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
		1st February 2008

HIS HONOUR JUDGE FOSTER QC:

1. Synopsis In May 2005 the Claimant and the Defendant entered into a contract to buy and sell aluminium waste. By the summer of 2006 there were arguments over the construction and implementation of the payments clause. On 4^th October 2006 the Defendant reported to repudiate the contract for the Claimant's alleged breaches. The court is asked to construe the payments clause and determine whether the Defendants were entitled to repudiate.
2. The payments clause reads as follows: "Alchemy agrees to pay CAV based on the following terms which were agreed on 08/04/2005 and will adjust them accordingly, in line with any increase or decrease of the LME High Grade Aluminium and Metal Bulletin published market prices." The contract goes on to discuss other aspects of the price. Prices for individual products for the Defendants' three plants are cited within the agreement.
3. Background The Defendants make components for the aviation industry. They produce considerable quantities of aluminium scrap. They have plants at Consett, Leicester and Llantrisant. The Claimants are non-ferrous scrap metal dealers. They buy scrap and sell it on to foundries who reprocess it.
4. On 30^th March 2005 there was a meeting at the Defendant's plant at Consett between Karen Greasby and Peter Hill of the Claimants and Les Parker of the Defendants. They discussed how they could do business. The majority of the discussions are uncontentious. They discussed prices. Peter Hill suggested that the price should be fixed to the London Metal Exchange and the Metal Bulletin. Karen Greasby said that was not possible and that the Claimant would take those factors into account along with a number of other factors. Mrs Greasby asserted that Les Parker agreed that the indices should be used as a guide and that he, Les Parker, clearly understood the price would not be calculated solely on LME or Metal Bulletin but they would be a guideline. Les Parker agreed that there were discussions about using LME or Metal Bulletin as a guideline but that he wanted a "pound for pound" link. I find that this was how the matter was left at the end of that meeting.
5. Karen Greasby produced a draft agreement dated 8^th April 2005. The pricing clause stipulated fixed prices with no adjustment.
6. There was clearly some communication between the parties between the draft dated 8^th April, 2005 and Karen Greasby sending the final contract to Les Parker on 24^th May 2005. Peter Hill's internal memo of 20^th May 2005 includes:

"…discussed…how Alchemy can guarantee pricing sturrctur mentioned LME/MB as guideline as per previous discussions with Karen..."

In evidence Les Parker said that he spoke to Peter Hill regularly and said more than once that the price should be in line with Metal Bulletin. He said he had one conversation with Karen Greasby. He thought it was to similar effect but could not remember the detail. Such a conversation is not part of his witness statement. He said he did not use the words "market guide". He wanted a price comparator. I do not read Peter Hill's note as necessarily suggesting otherwise. It was clearly hurriedly typed. A comma after "sturrctur" changes the meaning, and there is no indication of who mentioned LME/MB as a guideline. In those circumstances, I did not find Peter Hill's assertion that the conversation was per the note particularly helpful. I conclude at that stage there was further discussion about price adjustment but no resolution of the issue.

7. The contract dated 26^th May 2005 was drafted by Karen Greasby and sent to the Defendants on 24^th May 2005. It included the price adjustment clause as set out in paragraph 2 above. Karen Greasby said in cross-examination that she was "not used to drafting contracts, and I just missed out the words 'as a guide' or 'in the trend of.' I have made a mistake in missing out a critical word. I agree the contract does not mention other factors, e.g market conditions which I intended to take into account." She said the contract was intended to be operated flexibly and often fell back to the phrase "literal interpretation" when describing the effect of the contract, in contrast to what she thought the contract really meant. I have the duty to construe what the words in the written contract mean, and the parties' subjective intent is generally inadmissible and irrelevant.
8. In June 2005 the Claimants thought that the Leicester swarf did not contain any significant 2000 series product and was more akin to Llantrisant swarf, for which they paid a lower price. Karen Greasby altered the price accordingly on their self-billed invoices. Mr Hill said that he discussed the matter with Les Parker in early July 2005. In cross-examination he said that he informed Les Parker of the position. There was nothing in his phraseology to suggest that Les Parker agreed with the assertion or, more particularly, agreed to the reduction in price. Although Mr Hill routinely made typed notes of relevant conversations there is nothing about this in the documentation. Les Parker had no recollection of any such conversation. He accepted that Alchemy's self-billed invoices charged Leicester swarf at Llantrisant prices, but he did not notice this at the time and never agreed to it. I did not find Mr Hill a convincing witness on this point and prefer the evidence of Les Parker.
9. By May 2006 the Defendants noticed that their prices were falling behind the sharp rise in aluminium prices generally. Mr Rivaland suggests the Defendants drew up a shooting party to get out of their contract with Alchemy. The process allegedly started with Les Parker's email of 26^th May 2006 and eventually led to Mr Docherty visiting Alchemy's premises on 14^th June to inspect Alchemy's business records. The Defendants were provided with a graph and a set of figures comparing the prices paid with LME/MB prices. This meeting was described as "the audit".
10. On 11^th July 2006 there was an acrimonious meeting at the Defendant's Leicester premises. At that stage I think it likely that neither side had really stopped to think what the contract meant and that the main players wanted their relationship to continue. Unfortunately, the meeting got off to a bad start. Les Parker was not present. He was off with a bad back and there had been suggestions that he was personally benefiting from some arrangement with Alchemy. Mr Roland Jeffries accused the Claimants of stealing CAV's products. Mr Newman and Mrs Greasby, not unnaturally, took offence and cooperation thereafter rapidly declined. Gary Luke, the Defendant's business analyst, stated that he did not understand how the Claimant's pricing policy operated. I find that there was not then any direct suggestion of underpayment. Despite all this, I conclude that Gary Luke was genuine in asking for an open-book policy, by which he meant a transparent pricing structure possibly based on the Claimant's selling price. This would have involved re-writing the contract, but no one was paying much attention to the contractual terms at this stage.
11. Thereafter there was an exchange of correspondence. Mr Newman wrote on 19^th July, saying that no adjustment of the contract was required. Mr Luke replied on 9^th August alleging an underpayment of £96,793 and asking the Claimant to confirm that the shortfall would be paid by the end of August and that the Claimant would pay on the basis of Metal Bulletin in the future.
12. The Claimant asked for more time, and on 15^th September wrote agreeing that there had been some shortfall but that they were still calculating the exact sum.
13. Repudiation On 4^th October 2006 Gary Luke wrote to Philip Newman saying that the Claimants had had sufficient time to put their position in writing and that the Defendants now thought the shortfall to be £250,000. They purported to repudiate for continuing underpayment. The Claimants responded on 11^th October asserting that the Defendants' unlawful repudiation had brought the contract to an end. The Claimants then calculated the shortfall to be £96,487, which was offset by the Claimants' loss of profits on the balance of the contract.
14. I have confined this summary of the facts of the case to the matters which I consider relevant. Thus, I have not specifically dealt with, for instance, the arguments over the mention of Group 7 turnings, right-hand and left-hand columns in the Metal Bulletin, the fact that Metal Bulletin ceased publishing a cuttings price in October 2005 or the realignment of the cuttings price, nor the subsequent events concerning Fordpad. I do not consider these issues assist me in construing the words of the contract.
15. Assessment of witnesses I heard four days of witness evidence. I set out below my assessment of those witnesses as it has clearly influenced my factual findings. Karen Greasby was the Operations Manager of the Claimant company and their principal witness. She led the negotiations leading to the contract and operated the contract for the Claimants. She played an important part, along with her father Mr Philip Newman, in the discussions leading up to the repudiation. I found her an honest witness in the sense that she believed what she said and thought what she was doing was right. I acquit her of the implication of deliberately manipulating the contract to the Defendant's disadvantage. However, on her own admission the wording of the contract was a mistake. I do not think she realised the effects of that mistake then, or even now. She thought and thinks that the agreement gave her a discretion in the adjustment of the prices, and she generally followed the trend of the prices she was obtaining on the market. As I shall explain, that is not what the contract says. It was a blinkered and incorrect view. It led her to overlook crucial aspects of the case.
16. Les Parker was the Defendant's Health and Safety and Environmental Manager and responsible for the disposal of the Defendant's waste products. He gave a bluff presentation. He called a spade a spade. I concluded that he wanted to get on with the business relationship but on what he regarded as a fair basis. I do not think he was trying to find a way out of the contract. I found him an honest witness on whom I could rely.
17. I found Gary Luke defensive in his demeanour. Like Mr Parker I do not think he was trying to undermine the contract, but I do conclude that he became increasingly frustrated when he considered there was an underpayment with no effective response. Although his notes of the meeting of 10^th July 2006 and the absence of any internal communication in August and September 2006 are not satisfactory, I nevertheless accept the thrust of his evidence.
18. Other witnesses I have reviewed Mr Hill in the paragraphs above. In the event, Terry Docherty's role and evidence became relatively uncontentious. Mr Baster, Mr Moggeridge and Mr Owen are not at the centre of this case.
19. Construction of the contract. Both counsel have made lengthy written and oral submissions and are agreed on the correct approach. Both cite Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All E 896 and particularly Lord Hoffman at 913:

"The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy, and in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life."

The court must start with the words of the contract. They must, if possible, be given their natural and ordinary meaning. They must be interpreted from the viewpoint of the informed observer. Accordingly, extraneous evidence is admissible to determine the factual matrix in which the agreement was made. Similarly, extraneous evidence is admissible to resolve an ambiguity. However, the court must be wary of evidence of the parties' intentions or subjective interpretations. They have committed themselves to a form of words which should be interpreted objectively.

20. The factual matrix.

(a) London Metal Exchange High Grade Aluminium is a spot price for pure aluminium ingots quoted daily on the London Metal Exchange.

(b) Metal Bulletin is a weekly magazine which gives a variety of scrap metal prices. This includes aluminium 7000 Series turnings which is low-grade swarf. The information is obtained by the magazine from various traders.

(c) At the material time the Claimants had one other long-term contract. The price for pucked aluminium swarf scrap was quoted as MB Group 7 turnings, left-hand column plus a premium of £165 per tonne.

(d) Tom Martin, the biggest UK aluminium scrap dealer, routinely dealt on Metal Bulletin prices plus a premium. Mr Brettal, a trader employed by Tom Martin for ten years, told me that his company has quoted a price as a percentage of Metal Bulletin, but that is far less common than a fixed premium. He linked pucks to turnings and had no experience otherwise. Mr Brettal was a witness of fact, not an expert.

21. The parties' contentions. The Claimant's primary position is that the proper construction of the contract is to use LME/MB as a guideline. By re-amended paragraph 3A of the Particulars of Claim the Claimant pleaded:

"It is averred that in a conversation on 30^th March 2005 between Ms Karen Greasby, Mr Peter Hill of the Claimants and Mr Les Parker of the Defendants at Consett, it was represented by Ms Greasby and accepted and agreed by Mr Parker that if a contract was later to be signed, it would include a clause linking the contractual prices payable to the Defendant to the trend of prices in the London Metal Exchange and the Metal Bulletin, but not by way of a fixed pound for pound link to a comparator. In the premises the words of the contract in paragraph 3(iii) above must be construed in the light of that representation, alternatively, they bear an agreed meaning.

3B Alternatively, the parties reached an agreement on 30^th March 2005 that the Claimant would link the contractual prices payable to the Defendant to the trend of prices in the London Metal Exchange and the Metal Bulletin, but not by way of a fixed pound for pound link to a comparator which oral agreement was collateral or supplemental to the written contract."

22. The Defendants, by paragraph 7 of the Defence, argue that any rise (or fall) in the Metal Bulletin price is passed on pound for pound to the Defendants.
23. The natural and ordinary meaning of the words "in line with" is "linked to" or "fixed to" or "parallel with". In the light of the background facts set out in paragraph 20 above, I consider those words are properly construed as fixed to the Metal Bulletin with a premium. That is what all the contracts I have seen have done and what a metal trader would understand by the words. The contract does not use the words "the trend of prices" or "guidelines". The words could not be so construed unless the parties had agreed that they bore that meaning or there was a collateral contract. That is the argument in the Claimant's re-amended pleadings.
24. I find there was an impasse on the mechanism of price adjustment until the Claimant's written contract corresponded with Mr Parker's position. There was, therefore, no collateral contract or special meaning which detracts from the normal contractual construction.
25. The appropriate comparator for scrap metal is clearly Metal Bulletin rather than LME. Within Metal Bulletin the appropriate figure is the nearest to the particular product. Mr Rivaland for the Claimant argues that such a construction makes reference to LME otiose, that the Defendant's construction is therefore wrong, and that the only construction is an adjustment based on both factors, thereby inferring a decree of discretion. It is not uncommon for a contract to include references which subsequently become irrelevant. The argument ignores the way the clause can obviously be operated.
26. The remaining argument was the appropriate comparator for pucks. Pucks are compressed swarf. That is how they are treated in the other contracts before me and how a metal trader would understand the words.
27. The payment clause does not define the premium. However, it is easy to calculate the premium by comparing the contract price with the Metal Bulletin price at the date of the contract. In my opinion, the parties' construction referring back to a date of 8^th April is wrong. This is how a metal trader would interpret this contract. If Metal Bulletin discontinued the price for a particular product, a metal trader would take the nearest product and adjust the premium back to the contract date. That would be a reasonable price under the agreement.
28. Having found that the Claimants were wrong in their interpretation of the payments clause, it follows that they have not been making payments under the terms of the contract. They concede that, on this basis, there have been substantial underpayments. The precise figures are not before me, but it is something in the region of £96,000. That is the figure which both parties originally asserted. The fact of the underpayment and the Claimants' operation of the contract and their failure to remedy the situation in a reasonable time are all sufficient grounds for the Defendant to treat the contract as repudiated. Individually and cumulatively, they evinced an intention by the Claimant not to be bound by the terms of the contract.
29. These findings on the construction of the contract and the Defendants' entitlement to repudiate should define what if any issues require my further determination, and hopefully enable the parties to agree the financial consequences of their dispute.
30. There were further submissions on permission to appeal (which was refused on the grounds that they were essentially factual issues and/or there was no reasonable prospect of success) and possible future procedure. There will no doubt be a transcript of those discussions. During the course of his submissions Mr Rivilland for the Claimant asked whether I found that Karen Greasby was acting under a mistaken belief in her operation of the contract. I said that I did so find. On reflection I do not think that is a complete answer. I have made my assessment of Mrs Greasby as a witness at paragraph 15 above. By the end of the meeting on 11^th July 2006 she knew that her interpretation of the contract and the "literal meaning" were different (see paragraph 7 above). In late August or early September 2006 there was a conference involving Mr Hill, Mrs Greasby and Mr Rivalland of Counsel. I did not hear evidence of its content save that it resulted in the letter of 15^th September 2006. In evidence Mrs Greasby said that the words in that letter "complying with the terms of the contract" involved adjusting prices in line with LME/MB on a £ for £ basis. I concluded that the nature of her mistaken belief changed after the meeting of 11^th July 2006; hence the phraseology in the concluding sentences of paragraph 15 of the judgment that "It was a blinkered and incorrect view. It led her to overlook crucial aspects of the case." It would not be appropriate for me to say more.