Pursuer: Not represented at hearing

Defenders: Cormack, solicitor advocate; McGrigors LLP

Third Party: Tanner; HBJ Gateley Wareing

10 February 2009

Introduction

[1] In 2004 the pursuer agreed to purchase an Audi A4 motor vehicle from the defenders. He took delivery of the car in February 2005. He contends that initially the car was trouble free but that, from about March 2006, serious problems manifested themselves, which ultimately caused the car to be unusable. The car was sent in for repair on a number of occasions subsequently but to no avail. On 14 June 2007 the pursuer purported to reject the car. His right to do so is disputed by the defenders. In this action the pursuer seeks declarator of his right to reject and/or damages. He contends that the car was not of satisfactory quality in terms of section 14(2) of the Sale of Goods Act 1979.

[2] The defenders purchased the car from the Third Party, Volkswagen Group UK Ltd. ("Volkswagen"). With the leave of the court, they have served a third party notice on Volkswagen in which they contend that if the car was not of satisfactory quality as alleged by the pursuer, then they are entitled to claim from Volkswagen substantially on the same basis as the pursuer claims against them. They do not specifically refer to the terms of any contract of sale between themselves and Volkswagen. In their answers, Volkswagen aver that this court has no jurisdiction over them. They rely upon a clause (or clauses) in their contract (or contracts) with the defenders which provide for the exclusive jurisdiction of the courts of England and Wales.

[3] I heard a debate on the question of jurisdiction as between the defenders and Volkswagen. There was no dispute as to the relevant contractual documentation. The issue turned on the proper construction of the jurisdiction clause in two of the relevant agreements. Although jurisdiction was asserted by the defenders on the basis of Rules 3(a) and 5(b) of Schedule 4 to the Civil Jurisdiction and Judgments Act 1982, as amended, in opening the debate on their behalf Mr Cormack accepted that if, on the their proper construction, either or both of the clauses relied upon by Volkswagen did provide that the courts of England and Wales should have exclusive jurisdiction over the present dispute, then I should sustain Volkswagen's first plea in law and dismiss the action in so far as directed against them. Full notes of argument lodged by both parties raised more far-reaching issues; but, in the event, the debate focused entirely on the proper construction to be given to the jurisdiction clauses in the contracts.

[4] In the course of both parties' submissions I was referred to McGowan v Summit at Lloyds 2002 SC 638 and Mackay's Stores v Topward Ltd 2002 SLT 716 for the proposition that the same canons of construction are to be applied in relation to a jurisdiction clause as are to be applied to any other provision in a contract. I accept that. The proper approach is to construe the words used in the context of the contract or contracts as a whole and in the light of any relevant surrounding circumstances.

The agreements between the defenders and Volkswagen

[5] The relationship between Volkswagen and the defenders is that of franchisor and franchisee. So far as is relevant to the present dispute, the contractual nexus between them comprises an Umbrella Agreement, a Dealer Agreement and a contract for the purchase and sale of the particular vehicle.

(a) The Umbrella Agreement

[6] The Umbrella Agreement is dated 29 October 2003. It is between Volkswagen, who are named in the agreement as "the Supplier", and the defenders who are named as "the Dealer". The preamble to the Umbrella Agreement is in the following terms:

"WHEREAS, the parties wish to enter into a number of agreements and in order to simplify the execution process and minimise the number of separate signatures required to execute such agreements they have decided to use this Umbrella Agreement as a means of executing all the agreements chosen by the Dealer on the basis set out in this Agreement."

The agreements referred to as having been "chosen by the defenders", elsewhere called the "Ancillary Agreements", comprise an Authorised Repairer Agreement and a Parts National Stocks Agreement. Those agreements are not relevant for present purposes. In addition, clause 2 of the Umbrella Agreement provides that the parties shall be bound by the terms of the Dealer Agreement attached thereto.

[7] The Umbrella Agreement sets out details relating to the Dealer, such as its share capital, shareholders, parent company and directors, as well as of its outlets. It provides an address for service in connection with the Dealer Agreement and the other agreements to which I have referred. It requires the Dealer to give Volkswagen prior notice if any of those details change and, up to a certain date, to obtain Volkswagen's prior consent to any such change. Clause 9 provides as follows:

"The formation, existence, construction, performance, validity and all aspects whatsoever of this Agreement or of any term of this Agreement will be governed by the law of England and Wales. The courts of England and Wales will have exclusive jurisdiction to settle any disputes which may arise out of or in connection with this Agreement. The parties irrevocably agree to submit to that jurisdiction."

This is the first of the jurisdiction clauses relied upon by Volkswagen.

(b) The Dealer Agreement

[8] The Dealer Agreement is set out in Appendix 1 to the Umbrella Agreement. It is a detailed agreement running to 32 clauses and divided into five sections. Section I sets out the "Basis of the Agreement" and contains definitions of terms used in the agreement. Clause 2 covers the "subject matter" of the agreement and provides, so far as material, as follows:

"2.1 In the consideration of the Dealer's obligations under this Agreement, including as detailed in Clause 2.2, the Supplier hereby appoints the Dealer to market the Vehicles for resale in accordance with this Agreement within the European Area.

2.2 The Dealer undertakes that it will throughout the term of this Agreement:

2.2.1 comply with the Core Standards;

2.2.2 comply with the Guidelines;

2.2.3 perform all of the duties imposed upon it under this Agreement, exploit sales opportunities for the Vehicles and promote the standing and good reputation of the Manufacturer, the Supplier, the Sales Organisation and the Vehicles in all respects in order to increase the market share of the Audi brand;

2.2.4 deliver high levels of customer service in accordance with the Supplier's reasonable expectations so as to maximise customer satisfaction; and

2.2.5 fulfil these obligations through the legal and trading entity described in the Umbrella Agreement."

[9] Section II sets out the "Dealers Obligations and Legal Status". Clause 3 makes it clear that the dealer carries on business as an independent contractor and not as agent for Volkswagen. Clause 4 is headed "Sales Programme and Delivery". In terms of clause 4.1, the dealer and Volkswagen are required to agree annual targets for vehicles to be sold by the Dealer and purchased from Volkswagen. There are provisions in clause 4.2 for what is to happen if targets are not agreed. Clauses 4.3 to 4.9 set out the procedure for the placing of orders for vehicles and for the acceptance and fulfilment of those orders. It is necessary to set out parts of these clauses.

"4.3 The Dealer shall submit to the Supplier its orders for Vehicles to be purchased from the Supplier in compliance with the Standards. Orders placed by the Dealer shall be binding on it unless they are rejected by the Supplier within four weeks of the date of receipt and the Dealer shall not be entitled to make any claims whatsoever on grounds of rejection of any such orders. ....

4.4 The Supplier will use reasonable endeavours to supply to the Dealer the Vehicles agreed in the monthly allocation of the targets under Clause 4.1 and as ordered by the Dealer (including any motor vehicle that corresponds to a model within the contract range), unless the circumstances in Clause 4.7 apply or unless unable to do so for reasonable cause, but the Supplier shall not be under any obligation to accept any orders from the Dealer for Vehicles.

4.5 Upon any order for Vehicles being accepted by the Supplier the Supplier's Conditions of Sale and Delivery shall apply to the sale of Vehicles by the Supplier to the Dealer unless otherwise agreed. ....

4.6 Each party will comply with the Delivery Guide in respect of Vehicles delivered to the Dealer by or on behalf of the Supplier.

4.7 Without prejudice to Clause 20, the Supplier reserves the right to suspend without notice the supply of Vehicles to the Dealer if the Dealer fails to make any payment due to the Supplier under this Agreement or any other agreement between the parties or if the Dealer fails to make any payment due to a Connected Undertaking of the Supplier ... or if the Dealer otherwise acts in such a way as shall in the reasonable opinion of the Supplier brings or tend to bring the Manufacturer, the Supplier, the Sales Organisation or the Vehicles into disrepute.

4.8 The Vehicles shall be sold as supplied by the Supplier and, prior to registration of a Vehicle, the Dealer shall not make any modification of any nature without the Supplier's prior written consent. Any modification which is carried out at the request of a customer after registration shall be carried out in accordance with all applicable regulations and the Dealer shall inform customers that if any part of the Vehicle is modified this will invariably negate the operation of the Warranty Conditions as regards that part and may negate the operation of the Warranty Conditions as regards any other parts of the Vehicle directly or indirectly affected by the modifications. The Supplier may require the Dealer to make certain changes to Vehicles against reimbursement of costs."

The only other provisions of Section II which require to be noticed at this stage are clause 6, which requires the Dealer to provide a "high quality comprehensive After Sales Service for Vehicles" that it has sold; and clause 7, which requires the Dealer to incorporate Volkswagen's Warranty Conditions in its own sales contracts with customers and to "make clear that the customer is entitled to bring a claim for any defect to be remedied" against any of the partners in the Sales Organisation authorised to carry out After Sales Service. These are important provisions, and I shall refer to them more fully later.

[10] Section III deals with the "Suppliers Rights & Obligations". Clause 15 provides for advice and assistance to be given by the Supplier to the Dealer. Clause 16 deals with prices at which the vehicles may be sold; and clause 17 preserves Volkswagen's right to make direct sales to customers. Clause 18 deals with the Supplier's liability. Clause 18.1.1 deals with liability in respect of training, advice and assistance and, subject to clause 18.2 (which excepts from this limit cases of personal injury or death, illegality or fraud), sets a limit to such liability of £25,000 per calendar year. Clause 18.1.2 deals with Volkswagen's liability in respect of "the Vehicles". That is a defined term and means the models of motor vehicles listed in Schedule 1 to the agreement which are manufactured and marketed by Volkswagen. In terms of clause 18.1.2, Volkswagen's liability in respect of the Vehicles "is described in the Warranty Conditions". Neither the Warranty Conditions nor the Warranty to which they pertain was in the papers lodged in process, but it is clear that they set out the terms of the warranty given to the individual purchaser which is referred to in clause 7 of the Dealer Agreement. Clause 18.3 provides that, except as set out in clauses 18.1 and 18.2, Volkswagen is under no liability to the dealer whatsoever for anything arising out of or in connection with the Dealer Agreement.

[11] Section IV is entitled "Term and Termination of the Agreement". I need not refer to any of those terms. Section V contains "General Provisions". Clause 23 is headed "Form, Relationship with Previous Agreements". Neither party sought to make much of clause 23.2, but I should quote it in full.

"23.2 The Schedules to this Agreement and the Supplier's requirements as set forth in its Guidelines, each as amended from time to time, shall form an integral part of the Agreement. In the event of any conflict:

23.2.1 between a Schedule (including the Core Standards and the Guidelines) and the body of this Agreement, the body of the Agreement will prevail;

23.2.2 between the Standards and the Supplier's Trading Policy, the Standards will prevail;

23.2.3 between the Core Standards and the Guidelines, the Core Standards will prevail; and

23.2.4 between the Guidelines and any document referred to in the Guidelines, the Guidelines will prevail.

23.3 This Agreement (together with the documents referred to herein as from time to time amended) constitutes the entire agreement between the parties with respect to the matters dealt with herein and supersedes any previous agreement between the parties in relation to such matters. ..."

Clause 24 is concerned with dispute resolution. The first two parts of this clause are relied upon by Volkswagen. They provide as follows:

"24.1 Without prejudice to Clause 24.2, each of the parties hereby irrevocably submit (sic) to the jurisdiction of the courts of England and Wales for the settlement of all disputes or claims which may arise out of or in connection with this Agreement. Each of the parties irrevocably consents to any judgment or order in any proceedings before the courts of England and Wales. Each party shall have the right to take proceedings in any other jurisdiction for the purpose of enforcing a judgement or order obtained from any of the courts of England and Wales.

24.2 In the event of any dispute between the parties hereto in relation to the fulfilment of their contractual obligations (including the issue of whether termination of the Agreement is justified by reasons given in the notice of termination), either party may refer the dispute for resolution in accordance with Clauses 24.2.1 to 24.2.6 within three calendar months of the dispute arising or the relevant notice being served and the other party shall submit to this procedure. In any other case, the dispute shall be submitted to the exclusive jurisdiction of the courts of England and Wales."

The remainder of clause 24 contains provision for certain types of dispute to be referred first to nominated representatives of the parties and, failing agreement by them, to either an expert or an arbitrator depending upon the type of dispute. Finally, clause 32 provides that "the formation, existence, construction, performance, validity and all aspects whatsoever of this Agreement or any term of this Agreement shall be governed by the laws of England and Wales".

(c) The contract of purchase and sale

[12] There appears to have been no single document comprising the contract for the sale of the particular vehicle. In accordance with the mechanism set out in clauses 4.3 to 4.5 of the Dealer Agreement, I was told (and there appears to be no dispute about this) that the defenders submitted electronically an order for the vehicle and that Volkswagen accepted that order. In terms of clause 4.5, therefore, there came into existence a contract for the purchase and sale of that vehicle between the defenders and Volkswagen, to which contract the Supplier's Conditions of Sale and Delivery applied. I shall refer to those Conditions as the "Conditions of Sale". The Conditions of Sale are set out in Schedule 3 to the Dealer Agreement. Clause 1 of the Conditions of Sale is headed "Formation of Contract". It provides as follows:

"1.1 A contract will be formed when any order is accepted by the Supplier, by way of a written acknowledgement of order with an indicative build week or, in the case of Vehicles allocated to the Dealer, when the Supplier indicates a delivery date for the relevant Vehicles. Each order accepted by the Supplier will constitute a separate contract for the sale of Vehicles.

1.2 The following terms and conditions shall apply to any order of Vehicles by the Dealer from the Supplier and to the supply of any Vehicles allocated to the Dealer by the Supplier in accordance with the Dealer Agreement, provided that to the extent that any provision of these Conditions of Sale and Delivery is inconsistent with any provision of the Dealer Agreement, the latter shall prevail."

The remainder of those Conditions of Sale deal with questions such as delivery and the passing of property and risk. In dealing with liability, clause 9.2 provides as follows:

"9.2 Except as provided in paragraph 9.1" - which states that the Supplier does not seek to exclude liability for such things as personal injury or death resulting from negligence - "or in the Warranty Conditions, the Supplier will be under no liability to the Dealer whatsoever ... arising out of or in connection with or the manufacture or sale or supply, or failure or delay in supply, of the Vehicle ...".

Appended to the Conditions of Sale is another document setting out what are called "Consignment Terms". They deal with such matters as the duration of the consignment, payment, indemnities and the dealer's obligations in relation to vehicles during consignment. Neither party lodged in process a copy of the electronic order for the particular vehicle, nor any standard form order which might have been used. Parties were agreed that nothing communicated electronically in connection with the particular order would assist the court in determining the issue of construction with which I am concerned.

Submissions

Defenders' submissions

[13] For the defenders, Mr Cormack submitted that neither of the jurisdiction clauses in the Umbrella Agreement and the Dealer Agreement applied to the present dispute. He submitted that the Umbrella Agreement was entered into, to use the words in the preamble to it, in order to simplify the execution process relative to the Dealer Agreement and the two other agreements referred to therein. It was the means by which the Dealer Agreement became binding upon the parties. This was made clear both in the Umbrella Agreement and by the provision at the end of the Dealer Agreement which states that the parties have "signed" the Dealer Agreement by virtue of their signatures on the Umbrella Agreement. That having been done, then, except for certain limited purposes, such as the requirement for notification of any changes relative to the defenders and, for a limited period, the need to obtain Volkswagen's prior consent to any such changes, the Umbrella Agreement was spent. Certainly it could not be said that a dispute in respect of the condition of a particular vehicle was a dispute arising out of or in connection with the Umbrella Agreement. He submitted that the Dealer Agreement contained the rights and obligations of the defenders as Audi dealers within the Volkswagen dealership network and regulated the defenders' performance as dealers. Further, by clause 4.5 it prescribed the standard terms to which any contract for the purchase and sale of a particular vehicle would be subject. Those standard terms, the Conditions of Sale, made it clear that each contract for the purchase and sale of a particular vehicle was a separate contract. Those separate contracts of purchase and sale for individual vehicles did not contain any jurisdiction clause. On a proper construction, clauses 24.1 and 24.2 of the Dealer Agreement did provide for the exclusive jurisdiction of the courts of England and Wales, but only in respect of disputes or claims arising out of or in connection with the Dealer Agreement. As indicated by the opening words of clause 24.2, this clause was really concerned with the parties' contractual obligations to each other under the Dealer Agreement and was not concerned with the individual contracts of purchase and sale entered into by the parties in implementation of that relationship. Clause 23 of the Dealer Agreement, which provided that the Conditions of Sale, being one of the Schedules to the Dealer Agreement, "shall form an integral part of the [Dealer] Agreement" did not make the individual sales part of the Dealer Agreement - each such sale was to be regarded as "a separate contract" - nor, conversely, did they incorporate the terms of the Dealer Agreement into the individual contracts of sale. On a proper construction, therefore, the jurisdiction clause in the Dealer Agreement had no application to the present dispute, which was a dispute under the individual contract for purchase and sale.

Third Party's submissions

[14] Mrs Tanner, who appeared for Volkswagen, submitted that although the Conditions of Sale provided that the contract of purchase and sale was a "separate contract", it was nonetheless a contract formed under and in terms of the Dealer Agreement. The mechanism for contract formation was contained in clauses 4.3 to 4.5 of the Dealer Agreement. She emphasised that she did not argue that the Dealer Agreement was incorporated into the contract of purchase and sale, nor did she rely upon the terms of clause 23.2 of the Dealer Agreement to suggest that the Dealer Agreement and the individual contract of sale, containing the Conditions of Sale, were to be treated as part of one whole. Her position was simple. The individual contracts of purchase and sale were made under and in terms of the Dealer Agreement and in the context of the franchisor/ franchisee relationship. The Conditions of Sale were simply a set of conditions that applied to any particular sale of a particular vehicle but the relationship between the parties was and remained a relationship governed by the Dealer Agreement. Clause 1.2 of the Conditions of Sale, which provided that in the event of inconsistency between any provision of the Conditions of Sale and any provision of the Dealer Agreement the latter should prevail, supported this construction. There would be no need for such a term if the provisions of the Dealer Agreement ceased to be applicable to the relationship between the parties once they had entered into individual contracts of purchase and sale.

Discussion

[15] In considering the respective submissions of the parties, it is important to have regard to the different functions served by the agreements under consideration. The Umbrella Agreement has a limited function, namely, as set out in the preamble, the function of providing the means whereby a single signature can be effective to execute not only the Dealer Agreement but also the two Ancillary Agreements. Each of those three agreements was executed without a separate signature. Apart from this, the Umbrella Agreement appears to have only two purposes: to set out and (for a time) to regulate to the designation, shareholding, directors and other details of the defenders and their outlet in Edinburgh; and to specify where the defenders may be served in connection with the Dealer Agreement and the two Ancillary Agreements.

[16] The Dealer Agreement relates principally to the defenders' obligations as dealer and Volkswagen's rights and obligations as supplier. This is made clear by the terms of clause 2, which specifically identifies the "Subject Matter" of the agreement. In terms of that clause, Volkswagen appoints the defenders to market the vehicles for resale in accordance with the agreement, and the defenders undertake that throughout the term of the agreement they will comply with various standards and guidelines, exploit sales opportunities and promote the standing and reputation of Volkswagen and its products. Section II sets out provisions relating to the dealer's obligations and legal status, which covers such matters as: what is to happen where the dealer sells not only Volkswagen but other brands of motor vehicles; the dealer's sales and delivery outlets; the agreement of annual targets; stocking requirements; the obligation to provide a high quality after sales service for vehicles sold by the dealer; data systems; and other such matters. It also contains the mechanism by which the dealer places orders for vehicles and the manner in which a contract for the purchase and sale of a particular vehicle comes about and the terms applicable to it. Similarly, section III, in relation to the supplier's rights and obligations, deals with such matters as the provision by Volkswagen of assistance to the dealer and the recommendation of selling prices; and reserves to Volkswagen the right to conclude direct sales to customers.

[17] Clause 18, which I have quoted above, must be seen in its context. It seeks to set a limit on Volkswagen's liability "under this Agreement". Thus, clause 18.1.1 deals with liability in respect of training, advice or assistance. That is clearly referable to the obligations placed on Volkswagen under the Dealer Agreement. Clause 18.1.2, however, is concerned with Volkswagen's liability in respect of problems alleged to have occurred in respect of vehicles supplied under individual contracts of purchase and sale brought about by the process of order and acceptance of order laid down in clauses 4.3 to 4.5. The opening words of clause 18 include such liability as a liability "under this Agreement". Clause 18.1.2 limits that liability to a liability under the Warranty Conditions, i.e. to a liability to reimburse the defenders (or whoever carries out the warranty repairs) in respect of the work carried out by them in dealing with a warranty claim made by the customer, the defenders (as dealers) having incorporated Volkswagen's Warranty Conditions into the contract of sale between them and the customer in accordance with their obligation so to do under clause 7 of the Dealer Agreement. This is important, since it shows that if a claim is made against Volkswagen by a dealer in respect of a vehicle sold by Volkswagen to the dealer, and then sold on by the dealer to a customer, either that claim will be a claim under the Warranty Conditions or, if it is presented on some other basis, will give rise to an argument that Volkswagen's liability is limited to fulfilment of its obligations under the Warranty Conditions. In either case it will involve a consideration of the provisions of the Dealer Agreement. I note that in their answers to the third party claim against them, Volkswagen call into question whether the defenders complied with their obligation under clause 7.2 of the Dealer Agreement to give Volkswagen notice immediately of the claim in respect of the vehicle sold to the pursuer.

[18] It is true that the contract for the purchase and sale of the particular vehicle is expressly stated to constitute a separate contract. It is true also that it is subject to the Conditions of Sale, and that the Conditions of Sale contain no provisions dealing with jurisdiction. Nonetheless, it is a contract formed under and in terms of clauses 4.3 to 4.5 of the Dealer Agreement; and it is interlinked with the Dealer Agreement. The example of the Warranty Conditions illustrates the point. The contract of purchase and sale itself contains a clause (clause 9.2) limiting the liability of Volkswagen, save in certain types of case, to a liability under the Warranty Conditions. This overlaps significantly with the provisions of clause 18 of the Dealer Agreement. What is to happen if an issue arises as to the limit of Volkswagen's liability? The issue might arise under either contract; and on the defenders' argument, I suppose, would have to be litigated in England and Wales if it arose under the Dealer Agreement but might be litigated elsewhere, for example in Scotland, if it arose under the contract of purchase and sale for the particular vehicle. But what if it was raised under both contracts? To my mind, it cannot sensibly have been intended that the point should be litigated in two separate jurisdictions.

[19] This point - and it is not the only point of overlap between the contracts, since both contracts also contain a clause dealing with Volkswagen's right to suspend deliveries after a contract of purchase and sale is concluded - seems to me to suggest that the approach taken by Mrs Tanner is the correct one. The contract of purchase and sale is a separate contract without a choice of jurisdiction clause in the Conditions of Sale. But the relationship of that contract to the Dealer Agreement is such that, if a dispute arises under the contract of purchase and sale for a particular vehicle, it should properly be regarded as a dispute "arising out of or in connection with" the Dealer Agreement. Those are wide words, no doubt chosen deliberately for their width. But I do not rest my decision just on those words. The structure of the various contracts, the Umbrella Agreement linking the Dealer Agreement with the Ancillary Agreements, and the Conditions of Sale being attached as a Schedule to the Dealer Agreement and being described in clause 23 as forming "an integral part of" the Dealer Agreement, support the construction to which I have arrived. In short, they point to the parties having agreed - consistently with the commercially sensible notion that there should be "one stop adjudication", c.f. per Lord Eassie in Semple Cochrane Plc v P & O Cruises (UK) Limited [2000] Scot CS 249 at para.8 - that all disputes under the wide range of agreements between the same parties and covering the whole gamut of their relationship should be subject to the exclusive jurisdiction of the same courts, in this case the courts of England and Wales.

Decision

[20] For those reasons, I shall sustain the first plea-in-law for the Third Party and dismiss the action in so far as it relates to the Third Party.