OUTER HOUSE, COURT OF SESSION

 

[2008] CSOH 109

 

     

 

OPINION OF LORD GLENNIE

 

in the cause

 

WINCANTON GROUP LIMITED

 

Pursuers;

 

against

 

REID FURNITURE LIMITED

 

Defenders:

 

 

________________

 

 

 

Pursuer: Simpson, Brodies LLP

Defender: Connal QC, solicitor advocate, McGrigors

1 August 2008

Introduction
[1] This is a preliminary proof about the terms on which the parties carried on business between 5 August 2004, when Heads of Agreement were signed, and 20 February 2007, when the contract between them was terminated by mutual agreement.

[2] The Summons and the Counterclaim identify a large number of disputes which have arisen during that period. In asking for a preliminary proof, and in identifying the contractual issues which they wanted decided, the parties expressed the view that most of those disputes should be capable of resolution without the need for a further hearing once the specific questions concerning the terms of the contract had been answered.

[3] At the close of submissions on the preliminary proof, I also heard a brief debate at the instance of the pursuer as to the relevancy of certain parts of the counterclaim.

 

The parties and their business relationship
[4] The pursuer ("Wincanton") is a company engaged in the logistics business, i.e. the business of providing distribution services to others, principally to those involved in retailing. The defender ("Reid") is a large furniture retailer with a number of showrooms. Most of its stock is delivered to and held in a warehouse until delivered to customers. A customer wanting to buy an item of furniture from Reid will typically visit a Reid showroom and place an order. Thereafter the item of furniture will be delivered to the customer's home address. How quickly that happens will depend on whether or not the item is in stock. If the item is currently in stock, it will be despatched to the customer soon afterwards. If, as I understand more commonly occurs, the item is not then in stock, it will be despatched to the customer as soon as possible after its arrival in the warehouse. The business of matching the stock to orders and delivering it to the customer is the work of a company such as Wincanton. The operation is not straightforward. Arrangements for delivery have to be based upon the availability of the customer to take delivery at a time when other deliveries are to be made within the same area. It is not economically viable for each delivery to be effected by a single trip on a lorry dedicated to that delivery. Deliveries to different customers are grouped together. Ideally the lorry leaves the warehouse stuffed full of items to be delivered to different customers within a fairly narrow radius. But this is easier said than done. Sometimes the lorry will not be full. This is inefficient. Achieving an efficient operation requires co-ordination and co-operation between the retailer and the logistics company. There is scope for things to go wrong and for arguments over who is to blame when they do. That is what happened in the relationship between Wincanton and Reid before it was terminated. Key to the resolution of such arguments is the identification of who bears the responsibility for the different parts of the operation.

[5] Wincanton succeeded to arrangements which were already in place between Reid and Lane Group plc ("Lane"). In August 1996 a contract ("the Skelgate contract") was entered into between Reid and Skelgate Limited ("Skelgate") for the provision by Skelgate of distribution services to Reid. Before that, as I understand it, Reid had operated its own vehicle fleet. In about August 2000, Skelgate (which in 1997 had changed its name to SHL Delivery Plus Limited) was purchased by Lane; and on 30 November 2000 Lane entered into a contract with Reid ("the November 2000 contract") on similar terms to those contained in the Skelgate contract. The November 2000 contract was, in effect, a direct continuation of the Skelgate contract. It is a detailed document, consisting of twenty one clauses and extending over seventeen pages. It contained the following provision concerning its duration:

"2. Duration of Contact

2.1 Notwithstanding the date or dates hereof, this contract will be deemed to have commenced on 5 August 1996 and, subject to clauses 2.2 and 12 hereof, shall continue in force until 5 August 2001, when it will expire with 6 months notice having been given by 5 February 2001.

2.2 On or before 5 August 2001, the parties may, by agreement in writing, extend the period of the contract by a further year to 5 August 2002 (unless the contract has previously been terminated) and, in the event of an extension, annually on or before the 5 August in each year thereafter the parties may extend the period of the contract by a further year."

The commencement date of 5 August 1996 was the same commencement date as that for the Skelgate contract. It is agreed between the parties that, though the provisions of clause 2.2 for extending it were never formally observed, the November 2000 contract did in fact continue in force until at least some time in 2004. It is the pursuer's case that the November 2000 Contract continued in force until superseded by the Heads of Agreement; whereas the defender says that it continued in force even after that date in respect of matters not covered in the Heads of Agreement. Distribution services continued to be provided and paid for on the same basis. The point was not really developed in argument, but it seems to me to be clear that the Heads of Agreement replaced the November 2000 Contract as the agreement governing the relations between the parties. It is only natural that, where no change was intended, parties should continue to operate in the same way as before, but this does not mean that the earlier agreement continued alongside the new one.

[6] Thus far the contracts had been exclusively for the provision of distribution services. Reid had retained the responsibility for management of its warehouses. In 2004 Lane and Reid agreed that Lane should take over responsibility for management of Reid's Hillington warehouse in addition to carrying out its existing responsibilities for distribution. It was at least in part because of this that, on 5 August 2004, Lane and Reid entered into the Heads of Agreement. By contrast with the previous contracts, this is a short document, just three pages long. The parties intended the Heads of Agreement to be superseded in due course by a more detailed agreement but no more detailed agreement was ever concluded.

[7] With effect from 25 November 2006 Wincanton acquired the whole business and undertaking of Lane, including all Lane's rights and liabilities under the contractual arrangements then in force between Lane and Reid. Reid accepted the transfer of the contract from Lane to Wincanton. The relationship turned out to be short-lived. There were arguments over Wincanton's performance over the Christmas period 2006/7. Wincanton's involvement in the business with Reid came to an end on 20 February 2007.

[8] When referring to the events occurring during the parties' relationship, I shall refer to the participants in the pursuer's interest as Lane or Wincanton as appropriate; and to the defender as "Reid".

 

The Heads of Agreement
[9] It is agreed between the parties that the Heads of Agreement were intended to constitute a binding agreement between parties and that they did so. It sets out the "basic terms on which it is intended that Lane will provide to Reid a dedicated warehouse management and transportation service from and in respect of Reid's warehouses". It is necessary to set out those terms in full.

"1. Services

Lane will provide to Reid, in accordance with a formal written agreement to be concluded between the parties ("Agreement"), warehouse management and transportation services ("Services") comprising:

1.1 a comprehensive warehouse management service in respect of Reid's warehouses at Hillington, Glasgow and Wythenshawe (and any other satellite warehouse nominated by Reid) ("Warehouses");

1.2 the transportation of Reid's goods from the Warehouses to its branches;

1.3 the transportation of Reid's goods from the Warehouses to its customers (and back to the Warehouses in the case of returns); and

1.4 route planning services in accordance with Lane's Traffic Management System ("LTMS") software for route planning.

2. The Agreement will be for a rolling period of six months terminable by either party serving 3 months' notice on the other.

3. Pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("TUPE") Reid will initiate a consultation exercise with those of its employees engaged in respect of the warehouse management services which will transfer to Lane in order to effect a smooth transfer of such employees to Lane with effect from the date of commencement of the Agreement. Lane will provide such assistance, in accordance with TUPE, as Reid may reasonably require in connection with such consultation process.

4. Lane will agree to provide the Services in a professional manner in accordance with best industry practice and compliant with service level conditions and key performance indicators agreed between Reid and Lane. In particular, Lane will:

4.1 ensure the availability of a dedicated contract fleet with a minimum number of vehicles which does not fall below the minimum specified by Reid;

4.2 comply with Reid's reasonable directions and instruction in relation to the contract fleet (including the livery and the drivers and crew thereof).

5. Title in all Reid's goods and equipment shall remain vested in Reid (or any third party to whom they belong) and:

5.1 Lane will not acquire any ownership or similar rights in or to any such goods; and

5.2 Lane will have no special or general right of lien or other security right in relation to any such goods.

6. Lane will be responsible in connection with the Services for:

6.1 compliance with Reid's instructions and making available to Reid any information and documents Reid reasonably requires for monitoring purposes;

6.2 keeping the Warehouses in a tidy and orderly condition and property maintained internally and replacing or repairing plant and machinery (if provided by lane) in the Warehouses where necessary;

6.3 compliance with all relevant legislation including for health and safety;

6.4 keeping full and up to date records on all mattes required by Reid.

7. Reid will be responsible for maintaining the exterior of the Warehouses and will ensure that they are properly served by appropriate services and utilities.

8. Reid will give Lane access to its CIMPAC system which will be the basis for warehousing and delivery instructions relative to the provision of the Services. Lane will comply with such conditions of use of the CIMPAC system as Reid may specify.

9. In consideration of the provision of the Services Reid will pay a fixed management fee and service charges in amounts to be agreed between Reid and Lane. The management fee will be payable on the fifteenth working day of each month. 75% of the "projected core service charges" shall be paid on the fifteenth working day of that month. There will be a reconciliation in the following month between the amount paid and the actual level of service charges payable and the balance shall be payable on the fourteenth working day of that month. Lane agrees to operate on an "open book" basis and provide such vouching and information and access to its books and records as Reid may reasonably require relative to the services. Any variations to the agreed management fees or service charges will be agreed between the parties prior to being incurred.

10. Lane will maintain insurance (at a level agreed with Reid) in relation to:

10.1 its vehicles in the contract fleet;

10.2 Reid's goods while in transit;

10.3 Reid's goods and plant and machinery in the Warehouses;

10.4 public liability insurance for not less than 10 million;

10.5 employer's liability insurance for not less than 25 million.

Lane will provide Reid with appropriate certificates of insurance.

11. On termination of the Agreement, all employees of Lane engaged in relation to the warehouse management aspect of the Services will transfer under TUPE to Reid (or to any other party nominated by Reid). Lane will (notwithstanding TUPE) remain responsible for (and indemnify Reid in relation to) employees principally engaged in relation to the delivery aspect of the Services (i.e. including drivers and drivers' mates).

12. Reid will have the right to terminate the Agreement prior to its expiry if there is an insolvency event in relation to Lane, a breach of contract or change of control of Lane. Lane will have the right to terminate the Agreement prior to its expiry if there is an insolvency event in relation to Reid, a breach of contract or change of control of Reid.

13. Reid and Lane will use their respective best endeavours to finalise the Agreement as soon as possible and no later than 31 August 2004.

14. Neither Reid nor lane will make any announcement in relation to the subject matter of these Heads without first obtaining the other's consent. Information made available by either party to the other must be kept confidential save as may be required by law.

15. These Heads will have legally binding status pending execution by Reid and Lane of the Agreement.


The issues in outline

[10] During the course of the preliminary proof, the parties identified a number of discrete issues concerning the terms on which the parties carried on business after the Heads of Agreement were entered into on 5 August 2006. These revolved around the following areas:

(1) How was Lane/Wincanton to be paid for providing services under the contract: and, in particular, how, if at all, was it entitled to be paid in circumstances where it had used additional vehicles and agency labour to provide the required services without obtaining in advance Reid's agreement to the use of such additional vehicles or labour?

(2) At whose risk was the stock in the warehouse before it was loaded onto Lane/Wincanton's vehicles?

(3) How was damage to stock to be dealt with: in particular was Reid entitled to debit, from sums payable to Lane/Wincanton, damages for damage to stock alleged to have occurred during transit, without Lane/Wincanton first having agreed to such debit?

(4) How was the "northwest operation" to be paid for?

The first three issues raise issues of construction of the Heads of Agreement. The northwest operation was the subject of a separate oral agreement and the fourth issue is therefore a straightforward question of fact. I shall discuss these issues in turn below.

 

Witnesses

[11] I heard evidence from the following witnesses for Wincanton: Peter Keates, formerly operations director with Lane and then Wincanton; Rebecca Jenkins, Managing Director of Lane during the relevant period and latterly Sales Director of Wincanton; and Paul Murphy, who joined Lane as Transport Manager and worked on the Reid contract from October 2003. In addition, by agreement of the parties, evidence from Philip Bigland, an employee of Wincanton who took over responsibility for the Reid account after Wincanton acquired Lane, was adduced by Affidavit. The following witnesses were called on behalf of Reid: Tracy Cullen, who was at the material times employed by Reid as the Customer Service and Parts Supervisor and as such was involved in setting up the claims process; Joe Boyd, who was employed by Reid as Operations Director from about 2001 to date (and before that as Operations Manager reporting to the Operations Director); Iain Stewart, Group Finance Director for Reid since 2001; Mark Carrol, Wincanton's Finance Director for Retail, whose only involvement with Reid occurred after Wincanton acquired Lane; Les Flanagan, Wincanton's Managing Director for Retail Operations since 2005; and Alan Marnie, presently Chief Executive Officer of Reid (having led a management buy-out in 2006) and previously, during the relevant period, Managing Director of Reid. Full witness statements from each of these witnesses (apart from Mr Bigland) were lodged in process. With some oral amplification, those statements were adopted by the witnesses as their evidence in chief; and the witnesses were then cross-examined and re-examined in the usual way. There was little controversy about the material facts. I took the view that the witnesses were doing their best to assist and that such differences as there were resulted more from imperfect recollections rather than from any intent to mislead the court.


The scope and purpose of the evidence

[12] Before referring to the relevant parts of their evidence, I should say something about the purpose for which the evidence was led. Some parts of it related to the question of what agreement had been made about the northwest operations. No difficulty arises in respect of that. But most of the evidence related to the Heads of Agreement and was designed to assist on the question of construction.

[13] It was not in dispute, of course, that evidence about the circumstances surrounding the making of the contract (the "factual matrix") was admissible. However, some of the evidence went further than that, in particular by looking at the way in which the parties operated under the Heads of Agreement after it was concluded. This gave rise to a legal issue about the admissibility of such evidence. For Wincanton, Mr Simpson advanced four submissions, though in a slightly different order from that in which I record them. They were: (1) that any ambiguity in the contract should be resolved contra proferentem, against the party which drafted it, in this case, Reid; (2) that any ambiguity may be resolved by reference to the previous dealings between the parties; (3) that any such ambiguity may be resolved by reference to how the parties operated the contract after it was signed; and (4) that where the contract was silent on any particular matter, the relevant obligation could be discerned from how they operated under it. The first two submissions were not controversial. In support of the first, Mr Simpson referred to Life Association of Scotland vJane Foster (1873) 11 M 351, 358 and Neilson v Stewart 1991 SC (HL) 22. Mr Connal QC, for Reid, referred me to McBryde, The Law of Contract in Scotland, 3rd Ed., at para.8-39, but I did not understand him to dispute the possible application of this version of the contra proferentem rule, provided that the contract was, indeed, ambiguous in the material provisions. As to the second, Mr Simpson relied upon J. von Mehren & Company v The Edinburgh Roperie and Sailcloth Company (1901) 4 F 232, 239. Nor did Mr Connal have any difficulty in accepting that the way in which the parties had operated the previous contracts was all part of the background circumstances which could be taken into account in construing the contract. Also part of the factual matrix, in his submission, was Reid's concern, known to Lane, about costs; and the fact that, by the time of entering into the Heads of Agreement, Lane had already opened their books to Reid in the sense of offering transparency over costs on a number of areas. Mr Simpson did not suggest that such matters were not potentially relevant. I do not, therefore, need to say more about this aspect.

[14] Mr Simpson's third and fourth submissions were more contentious. These were that evidence of how the parties operated the contract after it was concluded was relevant to resolve any ambiguities and also to fill any "gaps" left in the Heads of Agreement. The latter submission took as its starting point the recognition that the Heads of Agreement was just that, a document setting out the basic terms on which Lane would provide the services to Reid, entered into in the expectation that it would be superseded by a much more detailed agreement; and that, inevitably, it would not cover everything. It would leave gaps which required to be filled. In support of the submission that it was permissible to look at how the parties acted under the Heads of Agreement, Mr Simpson referred to the Opinion of the Lord Justice-Clerk (Moncrieff) in Baird's Trustees v Robert Baird and Company (1877) 4 R 1005, in which he says (at p.1017): "the best exposition of doubtful expressions in a mercantile contract is the manner in which the persons who used them carried them into effect." However, he recognised that the Lord Justice-Clerk was in a minority. Lord Gifford, who formed part of the majority, took a different view. He said (at p.1015):

"No doubt I must look to the position in which the parties stood when they entered into the contract. I must take into consideration the circumstances in which the parties stood at the date of the contract, which was 1st July 1871, and I think the actings of the parties after that date, even if they had been much stronger than they were, could not give a different meaning to the contract from that which it had at its date."

In Smith v Johnston (1949) SLT (Notes) 11, the Inner House appears to have looked at subsequent conduct to assist in resolving the question of construction of an agreement between husband and wife regulating the wife's claim to legal rights in the event of decree of divorce being granted. The issue was as to whether the husband should continue paying an annuity at the rate of 400 or at all in the particular circumstances in which the wife had re-married. The husband had in fact carried on making payments at the rate of 400 a year for 17 years after the wife had re-married. The case is very briefly noted. Having held that the particular clause was ambiguous, being capable of two incompatible constructions, the court is reported to have held that "in these circumstances it was legitimate to have regard to the course of dealings between the parties since the agreement was entered into". Having regard to the fact that for 17 years the husband had acted upon the footing that the liability was for an annuity of 400, and the wife had accepted it, "the parties had acquiesced in the construction for which the wife contended". It is not clear to me that this is a finding that the parties' conduct was relevant to the construction of the contract as opposed to dealing with the matter by way of acquiescence. But there are some statements of principle to which Mr Simpson referred which are more directed to the question of whether evidence about the parties' actings under the contract can be a guide to its construction. Thus, in Hunter v Barron's Trustees (1886) 13 R 883, the question of whether the tenant had given timeous notice of his claim for compensation for improvements under the Agricultural Holdings Act 1883 depended upon whether "Whitsunday", the date for entry and termination of his 19 year tenancy, meant 15 or 26 May. It was held that the fact that possession was given and taken on 26 May, 19 years before, was conclusive. As the Lord Justice-Clerk put it (at p.890): "the fact that the tenant did so enter proves that the agreement of the parties was that he should so enter." That conclusion, he said, was "merely giving effect to the palpable agreement of the parties". I was referred also to McAllister v McGallagley 1911 SC 112. In that case the promissory notes issued pursuant to a term in a contract for the sale of a pawnbroking business were held to preclude further argument as to what the requirements of that clause were. I was taken to a passage in the Opinion of Lord President Dunedin at p.118, but it is not clear to me whether this was a case of subsequent actings being used as an aid to construction or whether it should properly be regarded as an example of waiver or personal bar, the acceptance of the promissory notes in that form precluding further argument on the point. Finally, Mr Simpson referred me to Macgill v Park (1899) 2 F 272, in which the headmaster of an academy was paid an annual salary, but the contract was silent as to dates of payment. The school session lasted ten months. The headmaster's employment ceased after five months. The issue was as to whether he should be paid one half of his annual salary, as he contended, or only five twelfths of it, as the school governors contended. It was proved that school fees had been collected from scholars for each quarter of eleven weeks of the school session, and that quarterly payments of salary to the pursuer and other teachers had been uniformly attributed to the same periods. The First Division took the practice of payment under the contract into account and found in favour of the headmaster. The Lord President said (at p.275) that where the contract was silent as to the principle of calculating the payments, "it is of vital importance to ascertain what the practice of payment has been under it." But he went on to say that it seemed to him "to be immaterial whether the practice is treated as being evidence of the contract under which the pursuer was employed, or as construing that contract."

[15] In response to these submissions, Mr Connal submitted that the evidence of the factual matrix which was admissible as an aid to construction was confined to matters which were or ought to have been known to, or to have been otherwise in the minds of, the parties at the time of entering into the contract. This might, of course, include the then current hopes or concerns about what might happen in the future during the course of the contract, and a perception of what matters required to be addressed in the contract. But the focus had to be on the parties' knowledge and state of mind as at the time they entered into the contract. By contrast, the occurrence of events after the contract was entered into was irrelevant to its construction. This included the subsequent actings of the parties under the contract. Such actings might be based upon a misapprehension of what the contract provided or upon a decision to disregard certain provisions: or the parties might simply have acquiesced in disregarding them without any decision to that effect having been taken. None of this could be relevant to the exercise of reaching a decision as to the proper construction of the contract, though it might of course be relevant to arguments of waiver, personal bar and acquiescence, none of which were raised in this case. He referred me to para.8-30 of McBryde, The Law of Contract in Scotland, 3rd Ed., and to a number of the authorities there cited. The position in England, if ever in doubt, was made clear in two decisions of the House of Lords, James Miller & Partners Ltd. v Whitworth Street Estates (Manchester) Ltd. [1970] AC 583 and L. Schuler AG v Wickman Machine Tool Sales Ltd. [1974] AC 235. Whatever might have been said in certain older authorities, it was clear that this was now accepted as the law in Scotland. He referred me to Cameron (Scotland) Ltd. v Melville Dundas Ltd. 2001 SCLR 691 at paras.[28]-[30], Hutchison v Graham's Executors 2006 SCLR 587 and Westbury Estates Ltd. v Royal Bank of Scotland Plc 2006 SLT 1143. Only the first of these cases is of direct relevance here. There the question arose as to what significance, if any, should be attached in construing the contract to the fact that during the course of the contract the pursuers for a considerable period believed that the main contract conditions applied to their relationship. Lord Hamilton referred to the two English House of Lords decisions and to certain remarks made by Lord Denning MR in Port Sudan Cotton Co. v Govindaswamy Chettiar & Sons [1977] 2 Lloyd's Rep. 12, expressing regret about the rule that it was illegitimate to use as an aid to the construction of a contract anything which the parties said or did after it was made. Lord Denning posited a dispute about whether a contract had been made at all or what terms had been agreed. Why should a letter written afterwards acknowledging that a contract was made or that certain terms were agreed not be relevant? Lord Denning concluded:

"... it seems to me that if a party, by words or conduct, admits at a later date that a contract was concluded between him and the other; or admits that it contains such and such a term; then that admission is receivable in evidence and [may] be given such weight as the court thinks proper. Likewise the subsequent conduct of the parties is admissible to show that the contract was made and what were its terms."

Lord Hamilton observed that these observations were clearly obiter and were not the subject of comment by either of the other members of the court. Nor had they been the subject of comment in subsequent cases, though they had been mentioned in Chitty on Contracts (28th Edition) at para.12-124 as supporting the proposition that subsequent actings are admissible "to show whether there was a contract and what the terms of that contract were". Lord Hamilton then continued in this way:

"[30] In the present case, although the sub-contract was not constituted by any formal written document, the parties' communings were expressed in written form. No question arises of any term of the bargain having been agreed solely or partially in oral form. Nor has either party suggested that the content of the written communings requires to be explained or elaborated by oral testimony. Where there is a dispute as to the existence in the parties' bargain of some term or terms maintained to have been agreed orally, it may well be legitimate to have regard to evidence of subsequent conduct, by way of admission or otherwise, in seeking to determine what was in fact agreed. Subsequent conduct may also of course bear on establishing additions or variations to a contract. ... Where, however, the parties' whole contract is admittedly in written form, whether formal or informal, and it is not suggested that any factual matrix requires to be established, no question arises of the existence or otherwise of any term agreed orally or to be inferred from other circumstances. The only question in a situation such as the present is the meaning and effect of the parties' written communings. Standing the rule enunciated in James Miller & Partners Ltd v Whitworth Street Estates Ltd and elsewhere, subsequent conduct cannot assist in resolving the only live issue between the parties. Insofar as Lord Denning's obiter observations in Port Sudan are to a different effect, I must respectfully disagree with them. ..."

For my part, I do not consider that Lord Denning's observations in Port Sudan are to a different effect. They are directed, as I understand them, to the case of a dispute about a contract constituted orally or by conduct rather than to the construction of a written contract.

[16] On this part of the dispute, I agree with Mr Connal. Proof of subsequent conduct falling short of further agreement is not relevant either to assist in resolving ambiguities nor to help fill gaps left untouched in the written contract. I accept that there are passages in some of the older cases cited by Mr Simpson which suggest the contrary. They appear in places to support the reasoning that the best way to know what the parties agreed is to see how they acted once they had concluded their agreement. For my part, I have some difficulty with this, since a contract must have a meaning capable of being ascertained at the time it is concluded, before either party has acted upon it. I would have thought, consistently with the well-known authorities, that the best way to know what parties have agreed, when they have concluded a written agreement, is to look at the agreement they have made and seek to construe it sensibly in the light of the surrounding circumstances known to both parties. As I have already indicated, it is not clear to me that such passages do not elide the issue of construction with questions of acquiescence, waiver, personal bar and the like. In so far as they may be taken as supporting Mr Simpson's third and fourth propositions, I do not consider that they set out the law as it now stands. The two House of Lords authorities to which Mr Connal referred me, James Miller & Partners Ltd. v Whitworth Street Estates (Manchester) Ltd. and L. Schuler AG v Wickman Machine Tool Sales Ltd., are clearly to the effect that subsequent conduct cannot be relied upon as an aid to construction. That that principle forms part of Scots law as well as English law is vouched by the Opinion of Lord Hamilton in Cameron (Scotland) Ltd. v Melville Dundas Ltd. I only add this qualification. I respectfully agree with Lord Hamilton that evidence of subsequent conduct may be relevant to questions of whether a contract was agreed orally and, if so, what were its terms, just as it might be relevant to questions of waiver, personal bar, rectification and the like. I note that Lord Hamilton also conceives that it may be relevant to establishing the factual matrix surrounding the making of the contract. I respectfully agree with that too. In this respect, evidence of subsequent conduct falls to be treated in much the same way as evidence of contractual negotiations. Neither is relevant for its own sake. Evidence of the position parties took during negotiations is not directly relevant to the proper construction of that contract, for the obvious reason that parties may or may not achieve their objective and it is the written agreement itself which reflects the bargain in fact struck as a result of the negotiations. Nonetheless, evidence of something said or done during the negotiations may provide evidence of the state of affairs existing at the time of concluding the contract, or of the knowledge of one or both parties of certain material facts then in existence. Similarly, proof of how parties acted after concluding a contract is irrelevant to its construction, but their actings may throw light upon the state of affairs or their knowledge before and at the time of the conclusion of the contract. Without wishing to encourage excessive and over-enthusiastic leading of evidence when what is in dispute is simply the construction of a written agreement, it has to be recognised that in identifying the factual matrix against which the contract falls to be understood, all evidence is admissible which is probative of some or all of the facts which form part of it. There are no artificial exclusions of any particular category of evidence on the ground that it can be labelled "negotiations" or "subsequent conduct".

[17] Quite apart from its probative value, the evidence was also led, as I understood it, to enable the court to understand the practical issues to which the questions of construction were directed. This involved looking, superficially at least, at some of the areas of dispute between the parties. In so far as its purpose was to help me understand the context in which the questions are raised, it is neither necessary nor appropriate for me on this preliminary proof to form any view as to where the blame lay for any problems that were encountered.

 

The November 2000 contract

[18] The November 2000 contract between Lane and the defenders was very detailed. Some of the submissions in this case were to the effect that the parties continued to operate under it even after the Heads of Agreement was concluded, at least in so far as the Heads of Agreement did not contradict it. At the very least, it informed the discussion about the practices that the parties followed after the Heads of Agreement. It is therefore necessary to summarise some of its terms. In terms of clause 3, Lane undertook to deliver goods from the warehouse to Reid's retail outlets (the "Branch Service") and from the warehouse to customers' homes (the "Home Service"), all in accordance with instructions given by Reid. In terms of clause 5, Lane was required to procure that the service was provided as efficiently as is reasonably practicable in all the circumstances. The clause also dealt with the question of customers' complaints. Clause 7 dealt with the question of risk. It provided that although, until delivery to the customer, property in the goods remained at all times with Reid, risk passed to Lane immediately on the goods being loaded on to one of Lane's vehicles and was to remain with Lane until the goods had been accepted by the customer. Lane were to be responsible to Reid for making good loss or damage only where it was caused by the negligence of its employees, agents or sub-contractors or where the loss or damage occurred whilst the goods were at Lane's risk. Clause 9 dealt with the "contract fleet", i.e. the fleet of vehicles owned or operated by Lane and agreed to be used for the service. At that time this comprised four 13 ton day cab vehicles and two 13 ton sleeper cab vehicles. Questions of price and payment were dealt with under clause 10. In addition to a small fixed sum per year for provision of certain Traffic Management Services, with which I am not presently concerned, Reid were to pay Lane a sum per working week in respect of the delivery of goods to Reid's retail outlets and to customers (the Branch Service and the Home Service) calculated as a fixed price (242.00) per vehicle per day, basis 5 working days per week. Saturdays would be charged at a different (lower) day rate of 213.00. There was provision in clause 10.5 dealing with the case where Lane had to bring in additional vehicles and drivers to perform the service: additional vehicles inclusive of personnel were to be charged at 242.00 per day. No prior agreement to the use of such vehicles was required, but Reid were entitled to be provided with full information surrounding the need to use additional vehicles. Clause 11 dealt with any variations to the sums due and to the size of the contract fleet. Clause 11.2 contemplated that prior to 5 August each year the parties would meet to agree the number of vehicles in the contract fleet and the amount of the sums payable under clause 10. This is a reference to the need to seek agreement on rates and numbers of vehicles.

 

Matters arising out of the evidence

[19] Since the evidence in chief was largely in written form lodged in process, and since in this case the witnesses tended to amplify rather than contradict their written statements, I do not propose to summarise extensively from the evidence given by each witness. It is sufficient that I attempt to set out matters arising from the evidence which are relevant to the questions of construction presently before the court. In so doing, I should emphasise that I am not seeking to reach any conclusions as to whether either party has failed in any respect to comply with its contractual obligations. I confine myself to making findings about the circumstances surrounding the entering into of the Heads of Agreement which are, or may be, germane to its proper construction; that is to say, in general terms, the nature of the business, the manner in which the parties acted towards one another in that business, the difficulties of which the parties were aware at that time and, if only for the purpose of identifying the context in which the court is asked to rule on the terms of the contract, some of the disputes that arose thereafter.

[20] Witnesses for Wincanton accepted that the service required of them was to deliver to customers as quickly and as efficiently as was reasonably practicable in all the circumstances. Essentially there were two aspects to this. One related to delivery time as an objective in itself. The other related to the cost of providing the service. Having ordered their goods at the showroom, customers would generally want them delivered without delay. In some cases, where there was "free product" already in stock, this would mean that delivery should take place within a few days of the goods being ordered. In most cases, however, the goods would not be in stock. Reid currently manufactures only about 10-12% of the furniture that it sells. About 5% comes from other sources within the United Kingdom. Most of the goods are manufactured abroad and imported into the United Kingdom, 75% from the Far East and 8-10% from Europe. This meant that there was often a significant gap between the customer ordering the goods and them arriving in the warehouse. By way of example, I was told that there was a lead time of about 20 weeks for goods brought in from Italy. Such goods were normally imported through Felixstowe and brought from there to the warehouse.

[21] Once the goods were in the warehouse, there was pressure on Lane for them to be moved on to the customer without delay. This was not only because the customer expected prompt delivery. It was also inefficient to Reid, in terms of cash-flow and storage capacity, to keep goods in the warehouse for longer than necessary. As I understood the evidence, the goods were usually purchased by the customer under finance arrangements; and about half of the price would only be payable to Reid on delivery to the customer. How soon after arrival in the warehouse delivery to the customer could be achieved would depend both on when the customer could take delivery, which would involve negotiation to identify a day on which he or she could wait in all day to take delivery; and on the availability of space on the delivery vehicles. This required forward planning by Lane once it knew when goods were due to arrive in the warehouse.

[22] Delivery time per se was only one aspect of efficiency. The cost of the service to Reid depended, in part, upon how cost effectively Lane could operate it. From Lane's point of view, this meant trying to use its vehicles and drivers to maximum capacity, i.e. both by endeavouring to ensure that delivery vehicles were full when they left the warehouse and trying to arrange for deliveries for any particular day or any particular vehicle to be grouped by location. This required forward planning; and that forward planning depended upon Lane being given sufficient advance notice of when goods were due to arrive at the warehouse ready for despatch to customers. Only then could arrangements with customers be made. In general terms, the longer the period of notice given, the better for the efficiency of the service. But even then, delays in shipment and other problems affecting the arrival of the goods at the warehouse, combined with the unavailability of customers to take delivery, meant that one hundred percent efficiency was an aspiration rather than the norm.

[23] As is apparent from the above, it was essential that Lane, as the provider of logistics services, be given accurate information about the impending arrival of goods in the warehouse; and be given that information far enough in advance to enable it to make effective arrangements for onward delivery. Reid operated a computer system known as "CIMPAC" which, as I understand it, contained details of customers' orders and monitored the progress of goods from despatch at their place of manufacture to their arrival at the warehouse. Lane had its own computer systems which went by the acronyms LCRM (Lane Customer Relations Management System) and LTMS (Lane Transport Management System). In practical terms, Lane's IT systems required to be able efficiently to interrogate Reid's system so as to enable Lane to obtain reliable information in advance of when goods were due to arrive for which customer and, on the basis of that, to make its own arrangements for delivering to customers. The evidence led before me indicated that there were complaints from Lane about the "visibility" of orders within the system and that this caused Lane problems in moving goods on after arrival at the warehouse quickly and efficiently.

[24] As I have noted under reference to the November 2000 Agreement, before the Heads of Agreement was entered into, the basic pricing structure agreed between the parties was on the basis of Lane operating a "core fleet" of so many vehicles and being paid at a rate per vehicle per day. They were also, I think, paid a fixed management fee. The day rate covered the cost of vehicle, driver and mate. It was calculated on the assumption that all vehicles in the core fleet would be used five days a week throughout the year, or 252 days per year. Weekend working, if required, and it tended to be limited to Saturdays, was charged separately at a fixed fee agreed in advance. This comprised the overtime rate for the driver plus any additional costs incurred, but not the cost of providing the vehicle, the theory being that the vehicle costs were covered by the day rate charged on weekdays - the use of that vehicle at weekends was a form of "sweating the assets". Sub-contractor costs, where sub-contracted vehicles were used, were charged at a rate agreed in advance. There was a separate charge made when vehicles were used for "shunting", i.e. moving goods from the warehouse and back, or from one store to another, for store openings and closings or for photo-shoots.

[25] The basis of charging for vehicles in the core fleet was described by the Wincanton witnesses as "closed book". Contrasted with this, according to a number of the Lane witnesses, was an "open book" basis for charging. There was, so it seemed to me, some inconsistency between the witnesses as to what "open book" meant in this context. This question lies at the heart of one of the principal issues to be decided at the preliminary proof and I should therefore set out my understanding of the evidence. I do so by reference to the evidence of two of Wincanton's principal witnesses, Rebecca Jenkins and Peter Keates and to some of the documents to which the witnesses referred. I have not overlooked the evidence of other witnesses - it is simply not necessary to refer to that evidence at this stage.

[26] In paras.5-11 of her witness statement lodged by the pursuers (30/1 of Process) Rebecca Jenkins described the basis of charging under the contract, mainly, I think, before the Heads of Agreement were entered into, in the following terms:

"5. In a fully open book contract, all the costs are itemised and fully visible to both parties. If the costs go up, the customer would pay that additional amount. A management fee is charged on top and that would be the profit margin for the supplier. Open book contracts are common in the logistics business.

6. Reid fully understood that they paid us for vehicles and drivers on a daily basis with further payment being made when Reid's volume increased resulting in increased resources being needed. Reid hired drivers and vehicles and paid for drivers and vehicles. They did not pay per drop or delivery (apart from the North West contract).

7. In a closed book contract, there is a unit rate for the job. There is a fixed rate for [the] operation and the margin for profit would be included in that rate. There is no visibility to the customer.

8. Open book was appropriate to the service which Reid required. The type of business which Reid operated had peaks which required extra drivers and extra vehicles. Open book is not a licence to run up costs. All costs have to be justified. For example it has to be shown that there was an increase in volume which required more drivers and more vehicles. ...

10. Reid operate on a semi open book basis. By this I mean that Reid fell in between a fully open book and a fully closed book situation. The elements of the Reid Contract that fell into the open book situation were visibility of daily rates for vehicles and drivers. If additional resources were needed to meet volume then that would be charged to Reid on top of the agreed cost.

11. The semi open book basis of the contract continued throughout our relationship with Reid. We didn't have a problem with the basis of the contract and I don't think Reid did either. It was a principle established in the Reid and Skelgate contract and was one that was continued when Lane acquired Skelgate."

In his witness statement lodged in process by the pursuers (30/3), Peter Keates described the arrangements in this way:

"6. Lane was only responsible for transport out of Hillington when I took over [in 2002]. The transport operation charges a day rate that covers the vehicle, driver and mate. It was worked out on the basis of Monday to Friday working and for 252 days per year. Weekend working was charged out at a different rate to reflect overtime and additional extra costs but would exclude the vehicle as its direct costs were covered within the weekly charge. Reid were trying to get to a cost per drop situation and we needed to breakdown our costs in an attempt to achieve that objective. Andy Marshall reconstructed the cost base. Transport had been a closed book arrangement but we opened up our costs for transport discussions. ..."

Referring to the negotiations leading up to the Heads of Agreement, he went on to say this:

"7. ... Initially Reid wanted open book plus a management fee for transport. Prior to the Heads of Agreement we were charging Reid about 272 per vehicle day. When Reid asked us to work on an open book basis I provided them with a breakdown of estimated costs. When I gave them this they then changed their mind and said they wanted to work on the basis of fixed cost per vehicle day. We therefore continued to charge a fixed cost per vehicle day for the deliveries out of Hillington to the customer. All other additional work however was charged on a cost management fee basis. These additional costs covered items such as drivers' overtime, fuel etc. The way Lane charged was part open book and part closed book. We had fixed cost charges plus extra cost."

Mr Keates also gave a statement to the defenders (31/6). He explained in para.5 that

"In an open book reconciliation, anything we spend is cost plus the overall fee. We would show the cost, i.e. the invoice cost plus management fee over and above this. ..."

Having then referred to correspondence in August 2003 in which there was reference to Lane "opening up their books" to arrive at a figure of cost per day, he continued in para.7:

"7. The transport costs were on a closed book basis in the 2000 contract. The vehicle, driver and mate were charged at a certain rate, on top of the management charge for office staff at a fixed amount. On top of that there were sub-contractor charges which were agreed in advance."

The expression "opening up their books" in this context is illustrative of some differences in the use of such language. That expression, to my mind, was used to indicate that Lane agreed to show Reid how their costs per vehicle day were made up. This is quite different, as I understand it, from charging on an "open book basis".

[27] This can be illustrated further by reference to e-mail correspondence between the parties in September to October 2003 concerning a revision to the daily charge for vehicles in Lane's core fleet. On 8 September 2003 Mr Keates proposed a revised daily charge of 337.60 per vehicle on the basis of a core fleet of eight vehicles, with three vehicles available for operation over Saturday and Sunday. On 10 September 2003 Mr Poppleton responded on behalf of Reid to the effect that it seemed that "we new boys" (by which he meant those within the two companies who were new to the arrangements) had been unaware of the history of the contract and therefore might have been discussing issues in ignorance of past facts. He now understood it to have "been agreed that the Hillington contract is open book and therefore a greater degree of detail is required." Mr Keates, in reply, expressed disagreement: "we have operated the contract on a rate per day and not open book". He went on to explain:

"If we were to operate this on an open book basis then there would be no need to supply you with a vehicle rate per day as all costs incurred would be sent to you on a weekly costs schedule. ... Obviously it is your decision on what method you choose for billing purposes but I am concerned that we have come this far and started a consultation process with the drivers before you have highlighted an issue.

If you want to go open book then I am quite happy to forward a schedule of costs but you have asked for a rate per vehicle day."

The reply from Reid on 11 September 2003, this time from Iain Stewart, was as follows:

"I think we are talking slightly at cross purposes here. You are correct that a rate per day is the basis of charge out on which you were asked to quote, however it is the build up to that calculation which was open book last time round...."

The correspondence reflects the fact that Lane had provided a great deal of information about their cost structure with a view to reaching agreement on a proposed rate per vehicle per day. It is not relevant to follow that discussion to its conclusion. For present purposes it is sufficient to note that the expression "open book" is used in some places as a specific basis of charging and in others as merely a shorthand for Lane being willing to show Reid the full back-up to the proposed daily rate per vehicle.

[28] The November 2000 contract did not require there to be prior agreement on the use of additional vehicles. But the core fleet and the rates per vehicle day were required to be agreed in advance. This was done by way of a budget which Lane would prepare on the basis of forecasts provided by Reid of their likely requirements for delivery in the forthcoming year. Lane would submit their budget to Reid for approval. As Reid's forecasts altered, so Lane would revise the budget and re-submit it for approval. I was shown two examples of budgets submitted to and approved by Reid, one for 2005 and the other for 2006. Mr Murphy explained how the process worked. Sometime in the middle of the year, Reid would provide a forecast of their requirements for the following year. This forecast was of the value of goods likely to be sold during that year, that value being spread unevenly over the different weeks of the following year on the basis, no doubt, of experience of fluctuations in sales. On the basis of these forecasts, Lane would produce a budget in the form of a schedule. The schedule would be divided into twelve periods, eight of them being periods of four weeks each, whilst the third, sixth, ninth and twelfth periods were each of five weeks. At the left hand side of the schedule would be the value estimated by Reid required to be dispatched each week. Moving from left to right, the schedule then converted this value into the number of deliveries likely to be required per week. This was obviously a rough and ready assessment based upon an average value per order/delivery. Certain adjustments were then made, to take account of the fact, for example, that deliveries to Aberdeen, Inverness and Carlisle were always carried out by sub-contractors. The remainder of the deliveries would, if possible, be carried out using the core fleet. The number of core fleet vehicle days available to carry out these deliveries was set out - in the Budget for 2005 lodged as 7/71 the number was 40 (eight vehicles at five days per week). The core fleet cost is recorded as 10,953 (40 vehicle days at 274 per vehicle day). Moving to the right, there is an estimate of core fleet capacity, i.e. the number of deliveries capable of being carried out by the core fleet. In some weeks the schedule indicated that the core fleet was capable, in theory, of carrying out the whole of the delivery requirement without the need to call in sub-contractors. In others, it was clear that sub-contractors would have to be used. In such cases, the number of sub-contractors anticipated was set out. Various costs were then shown including costs for direct management, customer services, and other items. In the 2006 budget, there was a cost shown for warehouse staff also. On the right hand column the total cost for each particular week is set out. In this way the budget for the year is established and in due course agreed. The forecasts were revised from time to time and the budget was updated and agreed in its updated form.

[29] There are a number of variables and uncertainties in this system of budgeting. One is that the forecast is a forecast of value, not of goods sold or deliveries. If every delivery was of the same value, the conversion to numbers of deliveries would present no problems. But in real life the value of each delivery will be different. If the forecast value in a particular week is met, but is made up of a greater number of smaller deliveries, there may be a requirement for additional vehicles and the use of sub-contracting. Further, the schedule assumes that certain quantities will be delivered to Aberdeen, Inverness and Carlisle, using sub-contractors. If this changes, greater demand may be placed on Lane's core fleet. Again, and of greater importance, the schedule assumes the ability to use vehicles to their capacity. The ability to do so will, however, depend on any number of contingencies including, but not limited to, the lack of effective communication between Lane and Reid concerning goods arriving at their warehouse (lack of "visibility"). There has to be sufficient advanced notice to enable Lane to fill their vehicles to capacity and thereby keep within budget. In addition, the schedule assumes that deliveries can be spread in the manner forecasted by Reid. Mr Murphy expressed some concern that Reid worked on a quarterly basis and were anxious, for accounting purposes, to ensure that a high volume of deliveries was made before the end of any quarter. This would sometimes mean that if there had been fewer deliveries in preceding weeks, that would have to be made up before the end of each quarter, thus placing an additional burden on the core fleet and requiring the use of sub-contractors. Accordingly it was almost inevitable, in my opinion, that if they were to provide a prompt and efficient service, Lane would sometimes have to bring in additional vehicles and incur, at relatively short notice, additional expenses by way of payments made to sub-contractors.

[30] It appears from the evidence that for some time this did not give rise to problems. Additional costs were incurred by Lane for the reasons which I have sought to explain; and such additional costs were charged to Reid and were paid by Reid without any point being taken that there had been no prior agreement to the use of the additional vehicles. As the relationship deteriorated, however, this practice changed. Reid introduced a practice of paying the extra costs if they did not exceed 3% of the value of the goods despatched in a particular month even if no prior agreement had been reached, but refusing payment of amounts exceeding that figure where there had been no prior agreement. The evidence from Wincanton, in particular from Mr Keates and Mr Murphy, was not entirely consistent as to what they did, but broadly it was to the effect that they usually tried to obtain prior agreement but were not always successful. Sometimes they simply had to make a decision to lay on the extra vehicles without getting a reply from Reid. I accept this evidence.

 

The issues for determination
[31] Both parties in their submissions at the end of the proof provided me with a list of the contractual issues which required to be determined and their submissions on them. I found these extremely helpful. I propose to deal with these issues under the headings set out in para.[10] above

 

Issue (1) How was Lane/Wincanton to be paid for providing services under the contract: and, in particular, how, if at all, was it entitled to be paid in circumstances where it had used additional vehicles and agency labour to provide the required services without obtaining in advance Reid's agreement to the use of such additional vehicles or labour?

 

[32] Mr Simpson, for the pursuers, submitted that Lane/Wincanton was entitled to payment from Reid of the full cost incurred by it in using additional vehicles and agency labour to make deliveries required by Reid, even if Reid had not agreed in advance to the use of such additional vehicles or agency labour, provided the use and the cost thereof were reasonable in the circumstances. Mr Connal QC, for his part, stressed that the terms of payment for the pursuer's services were governed by clause 9 of the Heads of Agreement. To be payable under that clause, costs or charges required to be agreed with the defenders in advance of being incurred, whether initially (through the agreement of a budget) or specifically in relation to each item. He submitted that the contract did not contain "open book" charging provisions if by that phrase was meant an entitlement to recover all reasonable charges incurred regardless of their being agreed in advance. Variations were regularly agreed in advance. Requests were responded to by the defenders, either by agreement or rejections. It was not impossible to agree variations in charges in advance.

[33] The relevant provision for payment in the Heads of Agreement is to be found in clause 9. I set it out again for convenience:

"In consideration of the provision of the Services Reid will pay a fixed management fee and service charges in amounts to be agreed between Reid and Lane. The management fee will be payable on the fifteenth working day of each month. 75% of the "projected core service charges" shall be paid on the fifteenth working day of that month. There will be a reconciliation in the following month between the amount paid and the actual level of service charges payable and the balance shall be payable on the fourteenth working day of that month. Lane agrees to operate on an "open book" basis and provide such vouching and information and access to its books and records as Reid may reasonably require relative to the services. Any variations to the agreed management fees or service charges will be agreed between the parties prior to being incurred."

At first I understood Mr Simpson to be arguing that the effect of this clause was that Lane were providing management and other services to Reid on a "fully open book" basis, in terms of which they would be entitled to reimbursement of all costs which they reasonably incurred in carrying out the services for Reid and, on top of that, a management fee. Such an argument appeared to be consistent with that intimated in a Written Statement of Proposals for Further Procedure lodged on behalf of the pursuer earlier in the process, in which the pursuer had sought a preliminary proof on the meaning of the term "open book". As his argument developed, however, I understood Mr Simpson to adopt a less extreme position. He accepted that the management fee and the charges for the vehicles in the core fleet were fixed. The core fleet was charged at a fixed rate per vehicle per day. The rates for deliveries to Aberdeen, Inverness and Carlisle, which were carried out by sub-contractors, were also agreed. The rates for sub-contractors, if used, on other delivery runs was, as I understood it, also agreed. What was at issue was whether Lane should be paid for the additional vehicles and drivers which it sub-contracted in order to make deliveries when the volume of goods to be delivered exceeded the capacity of the core fleet. It was Mr Simpson's contention that additional vehicles and drivers should be paid for even if not agreed in advance, provided the use of such vehicles and drivers and the sums claimed were both reasonable.

[34] Mr Simpson sought to draw some support for that from the provision in clause 9 that Lane agreed "to operate on an 'open book' basis." He did not contend that that provision was unambiguous. On the contrary, he submitted that there was ambiguity there, and that it was therefore to be construed against the defenders. It was apparent from the correspondence to which I have referred in paragraph [27] above that Mr Stewart knew that that term "open book" was ambiguous. Yet Reid put it forward in its draft of the Heads of Agreement. The word "and" in the fifth sentence, which linked operating "on an 'open book' basis" with the agreement to provide "such vouching and information and access to its books and records as Reid may reasonably require" did not resolve that ambiguity. The last sentence of clause 9, which required that variations to the agreed management fees or service charges had to be agreed prior to being incurred, did not refer to this question about charging for additional vehicles and drivers; it related back to the fixed management fee and service charges referred to at the beginning of clause 9. It was variations to those fees (e.g. rates per vehicle per day) which required to be agreed in advance. Having regard to the contra proferentem rule, it was legitimate to look at the position under the November 2000 contract which had continued in force at least until the Heads of Agreement were concluded. Clause 10.5 of the November 2000 contract provided that if additional vehicles were needed, they would be provided by Lane and paid for by Reid at a certain rate - there was no requirement that the use of such vehicles be agreed in advance in each case. This contrasted with other provisions of the November 2000 contract: for example Clause 9.2 which required the written agreement of both parties before vehicles could be added to or removed from the contract fleet; and clause 11.2 which contained provisions for agreeing in advance the number of vehicles in the contract fleet and the sums payable in respect thereof. Mr Simpson pointed out that Reid had, since 2002, paid for additional vehicles when used, even if their use had not been agreed in advance. It was only in June 2006 that the defenders first insisted on the requirement of prior agreement. Mr Simpson submitted that it did not make commercial or practical sense for Lane to have to sit down and discuss the matter with Reid every time the use of an additional vehicle arose for consideration. The obligation under the agreement was to deliver to the customer promptly. It was in Reid's interest that delivery be made promptly since until delivery they would only be paid about half of the price. Lane were logistics experts and they were the ones who knew when additional vehicles were necessary. Reid would have nothing to contribute to any discussion about whether an additional vehicle was needed at any particular time. The additional costs of extra vehicles was small in comparison with Reid's budget. It was perfectly possible that Mr Boyd, the person at Reid in charge of these matters, would simply not want to bother replying to some of Lane's requests for agreement. Reid was better protected by the requirement for a subsequent reconciliation, in which Lane would have to justify what they had done by providing full information and vouching. On the evidence, Lane did make some requests for prior approval and attempted to get prior agreement, but if they could get no response they would sometimes go ahead and incur the additional costs. Lane was aware that cost was an important issue to Reid and was conscious of the need to maintain good customer relations; it had no interest in inflating its costs. Mr Murphy gave a weekly account to Reid of what costs were being claimed immediately following those costs being incurred. For their part, Reid knew the core fleet capacity and also knew how many deliveries were required to be carried out and so could see when additional vehicles might be required.

[35] Mr Connal submitted that it was wrong to approach this by asking: what is an open book contract and, does it apply here? The proper approach was to look at clause 9 of the Heads of Agreement and see what, properly construed, that meant. Whilst the previous contract (the November 2000 contract) was part of the factual matrix, it was not clear what the evidence showed about how it operated in practice. The simple argument for the defenders was that the terms of payment for all the services rendered by the pursuers were governed by clause 9. On its plain wording, all such charges had to be agreed. This was provided for in the first sentence. Agreement generally was reached by Reid's approval of the budget. The management fee was agreed in this way. Reference to the "projected core service charges" was a reference to the projected costs as per the budget. 75% of the costs set out in the budget would be paid on the fifteenth working day of each month. The reconciliation in the following month between the amount paid (75% of the projected charges) and the actual level of service charges payable was necessary, since it would not always be the case that Lane would incur 100% of the projected charges set out in the budget - the charges actually incurred might be higher or lower. But none of that took away from the requirement for charges to be agreed in advance. The reference to an "open book" basis did not import some self contained concept of charging as contended for by the pursuer. The use of that term simply meant that the pursuer's vouching and other information relevant to its charges would be laid open to inspection by Reid. This was the way in which Reid had used that expression in the correspondence and it made good sense to read it in this way in clause 9. The meaning of the last sentence in clause 9 was clear. Any variations to the management fee and service charges had to be agreed in advance.

[36] Referring to the contra proferentem argument put forward by Mr Simpson, Mr Connal submitted that it did not apply at all unless there was an ambiguity. Here, properly construed, the meaning of clause 9 was clear. Further, there was not a lot of evidence as to how the contract was drawn up. It did not appear that it was presented to Lane on a take it or leave it basis. In those circumstances, it would be wrong to regard Reid as the proferens. Mr Simpson kept referring to "pure open book". It is not clear on the evidence whether this has a clear and precise meaning in the trade. Mr Keates, Ms Jenkins and Mr Flannigan appeared to have different understandings of what it meant. It was not as easy as the pursuer contended simply to say that the contract was a "pure open book" contract. In truth, as witnesses seem to accept, it was part closed and part open.

[37] Dealing with the issue of subsequent conduct, Mr Connal submitted that the evidence was mixed. Mr Keates said that he sought and obtained agreement for about 90% of the extra costs claimed. Mr Murphy sometimes sought agreement and sometimes not. Mr Marnie said that Lane kept incurring costs even though there had been no prior agreement. The evidence differed from witness to witness. Some documents showed Lane seeking and obtaining consent to incurring extra costs. The documents showed that within a certain limit payment was made even though there had been no prior agreement. But none of this was conclusive. If anything, it showed that Lane recognised the need to seek prior agreement.

[38] I have come to the conclusion that on this aspect the submissions on behalf of the pursuer are to be preferred, at least in so far as concerns the question whether additional charges over and above those projected required to be agreed in advance of being incurred.

[39] The wording of clause 9 is not as precise as it might be. The reference in the first sentence to a "fixed management fee" seems to point to a management fee in a fixed amount payable periodically, as opposed to a management fee based on a percentage of the value of the services provided. Otherwise, the second sentence which provides for the management fee to be payable on the fifteenth working day of each month, i.e. at a time before the total charge for services has been agreed, would not make sense. The reference to "service charges" in the first sentence is wide enough to encompass all charges to be made by Lane in providing the services, both in delivering the goods but also in their management and control of the warehouse. It is clear from the first sentence that the level of the management fee and the service charges (e.g. rates per vehicle per day, rates for sub-contractors, etc.) requires to be agreed between Reid and Lane. There is nothing surprising in this since, albeit that it was intended that that document be superseded in the near future by fully worked out agreement, it cannot have been envisaged that such fees and charges would necessarily remain the same throughout the life of the agreement, nor can it have been envisaged that Lane would be able to impose a charge without agreement.

[40] Thus far there is no real difficulty. Nor, to my mind, is there any real difficulty in the following three sentences. These are to do with the service charges. The third sentence provides that 75% of the projected core service charges shall be paid on the fifteenth working day of each month and that there will be a reconciliation in the following month. I take the expression "projected core service charges" to mean the service charges projected in the budget and any subsequent revisal thereof based upon forecasts provided by Reid. The actual volume of goods for despatch in any particular week or month might differ from that which was forecast. It might be less and it might be more. Similarly, in practice Lane might be able to carry out the deliveries more efficiently than forecast, thereby reducing service charges to below those projected in the budget, or might find that in the particular circumstances it exceeded the projected charges. In those circumstances the third sentence provides that Lane is not to be kept out of its money until the precise figures are agreed. Its cash flow is to be safeguarded by it being paid 75% of the projected (or budgeted) core service charges in the middle of that month with a reconciliation to take place the following month. That reconciliation, as the fourth sentence makes clear, is to be between the amount paid (i.e. the 75% of the projected core service charges) and the amount of the actual level of service charges payable in respect of that month. The reference to "open book" basis in the fifth sentence seems to me to relate to this reconciliation. It is not used as a term to define a method of charging. Rather, so it seems to me, it is used to make it clear that in the reconciliation Lane must justify the actual level of service charges payable by providing vouching and information and full access to its books and records as Reid may reasonably require. This is so that Reid can be satisfied that, for example, the use of additional vehicles was reasonable and necessary rather than brought about as a result of Lane's inefficiency.

[41] Much emphasis was placed by Mr Connal on the last sentence of clause 9. It was principally on the basis of that sentence that he argued that all charges had to be agreed in advance. I do not think that that sentence can properly bear that meaning. It seems to me to relate back to the first sentence and be concerned with fixing in advance the level of management fees and the level of service charges. The management fee is expressed at so much per week, that being calculated by dividing the proposed management fee by the number of weeks in the year. The service charges are expressed in a variety of ways. For the Aberdeen, Inverness and Carlisle deliveries, a proposed rate is set out in the budget and agreement is reached in this way. That is a rate per delivery which is then applied to the number of deliveries made in each area. The core fleet is charged at a rate of so much per vehicle per day. In the 2005 budget the rate given is 274 per vehicle per day. In the 2006 budget the rate is 284 per vehicle per day. Other charges are identified, in particular charges for warehouse staff. It seems to me that the last sentence is concerned to ensure that if there are to be changes to the level of these fees, those changes will be agreed before they come into effect. It does not, to my mind, mean that prior agreement is needed for every vehicle that is used in excess of the number of vehicles identified in the budget. I have come to this view as a matter of construction of the clause but I am reinforced in it by a consideration of the practical difficulties that were brought out during the evidence. It is true that on many, perhaps most, occasions the relevant individuals at Lane would seek Reid's prior agreement on the use of additional vehicles. But it is clear to me on the evidence that such agreement was not always easily obtainable. Lane's prime consideration was to provide a service as efficiently as possible and it seems to me, on the evidence, that Reid would not have wanted Lane to fail to deliver to customers simply because it, Reid, had not got back to it to agree the use of an additional vehicle. The impression I had from the evidence was that the operation was complex and fast moving. There would be a need for constant alterations to the particular delivery schedule. The operation would simply not work efficiently if Lane was always having to look over its shoulder to seek prior approval from Reid for every operational change which it made which might involve the incurring of extra charges.

 

Issue (2) At whose risk was the stock in the warehouse before it was loaded onto Lane/Wincanton's vehicles?

 

[42] This issue relates to the period after Lane assumed full responsibility for the warehouse. This happened at some time after the Heads of Agreement were signed. I have not been asked to decide on what date this happened.

[43] Mr Simpson submitted that there was no term in the Heads of Agreement putting the risk in the stock onto Lane before it was loaded into vehicles. Mr Connal pointed out that the pursuers were obliged to insure the goods against loss, damage or theft once they entered into possession of the goods on receipt at the warehouse. He submitted that the goods were at Lane's risk until delivered to customers or showrooms. Lane was in control of the warehouse. They were also in charge of stock control from 2005 on.

[44] It is true that there is no term directly dealing with the question of risk. The terms in the Heads of Agreement bearing upon the issue are these. Lane agreed to provide to Reid a dedicated warehouse management service in respect of Reid's warehouses. That was described in clause 1.1 as "a comprehensive warehouse management service". This means that Lane were to be responsible for all aspects of warehousing. This is borne out by the fact that they were to take over responsibility for some of the Reid personnel who had been engaged the warehouse management services. Clause 3 deals with the implications of this in terms of the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("TUPE"). Reid employees engaged in respect of warehouse management services were to transfer to Lane. Clause 5 provided that title in all of Reid's goods and equipment was to remain vested in Reid. Clause 6 required Lane to be responsible for keeping the warehouses in a tidy and orderly condition and properly maintained internally, albeit that under clause 7 Reid was responsible for the exterior maintenance. Clause 6.4 required Lane to keep full and up to date records on all matters required by Reid. Clause 8 allowed Lane access to Reid's CIMPAC system as the basis for warehousing and delivery instructions. All of these provisions appear to suggest that from the date of hand over Lane was to be wholly responsible for what went on in the warehouse. Against this background I turn to consider what the contract says about insurance. This is dealt with in clause 10. In addition to having to maintain insurance for its vehicles and for Reid's goods whilst in transit, Lane was also required by clause 10.3 to maintain insurance for Reid's goods and machinery in the warehouses. I would construe this as requiring Lane to take out insurance in its own name.

[45] In my opinion these provisions, and the practical transfer of responsibility which they reflect, point clearly to the goods being at Lane's risk whilst in the warehouse. As a practical matter, in accordance with the provision of warehouse services contemplated by the Heads of Agreement, Lane would have full responsibility for what went on in the warehouse. All employees in the warehouse responsible for the goods would be employed by Lane or under its supervision and control. The fact that, as the evidence suggested, Reid employees would sometimes enter the warehouse does not detract from this. Lane was in a position to put in place systems to protect its interests. Of greater importance however, is the insurance provision. Just as Lane was to insure goods whilst on vehicles, so under the Heads of Agreement Lane was to insure the goods in the warehouse notwithstanding that title in the goods remained with Reid. This can only mean, in my opinion, that Lane assumed the risk in the goods in the warehouse and were insuring accordingly.

[46] I would therefore answer this question by saying that the stock in the warehouse was at Lane's risk.

 

Issue (3) How was damage to stock to be dealt with: in particular was Reid entitled to debit, from sums payable to Lane/Wincanton, damages for damage to stock alleged to have occurred during transit, without Lane/Wincanton first having agreed to such debit?

 

[47] Mr Simpson submitted that there is no term entitling Reid to debit from sums otherwise payable to Lane/Wincanton damages for damage to stock alleged to have occurred during transit unless Lane/Wincanton first agreed to such debit. Mr Connal submitted that the defenders were entitled to charge the pursuers for all damage to goods caused during deliveries by the pursuers' operatives. By the actings of the parties they agreed that such charges would be made by debits to the pursuers' account rather than by invoices.

[48] It was common ground that the Heads of Agreement was silent on this point. It was accepted, as I understood it, that the goods were at Lane's risk whilst in transit from the warehouse to the place of delivery. I have also held that, after responsibility for the warehouse was effectively transferred to Lane, the goods in the warehouse were also at Lane's risk. In such circumstances, Reid would prima facie have a claim for losses or damage occurring during those periods.

[49] The issue for decision arose out of Reid's practice of debiting Lane/Wincanton for allegedly damaging stock in transit and then, without such debits having been agreed, deducting the amount of the debits from sums otherwise due to Lane/Wincanton. During the course of discussion it became clear that no issue of principle arose. Reid's right to deduct was simply that which it had at common law. The pursuer was perhaps apprehensive lest the adoption of this practice by Reid was seen to place upon it the burden of showing that the debit and consequent deduction were not justified. However, in his submissions Mr Connal accepted that the burden of establishing that goods were damaged whilst in transit remained on Reid. That must be correct. Mr Simpson seemed content with this acceptance of the position. I assume that the same concession would apply to allegations of loss or damage in the warehouse. That too must be correct. It was also confirmed that neither party sought to re-open what had already been agreed. In those circumstances, I need say no more about this question.

 

Issue (4) How was the "northwest operation" to be paid for?

 

[50] This issue is wholly discrete from the other issues to which I have referred.

It arose out of the fact that at some point in 2005 or 2006 Reid re-opened their stores in Bolton and Chester. It wanted to send products to those stores direct from Hillington. The delivery to those stores from Hillington was referred to in evidence as the "northwest operation" or the "northwest drop". It is clear, and not in dispute, that Lane agreed to carry out these deliveries at a charge of 55 per drop (i.e. per individual delivery). The dispute between the parties is as to whether this agreement was to continue for a fixed trial period ending at the end of 2006 or was to continue until altered by further discussion and agreement.

[51] It is convenient to look at the pleadings on this issue, starting with those for the defender. Reid pleads (at para. 4.3 of the Defences) that there had been discussions in November 2005 about this and that agreement was reached in early 2006 between Alan Marnie of Reid and Nick Cleary of Lane that the north west operation was to be carried out at a price of 55 per delivery exclusive of VAT. It is explained in that paragraph that a quote had been obtained by Reid from an alternative contractor based in England at that price, and that Lane had agreed to match the figure because it was keen to maximise its income. The agreement was to last "until re-negotiated". It is averred that no other agreement was reached between the parties and, accordingly, no sums in excess of that price of 55 are due from Reid.

[52] In response, the pursuer pleads that the agreement in early 2006 was that initially:

"[Lane] would charge the defender 55 plus VAT per drop for the North West Operation. This was agreed to be for a limited period only, namely until December 2006. This agreement was made by Mr Peter Keates on behalf of [Lane]"

The pursuer goes on to say that at a meeting between the parties in November 2006 the pursuer stated that, in accordance with the terms of that agreement, the pursuer would charge the defender on an "open book basis" for the North West Operation from 1 January 2007. It avers that none of the representatives of Reid who were at that meeting disagreed and that accordingly the pursuer started to charge them on an open book basis from 1 January 2007.

[53] The evidence on this was far from clear. Mr Keates, who the pursuer pleads was the person who made the agreement on its behalf, said at para.11 of his witness statement:

"As far as the northwest operation was concerned this was dealt with separately. Nick Cleary agreed a fixed price per drop of 55 with Reid. He spoke to me about this and I understood why he wanted to agree this price structure but I was concerned that we should cover our costs. I suggested that we should only do work on this fixed price basis for a trial period of 3 months. I am clear that this was not an open-ended agreement. Lane could not have afforded to do this for any longer than a trial period."

In his oral evidence, he confirmed in chief that Reid had had a quote from another contractor of 55 per drop and that he thought that Lane might just about break even at this price. He says that he therefore suggested that Lane should do it for a trial period of three months. This was to be a "wagon and drag" operation, that is to say an operation using an 18 tonne vehicle with a detachable trailer coming down from Glasgow. He said that Lane had to work on the assumption that it could do ten deliveries per vehicle per day using two vehicles (i.e. the 18 tonne lorry and the detachable trailer). Over a five-day week this meant 100 deliveries. I was referred to a letter of 3 February 2006 from Nick Cleary to Alan Marnie dealing with the 2006 budget and making it clear that the northwest operation was not included within the budget. In that letter Mr Cleary describes the northwest operation as:

"Deliveries to the north west stores, for which we have indicated a potential cost of 55 per drop assuming 100 deliveries per week utilizing drawbar equipment".

Mr Keates did not think that the volume was there, but suggested in his evidence that Paul Murphy would know more about that. He referred also to a note of a meeting on 6 February 2006 which Mr Cleary and Mr Murphy had attended on behalf of Lane and Mr Marnie and Mr Stewart on behalf of Reid. At item 7 of that note Mr Marnie is recorded as requiring Lane to provide a formal Letter of Engagement to undertake the northwest operation at 55 per drop from Head Office (which I take to be Hillington). In cross-examination, Mr Keates confirmed that Nick Cleary was the operations director and that it was he (i.e. Mr Cleary) who had agreed the 55 figure for the northwest drop. He said that he thought that Mr Cleary had agreed it with Alan Marnie when he, Mr Keates, was not there. Mr Cleary had told him that it was agreed on a trial period. Mr Keates was referred to an internal Wincanton e-mail of November 2006 in which Stuart Johnson told Paul Heaton that the northwest operation was based on a drop rate of 55 per drop to cover all costs from the product leaving the warehouse in Scotland and being delivered to peoples' houses. His comment was: "I have not seen any accounts for this part of the operation, but it must be costing money." There was no reference to any time limit upon 55 being the rate charged. On being asked why this was so, Mr Keates simply said that he was not involved in it at that stage.

[54] Mr Cleary was not called to give evidence by the pursuers. Mr Murphy dealt with the matter at paragraph 25 of his witness statement. His evidence was to this effect:

"At the end of 2006 and beginning of 2007 it was the start of the North West operation. I sat in on a meeting on the 'cost per drop' issue. The deal was that it was 55 per drop until critical mass was achieved. The cost would be reviewed in 2007. I am clear that charging 55 per drop was just a temporary arrangement. Lane Group had brought in a wagon and drag (an 18 tonne vehicle with detachable trailer) to do the North West operation. We worked out the total cost of taking goods from Glasgow with an overnight driver and calculated that each vehicle could provide 20 deliveries per day."

I take this to mean 20 deliveries for the combined lorry plus trailer, equivalent to the ten deliveries each spoken to by Mr Keates. He continued:

"This is how we arrived at the 55 per drop figure. In summer 2006 we agreed that we could do 20 deliveries each day. Reid said they didn't have a critical mass to meet 20 deliveries a day but they wanted to continue with 55 per drop anyway even if there was, for example, only one delivery. Nick Cleary who worked for Lane had agreed that we could do it using non-dedicated vans at 55 per drop but only for a limited period until January 2007. In October 2006, Reid asked that we used dedicated vans. Wincanton had agreed that the 55 per drop would only apply until January. Reid were unhappy with the non-dedicated service level. Paul Heaton of Wincanton attempted to review the situation in January 2007 but Reid would not agree to anything. Reid were told they would be invoiced based on an open book formula going forward which was what was done on the North West operation."

In his oral evidence he referred to the meeting which he attended. Under reference to the notes of the meeting of 6 February 2006, he confirmed that they had said that they could do 55 per drop "until we achieved critical mass". The agreement that, for a temporary period before achieving critical mass, they would deliver at 55 per drop, was to last until the end of 2006. Lane had put in their own dedicated vehicles in October, November and December 2006.

[55] Mr Murphy referred to a PowerPoint presentation given by Wincanton to Reid on 13 December 2006. It was put in evidence in the form of a substantial booklet, indicating that the presentation must have gone on for some time. Three pages from the end the northwest operation is referred to under the heading "Commercial Arrangements - Current Understanding". This indicated that the current practice, as perceived by Wincanton, was that the 55 per drop for the northwest operation was "agreed until end 2006". It is difficult to know what to make of this. This was a presentation by Wincanton, who had taken over from Lane less than a month previously. It is by no means clear that Wincanton were by then up to speed on what was going on. That same page indicated that their then understanding was that the Heads of Agreement was "Open Book" and that their understanding of the then current practice was that claims for damages were to be debited by Reid from sums otherwise due to them: neither reflects their current position. Nor is it clear that anyone on the Reid side indicated agreement with any part of it.

[56] Les Flannigan had been part of the Wincanton team giving the presentation. He was called to give evidence for Reid. In cross-examination he was taken to that page of the PowerPoint demonstration. He said that he made it clear that the agreement was only until the end of 2006 but he was not sure whether there was a particular reaction from Reid on that point.

[57] Mr Marnie gave evidence for Reid. In his witness statement at para.24 he said that the 55 per drop agreement had been put in place at a dinner in November 2005 but in early 2006 they were still chasing Lane's formal confirmation. He said that it was an agreement that was to last "until it was re-negotiated". In his evidence-in-chief he amplified this by saying that the rate was to be reviewed at a later date once Lane knew their strategy for the northwest. There was no later agreement reached. In cross-examination he agreed that the overall budget provided by Lane came to an end at the end of each calendar year. It was put to him that it would have been natural to review the charge for the northwest operation when the budget came to an end. He did not agree. According to his evidence, no end date for the agreement on 55 per drop was ever agreed. Had Lane said to him that after the end of 2006 the northwest operation would be on the basis of "open book", he would have said: No. That was not at all what they had agreed. With reference to the presentation in December 2006, he did not recall Mr Flannigan saying that it would be open book after the end of 2006. He said they never got to the end of the presentation. According to him, the people from Reid effectively lost interest when it was revealed that, according to Wincanton, Lane had been working to about 38% efficiency. That was the thing that concerned them.

[58] As I have said, the evidence on this issue is not wholly clear. It is clear that the rate of 55 per drop was agreed. The only question is whether that agreement came to an end and, if so, what replaced it. I am not persuaded on the evidence that it came to an end at the end of 2006 or at any other time. I can state my reasons briefly. First, it appears from the evidence, contrary to the pursuers' pleading, that it was Mr Cleary who made the agreement on behalf of Lane. He was not called to give evidence. The only evidence I had from the pursuers on this issue was, at best, second hand. No-one on behalf of Wincanton could speak directly of an agreement or understanding that the rate of 55 per drop was only for a trial period. Mr Marnie was directly involved at the original meetings on Reid's behalf and he disputed that there was any end date agreed. I found his evidence on this point convincing. His comment that they lost interest well before the end of the PowerPoint presentation in December 2006 rings true. Secondly, the evidence was that Lane agreed to supply at that rate, knowing it to be marginal from the point of view of profitability, because someone else had offered to provide the service at that rate. It would be natural that Lane would want to match such a price if they could. The calculation was that operating with a wagon and drag, the operation could probably just about break even at 55 per drop. The wagon and drag was never, in the event, deployed; but it would seem from the evidence that only the wagon and drag operation was in anyone's mind when the original agreement was reached. The provisional nature of the price that was agreed related to whether the critical mass necessary to justify 20 deliveries per day could be achieved. But in fact this method of proceeding never got started. Instead Lane delivered for a while by non-dedicated vehicles as a temporary method of carrying out the deliveries before the wagon and drag could be brought on-stream. It appears that delivery by these vehicles was unprofitable. It may be that, at Reid's request, Lane put in place a dedicated vehicle service during the last three months of 2006. This again, I infer, was not profitable. But it was all temporary, until the critical mass in terms of deliveries was achieved so as to make the wagon and drag viable. It is not clear to me why, even if the parties had been contemplating this temporary arrangement at the time of their agreement early in 2006, any particular date should have been agreed for what was at best an impermanent arrangement. Indeed, the expectation, when this arrangement was brought in, was not that the rate would have to be changed but that Lane's method of carrying out the deliveries would change from the (unsatisfactory) system of delivering by non-dedicated or dedicated vehicles to a full deployment of the wagon and drag. It was this part of the operation that was temporary, not the price.

[59] In those circumstances, it seems to me that this issue must be answered in Reid's favour. The northwest operation must be paid for at the rate of 55 per delivery.

 

Debate
[60] At the conclusion of the submissions relating to the preliminary proof, I heard argument at the instance of the pursuer on its first plea-in-law in its answers to the defender's counterclaim. There were four discrete issues and I deal with them in turn.

 

The defender's claim for repetition

[61] The first issue relates to the defender's averments in support of a claim for repetition of sums paid to the pursuer between January and August 2006. In Statement 2 of the counterclaim, the defender says this:

"Between the months of January and August 2006 the pursuer charged the defender 70,941 which charges were not agreed in accordance with the contract. The charges relate to unauthorised use of agency labour and excessive use of sub-contractors, for which the defender's agreement had not been obtained in advance. These charges were paid to the pursuer by the defender without prejudice to the terms of the contract which states that all charges must be agreed in advance. The sums were paid in good faith without considered analysis of the basis for the sums claimed and on the mistaken belief that the sums were due in terms of the contract. On subsequent analysis, these sums were found not to have been agreed and accordingly represent an overpayment made to the pursuer in error. There is no legal justification for the pursuer's retention of the money overpaid. The defender accordingly seeks repetition of the foregoing amount from the pursuer. In these circumstances condescended upon it would be equitable to pronounce an order for payment of the sum claimed. The sum of 70,941 is accordingly due from the pursuer to the defender."

The passages in italics were added by adjustment at an early stage during the course of the proof. Mr Simpson submitted that the case on error was not adequately identified and no fair notice was given of what case was intended to be made. Further, he submitted, the averment that the defender made an error contradicted the averment that the payments were made without prejudice. During the course of his submissions in response, Mr Connal accepted that there was some force in these criticisms and sought to delete the sentence which stated that the charges were paid without prejudice. He also sought to insert a sentence to the effect that the payments were made by the defender's accounts department. Notwithstanding these concessions, Mr Simpson insisted on his plea. It was agreed between the parties that, in light of these proposed changes, Mr Simpson could put in a further Note of Argument on this point after the hearing and that Mr Connal should have an opportunity of responding thereafter should he wish to do so. In that Note of Argument put in after the hearing, Mr Simpson submitted that this part of the counterclaim was still irrelevant for lack of specification. Under reference to Morgan Guarantee Trust Company of New York v Lothian Regional Council 1995 SC 151 at 176, and Miller v Campbell (Extra Division, unreported, 12 July 1991), he submitted that it was necessary for the defender to aver the nature of the error, how the error arose, and how it accounted for the payment having been made. There were no sufficient averments along these lines. Mr Connal submitted a formal adjusted counterclaim in which, as anticipated, the sentence stating that the charges were paid without prejudice was deleted and the following was added by way of further explanation of the error:

"The sums were paid in good faith by purchase ledger clerks working in the defender's accounts department without considered analysis of the basis for the sums claimed and on the mistaken belief that the invoices presented by the pursuer or its predecessor Lane Group plc were due to be paid in terms of the contract. On subsequent analysis, these sums were found not to have been agreed...."

Mr Connal did not seek to put in a further note of argument.

[62] I take the view that, with these further adjustments, the defender has given fair notice of the case it intends to make and has made sufficient averments to entitle it to have that case remitted to probation. The defender's case is simple. It is that the pursuer's invoices were paid by clerks in their accounts department as a mechanical exercise, without those clerks applying their minds to any particular questions affecting the validity of the claims for payment. The error was in believing that the invoices were due for payment. This is, of course, an error of law, but it is well established that an error of private law, for example as to the meaning of a contractual document or as to the contractual requirements for payment, is to be treated as an error of fact for the purpose of a claim for repetition. I do not think it matters that a precise individual has not been identified for each payment. The pursuer is given sufficient notice of the case to be made at proof. It will be able to obtain information from the defender about the names of individuals working within the defender's accounts department at the material time and will be able to precognose them if so desired. Accordingly, in light of the further adjustments that should be made, I would not refuse probation to this part of the counterclaim.

 

The defender's claim in respect of shortfall in stock

[63] Mr Simpson's second complaint concerned the averments in Statement 4 of the counterclaim. In this part of the counterclaim the defender claims in respect of a shortfall in the stock at the warehouse which, it contends, occurred whilst the pursuer was in charge of the warehouse. Their case is that after the Heads of Agreement were signed, Lane in due course took over responsibility for the warehouse; and risk in the goods in the warehouse passed to Lane. The question of passing of risk is one of the matters which I have decided in the defender's favour. Mr Simpson makes a further point. He criticised the defender's averments in support of there being a shortfall. The defender says that the pursuer left no physical records of the stock held at the warehouse as at 16 February 2007, when the contract came to an end. In those circumstances it seeks to prove what stock was in the warehouse on 16 February 2007 by pointing to the stock count it carried out on 26 March 2007, and proving that no stock went missing from the warehouse between 16 February and the stock count which it carried out on 26 March 2007. As part of this case, the defender makes these averments:

"No stock went missing from the defender's warehouse between 16 February and 26 March 2007, which was appropriately staffed and secured during that period. As there were no physical records left by the pursuers setting out the stock held at the warehouse as at 16 February 2007 the defender is not in a position to ascertain if any stock went missing in the intervening period. The defender was unable to carry out a stock count immediately on termination as the warehouse was left in such disarray by the pursuer that it took the defender six weeks to organise the warehouse so that it was in a state that a stock count could be undertaken."

Mr Simpson contends that there is an inconsistency between saying, on the one hand, that no stock went missing during the period 16 February to 26 March 2007 and, on the other, saying that because of the lack of records left by the pursuer the defender is not in a position to ascertain if any stock went missing during that period. I think this submission is based on over literal reading of the averment which I have quoted. The defender is simply saying that although it cannot prove from a comparison of stock count records that no stock went missing during the period 16 February to 26 March 2007, it is nonetheless in a position to prove that by showing that it secured the warehouse properly. I do not think that there is any real ambiguity and I reject the pursuer's contentions in this regard.

 

The defender's claim arising from the Boxing Day sales

[64] In Statement 5 of the counterclaim, the defender complains about the pursuer's failure to deliver goods to the defender's showrooms in time for the Boxing Day sales in December 2006. It complains that it lost sales and that its whole advertising was wasted. Details of the various types of suites which should have been but were not sold are set out in a schedule (7/245). Mr Simpson complains that there is no explanation as to the basis on which it was said that certain numbers of various types of suites were not sold. And there is no averment, he says, that the allegedly lost sales were not balanced out by additional sales of other products.

[65] It seems to me that the latter point is something which it is for the pursuer to raise. If they want to run a case that although Reid lost sales of certain suites it made up for that by sales of other suites which it would not otherwise have sold, they should plead it. As to the former point, Mr Connal, in his further adjustments, has added an explanation that the calculation set out in 7/245 is:

"the defender's best estimate of the sales which would otherwise have been made, based on previous experience and cross-checked for accuracy against the sales in similar stores where the products were available, and against the sales achieved by the relevant stores when the missing products were finally delivered."

It seems to me that this gives fair and adequate notice of the way that this part of the counterclaim is put. It will be open to the pursuer to seek to recover documents relevant to the various matters referred to in that passage. I would assume also that expert evidence will be adduced on these matters and that experts, being familiar with the trade, will be able to deal with these matters without difficulty. If it should turn out that further information is required, the matter can be raised at a further procedural hearing before the proof takes place. As the matter stands at present, I see no fundamental difficulty sufficient to justify deleting any part of this claim.

[66] Mr Simpson also complained about the width of the claim to recover the defender's wasted cost in advertising the Boxing Day sales. There is no attempt, he says, to specify what was wasted and what was not. It is absurd, he submits, to suggest that all of the advertising costs were wasted. This may prove to be so, but I do not see why the defenders should not be entitled to try to prove that it was all wasted. Even if it was not, the plea is sufficient, in my opinion, to entitle the defender to lead evidence in support of a claim for wasted advertising costs and to recover only a part of such advertising costs if, after proof, the Court is persuaded that there was some wastage albeit not of the total amount spent on advertising. Again, these matters will be dealt with by expert evidence and I see no difficulty in proceeding to a proof on these averments.

 

The defender's claim for wasted management time

[67] The defender avers, in Statement 10 of the counterclaim, that because of the pursuer's averred breaches of contract it has suffered loss in that,

"key and critical employees in the defender's business have had to be deployed to deal with problems caused by the pursuer's breach of contract and conduct generally."

They had to step in to deal with problems over the Christmas period 2006/2007. They had to be diverted from their normal duties to deal with problems in February 2007. The defender says that detailed vouching will be provided. Mr Simpson complained that if it is simply a case of management being diverted to other work, there is no recoverable loss. Presumably they would have been paid their salaries in any event. There is no averment that they were paid extra for specific periods worked. In response, Mr Connal submitted that there is no fundamental irrelevancy in such a claim. Such a claim is often put forward in building contracts as part of a claim for loss and expense caused by breaches. He referred me to Tate & Lyle Food and Distribution Ltd. v Greater London Council [1982] 1 WLR 149 at 152 in support of the proposition that waste of management time can form a proper head of loss, even though in practice it may be hard to quantify. He referred me also to the unreported decision of Gloster J in R+V Versicherung AG v Risk Insurance and Reinsurance Solutions SA, 27 January 2006, [2006] EWHC 42 (Comm) though I do not think this advances his argument.

[68] It seems to me that Mr Connal is right on this point. It would be wrong at this stage to exclude this claim from probation. I am satisfied that such a claim is a relevant head of claim. Whether the defender will be able to prove this head of claim is for another day.

 

Disposal

[69] As discussed at the hearing, I shall put the case out By Order for discussion of what interlocutor should be pronounced in light of my conclusion on the various points discussed in this Opinion and to discuss further procedure.