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OUTER HOUSE, COURT OF SESSION [2008] CSOH 109 |
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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
Introduction
[1] This is a preliminary proof about
the terms on which the parties carried on business between
[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
"2. Duration of Contact
2.1 Notwithstanding the date
or dates hereof, this contract will be deemed to have commenced on
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
[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
[7] With
effect from
[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
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
(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
[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
"... 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
For my part, I do not consider that
Lord Denning's observations in
[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
(
[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
[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
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
"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
"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
[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
[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
[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
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
[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
[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
[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
"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
[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
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
In his oral evidence he referred to
the meeting which he attended. Under
reference to the notes of the meeting of
[55] Mr Murphy referred to a PowerPoint presentation given by
Wincanton to Reid on
[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
"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
"No stock went
missing from the defender's warehouse between 16 February and
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
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.