Before: The Hon. Mr. Justice Owen
 
 

B E T W E E N

JUDGMENT
 
DATED: 1 November 1994

OWEN J

This is an appeal against the decision of District Judge Peters on 27 April 1994 by which he dismissed the Plaintiff's summons, dated 9 January 1994, and ordered that the Plaintiff should pay the Defendant's costs in any event.

The relevant essential history is:

(a) In November 1988 the Plaintiff began to supply steel products to the Defendant;

(b) The Plaintiff claims that on 21 January 1993 the Defendant owed the Plaintiff £56,967.91 for such products;

(c) On 24 July 1992 the Defendant issued an invoice against the Plaintiff for some £59,736 "in respect of some of the Defendant's loss and damage incurred as a result of the Plaintiff's persistent failure and refusal to deliver on time". The Plaintiff denies any such delay. The Defendant contends that the true amount of the counterclaim is much greater than the amount claimed in the invoice. Here, there seems to be a substantial issue which much be decided by trial;

(d) The Plaintiff issued a writ against the Defendants on 5 March 1993;

(e) On 21 July 1993 the Plaintiff obtained judgment on the Claim: execution on the judgment was stayed to enable the Defendant to serve a counterclaim. The Defendant served a counterclaim and the Plaintiff's judgment became stayed until the trial of the counterclaim;

(f) On 22 December 1993, the Plaintiff served a defence to the counterclaim and a request for further and better particulars of the counterclaim;

(g) On 9 January 1994, the Plaintiff issued the summons the dismissal of which led to this appeal. This summons sought the striking out of para 9, the second sentence of para 10, para 12(6) and paras 13 to 19 inclusive of the counterclaim on the grounds:

(1) that they disclose no reasonable cause of action;

(2) that they are frivolous and vexatious; and

(3) that they may prejudice, embarrass or delay the fair trial of the counterclaim and/or are otherwise an abuse of process of the Court.

The hearing before the District Judge in Sheffield went over two half days. Each side was represented by London counsel. At the end, on 27 April 1994, the District Judge considered that the only question for him was whether the paragraphs of which complaint was made showed a reasonable cause of action. He was not satisfied that they did not. The Plaintiff's application was accordingly dismissed with an order that it should pay the no doubt considerable costs of the application in any event. The Plaintiff appealed against the District Judge's decision. The appeal came before me on Thursday 23 June. I could not give judgment that day. I offered to give judgment in July but this was not possible, I was told, because one counsel was not available.

The appeal, which as the District Judge said, concerns only a relatively small amount of the claim was argued in two discrete parts. The first contention and main thrust has been against paras 13 to 19 with which paras 9 and 10 may be considered. The second and minor argument has concerned para 12(6).

Paragraph 9 alleges a meeting on 9 July 1992 held "with a view inter alia to attempting to resolve the problems of the Plaintiff's persistently delayed deliveries of steel products to the Defendant and the loss caused to the Defendant as a result". It further alleges that the Plaintiff acknowledged and admitted serious delays. Paragraph 10 alleges the issue of 24 July 1992 invoice and continues:

"The parties attempted to resolve the dispute which arose out of the foregoing matters."

It then sets out the basis for that attempt.

The Plaintiff contends that para 9, together with the second sentence of para 10, referred to "without prejudice" attempts to resolve the dispute which undoubtedly existed between the Plaintiff and the Defendant. The Defendant, however, alleges that the attempted resolution of the dispute was "effected by an agreement" made between the Plaintiff and the Defendant and by "a written contract which the parties procured to be entered into accordingly between their relevant associates on about the 18th November 1992." In para 14 the Defendant alleges that "by the Heads of Agreement, the parties and their said associates recorded the agreement reached between them for the purpose of preparing and executing the formal sale and purchase agreement". In para 16 the agreement is said to be either an oral agreement or that contained in the Heads of Agreement and/or "an agreement between the parties made collateral thereto that thereafter the Plaintiff and its said Associate would act in all good faith and with all due care in negotiating, discussing, drafting, preparing and otherwise dealing with the proposed draft sale and purchase contract and/or would do those acts or any of them with a view to reflecting the spirit and intent of the Heads of Agreement etc." In para 17 the Defendant alleges the irretrievable breakdown of the Heads of Agreement "as a result of the Plaintiff and/or its associates' introduction of and insistence upon fundamental new terms and matters which were unfavourable to the Defendant and its associate and unreasonable, in breach of the said oral agreement and/or the Heads of Agreement and/or the said collateral agreement". In para 18 the Plaintiff claims £6,079.13 together with VAT as damages wasted on the aborted negotiations to settle. The claim, I was told, would be for legal costs and time wasted by directors of the defendant company. This claim was subsequently reduced to some £3,000 plus VAT with the effect that the main dispute before the District Judge and before me has been about the £3,000 plus VAT. It seems likely that this sum would be less than the costs already incurred.

As to the main issue in this summons the Plaintiff points out that this claim for some £3,000 plus VAT will necessitate an investigation of evidence relating to all the negotiations between July 1992 and February 1993. This will be, it claims, expensive in time and money and for this reason it now pursues its contention that paras 13 to 19 of the counterclaim disclose no valid cause of action.

Although it is not as clear as could be wished these paragraphs purport to disclose three causes or bases of action; breach of contract; estoppel and restitution. These must be considered separately.

It is claimed by the Defendant that there was a binding agreement between the Plaintiff and the Defendant regarding the sale to a company associated with the Defendant (AD Holdings Limited) of SPC Systems, a separate business wholly owned by the Plaintiff. This agreement, the Defendant says, was breached. It is common ground that on 13 August 1992 there was some form of oral agreement and that this was evidenced by a written agreement signed on behalf of the Plaintiff and the Defendant on 18 November 1992.

Clearly there was no binding contract on 13 August 1992; this, as I understand, is now agreed. Was there a binding agreement contained in or evidenced by the agreement dated 18 November 1992? A copy of this document is to be found at Tab 6 Exhibit MLB2 attached to the Affidavit of Michael Leonard Biddell. The Plaintiff contends that this agreement was clearly not intended to be binding on the parties. In support of this contention the Plaintiff points out:

(a) One of the schedules, giving a list of current orders on hand, is incomplete;

(b) The agreement is clearly marked "SUBJECT TO CONTRACT". This appears on the first and last pages;

(c) On its second line, in the recital, it states that the Plaintiff "wishes to sell" and AD Holdings Limited "desires to acquire". Neither, it says, is consistent with there already being a binding agreement;

(d) It calls itself a "memorandum" intended to record the Heads of Agreement reached between the parties, for the purpose of preparing and executing a formal "Sale and Purchase Agreement";

(e) Clause 11 in terms states "the Heads of Agreement contained in this memorandum are not intended to be legally binding and are subject to contract."

(f) Clause 12 provides that "Upon the signing of this memorandum by both parties the vendor shall instruct its solicitors to prepare a draft formal Sale and Purchase Contract to reflect the spirit and intent of the Heads of Agreement."

In all these circumstances it is argued that there was no binding agreement. In fact no formal agreement was ever prepared and signed and the negotiations broke down in February 1993. The words "Subject to Contract" are in common usage. Especially this is so in connection with the sales of land and other property. On behalf of the Plaintiff Mr Choy cites Alpenstow Limited & Anr. v. Regalian Properties plc [1985] 1 WLR 721.

I have considered this case and the arguments put before me and despite Miss Staddon's valiant efforts, I am quite satisfied that the Defendant could not establish that the Heads of Agreement constituted a binding contract.

By para 16 the Defendant seems to be relying upon an implied term of the oral agreement made on 13 August 1992. I am quite satisfied that this oral agreement was not a binding contract.

Further, by para 16, the Defendant alleges "an agreement between the parties made collateral" to the oral agreement and/or the Heads of Agreement. It is said that this collateral agreement required the Plaintiff to negotiate in good faith and with a view to entering into a formal Sale and Purchase Agreement and that there was a breach of this collateral agreement. Here Mr Choy cites Walford v. Miles [1992] 2 AC 128. Especially he cites the passage at p 138 A to G. From this case it is clear that the concept of a contractual duty to negotiate in good faith is not recognised by English Law.

The upshot is that in my judgment the counterclaim does not allege a contractual claim which could lead to recovery of the damages suggested or any damages.

Firstly it is necessary to note that there is no allegation of any misrepresentation. In any event, given as I find that the Court would have to find that the agreement shown by the Heads of Agreement was subject to contract and not legally binding this allegation can add nothing. Mr Choy cites The Attorney General of Hong Kong v. Humphrey Estate (Queens Gardens) Ltd. [1987] 1 AC 114. It is true that at p 127H in his speech Lord Templeman said:

"It is possible but unlikely that in circumstances at present unforeseeable a party to negotiations set out in a document expressed to be 'subject to contract' would be able to satisfy the court that the parties had subsequently agreed to convert the document into a contract or that some form of estoppel had arisen to prevent both parties from refusing to proceed with the transactions envisaged by the document."

However, nothing is alleged in the counterclaim which could give rise to such an estoppel.

By para 19 the counterclaim alleges that the Plaintiff is liable to make restitution to the Defendant in respect of the £3,000 odd expenses incurred in the aborted sale negotiations. Here I have been referred to Goff & Jones on The Law of Restitution (1993 edition) at pp 554-558. Specifically I was referred to p 555 where the authors state:

"The problem arises most acutely when parties enter into negotiations which they confidently anticipate will mature into a binding contract. The negotiations break down in circumstances where one of the parties has incurred considerable expense, which may or may not have benefited the other. Can he recover all or any of this wasted expenditure? There is, of course, no contract and consequently no claim for damages for loss arising from its breach. Moreover, English law does not recognise, at least in name, any doctrine of good faith bargaining, Culpa in contrahendo, as it is known in civilian jurisdiction, which can form the basis of a collateral contract; a gentleman's agreement to pay for services does not bind any gentleman. It has been consistently held that a contract to negotiate is a contract which is not known to English law.

The relative paucity of the case law provides no clear and consistent answer to the questions whether a party can be recompensed for what he has lost. As will be seen, a number of factors may be critical. Prominent among them are whether the expenditure was incurred at the parties' request, whether it benefited the other party, and the reasons why the negotiations collapsed. One of the earliest decisions, which has proved quite influential, is William Lacey (Hounslow) Ltd v. Davis [1957] 1 WLR 932".

Although a contrary view has been expressed it seems that "the reality is that the award in that case concealed a claim for loss suffered in anticipation of a contractual agreement which never materialised". However, there is nothing in that case or elsewhere to suggest that a restitutionary claim may lie in respect of expenditure incurred in the negotiation of a contract as opposed to the performance of the contract in advance of its conclusion. Of course the parties may agree otherwise but here they did not. Paragraph 13 of the Heads of Agreement provides that "each party shall be responsible for its own legal costs." Accordingly, I am satisfied that the Defendant is unable to establish a restitutionary claim in respect of the £3,000 odd spent on the aborted negotiations towards a draft sale and purchase of SPC Systems.

The upshot is that I am satisfied that the claim made in paras 9,10, and 13 to 19 of the counterclaim discloses no reasonable cause of action.

I now turn to the objection made to para 12(6). This alleges that "generally the defendant has been put to a considerable amount of inconvenience, stress and difficulty in the course of its business as a result of the plaintiff's aforesaid acts and defaults (i.e. the delays in supplies) and attempting to deal with the problems created thereby".

The Defendant is a limited company in respect of which the language used is inappropriate. However, Miss Staddon recognising this, asserts that the inconvenience, stress and difficulty having been experienced by the Defendants' directors and other officers and employees in the course of their employment, they may be attributed to the company.

Mr Choy argues that by para 12(6) the Defendant claims a head of damage unknown to law. He puts forward these arguments:

(a) There can be no such attribution. The company itself has not suffered any inconvenience, stress or difficulty;

(b) There is no reported case in which a claim for stress or inconvenience suffered by agents or servants of a company has been brought by that company either successfully or unsuccessfully;

(c) Although if, for example, a director of a company were to become entitled to damages from that company for inconvenience, stress or difficulty suffered by him in the course of his duties and that company had a claim against another in respect of the causation of that inconvenience, stress and difficulty then it might be that the first company would have a claim against the second company, that is not the claim pleaded here;

(d) English law does not, as a general rule and as a matter of policy, award damages for breach of contract in respect of inconvenience, stress and difficulty caused by a breach of contract (see eg. Hayes v. James & Charles Dodd [1990] 2 All ER 815 and, to a lesser extent, Watts v. Morrow [1991] 1 WLR 1421. Although Mr Choy recognises that there are two well recognised exceptions to this rule - The so-called "Holiday" cases and claims in connection with physical inconvenience and discomfort suffered as a result of negligent advice in connection with the state of property - he contends that there is no such exception here. Here, he argues, there was a commercial contract between the plaintiff and the defendant and inconvenience, stress and difficulty could not reflect in damages.

Miss Staddon has again argued valiantly but I am satisfied that Mr Choy is right when he claims that this paragraph claims damages under a head unknown to English law.

Order 18 r.19 provides that:

"The court may at any stage of the proceedings order to be struck out or amended any pleading ... on the grounds alleged in the summons."

There is also an inherent jurisdiction to the same effect. It was under the inherent jurisdiction that I was asked to consider affidavit evidence. At this stage I should add that although the affidavits clearly evidence a difference of understanding as to the effect of the negotiations I have not decided this appeal on the affidavit evidence.

It is to be noted that the power given by 0.18 r.19 is discretionary. The White Book notes state that:

"An applicant must show that he is in some way prejudiced by the breach."

It was in this connection that I was concerned to ascertain why the plaintiff had appealed the decision of the District Judge rather than raising the arguments which he has argued here at the trial. Without a further consideration of the matter this appeal might be said to add considerably to the costs and also to the delay without corresponding benefit. That the original application and this appeal have added very considerably to the costs must be so. In a case where no real benefit could be shown I would be minded to dismiss an application to strike out a part of the pleading. However, here Mr Choy argues that to allow these proceedings to stand would necessitate a very substantial inquiry into all the negotiations to settle the main dispute, those negotiations having gone on from July 1992 to 23 February 1993 when finally the negotiations broke down. Mr Choy points out that these investigations and the evidence relating to the negotiations would inevitably delay and lengthen the trial and, excluding the allegation in para 12(6) of the counterclaim all for £3000 and VAT. I am satisfied that Mr Choy is right in this contention also.

I bear in mind that if I allow the appeal I will be preventing the defendant from raising a matter which has been pleaded and I should be very slow to do that. I have accepted that the power should only be exercised in clear and obvious cases which are beyond doubt. However, I have come to a firm decision that Mr Choy's complaints are valid and would succeed at a trial. I am also satisfied that were I not to decide these matters today the parties would be put to very considerable wasted expense and inevitably there would be more delay. In these circumstances I allow the appeal.