England and Wales High Court (Technology and Construction Court) Decisions

In The High Court Of Justice Official Referees' Business

Before: His Honour Judge Thornton Q.C.

Between:

Leeds Health Authority Plaintiffs

and

Phoenix Imaging Systems Limited First Defendant

and

General Utilities PLC Second Defendant

and

Fischer Imaging Corporation First Third Party

and

Phoenix Imaging Systems Limited Second Third Party

And Between:

General Utiltites PLC Plaintiff

and

Fischer Imaging Corporation Defendant

Case numbers: 1996 ORB 971 and 1997 ORB 584

Date of Hearing: 16 and 17 April 1998

Date of Judgment: 28 April 1998

1. This was a preliminary issue concerned with whether a valid and enforceable guarantee had been entered into. The judgment is concerned with the correct test for determing what surrounding circumstances are admissible when construing a deed, the operation of the parole evidence rule and what constitutes linked transactions for the purpose of determining whether an agreement was supported by consideration.

2. Judgment was entered for General Utilities PLC. Fischer was ordered to pay General Utilities PLC's costs to be taxed if not agreed. Fischer Imaging Corporation's application for leave to appeal findings of fact was dismissed.

3. The text of the judgment approved by His Honour Judge Thornton Q.C. is as follows:

1. This is the trial of two issues arising in the third party proceedings brought by General Utilities PLC, ("GU"), against Fischer Imaging Corporation, ("Fischer"), and in related proceedings brought by GU against Fischer. These two sets of proceedings were consolidated by an order dated 13th October 1997. The two issues are whether GU may bring proceedings against Fischer pursuant to a guarantee dated 2nd April 1992 or, by assignment, pursuant to an agreement made between Fischer and a third company, Compagnie Generale d'Equipements Medicaux, ("CGEM"), on 20th December 1991.

2. The background to these issues must first be explained. They arise out of the supply of diagnostic X-ray equipment which was manufactured by Fischer and supplied by Phoenix to the Leeds Health Authority, ("LHA"), who are the body responsible for running the Seacroft Hospital in Leeds, for whom the equipment was supplied. This equipment, the Imager System, had not previously been marketed in England and Phoenix, who had an exclusive distributorship agreement with Fischer to market Fischer's products, was attempting to break into the English market. This supply contract, and another unrelated one for the Imager System in Chertsey, were being negotiated in 1991.

3. Phoenix, in 1991, was a small company marketing imaging systems in the United Kingdom. 42% of its shares were owned by a French company, CGEM, which was a member of a group of companies whose principal was another French company, Compagnie General des Eaux, ("CGB"). That group was represented in England by a holding company, GU, which is an English registered company. CGEM's business was the managing and maintaining of trade marks of medical equipment in France. It also had commercial dealings with Fischer who was seeking to expand its European business in 1991 and was planning to set up its marketing and sales activities in Europe through an European office in early 1992.

4. This was the background to the negotiations through the second half of 1991 for the Imager System supply contract to the Seacroft Hospital. The practical difficulty that had to be overcome was that LHA required the supply and maintenance of the System to be backed by a guarantee provided by Phoenix's parent company with a further stipulation that that company had to be registered in England. Phoenix first approached its principal shareholder, CGEM, who indicated that it was prepared to provide an appropriate guarantee if its liability was itself guaranteed by Fischer. CGEM approached GU and secured that companies' agreement to provide a guarantee of Phoenix's obligations to LHA in return for CGEM providing a counter-guarantee to GU. However, this somewhat complex arrangement could only have resulted in a concluded contract between Phoenix and LHA if Fischer could be persuaded to provide a counter-counter-guarantee to CGEM.

5. The original approach to Fischer about this possible provision of a guarantee was made by Mr. Mike Naylor in a telephone call to Mr. Morgan Fields, Fischer's Chief Executive Officer and Chairman who is based in Denver, Colorado. Mr. Fields was himself in contact with M. Leon Pennequin, the then Vice President of CGEM, based in Paris. As a consequence of these contacts, Mr. Fields' colleague in Denver, the then President of Fischer, Mr. R. Cascella, sent Mr. Naylor a draft of a proposed guarantee on 9th December 1991. He sent a copy of the same draft guarantee to M. Pennequin of CGEM on 10th December 1991. This guarantee was in somewhat limited terms, since it was only concerned with the repair or replacement of the relevant equipment. By then, LHA had negotiated a draft guarantee with GU's solicitor in much wider terms and it was that draft which GU wanted replicated in a counter-guarantee from CGEM and it, in turn, wanted replicated in the guarantee it was looking for from Fischer.

6. Phoenix responded to Fischer's fax on 12th December. The fax was sent by Mr. R. Simpson and he informed Mr. Cascella that CGEM required what he referred to as a "back-to-back" guarantee. He also stressed the urgency of a positive response since he felt that the two Health Authorities might withdraw from the proposed purchases. The Chertsey contract was also in the balance at that time and that Health Authority also required a parent guarantee, albeit one issued directly by CGEM who, in turn, also wanted its guarantee supported by a back-to-back guarantee from Fischer. At some stage Fischer had also been sent the DHSS standard terms and conditions applicable to these two supply contracts. Mr. Cascella responded to Mr. Simpson's fax with one dated 15th December. He stated that Fischer was prepared to provide "a backup guarantee" so long as two queries, concerning terms of payment and liquidated damages for installation delays, were answered satisfactorily.

7. Mr. Naylor and Mr. Simpson responded on 16th December. This appears to be a joint response since the fax heading stated that the sender was Mr. Simpson whilst it was signed off by Mr. Naylor. The fax explained that the payment terms imposed on Phoenix by the standard DHSS terms and conditions were not negotiable. The fax then continued:

4. Fischer argued that this provision amounted to a representation as to the extent of the potential liability Fischer would have under a "backup guarantee" if one was entered into by Fischer. Mr. Cascella responded on 17th December. He gave evidence at the trial by submitting a statement under the Civil Evidence Act 1968. This stated that Mr. Simpson's statement allayed concerns he had that Fischer was being asked to provide a wider guarantee than one limited to parts replacement and servicing obligations. In consequence, he faxed both CGEM and Phoenix in these terms:

8. According to M. Pennequin, who gave evidence at the trial, he was waiting for an assurance from Fischer that it would provide a backup guarantee before he was prepared to sign, on behalf of CGEM, a guarantee in favour of GU. On receipt of Mr. Cascella's fax, he felt he had the assurance he needed and, on the strength of that assurance, signed a guarantee for the Chertsey contract on 19th December and one in favour of GU for the Leeds contract on 20th December. This GU guarantee was signed on the same day as Phoenix's contract was entered into with LHA and GU's guarantee was given to LHA.

9. Early in 1992, discussions started between Phoenix and CGEM with the aim of CGEM selling its shares in Phoenix. CGEM's wish to sell these shares was caused by CGEM's concerns as to Phoenix's financial viability. Mr. Naylor had resigned at the end of January to take up a new job and Phoenix was having difficulty in meeting its day to day expenses. These discussions culminated in Mr. Simpson buying CGEM's shareholding in mid-February. Meanwhile, no steps had been taken to obtain from Fischer the promised guarantee. Following a telephone conversation between M. Pennequin and Mr. Cascella, M. Pennequin sent to Mr. Cascella a draft guarantee on 31st January which fully covered the whole of CGEM's potential liability to GU. This draft had been drafted by Mr. Collier, an in-house lawyer at AMI, an English company which was also another subsidiary of CGB. This In the covering fax, M. Pennequin explained that GU and not CGEM had given a guarantee to LHA, because LHA would not accept the guarantee of a French company. The draft guarantee provided for three parties to enter into it, GU, CGEM and Fischer and it was intended to cover both hospitals. The guarantee entered into on 2nd April is in the same form as this draft.

10. Mr. Simpson spoke to Mr. Nields at about this time and explained that there had been a management buyout of Phoenix. Mr. Fields had been planning to travel to Paris to meet M. Pennequin for, amongst other business, the purpose of finalising and signing the guarantee. Mr. Pennequin had already informed Mr. Fields that Mr. Collier had legal competence on behalf of CEGM to act in relation to this guarantee. Mr. Nields changed his plans, travelled straight to London and met Mr. Simpson and Mr. Collier and the guarantee, whereby Fischer guaranteed GU's liability to LHA and CEGM's liability to the authority responsible for the Chertsey hospital, was signed by Mr. Nields, on behalf of Fischer, and Mr. Collier, on behalf of GU and CEGM, on 2nd April.

11. The effect of this document is that Fischer provided directly to GU a counter-guarantee for the Seacroft hospital supply. The document had been drafted in this way by Mr. Collier because, since CEGM had sold its shareholding in Phoenix, it wanted to extract itself from all business activities involving Phoenix. Mr. Nields signed the counter-guarantee in this form, even though Fischer's potential liability under it was significantly wider than that stated in the fax of 17th December 1991.

12. The guarantee dated 2nd April 1992 reads as follows:

13. There were material terms of the other relevant contracts which should be noted.

14. The claims in the main action are made by LHA in proceedings against Phoenix and GU. The claims arise out of alleged malfunctioning of the Imager equipment and out of alleged failures by Phoenix to undertake its servicing obligations. It is alleged that the System has had to be replaced. The claim, in total, is for approximately £150,000. In view of Phoenix's financial difficulties, the effective defendant is GU, sued on its guarantee.

15. In these proceedings, GU is claiming to be indemnified, under the guarantee dated 2nd April 1992, against LHA's claim. GU's claim is made in third party proceedings in LHA's joint action against Phoenix and GU. Phoenix is now insolvent and is taking no further part in these proceedings so, if Phoenix is liable under the supply contract, GU will have to meet that liability under its guarantee given to LHA.

16. Fischer's principal defence to the claim under the guarantee dated 2nd April 1992 is that that guarantee is void, being both under hand and unsupported by any consideration. Fischer points to the fact that the relevant suggested consideration, the entering into of the LHA guarantee by GU, occurred four months earlier and, therefore, was past. On receipt of this defence, GU took an assignment, dated 7th October 1997, of CGEM's rights under what is alleged to be a valid guarantee provided by Fischer to CEGM by its fax of 17th December 1991. GU's assigned claim arises because GU could have claimed an indemnity from CGEM under CGEM's counter-guarantee and CEGM had a further claim against Fischer based on the 17th December 1991 fax. Armed with this assignment, GU initiated the second set of proceedings against Fischer. This claim is a fall-back, it is only pursued by GU if its' primary claim under the 2nd April 1992 guarantee fails.

17. In answer to Fischer's allegation that the 2nd April guarantee is not supported by present consideration, GU raises three discrete and alternative arguments. These are that (1) the consideration for the guarantee is present consideration; (2) by virtue of the wording of either clause 1 or of the fourth recital, the parties agreed to treat as present consideration what might otherwise have been past consideration; and (3) Fischer is now estopped by the language of the fourth recital from contending that the consideration is past. Fischer, in reply to these arguments, contends that the argument that the consideration is present is erroneous and that, for various technical reasons, the fourth recital does not create an estoppel.

18. If GU fails to enforce the guarantee of 2nd April 1991, it seeks to enforce the earlier obligation created by Fischer's fax of 17th December. According to GU, this obligation was entered into when CGEM accepted, by its conduct in entering into the counter-guarantee, Fischer's offer to guarantee that counter-guarantee. Fischer answers these contentions by contending that the fax did not constitute an offer. Even if it was an offer, it was not accepted and, if it was, the resulting contract was procured by a misrepresentation that was contained in Mr. Naylor's fax to Fischer dated 16th December 1990. Fischer argued that Mr. Naylor was, in sending the fax, acting with the ostensible authority of CEGM.

6.1. The Law

19. There was much debate at the hearing as to the extent to which evidence was admissible as to the background circumstances of the 2nd April 1992 guarantee. This debate arose because of the historic rule, still known as the parole evidence rule, which confines the court to the contents of the contract documents when the contract is exclusively found within "the four corners" of those documents. This rule prohibits the court from adding to, or varying, the terms of the contract found in the contract documents.

20. However, extrinsic evidence is admissible to show that the contract, although apparently not supported by good consideration, is, nonetheless, so supported. Extrinsic evidence is also admissible to aid the construction of the agreement. In particular, such evidence may be used to enable the court to ascertain the meaning of particular words intended by the parties. Another purpose for which extrinsic evidence may be admitted is to identify the documents or other circumstances referred to in the contract but not clearly identified by the language used. These rules as to the admissibility of extrinsic evidence from the speeches of Lord Wilberforce in Prenn v. Simmonds and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen. However, the language of Lord Wilberforce has been enlarged upon and explained by the recent speech of Lord Hoffmann, when setting out the modern principles applicable to the interpretation of commercial contracts, in Investors Compensation Scheme Limited v. West Bromwich Building Society and Others. These principles were derived from the two earlier decisions of the House of Lords in which Lord Wilberforce delivered his speeches, but they are an extension of them. The relevant principles, as expounded by Lord Hoffmann, are these:

21. The width of the language of Lord Hoffmann has since been commented upon adversely by Staughton L.J. in Scottish Power plc v Britoil (Exploration) Ltd. and Others. He observed:

22. However, the Investors' case was cited and followed by Lightman J. in Don King Productions v Warren and Others. The judge held,in that case, that the relevant agreements with which he was concerned were badly drafted. In consequence, he applied the principles set out in the Investors' case. These required the court to deduce from the matrix of facts the commercial background and purpose of the contracts. The relevant purpose had to be one which the parties, as a matter of business common sense, must have intended to achieve.

23. Despite the reservations of Staughton L.J. in the Scottish Power case, which did not form part of the ratio decidendi of his decision to allow the appeal, the Investors' case contains guidance that a judge sitting at first instance should follow. Lightman J. followed this guidance and so do I. Both parties sought to rely, in addition to the parole evidence rule, on specific rules of construction applicable to recitals found in deeds and other written contracts. The guidance provided by Lord Hoffmann enables these ancient rules to be set in their proper context. These rules are somewhat technical in their approach. However, they only come into play at a third stage of the process of construction. The court must first decide what evidence is admissible to assist in the construction of the contract and in setting it in its factual matrix. Having thus laid down the contextual framework within which the construction process is to be undertaken, the court must then construe the contract as a whole, using the principles summarised by Lord Hoffmann. That process will, hopefully, show that the relevant operative parts of the contract are both consistent with, and do not contradict, the relevant parts of the recitals. Only if, at this second stage, it appears that the recitals are inconsistent with the operative parts of the agreement in a material way is it necessary, at a third stage, to chose between the two discordant provisions. Then the court must wheel into play the somewhat rusty principles governing the construction of, and effect to be given to, contractual recitals.

6.2. Application of the law to the facts of this case.

24. The factual setting of the guarantee dated 2nd April 1992 was the series of interlocking contacts aimed at supplying the Imager System to two separate English hospitals. This was supplied by Fischer through its exclusive distributorship agreement with Phoenix who was an English subsidiary of a group of French companies. Fischer was keen to widen and establish its marketing potential in Europe, Phoenix was keen to establish its fledgling marketing of Fischer equipment in the United Kingdom despite its slender financial resources and CGEM was keen to establish a commercial relationship with Fischer. Underlying these relationships were the unyielding requirements of both LHA and North West Surrey HA for parental guarantees that guaranteed Phoenix's obligations for both the supply and after-sales servicing of the equipment. These orders would, if obtained, constitute a significant breakthrough into the United Kingdom hospital market for the Imager System.

6.3. The construction of the 2nd April guarantee

25. Against this background, the commercial meaning to be placed on two critical provisions of the guarantee must be found. The relev8ant provisions are:

26. Two questions of construction arise.

27. It can be seen from the text of Schedule 1 that the relevant guarantee entered into by GU is not provided with a date whereas the guarantee entered into by CGEM is dated. It was argued by GU that the effect of this omission of the date, 20th December 1991, was that the 2nd April 1992 guarantee should be read as if that earlier guarantee was entered into contemporaneously with this guarantee. The document should, in other words, be read literally. In consequence, there could be no question of the consideration for the 2nd April 1992 guarantee being past since the document was drafted on the basis that the other guarantee was, or was to be taken as being, contemporaneously entered into.

28. I cannot accept that I must, or should, read the guarantee in that literal way. The parties were clearly referring to a particular guarantee which the admissible matrix of facts readily identifies as being dated 20th December 1991. This use of extraneous evidence to correct a drafting error is an obvious example of the applicability of Lord Hoffmann's fourth and fifth principles. There is a lacuna in the document which can be readily filled in. The way to read Schedule 1 is as if the actual date for the GU guarantee had been provided.

29. Fischer argued that clause 1 was to be taken to mean that, Fischer was, in consideration of GU having in the past entered into a guarantee, now entering into the 2nd April 1992 guarantee. This clearly showed, so it was argued, that the relevant consideration was past.

30. GU argued that the fourth recital was to be taken to be declaring that the 2nd April 1992 guarantee was entered into on the basis that the December guarantees were being provided simultaneously. It was, therefore, declaring that the consideration was existing or supportive of the 2nd April 1992 guarantee. GU's argument continued that since the relevant term appeared in a recital, that term should take precedence to any apparently conflicting language, suggesting past consideration, found in clause 1.

31. These arguments of both parties have an archaically literal bent to them. In my view the words of both provisions can only be properly construed if the underlying purpose of the 2nd April 1992 guarantee is ascertained and applied to the process of construction involved. This purpose was to provide the last piece in the jig-saw which constituted the pattern of contracts needed to produce supplies of Imager Systems to two United kingdom hospitals. The agreements were all linked and entered into contemporaneously, save for the actual signing of this last guarantee. It is not without significance that the following agreements were all entered into on 20th December 1991:

5. These contracts all followed immediately after Fischer's fax to CGEM, which it copied to Phoenix, dated 17th December 1991 and which stated that Fischer was prepared to provide a backup guarantee for the Imager orders from the Seacroft Hospital and the St. Peter's General Hospital. Although the date is not in evidence, Phoenix's orders to Fischer for the supply of these Systems must have been given on, or immediately after, 20th December 1991. Thus, the parties were intending, by the 2nd April 1992 guarantee, to conclude a series of interlinked contracts.

32. It is also relevant that Fischer clearly intended that its' 17th December 1991 fax would be acted upon but would not ultimately be the document in which its' guarantee would be set out. This document would follow later. Moreover, it was clearly not of moment to Fischer who would be the recipient of its' guarantee, so long as the resulting guarantee was a backup to a guarantee of a type which fulfilled the description of "parental guarantee". Thus, the recipient was to be the company or companies who had provided the parental guarantee required to secure the two Imager orders.

33. It is also part of the factual matrix that CGEM and Phoenix wished, following the entering into of the various agreements, to let CGEM out and to provide an alternative backup guarantee for GU's guarantee to LHA. This was explained to Fischer. Fischer was sent a copy of GU's guarantee that had already been provided to LHA and raised no objection to it. On being presented with the draft of the 2nd April 1992 guarantee, Mr. Nields signed it without demur.

34. These intentions can be seen to have been given effect to by the language used in the two relevant provisions with which I am concerned. When the factual matrix I have summarised is taken into account, their language clearly shows that their purpose and intended meaning are as follows:

35. This three-fold objective was given effect to by the language of the third and fourth recitals and clause 1. If the language of these provisions is read in this way, these provisions are consistent with each other. The effect of the language is to bring into being a document which, on its face, is a contract which is supported by two sets of consideration which mutually support each other. This twin consideration is as follows:

6. It is necessary to see whether either or both sets of possible consideration were, in law, sufficient to provide the necessary support to the guarantee to render it legally enforceable.

6.4. Good consideration - the group of contracts

36. It is first helpful to set out a passage from Chitty on Contracts. This reads as follows:

7. That passage sets out what I find to be the situation in this case. The manufacturer, or at least the supplier, of a proprietary brand of specialist medical equipment offered to provide a backup guarantee if a parental guarantee was provided to the customer and the customer placed an order on the supplier's sole distributer in the United Kingdom. The guarantee, when supplied, was supported by consideration moving from the promisee, namely from CGEM and Phoenix, to whom Fischer's offer had been made. In particular, CGEM provided a counter-guarantee and Phoenix placed an order on Fischer and accepted an order from LHA. All these promises and agreements were mutually dependant upon each other.

6.5. Fischer's contractual undertaking

37. In considering whether Fischer provided consideration by providing a guarantee pursuant to its earlier contractual undertaking set out in its' fax of 17th December, four questions require answering.

38. In form, the fax was an unilateral offer which offered a counter-guarantee if a guarantee was provided to secure the Imager orders. It is clear that M. Pennequin only provided GU with CGEM's guarantee because he relied on that fax and would not have issued the guarantee without an assurance of the kind Fischer appeared to be providing.

39. There is no requirement for a promisee to communicate its acceptance of an unilateral offer. The acceptance was achieved by CGEM's conduct in signing the guarantee on 20th December 1991. Thus, all the requirements for the formation of a contract existed.

40. CGEM argued that the wording created a guarantee without further ado. However, the wording is couched in the future tense:

8. Traditionally, guarantees are issued as a separate document and that is what this language contemplates. Any doubt as to whether or not Fischer was offering a contractually enforceable undertaking is settled by the wording of the 2nd April 1992 guarantee. This recites, in the fourth recital, that:

9. The part underlined constitutes an assertion made by Fischer that it made a contractually enforceable undertaking and it is not one Fischer can now resile from. The assertion is contained in a recital, it is clear and unambiguous and it is not inconsistent with the operative parts of the contract.

41. It follows that the fax of 17th December 1991 constituted an unilateral offer or undertaking to enter into a backup guarantee which was accepted by CGEM in providing a guarantee to GU.

42. The fax was directed to M. Pennequin, a Vice President of CGEM, in response, in part, to CGEM's request for a back to back guarantee. It was also sent to Phoenix, in response to Phoenix's request for such a guarantee. However, the promise was open-ended in the sense that it was being offered to whoever provided, or supported, the parental guarantee required by LHA. Thus, GU was one of the potential recipients of the offer, even though Fischer was unaware, when giving the undertaking, of GU and GU's involvement in the myriad of contracts being entered into.

43. At CGEM's request, the actual guarantee dated 2nd April was issued to GU who provided consideration for Fischer's guarantee in two ways. Firstly, GU provided a guarantee to LHA knowing that Fischer was going to support CGEM's consequent counter-guarantee with a third guarantee in favour of CGEM. Secondly, GU joined in a tri-partite agreement with GU and Fisher. In doing so, GU was accepting a guarantee direct from Fischer and was, by necessary implication, giving up its' guarantee from CGEM since there was no reason why GU required two guarantees to support its own guarantee provided to LHA.

6.6. Overall conclusion - construction

44. The construction of the guarantee that I have found is the applicable one is one that complies with Lord Hoffmann's fifth principle and the principle enunciated by Lord Diplock in The Antaios. These are to the effect that the contract should, if possible, be construed so as not to flout commercial business common sense. This flouting would occur if I adopted Fischer's construction of the guarantee. On that construction, an agreement, entered into by businessmen as an adjunct to their carefully negotiated series of agreements to supply hospitals with medical equipment, would be interpreted in such a way that the agreement would be void, thereby setting at nought the principle underlying those other agreements that they should be supported by a manufacturers' backup guarantee.

6.7. Arguments arising out of the recitals

45. It follows from my findings that there is no inconsistency between the recitals and the operative parts of the guarantee, there is no need for me to consider whether I should ignore the recitals as subverting the agreement nor for me to consider whether I should hold Fischer to the recitals on the basis that they create an estoppel by convention nor for me to consider ignoring the recitals on the basis that their language is too uncertain to be capable of setting up an estoppel. Instead, I can and should hold Fischer to its agreement.

46. Fischer argued that the contractual undertaking of 17th December 1991 and the guarantee of 2nd April 1992 were both procured by misrepresentation, being that of Mr. Naylor and Mr. Simpson in their joint fax of 16th December 1991 in stating that:

10. I am prepared to accept that the two Phoenix personnel were acting, in addition to acting for Phoenix, with the ostensible authority of CGEM in making this statement. However, the statement contained no inaccuracy since it stated, in context, that the only commercial risk to Fischer in providing a guarantee would occur if Phoenix become insolvent, which was an accurate appreciation of Fischer's risk. Furthermore, this statement did not procure Fischer's offer and, more importantly, played no part in Fischer's decision to enter into the 2nd April 1992 guarantee. It follows that Fischer cannot avoid the consequences of that guarantee by seeking to pray in aid a misrepresentation by Phoenix or by CGEM in procuring that agreement.

47. GU can enforce the guarantee dated 2nd April 1992 and, in consequence, CGEM's claim based on the earlier contractual undertaking does not arise.

H.H. Judge Thornton Q.C.