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Cite as: [2012] EWHC 498 (Ch)

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Neutral Citation Number: [2012] EWHC 498 (Ch)
Case No: HC10C01566


Royal Courts of Justice
Rolls Building, Fetter Lane,
London, EC4A 1NL

B e f o r e :



- and -




Mr Christopher Nugee QC (instructed by Jones Day) and Mr Stephen Brown (of Jones Day) for the Claimants
Mr Andrew Onslow QC and Ms Catherine Gibaud (instructed by Reynolds Porter Chamberlain LLP) for the Defendants
Hearing dates: 12, 13, 14 October 2011



Crown Copyright ©

    Mr. Justice Hildyard:


  1. This Judgment relates to one of two actions relating to the sale in 2007 by The Procter & Gamble Company ("P&G"), an Ohio corporation, to Svenska Cellulosa Aktiebolaget SCA ("SCA"), a Swedish corporation, of its European tissue towel business (facial tissues, toilet paper and kitchen towels, known collectively within P&G as "Family Care"). These actions were ordered to be tried consecutively by the same Trial Judge. The two actions have a common background and relate to the same contracts; but they raise distinct and very different questions. The second action, which relates to the operation of certain provisions relating to pensions benefits, will be the subject of a separate Judgment.
  2. The question in this action (which was tried first and has been referred to as "the Invoices Action") is whether on its true construction a contract for the supply of goods, at fixed prices expressed in Euros but agreed to be payable in Sterling, provides either expressly or implicitly for an agreed exchange rate; if not, whether it should be re-formed or rectified to provide such a rate; and if not again, what is the exchange rate to be applied.
  3. The contract concerned is dated 1st October 2007 and called the Transitional Supply and CPN Conversion Agreement ("the TS&CPN"). As its name implies, the TS&CPN provided for the supply of certain products manufactured during a transitional period until the conversion of a proprietary manufacturing process (called CPN Belt technology). The TS&CPN was supplemental to an Asset Sale and Purchase Agreement dated 12th March 2007 ("the ASPA").
  4. Summary of the parties' respective cases

  5. The case advanced by the Claimants (whom I shall refer to as "P&G") is that there is nothing in the contractual wording of the TS&CPN, whether expressly or implicitly, to displace what they submit is the general rule that the payer must provide enough Sterling (which, it is not disputed, was the agreed currency of payment) to cover the fixed Euro price (which they contend was the currency of account at the invoice date). In support of the general rule they rely on Woodhouse v. Nigerian Produce [1971] 2 QB 23.
  6. The Defendants (whom I shall refer to together as "SCA") contend that there is no such general rule, or at any rate that there is no room for it in this case. They submit that everything depends upon the terms of the contract in question; and that on its true construction the contract must be read as either expressly or impliedly stipulating a precise exchange rate, or should be rectified to do so.
  7. More particularly, SCA's case is that they are entitled under the TS&CPN to discharge the Euro amounts due not only by paying in Sterling, but using a fixed exchange rate of £1 to €1.49164. This is put in three alternative ways: (1) that this exchange rate was expressly provided for by the TS&CPN; (2) that it is implicit in the TS&CPN read as a whole, and the only interpretation consistent with what SCA's Counsel described as "the clear basic scheme", that this exchange rate would be used for the relevant transactions; and failing (1) and (2), that the TS&CPN was incomplete so that (3) the TS&CPN should be rectified because the use of that exchange rate for the relevant transactions was the objective intention of the parties.
  8. Although this was not quite the way they originally formulated their position in their Skeleton Argument, SCA also came to contend that on true analysis the money or currency of account, as regards the Manchester operation in question, was Sterling and not Euros. Indeed, in closing, and in recognition of the difficulties posed, if the contracts were to be read as requiring payment in a currency different than the currency of account, Leading Counsel for SCA (Mr Andrew Onslow QC) submitted that ultimately the question in the case is, was the money of account Euros or was the money of account Sterling? Leading Counsel for P&G (Mr Christopher Nugee QC) embraced this formulation of the issue and submitted the answer is plain: Euros.
  9. Approach and structure of this judgment

  10. I propose to follow the pattern of the Skeleton Arguments and the oral submissions made to me, and to deal with each of these arguments in turn. That is so even though, as indicated in the course of hearing, in a case such as this, where the dispute is really (and unusually) as to whether a given provision was ever intended to deal with the point in issue at all, and if not, whether one should be interpolated, the dividing line between the first two arguments can become difficult to maintain. That is especially so in light of the speech of Lord Hoffmann in A-G of Belize v Belize Telecom Ltd and another [2009] 1 WLR 1988, clarifying and emphasising that the implication of a term is an exercise in the construction of the instrument as a whole (see especially at para. 19).
  11. Both exercises of construction are subject to the usual rules as to the non-admissibility, for the purposes of construing or interpreting a contract (subject to certain limited exceptions), of evidence of the subjective intention of the parties, previous drafts and the content of previous negotiations, and the subsequent conduct of the parties.
  12. The claim for rectification, however, is obviously different in nature. Its premise is that the true intention of the parties cannot be found in the contract as it stands because the instrument does not reflect their common intention, but requires to be rectified in order that their common intention should be fulfilled.
  13. In this context, both Counsel were at pains to remind me that a sharp distinction needs to be made, and kept in mind, between the evidence admissible in the context of an issue of construction (be it of an express term or as to the implication of a term) on the one hand, and on the other hand in the context of a claim for rectification. I accept of course both the correctness and importance of this reminder: and I have carefully sought to keep out of my mind evidence relevant only to the rectification claim when addressing the issues of construction.
  14. Accordingly, the following statement of the background facts is intended to reflect only matters admissible for the purposes of the exercises of construing the relevant instruments. Subject to one point, it therefore does not include any reference to the negotiations and drafting process which are inadmissible for that purpose, although of course admissible on the question of rectification (which I deal with separately). That one point is that it was common ground that a draft of the TS&CPN annexed to the ASPA when the latter document was signed is admissible, since it became part of the agreed contractual documentation on signature: I accept this.
  15. Factual background relevant for purposes of construction

  16. P&G had 5 manufacturing sites in Europe making "Family Care" products: these were in Manchester (UK), Orleans (France), Lucca (Italy) and Neuss and Witzenhausen (Germany). Its Manchester site was owned by the third Claimant, Procter & Gamble Product Supply (U.K.) Limited ("P&G UK").
  17. The sale by P&G to SCA of its "Family Care" business was on the terms of the ASPA. Although those two bodies corporate were the named contracting parties the ASPA made provision (by clause 11.09) for P&G to procure (not as agent but as controlling ultimate parent) the sale of the defined Assets by whichever of P&G's affiliates actually owned them, and (by clause 11.10) for their purchase by SCA acting as agent for the affiliate of SCA intended to acquire such assets (in the case of the Manchester Assets, the Manchester Buying Affiliate).
  18. The total price of the sale was some €512.5m. The ASPA made provision (by Article 2.01) for the parties to agree the allocation of this aggregate price between the various assets sold as specifically defined in Article 1.06 of the ASPA. These assets included Real Property, Equipment, Inventory and Goodwill, all as expressly defined. It was not disputed that about €110m out of the aggregate was the amount allocated to the Manchester Assets.
  19. The ASPA provided for completion or closing of the sale in stages. Conventional Closing would take place first, at which point the Assets sold, other than the Manchester and Orleans Assets, would be transferred to SCA. Manchester and Orleans Closings in respect of the transfer of Manchester Assets and Orleans Assets would follow later. This was provided, in the case of Manchester Assets, by Article 3.07. The need for this arose because at those two sites P&G had been using certain proprietary paper making technology (CPN Belt Technology) which was stated to be highly secret and valuable, which was not amongst the assets sold, and which therefore had to be removed and replaced with conventional technology (called TAD technology) before SCA itself took over manufacture and supply. The period of deferral depended upon when the removal of the CPN Technology and its replacement by TAD technology was effected, subject to an agreed long stop date of 10 months. (In the event it took 9 months.)
  20. The TS&CPN provided more particularly for the removal of the CPN technology and the supply to SCA of Contract Products in the period from the execution of the ASPA until Manchester (and Orleans) Closing ("the Transitional Period"). In the case of the TS&CPN, P&G is expressed to be acting on behalf of itself and its Affiliates.
  21. Thus, the TS&CPN (which was an amalgam of what originally were drafted as two separate agreements to cover both (i) and (ii) below) provided for
  22. "(i) the short term Manufacture or Contract Manufacture by Seller ... of Contract Products for Buyer ...and (ii) Seller's removal of Seller's CPN belts from Equipment and the replacement by Seller with conventional belts and related technologies, processes and equipment."
  23. When the ASPA was made the TS&CPN had not yet been finally agreed; but a draft of the TS&CPN was exhibited to the ASPA when the ASPA was signed (on 12 March 2007).
  24. The TS&CPN provided for the prices charged to SCA for the supply of these products to be fixed for the transitional period, subject to two exceptions to cover variations in (i) pulp prices and (ii) changes in the volume manufactured, in each case outside a specified range.
  25. At the time that the ASPA was signed the prices had not yet been fixed. The version of the TS&CPN which was annexed to the ASPA at that time (and before Conventional Closing of the ASPA, which itself did not take place until quite some time after signature for competition or regulatory reasons) did not set out fixed prices. However, it did provide that the prices were to be fixed for the whole of the transitional period and derived from P&G's "Firm plant budgets" for budget years 2007/2008.
  26. By the time of Conventional Closing of the ASPA (on 1 October 2007) the prices as so derived had been fixed, and they were stated in the execution version of the TS&CPN, which was signed on that same day. As were the "Firm plant budget figures" from which they were derived, the prices so fixed were expressed in Euros.
  27. In the case of contract products manufactured in Orleans, payment was also prescribed to be in Euros. But by Article X, paragraph 10.01 of the TS&CPN the parties agreed that, in the case of supply of contract products manufactured in Manchester and shipped from the United Kingdom, actual payment should be made in Sterling.
  28. The P&G body corporate with overall responsibility for P&G's "Family Care" business in Europe was the second Claimant, Procter & Gamble International Operations SA ("P&G Europe"). P&G Europe is incorporated in Switzerland and based in Geneva. It was, in the terminology used within P&G and adopted at the hearing, P&G's "regional entrepreneur": it owned and sold to customers the finished products manufactured under licence on its behalf by local subsidiaries including (in Manchester) P&G UK.
  29. In the case of Manchester these arrangements, which it is common ground were disclosed to SCA prior to execution of the TS&CPN, were regulated by the terms of a tolling agreement between P&G UK and P&G Europe, called more precisely a "Toll Processing and Other Services Agreement". This tolling agreement was expressed to have been made effective as of 1st July 2000 and to be governed under the laws of Switzerland.
  30. Under these arrangements, P&G Europe sourced and supplied to P&G UK the raw materials; P&G UK carried out the manufacturing process, and would ordinarily ship the finished products on sale; but the products would belong to P&G Europe and any sales would be on P&G Europe's behalf.
  31. The tolling agreement provided (by its clause 6.2) for P&G UK to invoice P&G Europe its "Actual Costs" (together with VAT) "in the local currency of the Provider [P&G UK] on a monthly basis". "Actual Costs" to be invoiced in this way included direct and indirect costs adumbrated in Schedule 1 to the tolling agreement. These broadly encompassed infrastructure costs such as wages, utilities, maintenance and repair which would be, or be likely to be, incurred in Sterling; but not, for example, financing costs or raw material costs (which were down to P&G Europe). The local currency of the P&G UK was, of course, Sterling.
  32. However, by contrast, it is not disputed that P&G Europe operated in Euros; nor is it disputed that this was its "reporting currency" and that it prepared its budgets in Euros as its "currency of consolidation".
  33. Correspondingly perhaps (since it seems that in reality it was P&G Europe that was the operational business centre of the enterprises being sold), all financial amounts referred to in the ASPA and its related contracts (including, in particular, the TS&CPN) were denominated in Euros (most obviously the Initial Price of €512,500,000) except (1) the limit (US$1 million) on the cost which P&G might have to incur in satisfying its obligation to use best endeavours to cause various conditions to be satisfied (Clause 3.10); and (2) the limit (US$2 million) on the cost which P&G might have to incur with regard to securing the rights to "specific items not forming part of the Advertising Materials" (Clause 6.26(a)).
  34. Specific contractual provisions to be addressed

  35. Turning to the provisions in the two contracts specifically addressing pricing and payment, the following are of central relevance.
  36. First, as to the pricing of Contract Products to be manufactured in Manchester and Orleans and sold at fixed prices to SCA during the Transitional Period, Article IX of the TS&CPN provides shortly and simply as follows:
  37. "Pricing and Cost Assumptions. Schedule TS9.01 sets forth the calculation of the price Buyer will pay Seller for Contract Products."
  38. Schedule TS9.01 to the TS&CPN is entitled "CONTRACT PRODUCT PRICES" and by its first paragraph provides as follows:
  39. "Attached to this Schedule TS9.01 is a document entitled "CPN/TAD Final Transfer Prices". This document sets out the prices of the Contract Products per SKU ("Prices per SKU). These Prices per SKU have been determined in accordance with paragraph 2 below." [SKU is a defined term denoting Stock Keeping Units.]
  40. Paragraph 2 of the Schedule TS9.01, which is headed "TRANSLATING PLANT COSTS INTO PRICES PER SKU", is in two parts. As indicated in paragraphs 21 and 22 above, its wording in the draft version of the TS&CPN as attached to the ASPA on signature of the latter was slightly (but relevantly) changed in the TS&CPN as finally executed. The draft version provides for a prospective exercise; the final version reflects the fact that by then the exercise had been completed. The execution version is set out in ordinary type below, with words different from those in the draft version being shown in square brackets; the italicised words in square brackets are as in the earlier draft attached to the ASPA:
    2.1 Attached to this Schedule TS9.01 is a document entitled "Summit – CPN Firm plant budgets" within which are figures for 07/08 (the "Plant Costs"). [To determine the cost per SKU for each Contract Product, it is necessary to break down] [In determining the Prices per SKU, the Seller has broken down] the figures comprised in Plant Costs and [reconstitute] [re-constituted] them on a per SKU basis. Seller undertakes that:
    (a) [within twenty (20) days of the signing of the APA, it shall produce a table setting out the prices of the Contract Products per SKU ("Prices per SKU")];
    (b) the Prices per SKU [will] have been derived using the figures set out in the Plant Costs and applying those against its reasonable anticipated volumes and SKU mix for 07/08 ("Anticipated Quantities"); and
    (c) in respect of each CPN Facility, the total cost of the Anticipated Quantities at that CPN Facility does not exceed the total Plant Costs.
    2.2 The Prices per SKU represent a fixed standard cost in relation to each Contract Product SKU, variable only by reference to and in accordance with paragraphs 3 and 5 below."
  42. Then paragraphs 3 and 4 in that Schedule TS9.01 deal respectively with (a) (by paragraph 3) provisions for adjusting the prices per SKU in the event of either (i) variations in the price of pulp beyond prescribed parameters and (ii) variations in volumes produced beyond stated parameters (high and low) and (b) (by paragraph 4) a provision for the Seller to permit the Buyer a single audit "for the purpose of verifying that the Prices per SKU were produced in accordance with this Schedule TS9.01 and are derived from the agreed Plant Costs" (as to Plant Costs see below).
  43. Lastly in that Schedule TS9.01, paragraph 5 provides for good faith negotiation between the parties to agree a revised pricing structure in the event of substantially different SKU volumes and mix from those expected.
  44. Following Schedule TS9.01 are two documents of considerable importance also. One is headed "Summit – CPN Firm plant budgets" ("Summit" being the project code name for P&G). This document was included both in the draft TS&CPN exhibited to the ASPA upon its execution, and in the final TS&CPN upon completion. It sets out P&G's firm manufacturing budgets for Orleans and Manchester for the year 2007/2008, as well as estimates of cost components of total plant costs. All these costs are stated in Euros, even though in reality some of the costs would be incurred in other currencies (Sterling and US$). The function of this document was to enable the calculation of fixed prices using the budgeted costs as an agreed proxy for actual costs to be incurred over time.
  45. It is particularly to be noted, since (as I shall elaborate later) it is really the lynch-pin of SCA's case, that the document entitled "Summit – CPN Firm plant budgets" has at its foot an annotation as follows:
  46. "£/Euro exchange rate 1.49164"

  47. The other document, which is on the immediate preceding page of the final and completed version of the TS&CPN, is headed "CPN/TAD Final Transfer Prices". This sets out fixed prices calculated or derived from the budget figures set out in the CPN Firm Plant budgets (the document described above). All the costs are stated in Euros. That document contains no reference to any exchange rates.
  48. The last of the provisions of the TS&CPN which it is necessary to set out is Article X. This expressly stipulated that in the case of Manchester Products
  49. "Payment will be made in pounds Sterling (in relation to Contract Products shipped from the UK) and Euros (in relation to Contract Products shipped from France)."

    Elaboration of SCA's case on construction

  50. It is the combination of these provisions in the TS&CPN, (1) for fixed prices to be applicable over the whole Transitional Supply Period (as defined), (2) for payment for Manchester Contract Products in Sterling and (3) the annotation of the exchange rate in the document setting out "Firm Plant budgets" which provides the bedrock of SCA's case on construction.
  51. SCA contends that these provisions together, properly construed, expressly mandate an agreed exchange rate of Sterling/Euro 1.49164 for all prices stated in Euro and payable in Sterling under the TS&CPN. It is these provisions, in other words, which read together constitute, on SCA's case, an express term importing not only fixed prices, but also a fixed exchange rate when converting such fixed prices into Sterling for the purposes of invoicing.
  52. Thus, in their note for closing submissions, Counsel for SCA more particularly summarised their case as being that "On a proper construction of Schedule TS9.01 the Court should read the CPN/TAD Final Transfer list together with the 07/08 Plant Cost budget document so that the Euro prices in the price list are, where necessary for the Sterling payment clause (i.e. for Manchester products) converted to Sterling at the fixed and assumed 07/08 budget £/Euro exchange rate of 1.49164 which was specified on the face of the Plant Cost budget document."
  53. SCA further contends that this chain of provisions illustrates and should be interpreted to fulfil what Mr Onslow QC described as "the clear basic scheme". This he presented to be (to quote the transcript of the proceedings which was provided to me, most usefully)
  54. "that SCA will pay a fixed cost derived from agreed fixed assumptions as to what the cost of manufacturing the products will be during the transitional period, expressly including a fixed exchange rate by use of which prices expressed in Euros are to be converted to Sterling."

    Elaboration of P&G's case on construction

  55. As foreshadowed at the beginning of this Judgment, P&G's case is that the documents clearly provide for fixed prices (with specific exceptions); but the prices so fixed are denominated in Euros and none of these provisions provides for or mandates their conversion for invoicing purposes into Sterling at any particular exchange rate.
  56. They contend that this is therefore a simple case where the contract provides for the amount due to be calculated in one currency (the money of account, here Euro) and payment of that amount to be discharged in another currency (the money of payment, here Sterling); and in the absence of any other agreement the payer therefore has to pay sufficient Sterling to be equivalent to the Euro amount due at the prevailing rate of exchange at the date when payment is due.
  57. They submit that the annotation of "£/Euro exchange rate 1.49164" at the foot of the document entitled "Summit – CPN Firm plant budgets" was never agreed or intended to apply outside the context of that particular document. The annotation was included and then retained simply to explain how the figures in that document were derived (given that some of the costs were incurred originally in Sterling and had to be converted to Euros for the purpose of the plant budgets) and to facilitate audit of the figures in the future.
  58. Analysis of competing cases

  59. To guide me in deciding between these competing interpretations I have been referred to a number of well-known authorities on contractual interpretation, including Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (especially at 995-996 per Lord Wilberforce); Mannai Investment Co. Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; Charter Reinsurance Co Ltd v Fagan [1997] AC 313 (especially at 338 per Lord Mustill); Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (especially at 912 per Lord Hoffmann); Re Sigma Finance Corp (in administrative receivership) [2010] 1 All ER 571; and (in a Judgment of the UK Supreme Court handed down just after the hearing of this matter), Rainy Sky SA and Others v Kookmin Bank [2011] UKSC 50.
  60. These authorities grapple with the familiar but elusive questions that arise as to whether in construing words their literal meaning or some more purposive interpretation is to be adopted, and illustrate the swing of the pendulum between the two.
  61. I have carefully re-read each of these authorities, and in seeking a synthesis have reminded myself also of the words of Sir Thomas Bingham MR (as he then was) in Arbuthnott v Fagan [1995] C.L.C. 1396:
  62. "Courts will never construe words in a vacuum. To a greater or lesser extent, depending on the subject matter, they will wish to be informed of what may variously be described as the context, the background, the factual matrix or the mischief. To seek to construe any instrument in ignorance or disregard of the circumstances which gave rise to it or the situation in which it was expected to take effect is in my view pedantic, sterile and productive of error. But that is not to say that an initial judgment of what an instrument was or should reasonably have been intended to achieve should be permitted to override the clear language of the instrument, since what an author says is usually the surest guide to what he meant. To my mind, construction is a composite exercise, neither uncompromisingly literal nor unswervingly purposive: the instrument must speak for itself, but it must do so in situ and not be transported to the laboratory for microscopic analysis."
  63. The Supreme Court (in allowing an appeal from a majority decision of the Court of Appeal in the Rainy Sky case) has very recently emphasised that the exercise to be conducted "is essentially one unitary exercise"; and where the language used by the parties has more than one potential meaning, the court need not necessarily favour the most natural meaning of the words: it is entitled "to prefer the construction which is consistent with business common sense and to reject the other".
  64. The ultimate task and objective, of course, is (as classically stated by Lord Hoffmann in the ICS v West Bromwich case [supra])
  65. "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."
  66. I turn to apply this guidance to the question of interpretation raised in this case. My starting point is to identify what is not in issue; for in this case there is on analysis less between the parties than may at first appear, although the economic consequences of the narrow division are very considerable. In particular, none of the following is in issue.
  67. The parties are agreed that the TS&CPN provided for the supply of Contract Products at fixed prices: it was a fixed price contract. The parties are agreed that these fixed prices were based on or derived from budgeted figures (P&G's "Firm Plant Budgets") prepared by P&G.
  68. There is no dispute that the actual cost components that made up the Firm Plant Budgets were (a) costs actually incurred in running the two plants (Orleans and Manchester), which in the case of Manchester it is not disputed were incurred in Sterling; (b) depreciation and non-cash Sterling denominated items such as general manufacturing and logistics costs incurred by P&G UK; (c) costs of pulp (which was compositely priced in dollars and purchased in dollars by P&G Europe although in fact 2-5% of pulp costs related to core which was a Euro-based costs); (d) costs of chemicals, colours and pack materials incurred in Euros (by P&G Europe). It is not disputed that there was also factored in an agreed mark-up of 5.92% to reflect the services in fact incurred centrally by P&G SA (which it is not disputed operated in Euros) but attributable to the costs of operating the Manchester plant.
  69. The parties are also agreed that their shared intention was that during the Transitional Period P&G would manufacture the relevant Contract Products in SCA's stead and require SCA to pay no more than P&G's cost of production (what SCA's Counsel termed "the profit neutrality principle"). The parties are agreed that the fixed prices so based on or derived from the Firm Plant Budgets were intended to provide a proxy for actual costs of production incurred by P&G and re-charged to SCA without any profit margin (what SCA described as the "fixed budgeted cost principle").
  70. As previously recorded, there is no doubt that it was an express term of the TS&CPN that payment for Orleans Contract Products would be in Euros, but payment for Manchester Contract Products would be in Sterling. The parties are agreed that the objective was certainty through the relatively short time frame of the Transitional Period and that the prices were fixed for the life of the TS&CPN except only for pulp and volume adjustments outside set parameters (and a minor adjustment for hybrid paper).
  71. However, it is also common ground (and could not be gainsaid) that the prices as fixed were stated in Euros. As set out above, and as stipulated by paragraph 1 of Schedule TS9.01, the particular document (entitled "CPN/TAD Final Transfer Prices") that sets out the prices of the Contract Products per SKU lists all such prices in Euros. There is no reference in or annotation on that document of any Euro-Sterling exchange rate; there is no mention of Sterling prices at all.
  72. The nearest SCA can get to anything expressed in the TS&CPN that might be interpreted as mandating a fixed Euro-Sterling exchange rate for invoice and payment purposes is the annotation at the foot of the document (to which I have already referred above) entitled "Summit – CPN Firm plant budgets". The narrow question becomes whether in the context, and having regard (if and to the extent appropriate) to the "clear basic scheme", that annotation on that document should be interpreted as constituting such an express provision.
  73. I have concluded that this footnote or annotation cannot sensibly be read as an express term mandating that exchange rate and providing for the conversion of what appears to be a Euro denominated fixed price list into a Sterling denominated list in the case of Manchester products.
  74. First, in my judgment, it was not the purpose or effect of that document in general or the annotation in particular to make any substantive provision regulating the performance of the parties. Its purpose was simply to set out the Firm Plant Budgets, explain how they were broken down, and record the basis on which any Sterling costs comprised in the Budget had been translated into Euro costs. The opening words of the document make this clear. The Firm Manufacturing budgets as well as estimates of cost components of total plant costs are presented, and it is then recorded that "They will form the basis for transfer prices per individual sku."
  75. It seems to me plain, and I so find, that the document was attached to the ASPA to provide the base material for, and explain the process of, fixing transfer prices which the ASPA required to be undertaken; and the same document was attached to the TS&CPN in its signature or execution copy once the process it enabled had been completed simply to enable verification that the process which by then had been completed had been completed properly.
  76. Thus, I accept Mr Nugee's basic submission that the document on which the annotation appears was simply intended to prescribe and explain how the Final Transfer Prices were to be established: it prescribes machinery for that (historic) exercise, but its relevance is confined to the process of calculating those Transfer Prices and the single audit of that process provided for in paragraph 5 of Schedule TS9.01 to the TS&CPN.
  77. I accept also that the explanation for its inclusion in the attachment to the execution copy of the TS&CPN is likely to have been that (a) it provided a ready and available means of understanding how the Prices per SKU had been calculated and (b) it facilitated the single audit for the purpose of verifying compliance with P&G's undertaking in paragraph 2 of TS9.01 with regard to the derivation of the Prices per SKU and the total cost of the "Anticipated Quantities" (as defined).
  78. Secondly, the TS&CPN is, as might be expected given the legal firms involved and the complexity and size of the transaction concerned, a carefully drafted document. It would be uncharacteristic of the document and the care that obviously went into it to leave to an annotation, without elaboration, such an important provision. It would have been logical and so easy, if such a provision was truly intended to be included as an express term, to add it to the existing provision in Article X for payment to be made for Manchester Contract Products in Sterling.
  79. Put another way, I cannot persuade myself that if it had really been intended to include an express provision for a fixed exchange rate it would have been done in such a casual, confusing and elliptical way.
  80. Thirdly, though perhaps this is another way of stating my previous point, I do not consider that the annotation or footnote can sensibly be elevated to be, or construed as, an operative express term. In form, it seems to me to be no more than a key to the manner in which the costs as stated in the particular document in which it appears (headed "Summit – CPN Firm plant budgets") have been calculated, given that some of such costs were incurred in different currencies. To my mind, it is inaccurate, and inapposite, to characterise such an annotation, which on its face is explanatory rather than operative, and which would require so much more to be read into it or inferred from it for it to serve the purpose for which it is sought to be relied upon, as an "express term" at all.
  81. It follows that if a provision for a fixed exchange rate for future Sterling payments of fixed Euro prices is to be spelt out of the TS&CPN it must, in my view, be a process of inference, implication or interpolation (the phrases are used interchangeably, though I think there are differences, as I explain below) and not because there is any express provision.
  82. Indeed Mr Nugee indicated that the question whether such an inference or implication could be made was the real nub of the case on construction. Mr Onslow, though he never accepted Mr Nugee's presentation of this being a "no express term case", seemed to me, by the end, increasingly to base his case on implication from the contracts and from "the clear basic scheme".
  83. In his oral closing submissions, Mr Onslow described the task before him in the following way:
  84. "…we submit that on the examination of the contract, the money of account for the Manchester products was Sterling, because…the agreement was that we would pay fixed Sterling prices and we have to satisfy your Lordship that notwithstanding that the only fixed prices expressly stated in the contract are Euro prices, the effect of this agreement was that we would in fact be paying fixed Sterling prices so far as the Manchester [contract product] is concerned."
  85. It may be a distinction without a difference; but I would tend to regard the terms inference and implication as connoting slightly different processes. By inference I mean the process of spelling out in words a provision which it is to be inferred from particular express terms that they used the parties must have meant to include. By implication I mean the process of writing in a provision in order to give effect to the obvious objective intention of the parties as evinced by the instrument read as a whole in its admissible factual context. This latter is sometimes called a process of interpolation, which perhaps is more accurate in semantic terms (and see per Sir Thomas Bingham MR (as he then was) in Philips Electronique Grand Public SA and Another v British Sky Broadcasting Limited [1995] E.M.L.R. 472). The one is a process of spelling out an intention which has only been partly successfully expressed; the other is a process of supplying an additional term to correct a clear mistake and to make the contract workable.
  86. Be that as it may, the first question under this heading is whether it is a necessary inference from or to be implied or interpolated into (1) the agreement in Article X of the TS&CPN for payment in Sterling of amounts fixed in Euros and/or (2) the reference to an exchange rate as an annotation to the document headed "Summit – CPN Firm plant budgets", that the parties intended that the fixed prices set out in the document headed "CPN/TAD Final Transfer Prices", though ostensibly stated in Euros, be read as fixed Sterling prices in the case of Manchester products. Another possible way of putting this was to the effect that it is to be implied that the parties envisaged and intended invoices be rendered in Sterling (using the annotated rate to convert the costs fixed in Euros) or to agree that exchange rate for prices when it came to payment.
  87. Absent such an inference or implied term, Mr Onslow was inclined to accept, I think correctly, that the natural consequence, where parties have agreed that prices fixed in one currency may be, or indeed must be, paid in another is that the exchange rate to be adopted is the market rate at the date of payment. The buyer must provide enough of the second currency to buy sufficient of the first currency to meet the debt when tendering its payment.
  88. This is the point lucidly explained and illustrated in the judgment of Lord Denning MR Woodhouse A.C. Israel Cocoa Ltd. S.A. and Another v Nigerian Produce Marketing Co. Ltd. [1971] 2 QB 23:
  89. "At the heart of the case lies the difference between the money of account and the money of payment. It is this: The money of account is the currency in which an obligation is measured. It tells the debtor how much he has to pay. The money of payment is the currency in which the obligation is to be discharged. It tells the debtor by what means he is to pay. Take an example: Suppose an English merchant buys 20 tons of cocoa beans from a Nigerian supplier for delivery in three months' time at the price of five Nigerian pounds a ton payable in pounds sterling in London. Then the money of account is Nigerian pounds. But the money of payment is sterling. Assume that, at the making of the contract, the exchange rate is one Nigerian pound for one pound sterling - "pound for pound." Then, so long as the exchange rate remains steady, no one worries. The buyer pays £100 sterling in London. It is transferred to Lagos where the seller receives 100 Nigerian pounds. But suppose that, before the time for payment, sterling is devalued by 14 per cent. whilst the Nigerian pound stands firm. The Nigerian seller is entitled to have the price measured in Nigerian pounds. He is entitled to have currency worth 100 Nigerian pounds: because the Nigerian pound is the money of account. But the money of payment is sterling. So the buyer must provide enough sterling to make up 100 Nigerian pounds. To do this, after devaluation, he will have to provide £116 5s. in pounds sterling. So the buyer in England, looking at it as he will in sterling, has to pay much more for his 20 tons of cocoa beans than he had anticipated. He will have to pay £116 5s., instead of £100. He will have to pass the increase onto his customers. But the seller in Nigeria, looking at it as he will in Nigerian pounds, will receive the same amount as he had anticipated. He will receive 100 Nigerian pounds just the same: and he will be able to pay his growers accordingly. But, now suppose that in the contract for purchase the price had been, not five Nigerian pounds, but five pounds sterling a ton, so that the money of account was sterling. After devaluation, the buyer in England would be able to discharge his obligation by paying £100 sterling: but the Nigerian seller would suffer. For, when he transferred the £100 sterling to Nigeria, it would only be worth 86 Nigerian pounds. So, instead of getting 100 Nigerian pounds as he had anticipated, he would only get 86: and he would not have enough to pay his growers. So you see how vital it is to decide, in any contract, what is the money of account and what is the money of payment."

  90. This point flows naturally and inevitably from the basic fact that money serves a twofold function. In the Woodhouse case at first instance Roskill J. (as he then was) quoted the following from Dr FG Mann in "Legal Aspects of Money" 2nd ed. at page 847:
  91. "Money serves the twofold function of a means of measurement and of a medium of payment. Hence a distinction must be drawn between the currency in which a debt is expressed or a liability to pay damages is calculated and the currency in which such debt or liability is to be discharged…"
  92. As it seems to me, it follows, not so much as a rule of law but as a consequence of this twofold function of money, that an agreement to pay in a currency (the mode or currency of payment) different from the currency of measurement or account does not by inference or implication alter or affect the measurement of the obligation to pay. More especially, it raises no inference that the paying party will be invoiced in the currency of payment, nor that the parties have agreed any rate of exchange other than the market rate at the date of tendering payment.
  93. Nor, for completeness, is it to my mind commercially absurd to conclude that the paying party accepted the inherent exchange rate risk. There is no warrant for being quicker or slower to draw an inference in such a context than any other.
  94. That leads me on to the second factor relied on by SCA, the annotation of an exchange rate on the document headed "Summit – CPN Firm plant budgets". I have referred to this at some length earlier in this Judgment when dealing with the argument that the annotation should be read as (in effect) an express term for the measurement of the payment obligation.
  95. In my judgment, having concluded that the annotation does not constitute such an express term (for the reasons I have sought to set out) I see no reason to give it any wider meaning or different effect by a process of inference. The reasons why I have concluded the annotation was not intended to operate outside the context of deriving the detailed fixed price list in the document attached to Schedule TS9.01 apply equally to the argument based on inference.
  96. That conclusion does not strike me as surprising: when the argument is really not as between competing interpretation of words, but as to whether the words were intended to operate in a particular context at all, it seems to me that a conclusion on an argument asserting an express term almost inevitably forecloses the result on an alternative argument based on inference, at least to the extent that the argument is narrowly focused on the same words.
  97. Then the question is whether, if the particular words cannot bear the weight alone, it is to be implied or interpolated into the various agreements read as a whole in the light of the nature and objective of the arrangements they evidence and define, that the parties must have intended that the prices though stated in Euro should be treated as fixed Sterling prices determined by a fixed Euro/Sterling exchange rate. This requires a process of a more ambitious nature: see again the Philips Electronique case [supra, at 26].
  98. There was substantial consensus between Counsel as to the test and approach to be adopted in seeking to answer this question. However, I was also referred to a number of authorities, including particularly (in addition to Philips Electronique) what has become the leading case domestically, though decided in the Privy Council, Attorney General of Belize and others v Belize Telecom Ltd and another [2009] 1 WLR 1988, Mediterranean Salvage & Towage Limited v Seamar Trading & Commerce Inc [2009] EWCA Civ 531, Crema v Cenkos Securities plc [2010] EWCA Civ 1444 CA, and Anthracite Rated Investments (Jersey) Ltd v Lehman Brothers Finance SA (In Liquidation); Fondazione Enasarco v Lehman Brothers Finance SA and another [2011] EWHC 1822 (Ch) per Briggs J (15 July 2011) at paras 67 to 70.
  99. These authorities (which for the avoidance of doubt I have had in mind also in the more restricted exercise, as I see it, of determining the natural inference of the annotation to which I have referred previously) emphasise (to quote Lord Hoffmann in the Belize case at p1994B) that
  100. "…in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson's speech [in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 at 609] that this question can be reformulated in various ways which a court may find helpful in providing an answer – the implied term must "go without saying", it must be "necessary to give business efficacy to the contract" and so on - but these are not in the Board's opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?"
  101. That emphasis is accompanied by words of caution. The task being to discover the objective meaning of the instrument the court must not seek to improve the instrument to accord with its view of what would have been commercially sensible. The court cannot know why a provision that might in retrospect appear to be sensible was not included; and it may well be ill-equipped to judge what at the time of the instrument would or would not have been commercially reasonable. Thus, once more to quote Lord Hoffmann in Belize (at [paragraph 16A-B]):
  102. "The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means."

    And at paragraphs [17] and [18]:

    "The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.
    In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means."
  103. It is to be noted that, in the present case, the event in question is not one which might have been difficult to foresee; nor is the risk of it one which the parties might naturally have overlooked. The event in question is that most basic of contractual events: the ascertainment of the amount payable in the currency of payment. Also, there is no doubt as to the care taken in constructing the document: all parties were advised throughout by firms of the highest quality, and it is obvious on their face that the contracts have been carefully crafted.
  104. Further, the fact that for the purpose of providing Euro budget figures from which the Euro fixed prices could be derived the parties identified an exchange rate reinforces the obvious supposition that as sophisticated commercial parties they must have been aware of the exchange rate issues inherent in pricing in one currency and payment in another.
  105. These factors, to my mind, reinforce the prima facie supposition that if the parties had wanted to provide for fixed Sterling prices they would have said so unequivocally; likewise if they had intended the application of a fixed exchange rate they would have made unequivocal provision for it; and these considerations increase the need for caution before interpolating a provision that is so notable for its absence.
  106. Such caution is the more strongly indicated when, as is the case, the term sought to be implied or interpolated so basically affects the allocation of risks in the events that happened (a substantial and rapid rise in the value of the Euro against Sterling). It is not merely a matter of supplying machinery: it does fundamentally affect the allocation of risks that are inherent on the terms of the parties' documented arrangements so far as expressed.
  107. In the latter context, P&G's Counsel further objected to the implication of a term requiring the contract to be read as providing for fixed Sterling prices on the basis of a concern that the balance of the contract in terms of the allocation of risk would be fundamentally altered. Counsel for SCA sought to counter that on the basis that the contention was predicated on the assumption of Euros being the currency of account, which he came to present as the essential point for P&G to prove. I do not accept fully either contention.
  108. Although I have broken down and addressed separately the arguments based on express terms and then the argument based on implication, both are exercises in interpretation and (as I have noted from the authorities I have had cited to me) require a composite approach. The question ultimately is: on its true construction did this contract provide, if not expressly then by necessary implication, for fixed Sterling prices? The answer will determine the allocation of risk and not vice-versa.
  109. SCA's Counsel additionally contended that a fixed exchange rate was necessary in order to remove a disproportionate currency risk which it cannot sensibly be supposed would have been accepted by a commercial person in the position of SCA acting reasonably to protect its interests. Put shortly: that the parties must have intended Sterling payment for costs in fact incurred in Sterling so that neither should run an uncertain and potentially significant exchange rate risk.
  110. This argument, as was SCA's case in every aspect, was bolstered by reference to what was presented as the "clear basic scheme" (to which I have already referred and quoted in paragraphs 6 and 43 above). SCA contended that the chain of contracts should be construed to give effect to, and certainly not to thwart, that "clear basic scheme."
  111. I have considerable reservations about this approach as a matter of principle where it has not been demonstrated that the contract is unworkable or even difficult to operate as it stands and where the contract is being tested not in the context of an unforeseeable event but in the context of circumstances that were always bound to arise. Once again, I think it essential to bear in mind that the question in issue is as to an obvious and fundamental matter: at what rate prices stated in Euros were to be converted into Sterling for the purposes of payment in Sterling. As it seems to me, a court should be very wary of implying or interpolating a term that has the effect of altering (from that which without such term the law would prescribe) the allocation of an exchange rate risk, especially in the context of a contract where it is inherent or bound to arise.
  112. Thus, though the case was much pressed by SCA, and I assume is the source and reason for deploying the phrase "a clear basic scheme", the present case is a long way from that considered by the Supreme Court in In re Sigma Finance Corporation (in administrative receivership); In re The Insolvency Act 1986 (Conjoined Appeals) [2009] UKSC 2. In that case, the point was that the relevant clause had to be interpreted in a quite different context than it had been envisaged it would have its application: it had been drafted in contemplation of a situation where there was no question of insolvency and was being tested in the context of an insolvency (see, especially, paragraph 32). It may be, and in that case was held to be, appropriate to seek to bring a meaning to a clause not designed for the purpose that has arisen which accords with the likely expectation and objectives of the parties as discernible from a "clear basic scheme, from which it is improbable that the parties would have wished to depart." But this is not such a case: and there are obvious fundamental objections to approaching the exercise of construing the words the parties used with an a priori assumption that their language must be changed or supplemented to fit that assumption. I do not read either the Sigma case or any of the other authorities as sanctioning such an approach.
  113. Nor, to my mind, do such authorities sanction an approach of supplying terms that would result in an allocation of risk which it simply happens to consider fairer or more appropriate. Whilst of course I must faithfully follow Rainy Sky and the other authorities that appear to permit and direct the court to adopt a construction which is consistent with common sense and to reject a construction which it considers not to be so, I cannot think that this requires or permits a court simply to imply or interpolate terms that it happens to consider would be fairer. As Lord Hoffmann stressed in Attorney-General of Belize and others v Belize Telecom Ltd. and another [2009] 1 WLR 1988 at 1993B:
  114. "The court has no power to improve upon the instrument which it is called upon to construe…It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means."

    There are very good reasons for this, as well as the principle of freedom of contract. It is almost inevitable that a court has an imperfect grasp of all the commercial consequences; and it denies itself the knowledge of the pre-contractual negotiations that may offer the explanation for the result it happens to query.

  115. In any event, even if I were to accept SCA's contention of a "clear basic scheme", it does not seem to me that a fixed exchange rate is a necessary ingredient or corollary of the scheme as stated. As I have mentioned, the costs were stated in Euros. Neither the profit neutrality principle, nor the fixed budgeted cost principle (the twin pillars of the suggested basic scheme) requires a fixed exchange rate or mandates the attribution of currency risk in respect of the costs so stated.
  116. Rectification

  117. My conclusion that on its true construction, in its present form, the TS&CPN provided for Euro fixed prices to be payable in Sterling but contained no provision either express or implied (whether by inference or by interpolation) to dislodge the ordinary rule that the Euro prices were to be converted into Sterling at the market rate applicable when payment is due, makes it necessary to consider SCA's alternative claim for rectification.
  118. SCA formulate the question as being whether the parties can be seen, from material which could not properly be considered in the context of construction, to have had a different common intention than has been found to be the intention of the words of the contract on their true construction.
  119. Two main issues arise. The first is whether such a claim is precluded by the entire agreement clause at Section 19.01 of the TS&CPN. The second is whether, if not so precluded, the claim can be sustained. For the claim to succeed, the Court must be provided with "convincing proof" (see Joscelyne v Nissen [1970] 2 QB 86 at 95-96 and 98) and persuaded to "a high degree of conviction" so that it can be "sure" (see The Olympic Pride [1980] 2 Lloyd's Rep 67 at 73) that the parties had a common understanding which by mistake the instrument (here the TS&CPN) did not reflect.
  120. Does the entire agreement clause preclude rectification?

  121. The first issue, as to the effect of an entire agreement clause in the context of a claim for rectification, is the subject of various cases. I was referred in particular to Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd's Rep 611; JJ Huber Ltd v The Private DIY Company Ltd (1995) 70 P & CR 33; and Surgicraft Limited v Paradigm Biodevices Inc. [2010] EWHC 1291 (Ch).
  122. The conclusions in those cases (all at first instance) are, put summarily, that though such a clause in usual form may, and probably will, operate to preclude reliance on a collateral warranty (see the Inntrepreneur case), it does not preclude a claim to rectify terms within an instrument which do not accurately effect the parties' intentions (see the Huber and Surgicraft cases). The purpose of such a clause, it was held in effect in both the latter cases, is to limit possible contractual claims arising from dealings outside the contract; the purpose is not to prevent rectification of the document in order to bring it into line with the true consensus between the parties. SCA adopts that reasoning and relies on those cases as established authority.
  123. Mr Nugee, in contending that the entire agreement clause in this case does preclude SCA's claim to rectification, did not seek to argue that any of those cases was wrongly decided. He submitted that they are distinguishable and should be distinguished, on the ground that what SCA is seeking to do in this case is not to correct an errant provision (as in each of those cases), but rather to put in an extra term which presently is not there at all. An entire agreement clause may perfectly permissibly prevent efforts to supplement rather than correct a contract: and the relevant clause does so here. (This characterisation of the exercise that SCA wish to undertake is, of course, consistent with the way P&G puts its case in relation to the first two issues.)
  124. I agree with Mr Nugee that there is plainly a difference between, on the one hand, a case where one of the parties is saying, in effect "I know this is what you say the words we used mean, but that is not what we meant when we used those words, and our prior consensus shows it" and, on the other hand, where one party is saying, in effect, "if that is what the words we used mean, then the contract is incomplete and should be supplemented by a further term which we can show we agreed between us."
  125. Further, I agree that whilst there may be good reasons to allow the first (since, subject to the strict burden of proof, prior consensus demonstrated to the satisfaction of the Court should prevail against the choice of the wrong words to express it) there is equally good reason to uphold an agreement to prevent the second so as, in the words of Lightman J in the Inntrepreneur case, to
  126. "preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim…to the existence of a contractual warranty.")
  127. However, as it seems to me, Mr Nugee's argument is really as to the proper ambit of the remedy of rectification, rather than as to the permissible ambit of an entire agreement clause. Put another way, it seems to me that Mr Nugee accepts (inevitably and correctly) that the Court's undoubted jurisdiction to reform the words used in a written instrument in order to conform with what is demonstrated to be their true shared intent and accord when that instrument was made cannot be excluded; but the parties may perfectly permissibly by clear words preclude any attempt to extend or modify the accord that the written instrument was intended to reflect and implement, whether by reference to some collateral promise or otherwise.
  128. This follows, in my view, from the fact that the basis and purpose of rectification is not to vary, modify or extend the parties' contract: it is to reform the instrument by which they have sought to record it in order to conform it with their true common intention when that instrument was made. Although subsequent authority has clarified that it is not necessary for these purposes to show a binding agreement prior to execution of the inaccurate instrument, and an "outward expression of accord" will suffice (see Joscelyne v Nissen and Another [1970] 2 QB 86 at 98), what James LJ said long ago in McKenzie v Coulson (1869) LR 8 Eq 368 at 375 is still applicable:
  129. "Courts of Equity do not rectify contracts; they may and do rectify instruments purporting to have been made in pursuance of the terms of contracts."
  130. Given the ambit of the jurisdiction of the Court, which may not be excluded, I agree (and in any event would feel bound by the two authorities to accept) that it is not permissible to preclude the parties from seeking to establish that the words they both used, as construed objectively by the court, failed to give expression to the shared intention of them both in using those words. The object of such an exercise is not to assert some side, collateral or additional agreement qualifying or adding to their contract; it is to rectify their contract because something has gone wrong in seeking to express the consensus which it was its purpose to record and give binding effect to. That would be (impermissibly, in my view) to exclude the correction of honest shared mistake in expression, which has long been within the overall jurisdiction of the courts both of law and equity.
  131. More difficult, however, is in any given case to determine whether the party seeking rectification only wishes to reform the existing contract to correct a shared mistake in expressing their common accord and preserving it as the sole source of obligations between the parties, or whether in truth a different compact or understanding, not intended to be expressed by the words the parties have used but said to have additionally been agreed, is sought to be given legal effect. Categorisation may be difficult and disputed: the present is a case in point.
  132. The position is, to my mind at least, made more difficult in consequence of the nature of SCA's case and the two-stage approach, which it is difficult to avoid, of first construing the contract as it is, and then considering the question of rectification. Put shortly, SCA's case depends upon demonstrating that the parties agreed a fixed exchange rate. My conclusion on the issue of construction, that the provision that SCA rely on as denoting agreement to apply a fixed exchange rate was on its true construction intended simply to prescribe machinery whereby to fix Final Transfer Prices at completion, suggests that SCA must be seeking by process of rectification not (potentially permissibly) to correct an error in the words used but (impermissibly) to introduce a new term. Hence Mr Nugee's submission in his Skeleton Argument that "SCA's case here is not that there is anything mistaken or misdrafted in the contract itself. Rather it is that there should be an additional term added to the contract because it was agreed in pre-contractual negotiations: the contract does not provide Y but it should do."
  133. Is this a case of mending an instrument or mending a bargain? The problem with the question is that it is not fairly answerable without reviewing the factual material, and thus the undergrowth. I turn, therefore, to consider whether the facts which were inadmissible on the primary issue of what might be called pure construction sustain SCA's contention that it was the real intention of both parties to provide for fixed Sterling prices payable in Sterling.
  134. Should the TS&CPN be rectified?

  135. As to the purpose of the factual enquiry thus opened up, Lord Hoffmann has clarified in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 that where rectification of the terms of a contract is sought (as here) on the basis of alleged common mistake the general rule is that the court should judge the question by reference to what a hypothetical reasonable objective observer, aware of all the relevant facts known to both parties, would conclude. But in this context, unlike in the process of interpretation, the antecedent negotiations are admissible and normally of central relevance; and subjective evidence of intention or understanding is not merely admissible but normally essential: and see per Lord Neuberger MR (at paras. 197 to 198) in Daventry District Council v Daventry & District Housing Limited [2011] EWCA Civ 1153 (in which the Court of Appeal followed, albeit with some reservations, the views (technically obiter) of Lord Hoffmann in Chartbrook).
  136. P&G put forward 6 witnesses of fact, namely Elizabeth Merrell Ricci ("Ms Ricci"), Axel Sascha Riemann ("Mr Riemann"), Jayson Ashaye Nunkoo ("Mr Nunkoo"), Richard John Toward ("Mr Toward"), Elizabeth Ann Oberle-Robertson ("Ms Oberle-Robertson") and Helen Jean Johnson ("Ms Johnson").
  137. Ms Ricci had been involved in overall negotiations for the transaction, working with Mr Robert Neid ("Mr Neid", then P&G's finance and accounting manager for Western Europe, who has since left the company). Ms Ricci was P&G's principal witness accordingly. Mr Riemann, who reported to Mr Neid, was Product Supply Finance Manager at P&G Europe, and was responsible for the Manchester and Orleans plants. Mr Nunkoo was at the relevant time the main point of contact in accounts for the tissue towel divestiture. During the operation of the TS&CPN, Mr Toward looked after cost capital for the Manchester site and was responsible for raising final invoices sent to SCA using data supplied by Mr Nunkoo. Ms Oberle-Robertson is a solicitor at Jones Day, who advised P&G in relation to the transaction. All those witnesses attended and were cross-examined by Mr Onslow, in the case of Ms Ricci at some length. Ms Johnson's evidence was not called but her evidence was admitted under a Civil Evidence Act notice.
  138. The only witness called by SCA was Toby Lawton ("Mr Lawton"). He is and at the relevant times was Vice President, SCA Mergers & Acquisitions. He was SCA's lead commercial negotiator in the transaction. He was based in SCA's head office in Stockholm at the relevant time, though he is now based in Shanghai. He was assisted in relation to legal aspects of what was a complex transaction by Ms Dianne Vander Cruyssen, a partner in the firm of Reynolds Porter Chamberlain (who acted for SCA). Mr Lawton was cross-examined by Mr Nugee in some detail.
  139. All these witnesses seemed to me to be honest and careful, trying their best to assist me: Counsel for the parties agreed this. The factual dispute between the parties is a narrow one; and the dispute arises because of plain difference in understanding, rather than a dispute about the facts, save in one respect: there is a difference in recollection as to the content or substance of a telephone conversation (which took place on 6th March 2007). During the course of this conversation, according to Mr Lawton, he agreed with Ms Ricci that the same Sterling/Euro exchange rate as had been used for deriving the firm budget costs and thus the final transfer prices as set out in Euros in the list comprising Schedule TS9.01 to the TS&CPN was to be used to calculate fixed Sterling prices for invoicing purposes. Ms Ricci disputes this. The relevance of this issue will be obvious: and I need to resolve that difference in recollection after I have set out the context more fully.
  140. For that purpose, however, it seems to me to be unnecessary to set out in detail the negotiating process. What I think is necessary is to analyse the process and exchanges by which the provision for payment in Sterling came to be agreed; the rationale and purpose of that provision, and for whose benefit it was; the intended function and purpose of the calculation of "Firm manufacturing Budgets" from which the Final Transfer Prices as set out in TS9.01 were derived; and the subjective understanding the parties respectively had of these various arrangements and provisions.
  141. There was never any disagreement between the parties that there should be provision for SCA to be charged no more or less for the Contract Products to be manufactured on its behalf in the transitional period than P&G's cost of production. As Mr Lawton put it in cross-examination, "We wanted to be in a position as if we owned all the plants from conventional closing." At the outset of the negotiating process in January 2007 it was envisaged that this would be achieved by a list of specified prices adjusted to reflect actual costs: thus there would be a pass-through of the actual costs incurred by P&G in running the Manchester and Orleans plants, in effect on behalf of SCA, during the transitional period. A re-draft prepared on 27 February 2007 still provided (at paragraph 9.01) for specified prices but with a pass-through of costs. The currency of payment was left blank in paragraph 10.01 of that draft.
  142. SCA became unhappy with this pass-through basis, because it provided no incentive for cost control by P&G. SCA prepared a different proposal, conveyed by a draft prepared by its Solicitors Reynolds Porter Chamberlain dated 1 March 2007. The new paragraph 9.01 in that draft, which in substance was the approach adopted in the final version, provided for fixed prices (as yet unspecific), but subject to two adjusters, the volume adjuster and the pulp adjuster (each expressed in Euros), as I have explained in paragraph 20 above. In the same draft, paragraph 10.01 filled in the blank previously left to denote the currency of payment, inserting Sterling for Manchester and Euros for Orleans.
  143. Jones Day, as solicitors for P&G, accepted this in their next draft of 5 March 2007. There was no resistance either to the altered approach for paragraph 9.01 or the selection of Sterling in paragraph 10.01 in the case of Manchester. At this stage, no method of fixing the prices in clause 9.01 and its intended schedule had yet been established.
  144. As to the provision for Sterling payment, in his Witness Statement, Mr Lawton depicted this as consequent upon SCA having "insisted" upon it "precisely so as to avoid the exchange rate issue which would otherwise arise". But it was put to him in cross-examination that P&G had readily agreed without any resistance to the proposal for payment in Sterling, and that there was no discussion at that time (2 March 2007) as to SCA's reasons for wanting payment in Sterling, still less that its objective might be the elimination of exchange risk. Mr Lawton eventually accepted this.
  145. Not long after this, P&G suggested in a memorandum on Article IX sent to SCA that a mechanism for establishing fixed costs might be to use the Firm 07/08 budget costs which P&G had prepared. Prices would then be derived from firm manufacturing budgets, which would then be "valid during the whole contract manufacturing period" subject to the two adjusters to derive SKU prices. There were then at least one and possibly up to 3 telephone conversations between the parties, of which notes were taken by Ms Vander Cruyssen. Through Mr Lawton, SCA embraced this solution, as providing a suitable and acceptable "proxy" for actual costs, and enabling firm fixed prices to be included in the TS&CPN by completion. P&G agreed to supply 07/08 Firm Budget figures by 8 March 2007. The notes of the conversations appear detailed. They do not record any discussion of Sterling prices, exchange rates, or exchange rate risk.
  146. The 07/08 Firm budget figures were then provided by P&G to SCA earlier than anticipated on 6 March 2007, and these were circulated for discussion on the telephone. In his e-mail attaching the draft Mr Lawton reported to senior executives in the relevant division (copied to Ms Vander Cruyssen) in this regard as follows:
  147. "The transitional supply covers their supply of products to us during [the] interim period. The pricing on this has been the subject of most last minute discussion. We have ended up with [P&G] committing to a total plant cost according to their 07/08 plan – which we have reviewed and looks reasonable (attached). They will then split into their cost prices per SKU which will be based on this total cost for the plant. We will have the right to audit and check they are doing this correctly. There is an adjuster in these prices if the pulp price goes up or down within a range and if the volumes go up or down…"

  148. There is no mention in that e-mail about paying fixed Sterling prices or fixed exchange rates. There followed a telephone call, one purpose of it being to discuss pricing. This is the telephone conversation of such importance for SCA's rectification claim that I deferred addressing until after I had painted in some of the background. There is an attendance note of it prepared by Ms Vander Cruyssen (though it is wrongly dated 5 March 2007). That attendance note records the participants as having been Ms Ricci, Mary Pat, Mr Robert Neid and Ms Oberle-Robertson from P&G, and Mr Lawton and Ms Vander Cruyssen for SCA. Mr Anders Nyberg of SCA is also listed; but Mr Lawton said in cross-examination that this is in fact an error and it was a Mr Alex Nikolic. Neither of them gave evidence, and the error does not seem important.
  149. That attendance note records that Ms Ricci indicated satisfaction with the schedule that RPC had produced (and which in its final form became TS9.01 to the TS&CPN). Certain minor amendments appear to have been suggested and agreed to that document: and these appear in manuscript in a marked up version. None seems to me material.
  150. However, it was Mr Lawton's evidence that during the telephone call three revisions of another document, the "Summit – CPN Firm plant budgets" document which P&G had produced, were agreed: the addition of a note referring to the volume of parent rolls (reels of paper ready to be converted into final product) supplied from Manchester to another plant at Witzenhausen; the removal of the "Comments" at the foot of the document, with the exception of the exchange rate; and the addition of the 05/06 figures.
  151. It is the second of these "revisions" which Mr Lawton emphasises in this context: for he says the decision not to remove but to keep the exchange rate footnoted connotes and confirms his evidence that this exchange rate was agreed to be used, not only to derive the Final Transfer Prices prior to Completion, but also for charging and invoicing in Sterling for prices stated in Euros but to be converted from Euros into Sterling at that fixed exchange rate.
  152. The attendance note does not expressly record such a discussion; nor does it refer expressly to any discussion of fixed exchange rates or exchange rate risk. However, there is a line in it which states, under the heading 'CPN True-up CPN13.10 p34', as follows: "- removal of asterisked language". Mr Lawton was asked in cross–examination whether these words might be the source of his belief, and evidence to establish, the second "revision" on which he relies. It is to his credit that Mr Lawton did not seize that suggestion. He frankly accepted that the words probably related to a document outlining a "true-up" or adjustment mechanism for price adjustment if the TAD technology produced fewer lower quantities or a lower quality than the CPN technology, and not to the Firm Plant budgets document. He had not seen the notes in question until "much, much later"; his recollection was not based on such notes. He accepted, or at least, did not dispute, that there is no reference at all in Ms Vander Cruyssen's note of the relevant telephone call to the exchange rate.
  153. Given the importance of the issue this omission does seem to me to be significant. Further, there is no reference to any agreement that the exchange rate footnote should be left in the final documentation for the purpose of reconverting the Euro prices set out into Sterling prices in any of the e-mail traffic later on 6 March 2007; nor was such an agreement with respect to that footnote mentioned in the Further Information about its case served by SCA on 8 July 2010. Indeed, strictly, it is not part of SCA's pleaded case at all that there was any specific agreement between the parties that the footnote should be left on for that purpose.
  154. As for the evidence on the other side of the record, Ms Ricci was asked about this; so too was Ms Oberle-Robertson. Ms Ricci had no recollection of Mr Lawton ever having asked for fixed Sterling prices. She was clear that had the exchange rate annotation in the CPN Firm budgets document been suggested to have any application for the future (as distinct from its relevance for the purpose of deriving the Final Transfer Prices as stated in Euros) "that would have elevated it into an entirely different discussion…We would have done something – we would have had a different conversation I believe, which would then have been documented in the contract as one of the agreed terms." This has the ring of truth. I agree with Mr Nugee's depiction of Ms Ricci as a patently careful and honest witness with a very clear command of the commercial realities and understanding of the deal.
  155. As to other witnesses for P&G, in Ms Oberle-Robertson's witness statement she said this:
  156. "While I participated in parts of calls on 5 and 6 March 2007 to discuss amendments to both the CPN and the Transitional Supply provisions, I do not recall participating in any communications where it was suggested that this exchange rate would be used to determine the Pounds Sterling equivalent of the Euros amount to be invoiced by P&G."

    However, under cross-examination by Mr Onslow she accepted that she was only involved for part of the call, and did not "recall being on the call in any great detail." She did not recall at all being on that part of the call dealing with "the outstanding issue as to how supply was ultimately to be priced." I do not therefore think I can place any weight in this context on the passage of her witness statement which I have quoted.

  157. The evidence is thus sparse; there is no direct documentary support for either side; but taking all this into consideration, I am not persuaded that there was any discussion or agreement that the provision for a fixed Sterling exchange rate was to be carried forward beyond completion (otherwise than for audit purposes) and applied in the calculation of invoiced prices such as Mr Lawton has now convinced himself there was. I have concluded that there is no compelling evidence that the parties discussed or agreed anything more than the continued inclusion of the annotation of a Sterling/Euro exchange rate on the document headed "Summit – CPN Firm plant budgets" as annexed to the TS&CPN as executed. I accept Ms Ricci's evidence (in re-examination) that if a fixed exchange rate for invoiced prices had been raised
  158. "We would have done something – we would have had a different conversation I believe, which would then have been documented as one of the agreed terms."
  159. In my judgment, SCA's evidence falls well short of the "convincing proof" required to justify rectifying a contract that makes sense without reforming it in the way proposed. The presumption that the parties have recorded their true agreement is not easily to be rebutted. It seems to me that the task may be the more difficult where the parties have agreed an "entire agreement clause". Certainly, I cannot be sure in this case that the instrument does not reflect their true accord. Indeed, as it seems to me, the parties were agreed as to the content of the contract and made no mistake in recording it; what went wrong was that the Defendants had a different perception of the effect of that content; and, except perhaps in exceptional circumstances (in effect, impropriety) where rectification may be granted in the context of unilateral mistake, that is no ground for rectification.
  160. I should make clear that this should not be taken to signify that I consider that Mr Lawton was knowingly or intentionally misleading me or making his evidence up. As I say, I consider he was doing his best to assist me. But some time has elapsed. I do think that his continuing and clear (though erroneous) perception of the legal effect of what he undeniably had agreed, that is to say, payment in Sterling, must have come to colour his thinking and, with the pressure also of an unexpected deterioration in the value of Sterling against the Euro, to distort his hindsight. I think that what he thought he had agreed in consequence of P&G's acceptance that Sterling should be the currency of payment, and his own perception of the effect of the continued inclusion of the annotation on the document headed 'Summit - CPN Firm plant budgets', translated into a false recollection that it had been expressly agreed that prices too were fixed in Sterling.
  161. In the course of Mr Lawton's cross-examination there was the following exchange between himself and Mr Nugee. It related to the e-mail which Mr Lawton sent on 6 March 2007 to a number of senior executives (to which I have referred previously at paragraph 121 above):
  162. "Q. That is your description to senior people within SCA's European tissue business of the key aspects that you've been negotiating in relation to transitional supply pricing, isn't it?
    A. Yes.
    Q. Yes. And we can skip over the fourth bullet point but at the bottom point you reiterated that you wanted: "I think this should be acceptable to us but wanted to show the key terms to you before we commit. If you've have any queries please let me know." So what you have described in this email, you've have described twice as the key aspects and the key terms; that's correct, isn't it?
    A. Sorry, the key aspects and the key terms.
    Q. At the beginning of the email you describe it as the key aspects and at the end of it you describe it as the key terms.
    A. Yes.
    Q. Yes. The document which you attached is a document which gives the budgets in euros, isn't it?
    A. It's the CPN firm plant budgets, yes.
    Q. Yes. Nowhere in that email do you indicate to your senior European tissue people that the prices which you're going to pay per SKU which will be based on this total cost will be sterling prices, do you? There's no reference to the currency in which the prices will be developed at all, is there?
    A. No, there isn't, and I mean I think it was not a controversial point.
    Q. Let me put this to you, it wasn't for you --
    A. No.
    Q. -- a key aspect or key term of the pricing discussions?
    A. It was a key term if it wasn't acceptable to P&G.
    Q. Right.
    A. But we had no -- we had no belief at that time and no understanding that it was acceptable to P&G.
    Q. But the only conversation you've had with P&G about pricing is the one -- we've seen Mrs Vander Cruyssen's notes, four pages of notes and I think you accepted a moment ago that there was nothing in those notes to indicate and you had no recollection of raising the question at all of the prices being sterling prices.
    A. No, but I knew they'd accepted that payment would be in sterling in that document and to me at that time I thought that was -- I didn't appreciate any difference then, and indeed when we signed, that there was a distinction between invoicing and pricing and payment. So to me that -- the very fact that that part had been accepted in the document meant that there was a mutual understanding that pricing and invoicing and payment would be in sterling.
    Q. I think you've just said, tell me if I am wrong, that that was your position right up until signing, that you didn't understand there was a difference?
    A. Correct." [My emphasis.]

  163. That passage (and in particular the underlined part) reinforces me in my view that the parties had different conceptions of the effect of the agreement as to payment in Sterling. There is nothing in the evidence to suggest that either was aware of the other's error or misconception. There is no question of impropriety such as might give rise to an estoppel preventing a party from relying on a provision he knew bore a meaning contrary to the other party's understanding, or where one party knew that a provision had been omitted that the other party thought had been included.
  164. In my judgment, Mr Lawton's erroneous perception is not a ground or justification for rectification: a party "should not be entitled to rectification to bring the documentation into line with a subjective intention and belief that was never communicated to [the other party] and to which [the other party] never agreed"; see per Etherton LJ in Daventry District Council v Daventry & District Housing Limited [2011] EWCA Civ 1153. Whatever their subjective differences, objectively all they agreed was that P&G should be entitled to make payment in one currency for the supply of goods at prices fixed in another currency, with the consequences explained in Woodhouse v Nigerian Produce [supra]. There is, in my judgment, no basis on which the Court could, or should intervene, where to do so would be, not to reform the instrument that the parties made, but substantively to change their accord and its consequences. I reject SCA's claim for rectification accordingly.
  165. Conclusion

  166. In my judgment, therefore, and for the reasons I have sought to set out above:
  167. (1) the TS&CPN, on its true construction, contains no provision stipulating any particular exchange rate, and none can or should be inferred or interpolated to displace the rule that where (as here) the contract provides for the amount due to be calculated or fixed in one currency (here Euros, which I accept was the money of account) and payment of that amount to be fixed in another currency (here, it is common ground, Sterling, the money of payment) the payer must pay sufficient in the money of payment (Sterling) to be sufficient to the amount due in the currency of account (Euros) at the prevailing rate of exchange when payment is due;
    (2) the entire agreement clause in the TS&CPN does not preclude rectification, but on the facts there is no or no sufficient basis for rectification in this case.
  168. There is or may be an additional claim by P&G for damages for currency losses. SCA contend that it has not been adequately pleaded and particularised. The parties have agreed it should be dealt with later, after this decision on the main issues.
  169. I will hear the parties further on that, the appropriate form of order, and the question of costs, at a hearing after this judgment has been handed down formally.
  170. In that regard, and by arrangement between the parties, I will hand this judgment down on 8th March 2012, but I do not expect the attendance of the parties or their legal representatives on that occasion, when I shall adjourn the question of costs, the other matters I have mentioned, and any other applications, to a hearing to be fixed. The time for appealing any order on this judgment will not start to run until the conclusion of that adjourned hearing.
  171. For the present, it remains for me only to thank Counsel and their teams for their painstaking and patient assistance, which has greatly eased my task.

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