England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st September 2006

Mrs Justice Gloster, DBE:

Introduction

1. The Claimant, Six Continents Hotels Inc ("Six Continents"), is the owner of the Holiday Inn trademark, used and registered for hotel services (amongst others). It is a member of the group of companies trading under the name InterContinental Hotels Group. Six Continents licenses to franchisees the use of different trademarks for hotel services, including "Express by Holiday Inn", "Holiday Inn" and "Crowne Plaza". Use of each of these trademarks by franchisees is subject to compliance with certain standards. Six Continents charges franchise/licence fees based upon what is defined in the licence agreements as Gross Room Revenue; it also charges a marketing and reservation contribution fee. I collectively refer to all these fees as "licence fees".
2. The Defendant, Event Hotel GmbH ("Event") is a German company which, between 27 December 1995 and 21 December 1999, entered into seven separate "license" [sic] agreements with Six Continents, each for the operation of a Holiday Inn branded hotel in Germany (together "the Agreements").
3. By its claim, Six Continents claims payment of unpaid licence fees in the sum of £859,144 allegedly due to it from Event under the Agreements. In addition, because the Agreements were terminated by Six Continents on account of Event's alleged breaches of contract in failing to pay fees that were due, Six Continents also claims contractual termination payments, which the Agreements provide are payable upon termination, in the sum of £2,286,140.73. Six Continents claims interest on both these heads of claim.
4. Six Continents alleges that, in or about 2002, Event fell behind with payment of amounts due to Six Continents under the franchise and associated agreements: that the amount owed to Six Continents was €1,064,383.41; that in June 2003 Six Continents agreed a revised payment plan ("the payment plan") with Event, and that, under this payment plan, Event agreed to pay €97,000 in June 2003, and thereafter €97,000 each month from September 2003 until May 2004, with a final payment of €94,383.41 in June 2004. Six Continents alleges that it was agreed that Event would continue to make its regular Licence fee ("regular Licence Fees") payments as they fell due.
5. It is common ground that Event did make the monthly payments under the payment plan but failed to pay the regular Licence Fees. By a letter dated 26 October 2004 Six Continents purported to terminate the Agreements pursuant to their terms for non-payment of licence fees due. As I have already said, as consequence of that termination, Six Continents claims termination payments pursuant to the termination provisions of the Agreements.
6. Event does not dispute that it fell very substantially into arrears in its payment of sums which, under certain of the Agreements, prima facie had fallen due. Nor does it take issue with the calculation of the quantum of Six Continents' claim. That was confirmed in oral evidence by a Mr. Michael Bauer, Event's Chief Executive Officer. However, Event contends that, by reason of the set off of its counter-claim, no sums are due or owing to Six Continents under the Agreements and substantial sums are due in damages to Event from Six Continents for fraudulent and/or negligent misrepresentation. Its counterclaim is based upon alleged fraudulent and/or negligent misrepresentations made by a Mr. Peter Vermeer, (then Six Continents' Development Director for Germany, Benelux, Switzerland and Eastern Europe, and who subsequently became, in 2003, Vice-President for Development (North, Central and Eastern Europe) of the Intercontinental Hotels Group), at a meeting in June 1999 in the course of the negotiations that led to the conclusion of the seventh and last licence agreement, in respect of the Holiday Inn, Cologne City-West. The meeting is alleged to have taken place on or about 23 June 1999 at Event's offices at Theodor Heuss-Ring No.9, in Cologne, and, as well as Mr. Vermeer, it is said that Mr. Anders Braks (the founder of, and 50% shareholder in, Event) and Mr. Michael Lachmann and Mr. Heinemann (then members of the Executive Committee of Event) were present on behalf of Event.
7. The alleged misrepresentations, as pleaded in paragraph 13 of the Re-Amended Defence, are that, at the meeting in June 1999, Mr. Vermeer represented to Event:

i) that "all other franchisees operating under the [Holiday Inn] Trademark Name in Germany, and in particular, the Queen's Moat Group and Scandic Group, did not pay lower franchise fees than [Event]"; and

ii) "[Six Continents] had decided that in respect of new franchise agreements, it would impose higher franchise fees than those agreed for …[Event]."

8. The factual case presented on Event's behalf at trial was that, at the outset of the negotiations in or about June 1999, Mr. Braks, on behalf of Event, stated to Mr. Vermeer that Event would not enter into the Cologne City West Licence Agreement unless Mr. Vermeer, on behalf of Six Continents, confirmed that the proposed Licence Fees in respect of the Cologne City West Licence Agreement and the other six hotels operated by Event in Germany under Licence Agreements were no higher than those charged by Six Continents to other licensees operating in Germany, and that, in response, Mr. Vermeer made the alleged misrepresentations. It was further contended that Event was induced by Mr. Vermeer's representations to enter into the last Agreement, namely the Cologne City West Agreement. It was further contended that in fact the representations were false, in that, at all material times there were franchisees/licensees of the Holiday Inn Brand in the German territory with whom Six Continents had agreed lower rates or subsequently agreed lower rates. Event therefore claimed damages under two heads:

i) the difference between the royalty which it was committed to pay and the royalty which it would probably have been able to negotiate had the misrepresentation not been made; and

ii) loss of revenue under the seven agreements arising from their allegedly wrongful repudiation in relation to the period from December 2004 to December 2008.

Issues

9. The issues that arise for determination can be summarised as follows:

i) Whether Mr. Vermeer made the misrepresentations as alleged?

ii) If so, whether Mr. Vermeer was fraudulent in so doing?

iii) If not, whether the terms of the Agreements preclude reliance upon any misrepresentation?

iv) Whether Event reasonably relied upon the alleged misrepresentations in concluding the City West agreement?

v) Assuming Event can make good its defence, what recoverable loss has Event proved in respect of its counterclaim?

10. Six Continents contends that the alleged misrepresentations were never made and, accordingly, Event's defence fails at first base. It further contends that, even were Event to clear that initial factual hurdle of establishing a misrepresentation, its case would fall at any one of the further hurdles identified by the above list of issues.

Summary of background facts

11. The background facts leading up to the meeting in June 1999, and thereafter, were largely uncontentious and may be summarised as follows.
12. There were, as I have already said, seven "license" agreements concluded between Six Continents and Event in relation to the Holiday Inn franchise. In summary:

i) Agreements in respect of three hotels were concluded in 1995. These were:

a) Holiday Inn Kamen-Unna. The 20 year licence term began on 12 January 1996.

b) Holiday Inn Bochum. The 20 year licence term began on 2 February 1996.

c) Holiday Inn Düsseldorf-Kaarst. The 20 year licence term began on 19 February 1996.

ii) Agreements in respect of two further hotels were concluded in 1996. These were:

a) Holiday Inn Hannover. The licence term began on 16 June 1996.

b) Holiday Inn Dortmund. The licence term began on 21 July 1996

iii) Agreements for two further hotels, both in Cologne, were entered into in 1999. These were:

a) Holiday Inn Cologne Belfortstrasse.

b) Holiday Inn Cologne City West. The licence term of 20 years did not begin until 23 August 2001 because this was a new build hotel.

iv) For the three agreements concluded in 1995, the fees initially included

a) royalty fees for year 1, 2%, for year 2, 3%, and for year 3 onwards 4% of gross room revenues; and

b) a marketing and reservation fee of 2% of gross room revenues.

v) It was common ground that in 1996, this fee structure was revised for each of the Düsseldorf-Kaarst, Bochum and Kamen-Unna hotels so as to provide for royalty fees in years 1 and 2 of 2% and in year 3 onwards of 3% but subject to an annual review, from year 5, of the profitability of the hotel, with an agreement to raise the royalty fee to 4% "if the hotel has benefited significantly from its affiliation with the Holiday Inn system." This revised royalty fee structure was also adopted in the two agreements reached in 1996, for Holiday Inn Dortmund and Holiday Inn Hannover. For all hotels the increase to 4% royalty fees occurred on review.

vi) The other fees for the Holiday Inn Dortmund and Holiday Inn Hannover were:

a) marketing and reservation fee: 2% of gross room revenues;

b) "special priority club frequency marketing contribution" of 7% of gross room revenues; and

c) a reservation system fee as provided for in the Holidex (Six Continents' booking and reservation system) agreements, which accompanied each Agreement.

vii) The fees agreed in 1999 for the two Cologne hotels included:

a) royalty fees: for years 1 and 2, 3% of gross room revenues and for years 3 – 20, 4% of gross room revenue; and

b) marketing and reservation fee: 2.5% of gross room revenues.

viii) The position is, therefore, that as at the date of termination, the royalty fee for all seven hotels was 4%, as pleaded in the Amended Particulars of Claim.

13. It was a condition of Event's being licensed to operate the hotels as Holiday Inn hotels that it also entered into Six Continents' standard trademark user agreement and standard Holidex "license" agreement prior to opening a hotel as a Holiday Inn hotel. The trade mark user agreements record that the "User", that is the licensee, was to be granted a non-exclusive licence to use the Holiday Inn trademark in Germany.
14. In order to obtain a Holiday Inn franchise, the prospective licensee had to make an application by completing an "application letter agreement". These application letter agreements expressly provided, inter alia:

"4. The undersigned understand(s) and acknowledge(s) that:

[Six Continents] does not enter into and, in fact, has not entered into oral agreements or understandings with respect to the Contracts or matters pertaining to the granting of a license for a Holiday Inn brand hotel.."

The application for the Holiday Inn Cologne City-West hotel

15. On 24 June 1999, Event submitted an application for a licence for a Holiday Inn hotel at Cologne Innere Kanalstrasse, which was later re-named Holiday Inn Cologne City West hotel. The application letter was signed by Mr. Lachmann and Mr. Heinemann and was in similar terms to its predecessors for the other hotels, in that it gave confirmation in the terms set out above. The application set out anticipated occupancy and room rate statistics for the first five years of operation, and anticipated this new build hotel opening on 1 April 2001. Mr. Lachmann was identified as the "person responsible for correspondence" for Event.
16. The application was accepted by Six Continents' letter dated 13 July 1999, which set out the proposed royalty and marketing and reservation fees for the Holiday Inn Cologne City West. Copies of the various agreements were sent to Event for signature by Six Continents under cover of a letter dated 26 July 1999.
17. The Cologne City West Agreement, which was dated 21 December 1999, contained, so far as is material for present purposes, the following express terms, which were materially similar to the terms which appeared in the other Agreements:

"1.1. … [Event] has independently investigated the risks of the business. Neither [Six Continents] nor any other person has made any representation with respect to the subject matter of this Agreement not fully set forth below. Aware of the relevant facts, [Event] desires to enter into this Agreement in order to obtain a license to use the System in the operation of a hotel located at Innere Kanalstrasse 15….

1.2 Grant of License

[Six Continents] hereby grants to [Event] a non-assignable, non-exclusive license (the 'License') to use the Marks and the System at the Hotel but

1.2.1 only in accordance with this Agreement and only during the 'License Term' as set out in Article 15 hereof., …

4. [EVENT'S] RESPONSIBILITIES

4.1 [Event's] Responsibilities

At all times during the License Term (as defined in Article 15), [Event] shall:

…

promptly pay to [Six Continents] all amounts due [to Six Continents] and its affiliates as royalties or fees, whether or not arising out of this Agreement, and ….

6 COMPENSATION; PAYMENTS

6.1 Fees and Assessments. For each month (or part of a month) during the License Term, [Event] will pay to [Six Continents] by the 15^th of the following month:

6.1.1 except as amended in Attachment B, paragraph 1 …

6.1.2 the following assessments

(a) a 'Marketing and Reservation Contribution' of 2.5% of Gross Rooms Revenue, and

(b) a 'Special Priority Club Frequency Marketing Contribution' at the current rate of 7% of Gross Rooms Revenue for each night of a hotel stay on which Priority Club points or frequency miles…are required to be awarded by the terms of the Priority Club program ….

6.1.3 a Reservations and Operations System fee ('ROS' Fee) equal to the amounts due at the then prevailing rate and in the currency established under the terms of the Master Technology Agreement for such services (amongst which the reservation system currently known as 'Holidex') executed by [Event] with [Six Continents] or an affiliate of [Six Continents].

…

6.5 Application of payments

Each payment under this section shall be accompanied by the monthly statement referred to in Section 11.1 below….Failure to pay amounts when due shall constitute a breach of this Agreement and overdue amounts shall accrue interest from the due date at one and a half per cent (1 ½%) per month but not in any case to exceed the maximum interest permitted by applicable law.

LICENSE TERM; TERMINATION

15.1 License Term; Expiration

This Agreement and any License granted hereunder will expire without notice twenty (20) years from the date [Six Continents] authorises [Event] in writing to commence use of the System at the Hotel …subject to earlier termination as set forth herein.

…

Termination by [Six Continents] on Advance Notice

This Agreement will terminate in accordance with any notice from [Six Continents] to [Event], and/or [Six Continents] … may cease to provide services (including Holidex service) to [Event] without any further notice, unless required by law, provided that:

the notice is mailed at least 30 days in advance of the termination date;

the notice reasonably identifies one or more breaches of [Event's] obligations; and

the breach(es) are not fully remedied within the time period specified in the notice.

… [Six Continents'] notice of termination or suspension of services shall not relieve [Event] of its obligations under this Agreement.

…

15.5 Termination Payment

The parties recognise the difficulty of ascertaining losses suffered by [Six Continents] resulting from premature termination of this Agreement, and have provided for a termination payment which represents their best estimate as to the losses arising from the circumstances in which they are provided and which is only a payment relating to the premature termination of this Agreement and is not a penalty or damages for any other breach of this Agreement or in lieu of any other payment. If this Agreement terminates pursuant to section 15.3 or 15.4 above, [Event] shall promptly pay to [Six Continents] a lump sum equal to the total amounts required under Article 6 (with the royalty fee component of this lump sum to be, in no event, less than US$50,000 per year) for the 36 calendar months of operation preceding the termination, or such shorter period as equals the remaining License Term at the time of termination ….

19 Miscellaneous

19.1 Severability and Interpretation

The remedies provided in this Agreement are not exclusive. If any provision of this Agreement or any part thereof (the "Offending Provision") is hereafter found unenforceable, invalid or illegal for any reason, then

19.1.1. the Offending Provision shall, whenever allowed by the context, be deemed replaced by such valid and enforceable provision whose contents are as close as permissible to those of the Offending Provision, and

19.5 Entire Agreement

This Agreement (together with the Application Letter Agreement signed by the parties in anticipation of this Agreement) supersede all prior written or verbal commitments, representations and warranties between the parties and constitute the entire Agreement between the parties with respect to the subject matter hereof. This Agreement may not be amended or supplemented except by a written agreement of the parties specifically identified as such and signed by a representative of each party.

…

19.10 Binding Effect; Governing law and forum

This Agreement shall become valid when executed by [Six Continents] and shall be governed by and construed under and in accordance with the internal laws of England….

19.12 General Release and Covenant Not to Sue

Each of the parties agrees that it shall not commence any lawsuit or assert any claim, whether known or unknown, against the other party or any of its affiliates based on actions, discussions or agreements (except for the Application Letter Agreement signed by the parties in anticipation of this Agreement) which occurred prior to the signing of this Agreement.

19.15 Survival

Notwithstanding anything contained elsewhere in this Agreement, the provisions of Sections 6.1 (in respect of amounts payable in relation to periods prior to expiry or termination of this Agreement) and Section 8.1, Article 10, Sections 11.2, 11.3 and 12.1, Article 16 and Sections 18.2, 19.10 and 19.12 shall survive the expiry or termination of this Agreement howsoever caused, and shall continue thereafter in full force and effect."

18. Attachment B, paragraph 1 amended clause 6.1.1 of the License Agreement and provided:

"During the first two years of operation, starting as of the commencement date of the License Term, [Event] shall pay to [Six Continents] a royalty fee of three percent (3%) of Gross Rooms Revenue attributable to or payable for rental or reservation of guest rooms at the Hotel with deductions for sales and room taxes only ….

Beginning with the third year and until the expiration or early termination of the License Term, [Event] shall pay [Six Continents] a royalty fee of four percent (4%) of Gross Room Revenue."

Event's failure to pay fees and subsequent termination of the Agreements

19. There is no dispute that, by 2003, Event had fallen behind in the payment of fees due to Six Continents. Thus by 15 March 2003, Event owed €980,255.42. Event appears to have encountered commercial difficulties and, in a letter of 14 March 2003, referred to its having

"enough problems to deal with a wrecked market, increasing supply and decreasing demand – not even talking about the price battles among three to five star hotels."

20. In March 2003 a payment plan was agreed orally and in correspondence, which was intended to pay off the arrears in 8 monthly instalments between 30 May 2003 to 30 December 2003. The terms of the plan were set out in a letter from Six Continents to Event dated 8 May 2003, which stipulated that, in the event that the plan was not complied with, and future invoices were not paid on time, the outstanding instalments would become immediately payable. In its reply dated 5 June 2003, Event offered its apologies and explained that the company was being restructured. The letter continued:

"Our efforts in this restructuring process may also be the reason why the outstanding amount of [Six Continents] was lost out of sight. We do understand that you need a payment schedule for the outstanding amounts; but please consider that we all live in a very difficult economical time so that we cannot live up to your proposal and settle the outstanding until the end of the year."

21. Event itself then made a counter-proposal to pay off the arrears. What is important for present purposes, is that the letter contained no suggestion that any of the sums sought were other than due and payable, or that Event had a basis for any set off against Six Continents. Event proposed a payment plan whereby:

i) all future invoices would be settled on their due date;

ii) from September 2003, Event would additionally pay monthly instalments of arrears in the sum of €97,000, so that the total outstanding would be paid off by the end of June 2004; and

iii) an initial payment against the arrears would be made in June 2003.

Six Continents was prepared to accept this revised proposal.

22. Unfortunately, as was common ground, Event did not honour this agreement. Although the required payments to pay off the arrears were made, though not always on time, the new fees which had been incurred in June 2003 and subsequently, were not paid, so that fresh arrears quickly accrued. By 15 February 2004, further arrears of €654,202.41 had built up. At a meeting on 26 February 2004, Mr. Braks told Mr. Vermeer that he, Mr. Braks, was willing to settle the outstanding invoices immediately out of "private funding" if, in return, Six Continents agreed to renegotiate the agreed fee structure. Six Continents declined this invitation.
23. The arrears situation did not improve. Six Continents wrote to Event on 1 April 2004, recording that as at 31 March 2004 the overdue amounts totalled €1,019,341.79, and demanded payment by 1 May 2004. Payment was not forthcoming. Instead, Event wrote a letter dated 26 April 2004 in which it stated that:

"When negotiating this agreement you assured us that the fees claimed by you under this agreement were the lowest possible fees. You assured us that other franchisees in Germany would not pay lower fees for the same services delivered by your company and your group under such franchise agreements."

The letter went on to claim that this had been a misrepresentation and requesting discussions with Six Continents "regarding compensation for the past on one hand and payment of outstanding dues on the other."

24. Mr. Arie van der Spek (Chief Operating Officer, Northern, Central and Eastern Europe of Six Continents) replied on 10 May 2004 on behalf of Six Continents refuting these suggestions, and pointing out that Six Continents had always remained at liberty to conclude other licence agreements with other parties on other terms. This was of course correct, given the fact that the licences were expressly granted on a non-exclusive basis. Mr. van der Spek's letter drew attention to the outstanding arrears, which were a serious concern for Six Continents. The letter stated:

"We nevertheless would like to meet you to discuss ways to resolve your payment problems, subject to the condition that you provide us with a reasonable payment plan proposal as a basis for our discussion, pursuant to which you would take the firm obligation to pay your entire outstanding debt, in addition to all fees coming due, within a reasonable period."

25. A meeting took place between senior representatives of both parties on 2 July 2004 in Frankfurt, and this was followed by Six Continents' letter of 6 July 2004. That letter recorded the agreement that Six Continents claimed had been reached at the meeting and was in the following terms:

"…

according to our files the outstanding amount is €878,386.85 plus interest of €64,232.32

you agreed to pay €300,000 – as a down payment not later than 15.7.2004 in addition to the current fees

if this payment is received in time we will waive the interest of €64,232.32 and will send you a credit note for this amount.

as of August 2004 you will pay €65,000 in each of the following 8 months till March 2005 in addition to the current fees

in April 2005 the last instalment is due as a balance of the remaining amount.

All outstanding balances will be immediately payable in full if one of the above-mentioned conditions is not observed. In such case, we will not send any further reminder/correspondence but will continue with the default process right away. As a consequence Holidex Plus will be closed as a first step and termination of the license agreement will be the next step."

26. However, the Event board was not prepared to ratify the agreement that had been reached. Event replied by letter dated 14 July 2004. It referred to the "inequality of franchise fees in comparison to one of our main competitors" and an alleged assurance by Mr. Vermeer that Event "would sign the lowest possible conditions for our hotels" and then went on to state:

"… since you did not agree to an adjustment/reduction of our fees we decided to forward the issue to our lawyer who will get in touch with you and raise the matter of fee-reduction and compensation payment for the recent years. As a result we will retain the amount of outstanding invoices with [Six Continents] until a solution has been found …."

27. Six Continents responded on 16 August 2004, demanding that Event provide written confirmation by 23 August 2004 that it would abide by the terms agreed at the Frankfurt meeting. Meanwhile, Event had purported - unilaterally - to set new royalty, marketing and reservation fees, at rates lower than those provided for in the Agreements, "until a final solution has been found". Event made no payments at all after 1 August 2004 and did not provide the confirmation sought, and so, on 23 September 2004, Eversheds, solicitors for Six Continents, wrote seeking payment of the then outstanding arrears of €1,162,209.55. The letter clearly set out the consequences of continued default:

"… your conduct entitles our client to terminate the Licence Agreements on notice under section 15 of the Head Licence, should you fail to remedy your breaches of those agreements within the time periods specified by our client. Accordingly, we hereby give you formal notice that if you do not pay the outstanding license fees plus interest at the agreed rate within 21 days of the date of this letter, our client reserves the right to terminate the Licence Agreements on 48 hours' notice, such notice to expire at least 30 days from the date of this letter.

Our client wishes to resolve the current dispute without recourse to termination of the License Agreements. However, the extent of your non-payment is now so serious that our client considers that it has no option but to suspend your access to the Holidex reservations system, as it is entitled to under sections 11 and 12 of the [relevant agreements] on the occurrence of an Event of Default in order to mitigate potential future continuing losses. Suspension will be effective at 4pm today (German time)."

28. Norton Rose Vieregge, solicitors acting on behalf of Event, replied on behalf of Event on 29 September 2004. They took no issue with the sum demanded, and made no mention of any alleged misrepresentations, fraudulent or otherwise, such as are now pleaded by Event.
29. Six Continents issued a claim form on 19 October 2004, seeking payment of the sums outstanding under the Agreements with Event. At that stage, the Agreements had not been terminated, and thus payment of the outstanding sums at that time would have prevented termination taking place, and thereby have relieved Event of the additional burden of incurring termination payment liability.
30. Subsequently, following a Regional Executive Committee meeting on 25 October 2004, Six Continents gave notice to Event on 26 October 2004 of the termination of the licence agreements for all 7 hotels, with effect from 1900 hrs on 28 October 2004. It also demanded payment of the contractual termination payments provided for in the various Agreements. The letter stated:

"You have failed to remedy the fundamental breaches of your contractual license fee payment obligations within the timescale set out [in Eversheds' letter of 23 September 2004], or at all. Nor have you given any indication that you are willing or able to remedy those breaches in the future.

Accordingly, under the provisions of clause 15 of the license agreements between us in respect of [each of the 7 hotels] we hereby give you notice of termination of the said license agreements and all ancillary agreements (including the related Master Technology Agreements, Holidex License Agreements and Trade Mark User Agreements). Termination will be effective in 48 hours, namely at 1900 on 28 October 2004.

Upon termination of the agreements by notice, based on your failure to remedy one or more breaches duly notified to you, you must pay promptly to us a termination payment equal to the total amounts required under clause 6 of each licence agreement during the 36 calendar months of operation preceding the termination, amounting in total to USD $ 3,631,948.48…"

31. Norton Rose Vieregge responded on 12 November 2004, "rejecting" Six Continents' notice of termination and claim, and alleging that Six Continents was in breach of its contractual obligations towards Event, which was therefore entitled to withhold payments of the fees claimed.

The issues

32. I turn now to deal with the various issues that arose for the Court's determination. There was no dispute about the relevant legal principles that applied. In particular there was no dispute that the burden of proof was upon Event to demonstrate that the constituent elements of the tort were established and that, although the standard of proof in a case such as the present was not the criminal standard, in practice more convincing evidence will be required to establish fraud than any other types of allegation: Hornal v Neuberger [1957] 1 QB 247, and the authorities summarized in The Ikarian Reefer [1993] 2 Lloyd's Rep. 69, 71-72.

Issue i): Whether Mr. Vermeer made the misrepresentations as alleged.

33. I find as a fact that a meeting did occur on or about 23 June 1999 between Mr. Vermeer (on behalf of Six Continents) and Mr. Heinemann, Mr. Braks and Mr. Lachmann (on behalf of Event) at Event's offices at Theodor Heuss-Ring No.9, in Cologne. Mr. Vincent Nelson QC, on behalf of Event, made a sustained attack on Mr. Vermeer's credibility based on differences between passages in his witness statement and the evidence that he gave in Court about such a meeting and the fact that he had not addressed the meeting in his witness statement, despite the fact that his diary had a reference to a meeting at "Koln Villa" on 23 June 1999 and that this was the name by which Event's offices were known. Mr. Nelson contended that Mr. Vermeer's evidence on what Mr. Nelson characterised as "this central and crucial issue" as to whether a meeting had taken place in "Koln Villa" on 23 June 1999 was not credible and that the Court should, as a result, reject his evidence as to whether any misrepresentations were made and accept the evidence of the Event representatives.
34. However, in my judgment these criticisms were misplaced. Mr. Vermeer frankly admitted that such a meeting could have occurred on that date at Koln Villa, as he frequently went there to discuss matters with the Event representatives, and an entry in his diary referred to a meeting. What, however, he denied was that he made any of the representations alleged. I found Mr. Vermeer to be a straightforward witness, who gave his evidence in a patently honest manner.
35. On the other hand, I did not find the evidence of the Event representatives at all satisfactory in relation to the alleged misrepresentations that were said to have been made at this meeting. I found that their evidence tended to be self-serving, at times gave the impression of having been reconstructed by reference to documents, and on occasions deviated markedly from the evidence that had been given in their witness statements.
36. Thus, for example, it was clear from his oral evidence that Mr. Braks had no clear recollection of events in 1999. He had not been involved in "contract issues" with Six Continents but rather discussed what he called "strategic questions" with Mr. Vermeer. He was able to reconstruct that any discussion must have been in 1999 but he was not able to identify even the month of the alleged meeting and accepted that Mr. Vermeer's diary entry had helped him to engage in a process of reconstruction. Although he tried to suggest in his oral evidence that he had made it clear that Event would not enter into the Cologne City West agreement unless the franchise fees charged to Event were no higher than those charged to Six Continents' other German franchisees, any such assertion was missing from his witness statement. The evidence he gave in his witness statement as to the second alleged misrepresentation was inconsistent with Event's pleaded case that Six Continents had actually made a decision that in respect of new franchise agreements, it would impose higher franchise fees than those agreed for Event; the statement merely referred to an intention. Mr. Braks then resiled from what was in his statement in his oral evidence and suggested, in my judgment wholly implausibly, that what was represented was that Six Continents had made a decision as to its intention.
37. Mr. Lachmann in his oral evidence frankly accepted that he did not have a clear recollection of what was said at any meeting and that, in the absence of any documents to jog his memory, it was impossible for him independently to recall what happened or what words were used at any particular meeting. The only exception was a meeting that is irrelevant for present purposes, where the structure of the building was discussed. Likewise, Mr. Heineman, when asked to recall events, was not able to do better than recall a mental picture of a meeting at Koln Villa attended by Mr. Vermeer. He too frankly accepted that in the absence of any documents to jog his memory, it was impossible independently to recall what had happened at any particular meeting but that, when given some assistance to reconstruct what must have happened, it was possible to reconstruct what must have happened. Mr. Heineman's evidence was that he recollected one particular meeting. But that meeting was clearly not the same as the meeting which Mr. Lachmann specifically recalled, because different people attended. I also formed the clear impression that both Mr. Lachmann and Mr. Heineman's statements had been drafted by Event's lawyers without sufficient regard to those witnesses' actual recollections. Indeed Mr. Heineman admitted that, despite his being a lawyer with excellent English, the words and language of his statement were not his but those of Event's lawyers. In my judgment, I had therefore to regard the written evidence of Event's witnesses with a measure of scepticism.
38. Moreover, Mr. Heineman, in his oral evidence, did not support Event's case as to either of the pleaded misrepresentations. As to the first alleged misrepresentation, namely that "all other franchisees operating under the [Holiday Inn] Trademark Name in Germany, and in particular, the Queen's Moat Group and Scandic Group, did not pay lower franchise fees than [Event]", Mr. Heineman in cross-examination did not say that Mr. Vermeer had represented that Queen's Moat Group and Scandic Group, did not at that time pay lower franchise fees. On the contrary, he said that the representation was that, if Queen's Moat Group and Scandic Group came along and asked for a new licence, they would have to pay higher fees than those paid by Event. As to the second alleged misrepresentation, namely that "[Six Continents] had decided that in respect of new franchise agreements, it would impose higher franchise fees than those agreed for …[Event]", Mr. Heineman did not support the pleaded case either. He asserted that what Mr. Vermeer had said was merely that "there was a tendency in higher fees and that it was more or less the situation that the set fees were going up. That was what he said, that it was more likely that in the future we would get higher fees." In my judgment Mr. Vermeer may well have said something along those lines, but that is a far cry from the alleged or any misrepresentation.
39. I also find, looking at the commercial context in which the alleged misrepresentations were made, that objectively it is highly implausible that Mr. Vermeer would have made such statements in order to induce Event to enter into the Cologne City West Franchisee Agreement. That is so, even though, as Mr. Nelson submitted, Six Continents was clearly interested in 1999 in developing its relationship with Event, which at that stage it regarded as an important partner in Germany. First of all, information about comparative fees was clearly regarded by Six Continents as commercially confidential as Mr. Lachmann agreed. I also accept the evidence of Mr. Vermeer and Mr. Wicks, Chief Operating Office for Continental Europe, to the effect that Six Continents would not discuss one licensee's commercial terms with another licensee. In my judgment it would have been most surprising for Six Continents to have done so. Secondly, as to the second alleged fraudulent misrepresentation (namely that Six Continents had decided that, from then on all other franchisees anywhere or at least in Germany, would be charged a higher rate in new franchise agreements than the rate that was being suggested for Cologne City West), as Mr. Braks accepted, any such representation would be an unusual representation for Six Continents to make. Indeed Mr. Braks' evidence as to the misrepresentations was at odds with Event's own case, since he suggested that he was given the impression that all franchisees paid the same, though he was completely vague as to when such an impression was communicated. As Mr. Alan Maclean, counsel for Six Continents, submitted, that would be a surprising state of affairs, given that different franchisees agreed licences for different hotels, in different cities, at different times, for terms of varying length, and in different economic circumstances. Yet Mr. Braks accepted that "there was nothing in the information that [Event] were given in relation to the franchise or the brand that in any way suggested that all franchisees would be dealt with on the same terms".
40. Most importantly, in my judgment, none of the contemporaneous correspondence supports Event's case as to the alleged misrepresentations in any respect whatsoever. And, when a court has to weigh the various and varying recollections of witnesses about what was said at meetings that occurred over seven years ago, the surest guides are the contemporaneous documents and the overall probabilities: see per Lord Goff in Grace Shipping Inc. v. C.F. Sharp & Co. (Malaya) Pte. Ltd, (P.C.) [1987] 1 Lloyd's Rep 207 at pages 215-6. Although motive may also play a part, in this case the evidence about motive was, perhaps not surprisingly, unreliably subjective.
41. After the meeting at which the misrepresentations were allegedly made, Mr. Lachmann wrote a letter to Miss Daniels of Six Continents on 24 June 1999 enclosing the application form for a "Holiday Inn Core Brand' for Cologne West with the words 'as discussed with Mr. Vermeer". In this letter, Mr. Lachmann, stated that

"It is important in this connection that we do not enter into a legally binding lease with the owner of the property until we have received your confirmation that this object will be granted a licence. Conversely, this means - should it not be possible to enter into a lease with the owner – that we shall not be able to meet our obligations under the licence agreement.

Furthermore, in connection with the lease it is essential for the owner of the property that - if Event Hotels AG is no longer able to meet its obligations under the lease – [Six Continents] are entitled to operate the hotel for a period of one year on the basis of a customary management contract."

This was clearly an important letter, in which Event was laying out conditions to which the licence agreement would have to be subject. Yet, despite the alleged importance of the alleged representations made by Mr. Vermeer at the same meeting, no mention whatsoever was made of these supposedly critical terms in this letter. Mr. Lachmann accepted that matters which were important to the completion of the licence should have been included in this letter, but his explanation as to why he had not included any reference to such matters in the letter undermined any suggestion that at the same meeting Mr. Vermeer had made clear contractual representations in the terms alleged upon the basis of which Event relied in coming to its decision to enter into the licence. Mr. Lachmann's explanation for the omission was that at the time he "was of the opinion that the talks that Peter Vermeer and myself had had would be enough to support a co-operation in the future." That points, in my judgment, to the most likely analysis of what happened being that Mr. Vermeer offered no more than generalised and vague words of comfort to the effect that the deal that Six Continents was putting on the table for Event for Cologne City West, was the best possible deal that Event was going to get from Six Continents for that hotel, in that city, at that time; that the reality was that licence fees were going to go up in the future; and that, because Six Continents was keen to develop its relationship with Event, Event was being given and would be given favourable consideration in relation to franchise fees. However, in my judgment, if the alleged representations had indeed been made, in the actual terms alleged, it is inconceivable, given the importance they would have assumed, that they would have not been recorded in correspondence between the parties or at least in some internal document.

42. Mr. Nelson sought to rely on a recently disclosed internal memorandum, prepared by Mr. Lachmann and submitted to Event's supervisory board, which was dated 16 December 1999. This referred to the "following key points fixed in a final meeting with [Six Continents]" and stated "A further targeted reduction in the fee structure as discussed was not possible. Event has the best-possible conditions for existing and future objects." In my judgment, this memorandum does not assist Event in establishing that misrepresentations were made at the 23 June meeting. The memorandum refers to a "final meeting" which had recently taken place, probably on 8 or 9 December 1999. The memorandum does not deal with any meetings in June 1999 at all, nor does it, as Mr. Lachmann asserted in his second witness statement, "record.. the essence of what had been stated by Mr. Vermeer in the meeting in June 1999….". Indeed this was frankly accepted by Mr. Lachmann in cross-examination.
43. Mr. Heineman's evidence also supported the analysis that the thrust of what Mr. Vermeer said was no more than what I have articulated above, namely that the deal that Six Continents was giving Event for Cologne City West, was the best possible one that Event was going to get from Six Continents for that hotel, in that city, at that time. Mr. Heineman accepted that when Event asked for a material reduction for all of the hotels, Six Continents refused to entertain that possibility and, when the request was repeated, Six Continents again refused to entertain that suggestion. He also confirmed that Mr. Vermeer said that the terms offered were the best conditions available for Cologne City West at that time. In my judgment, his evidence confirmed my conclusion that none of the assurances of comfort no doubt given by Mr. Vermeer as part of the process of negotiation amounted to anything like as specific or as clear cut as the pleaded misrepresentations.
44. Moreover, even when the alleged misrepresentations were first raised in correspondence in a letter dated 26 April 2004 from Mr. Bauer, by then Chief Executive Officer of Event, to Mr. Van der Spek of Six Continents, there was no mention of Mr. Vermeer, or a meeting in June 1999, or Scandic, or Queen's Moat, at all. All the letter said was that:

"When negotiating this agreement [i.e. the Cologne City West licence Agreement] you assured us that the fees claimed by you under this agreement were the lowest possible fees. You assured us that other franchisees in Germany would not pay lower fees for the same services delivered by your company and your group under such franchise agreements."

That is nothing like as specific as the pleaded misrepresentations nor, in that letter, is there any suggestion that anyone at Six Continents ever claimed that it had decided that in respect of new franchise agreements, "higher franchise fees would be imposed than those fees agreed for [Event]."

45. Accordingly, in my judgment, Event has failed to establish that the alleged misrepresentations were made.

Issue ii) If the representations were made, was Mr. Vermeer fraudulent in making them?

46. Given my decision on the first issue, this issue does not arise for the Court's determination. However, I should say that, even if I had concluded that the misrepresentations had been made, I would not have found Mr. Vermeer, or Six Continents, to have been fraudulent in making them. The thrust of Event's fraudulent misrepresentation case is that in June 1999, when he made the alleged misrepresentations, Mr. Vermeer knew that the rates charged to Queen's Moat and/or Scandic were lower than the rates charged to Event. (That the rates were lower was not disputed.)
47. In my judgment the evidence did not support a case that Mr. Vermeer had such knowledge in 1999. He denied having such knowledge in cross-examination. I accept his evidence since there was nothing to undermine it. It was clear that he was not involved in negotiating the licence agreements with Queen's Moat and Scandic. The document that Mr. Nelson relied upon as purportedly fixing Mr. Vermeer with knowledge of Scandic and/or Queen's Moat terms was a "Deal Summary Sheet" prepared in 2001. But the deal summary sheets were not Mr. Vermeer's documents, as he neither prepared them nor was an intended recipient of them as he was not a member of the relevant committee which considered them at the time. Moreover, it was never suggested that he dealt with Queens Moat; and the only evidence in relation to his association with Scandic was a meeting which Mr. Vermeer admittedly had once had in a Scandic hotel in Brussels. Nor did I consider that Mr. Vermeer's email dated 26 February 2004 to Mr. van der Spek and others provided any support for Event's case on this issue, as Mr. Nelson sought to suggest.

Issue iii) If the misrepresentations were not fraudulent, whether the terms of the Agreements preclude reliance upon any misrepresentation?

48. Again, given my decision on the first issue, this issue does not strictly arise for the Court's determination. However, again, had I had to decide the matter, I would have had no hesitation in deciding it in Six Continent's favour. Six Continents accepted, in accordance with well-established authority, that, if the alleged misrepresentations had been fraudulent, it could not have relied upon contractual provisions to have escaped liability; see Government of Zanzibar v British Aerospace Ltd [2000] 1 WLR 2333, 2346 – 2347. However, in circumstances where, as Six Continents contended, and I have found, the representations, if made at all, would not have been made fraudulently, Mr. Maclean submitted that Six Continents was entitled to rely on the contractual terms of the Agreements, and, in particular, clause 19.12 to defeat any counterclaim based upon misrepresentation.
49. It was not Six Continents' submission that clause 19.5 alone had the effect of precluding liability for misrepresentation. Mr. Maclean accepted that an entire agreement clause limits the terms of the parties' agreement to their written agreement and prevents a representation from assuming contractual force, but that it does not, without more, preclude or exclude liability for misrepresentation: see Cartwright on Misrepresentation Sweet & Maxwell (2002) at 8.06; Deepak Fertilisers v ICI Chemicals [1999] 1 Lloyd's Rep 387, 395 per Stuart-Smith LJ; and Witter Ltd v T.B.P. Industries Ltd [1996] 2 All E.R. 573, 595 per Jacob J. However, what Mr. Maclean submitted was that clause 19.5 emphasized the importance which the parties attached to ensuring commercial certainty in their bargain. I agree.
50. The main plank of Mr. Maclean's submission under this head was clause 19.12. He contended that this was a clear and obvious contractual bar to Event's counterclaim. He contended that, by this clause, Event entered into a specific covenant (which continued in full force and effect notwithstanding termination of the Licence Agreement, howsoever caused) not to "commence any lawsuit or assert any claim, whether known or unknown, against [Six Continents] … based on ... discussions or agreements …which occurred prior to the signing of [the Cologne City West License] Agreement." He submitted that that was plain language which, on its ordinary and natural construction, amounted to a complete bar to the pleaded counterclaim based on alleged misrepresentations made in discussions prior to the conclusion of the Licence Agreement.
51. In response, Mr. Nelson submitted that clause 19.12, namely the general release and covenant not to sue clause, falls foul of section 3 of the Misrepresentation Act 1967. That section provides as follows:

"If a contract contains a term which would exclude or restrict-(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or (b) any remedy available to another party to the contract by reason of such a misrepresentation, that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does".

Section 11(1) of the 1977 Act defines the requirement of 'reasonableness' as follows:

"In relation to a contract term, the requirement of reasonableness for the purposes of …section 3 of the Misrepresentation Act 1967…is that the term shall have been a fair and reasonable one to be included having regarded to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made."

52. Mr. Nelson submitted that since Clause 19.12 was so widely drawn it was capable of including fraudulent, negligent and innocent misrepresentations and that, accordingly, since there was no linguistic differentiation between the type of misrepresentations covered, and no possibility of severance of fraudulent misrepresentations, the whole clause was unreasonable. He relied upon the passage in Witter supra at 598, where Jacob J. said (in the context of a clause whereby a party acknowledged that he had not been induced to enter the subject agreement by any representation, save those specified in a schedule):

"The problem [of the relevant clause] is its scope. The Act of 1967 calls for consideration of the term as such. And it refers to 'any liability' and 'any misrepresentation'. It does not call for consideration of the term so far as it applies to the misrepresentation in question or the kind of misrepresentation in question. The term is not severable: it is either reasonable as a whole or not. So one must consider its every potential effect. The clause does not seek to distinguish between fraudulent, negligent, or innocent misrepresentation. If it excludes liability for one kind of misrepresentation it does so for all. I cannot think it reasonable to exclude liability for fraudulent misrepresentation … It may well be, with a different clause, reasonable to exclude liability for innocent misrepresentation or even negligent misrepresentation. But since the width of this clause is too great I would have held it failed the requirement of reasonableness and was of no effect.

A possible route round this latter objection would be to construe the clause so that it did not apply to a fraudulent misrepresentation. This approach is artificial. It is unnecessary now that the 1977 Act exists to destroy unreasonable exclusion clauses. The construction involves creating an implied exception in the case of fraud. What about an implied exclusion of negligence? Or gross negligence? It is not for the law to fudge a way for an exclusion to be valid. If a party wants to exclude liability for certain sorts of misrepresentation, it must spell those out clearly".

Mr. Nelson submitted that it followed that the whole clause was unreasonable, and thus it could not operate even to exclude claims for innocent or negligent misrepresentation.

53. I disagree. In Government of Zanzibar v British Aerospace Ltd supra at 2346 – 2347, His Honour Judge Raymond Jack QC, sitting as a High Court Judge, did not follow the approach of Jacob J in Witter. The Government of Zanzibar case dealt with an entire agreement clause that additionally excluded all liabilities for pre-contractual representations and contained a non-reliance provision. His Honour Judge Raymond Jack QC held that since long standing authority, such as S. Pearson & Son Ltd v Dublin Corporation [1907] AC 351, clearly established that such clauses excluding or limiting liability were not apt on their true construction to cover fraudulent misrepresentation, section 3 could (on the facts) have no application. He also referred to the unreported Court of Appeal case of Grimstead & Son Ltd v McGarrigan [1999] CA Transcript 1733 (27 October 1999) where there was an acknowledgement of non-reliance clause in similarly wide terms, which the Court of Appeal held (obiter) was capable of operating as an evidential estoppel. Although the Court did not expressly address the point made by Jacob J, its decision on the reasonableness issue under section 3 of the 1967 Act appears to be inconsistent with his approach.
54. I would also in this context have held that, insofar as clause 19.12 falls to be tested against section 3 of the 1967 Act, it passes the test of reasonableness. The Agreements were sophisticated agreements that were entered into by substantial entities in respect of a major transaction. There was no inequality of bargaining power. As Chadwick LJ said in Grimstead & Son Ltd v McGarrigan :

"There are, as it seems to me, at least two good reasons why the courts should not refuse to give effect to an acknowledgement of non-reliance in a commercial contract between experienced parties of equal bargaining power—a fortiori, where those parties have the benefit of professional advice. First, it is reasonable to assume that the parties desire commercial certainty. They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed. They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings. Second, it is reasonable to assume that the price to be paid reflects the commercial risk which each party—or, more usually, the purchaser—is willing to accept. The risk is determined, in part at least, by the warranties which the vendor is prepared to give. The tighter the warranties, the less the risk and (in principle at least) the greater the price the vendor will require and which the purchaser will be prepared to pay. It is legitimate and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted."

I respectfully agree.

55. Accordingly, had it been relevant, I would have held against Event on this issue also. I would have held that it was prevented by clause 19.12 from bringing a claim for damages in respect of negligent or innocent misrepresentations arising out of pre-contractual discussions.

Issue iv) If misrepresentations were made, were they reasonably relied upon?

56. Given my decision on the first issue that the alleged misrepresentations were not made, this issue does not arise for the Court's determination. Moreover, it is not feasible or realistic in the circumstances to decide the issue on an alternative factual basis. However, I should say that, in my judgment, as a matter of logic, no misrepresentations made at the time of the negotiations in respect of Cologne City West could possibly have provided any basis for any counterclaim in respect of any of the six earlier franchise agreements, nor could it be suggested that Six Continents was in breach of any of those earlier agreements, because the misrepresentations (if made) were not true. The obvious reasons for this conclusion are:

i) All these six earlier Agreements pre-dated the Cologne City West agreement, and it was not alleged (and could not have been alleged) that any of them were entered into in reliance upon any oral misrepresentations.

ii) Each of those agreements provided that "no provision of this Agreement may be waived, altered or modified except by a written agreement of the parties specifically identified as such and signed by a representative of each party".

iii) Event does not suggest that there was any such alteration or modification.

iv) There was in fact no such alteration or modification.

Issue v) Assuming Event can make good its defence, what recoverable loss has Event proved in respect of its counterclaim?

57. This issue likewise does not arise for determination, given my decision on the first issue.

Conclusion

58. It follows that Six Continents is entitled to judgment in respect of the full amount of its claim, namely unpaid licence fees in the sum of £859,144 and contractual termination payments, in the sum of £2,286,140.73, with interest in respect of both heads of claim.
59. I am grateful to counsel and solicitors on both sides for the detailed written and oral submissions that were presented to the Court, which were of valuable assistance in the preparation of this judgment. I shall address any consequential matters that may arise from this judgment and the form of the order after hearing submissions from counsel.