to say about how the credit note of December 2011 came into existence. For these reasons I reject the submission that the defendant will be unfairly prejudiced if I permit the claimant to advance its true case."

24. As earlier mentioned, the principal challenge on this appeal (grounds 1 and 2) is that the case accepted by the judge was not pleaded and was so far removed from the pleaded case that it was procedurally unfair for the judge to accede to it, and further that the settlement agreement found by the judge was not advanced by either party and the appellant was not given the opportunity to make submissions on it.
25. I have set out above in some detail the development of the unpleaded case. The disparity between the respondent's pleaded case and its evidence was apparent from Mr Buchanan's witness statement and was explored by the appellant's counsel in his cross-examination of Mr Buchanan. His oral evidence confirmed his witness statement and cannot have been a surprise to the appellant. On the face of it, the appellant had a proper opportunity at the trial of dealing with the unpleaded case. Counsel for the appellant submitted to the judge, and has submitted to us, that the failure to plead the new case deprived the appellant of properly meeting it, through an amended defence, the submission of new evidence or different cross-examination. These submissions, expressed in general terms, have not been particularised. No details have been given of the amendments to the defence or of any evidence or investigation that would have been given or undertaken if the new case had been pleaded. In answer to a question in this court, counsel for the appellant said that it would have challenged Mr Armstrong's authority to agree a compensation figure and issue the compensation credit note in December 2011. But no indication has been given of the basis on which it could be said that he lacked such authority in December 2011, the judge having rejected the appellant's case that Mr Armstrong lacked authority in November 2010.
26. In my judgment, the appellant suffered no procedural unfairness as a result of the judge's decision to permit the respondent to develop its case in accordance with its evidence, rather than its pleading. Nor was there any unfairness in the judge's finding as to the content of the settlement agreement, as suggested by ground 2 of the grounds of appeal. It was a finding that was open on the evidence and the appellant had a full opportunity of dealing with the evidence.
27. Ground 3 challenges the judge's finding of a settlement agreement as not supported either by the judge's own findings of fact or by any evidence. It is said that the judge's finding at [9] that "the complaint was quickly communicated to Mr Armstrong who quickly accepted that it was correct and it was then assumed that it would be sorted out in due course….no agreement was reached beyond what that I have just described" cannot support the terms of the settlement agreement found by him.
28. The judgment must, however, be read as a whole. It is clear from [20] that the judge was making findings as to the terms of the agreement reached in November 2010 and as to the subsequent assessment and acceptance of the losses of £19,381.59 advanced by the respondent. Those findings were available to the judge on the written and oral evidence of the witnesses called by both parties. Indeed, it accurately reflects the summary of Mr Buchanan's evidence put to him by counsel for the appellant that in November 2010 "there was an agreement that there would be some compensation, but there wasn't any agreement as to precise figures". The issue of the credit note in December 2011 is in any event inexplicable unless it was the acceptance by the appellant of the respondent's claim for loss.
29. Finally, under ground 4, the appellant challenges the finding of a binding settlement agreement on the ground that the basic contractual elements of offer, acceptance, consideration and certainty of terms were missing. Focusing on the finding of an agreement in November 2010, it is said that the judge made no finding of any acceptance by the respondent of any offer made by the appellant, or of any consideration emanating from the respondent, and that an agreement that the claim would be "sorted out in due course" was insufficiently certain. In my judgment, this challenge cannot succeed. First, the agreement found by the judge to have been made in November 2010 involved clear consideration on the part of the respondent in forbearing to sue and agreeing to accept a reasonable sum in respect of its losses. The judge found that the parties were agreed on the terms and, where there is agreement, it is unnecessary to identify the precise mechanics of offer and acceptance. There can be no doubt that the quantification of the respondent's losses was subsequently agreed, through a discussion between the parties' representatives and the issue of the credit note and its acceptance by the respondent.
30. For these reasons, I would dismiss this appeal.

Lord Justice Gross:

31. I agree.