B e f o r e :
MR JUSTICE CHRISTOPHER
CLARKE
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Between:
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DALKIA UTILITIES SERVICES PLC
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Claimant
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- and -
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CELTECH INTERNATIONAL LIMITED
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Defendant
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Mr Michael Soole Q.C., and Mr Scott Allen (instructed by Reynolds
Porter Chamberlain) for the Claimant
Mr Charles Gibson Q.C., and Mr Hashim
Reza (instructed by Constant & Constant) for the Defendant
Hearing dates:
4th 12th October 2005
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
see also: Dalkia Utilities Services Plc v Celtech International Ltd (No. 2) [2006] EWHC 63_2 (Comm) (02 February 2006)
MR JUSTICE CHRISTOPHER CLARKE:
Introduction
- In the present case I have to decide, amongst other
things, (i) which, if either, of the two parties to a 15 year agreement
lawfully terminated it; (ii) whether, if one of them did so, it was by giving
notice under a contractual termination clause or by way of acceptance of the
repudiation of the contract by the other party, or both; and (iii) whether a
notice of termination pursuant to a particular clause of the contract may,
also, serve as an acceptance of a repudiation by the other party or may, if
the notice was invalid and there was no such repudiation, itself, be a
repudiation.
- The dispute has certain remarkable features. First,
at the time when the agreement was brought to an end, the relevant
representatives of both parties, including the then managing director of the
defendant and its external legal advisors, were ignorant of two important
written amendments to it. Second, the last of those amendments contained
provisions which, according to the claimant produced, on their literal
meaning, a result that was commercially absurd and which was, on any view,
surprising. Third, the claimant sought at the commencement of the trial to
amend its Points of Claim to rectify the agreement as amended. I refused
permission to amend. But the claimant contends that the absurdity of the
literal meaning of the amendment can be remedied by a process of construction.
The Parties
- The claimant Dalkia Utilities Services Limited
("Dalkia") designs, constructs, funds, installs, commissions and operates
energy plants. It is part of a group which is said to be Europe's leading
energy services provider.
- The defendant Celtech International Limited
("Celtech") is a subsidiary in a group of UK companies involved in the paper
industry. Its parent company is Celtech Holdings Ltd. It is ultimately
controlled by Mr Fabio Perini, a wealthy and successful businessman, whose
Group originally had a 50%, then a majority, and later a 100% interest in the
holding company. Celtech's principal business is the manufacture of tissue
paper which it does by making large reels, up to a couple of tonnes in weight.
These reels are later converted by those who purchase them into industrial and
domestic paper products such as towels and toilet paper. In 1993 Celtech
embarked upon the construction of a large paper mill at a site at Lansil
Industrial Estate, Lancaster, the total cost of which was in the region of £17
million. In order to operate the mill Celtech required both electricity and
steam. For that purpose it negotiated a series of agreements with Dalkia (then
named AHS Emstar Utilities Services PLC) whereby Dalkia would provide energy
services by means of an energy plant, described as a combined heat and power
facility ("CHP"), the cost of which was anticipated to be in the region of £3
million.
- Between 17th October 1994 and
27th June 1997 Dalkia and Celtech signed six agreements in
connection with the construction of the Plant and the supply and management of
the Energy Services and the Charges for them:
i. an agreement dated 17th October 1994 in
connection with the development of the project to design, build,
commission and operate the Plant;
ii. the Principal Agreement dated 24th October 1995
whereby Dalkia agreed (a) to procure the design, construction, funding,
installation, commissioning and operation of the Combined Heat and Power
Plant ("the Plant") which was to provide the necessary electricity and
steam to the mill and (b), over a fifteen year period, to supply certain
defined Energy Services by means of the Plant;
iii. an agreement dated 24th October 1995 by which Celtech (as
landlord) agreed to lease to Dalkia the property that would house the
Plant ("the Agreement for Lease");
iv. an agreement dated 17th April 1996 covering
certain new works which Dalkia agreed to finance, which amended certain
specific provisions of the Principal Agreement ("the First Amendment
Agreement");
v. a supplemental letter agreement dated 22nd May
1996 in connection with the provision of further services by Dalkia ("the
Supplemental Agreement"); and
vi. an agreement dated 27th June 1997 that again
amended the Principal Agreement and provided for rescheduling of the
finance element payable by Celtech and for charges for new works ("the
Second Amendment Agreement").
- The Plant took gas from the mains gas supply, for
which Celtech paid, and converted it into electricity ("power") and steam
("heat") which were used to operate the paper mill. The purpose of the CHP
facility was to take advantage of the energy efficiencies which it was thought
would be achieved so as to reduce the cost of electricity and steam below that
which would arise if power and heat were derived solely from conventional
sources, in particular electricity from the grid. The generation of power by
the facility should have been almost as efficient as the national grid, but
without the inevitable energy loss in transmission, and the "waste heat"
recovered through a heat exchanger[1] to raise steam was effectively free. The electricity derived
from the Plant could be used in the mill and, depending on the relationship
between gas and electricity prices, sold back to the grid. The Plant was
housed on a discrete parcel of land located within the paper mill. The
freehold of this land is owned by Celtech.
- The Principal Agreement came into force on its date
24th October 1995. It was conditional on Celtech executing and
delivering to Dalkia the Agreement for Lease. Under clause 3.1 headed
"Supply of Energy Service"- Dalkia undertook to procure the design,
construction, funding, installation, commissioning and operation of what was
described as the Interim Energy Plant and the New Plant. The Interim Energy
Plant consisted of a fired packaged boiler and a number of boiler ancillaries.
The New Plant comprised a gas turbine driven generator set, gas turbine
ancillary equipment, a waste heat boiler, and a standby boiler[2], with boiler ancillaries, a computer based plant management
system and various other items of plant and equipment. Under clause 3.2 Dalkia
was bound to supply from what turned out to be 15th March 1996
until 2nd December 1996[3] what was described as the Interim Energy Service,
defined in Part 1 of Schedule G as being a quantity of saturated steam to be
supplied by the use of the interim energy plant. From 2nd December
1996 Dalkia was to supply the New Energy Service, defined in Part 2 of
Schedule G as electricity and steam up to certain maximum quantities and
turbine exhaust gases. These utilities were to be supplied by the New Plant
which Dalkia and its staff were to operate, and which Dalkia was to maintain
and repair. For its part Celtech was obliged, by clause 3.7, to supply a
number of specified Support Services including space within the building for
the New Plant and concrete foundation plinths therefor.
- The Principal Agreement was to last in the first
instance for an "Initial Period" of 15 years from the Certification Date, i.e.
from 2nd December 1996 until 2nd December 2011.
Thereafter it was to continue for successive periods of one year unless either
party gave a year's notice to terminate at the end of any such successive
period. By clause 2.2.3 of the Second Amendment Agreement the Initial Period
was defined to mean the period commencing on the Certification Date and ending
on 31st December 2011.
Charges
- Clause 4 provided for Dalkia to charge Celtech and
Celtech to pay for the Energy Service in accordance with Schedule A. Part II
of that Schedule specified that for the duration of the agreement Celtech
should pay for the New Energy Service, an annual charge of £950,232 in 12
equal monthly instalments. That charge was divided into two parts:
a. The "Finance Element" of the annual charge, being
£409,926;
b. The "Operational Element" of the annual charge, being
£540,306;
in each case exclusive of VAT. The monthly instalments for the
finance element of the annual charge of £409,926 were £34,160. Payment of
those monthly instalments has the effect, using an interest rate of 9.1%, of
completely amortising the capital cost of the Plant (which was £3,340,804)
by the end of the 15 year period: see Schedule J to the Principal Agreement.
The operational element was a fixed rate price for the operation of the
plant and the supply of electricity, steam and gas produced by it. That
element paid for the employment of 4 Dalkia workers to monitor the equipment
and those who supervised them at Dalkia's regional office in Manchester,
some sub-contract labour for maintenance tasks, together with other
maintenance, repair and replacement and insurance costs. Celtech remained
responsible for payment for the gas and electricity used by the Plant.
Variation of the Charges
Increased payments on account of costs savings
- Schedule B provided for variation of the charges.
In respect of the finance element clause B1.1 provided that after Celtech's
first full annual accounting period after the fourth anniversary of the
Certification Date and after each full accounting period thereafter until such
time as Dalkia had completely amortised its investment in the Interim Energy
Plant and the New Plant Celtech should make additional payments at the rate of
40% of the actual cost savings arising from the agreement in the relevant
accounting period. Those savings were to be the difference between (i) the
aggregate of the finance and operational elements paid by Celtech to Dalkia in
the relevant accounting period and (ii) Celtech's annual non-CHP energy and
operating costs (i.e. the costs that Celtech would have incurred for steam,
electricity, and hot gases for the paper machine drying hood if the New Plant
had not been installed and all steam was generated by conventional boiler
plant, all electricity imported from the regional electricity company and all
hot gases for the hood provided from direct natural gas firing) calculated in
accordance with a complicated formula.
Payment to amortize the cost of Dalkia's investment by the end of year
10
- Clause B1.2 allowed Celtech not to make additional
payments if it had insufficient cash available to do so. Clause B1.3 however
required Celtech to make sufficient additional payments to amortise the whole
of Dalkia's investment in the two Plants on or before the tenth anniversary of
the Certification Date. In the event no additional payments have been made.
Clause B 1.4 provided that on the day that Dalkia's investment in the two
plants was fully amortised by Celtech the finance element of the charges
should be reduced to zero and the operational element reduced from £540,306 to
£415,306 i.e. a reduction of £125,000[4]. The rationale for that reduction is not clear. Mr Roberts,
the Group Finance Director of Dalkia Plc, the parent of the claimant, thought
that it was intended as an incentive for early repayment and a reflection of
Dalkia's view that the overall risk of the transaction would reduce once the
financial element was paid off.
Delaying payment of the finance element
- Clause B1.7 allowed Celtech to elect to have the
finance element only become payable on the date six months after the
Certification Date. In that case the finance element would be payable at the
revised rate of £424,226 and, if no additional or further payments had been
made by Celtech, an additional £212,113 (i.e. an additional six months charge)
on the expiry of the Initial Period. Celtech made this election. Under that
clause the election should have been made before the Certification Date of
2nd December 1996. In fact it was made by a letter of
14th January 1997 but Dalkia accepted it.
Variations in the operational element
- Schedule B also provided for variations in the
operational element of the charges in accordance with the movement of certain
labour and materials indices; for variation of the charges if certain
assumptions as to the incidence of taxation turned out to be incorrect, and
for a general entitlement on Dalkia's part to adjust the charges to reflect
changes in local or government taxes.
Payment of the annual charge for the New Energy Service
- Schedule C Part II provided that one twelfth of
the annual charge for the New Energy Service would be invoiced to the client
monthly in arrears, to be paid by direct debit (although one was never in fact
set up). Dalkia was to be entitled to charge interest on overdue amounts at 4%
above the National Westminster Bank base rate. It also provided for the
undisputed portion of any sum the subject of a bona fide dispute to be
promptly paid and for the balance to be paid within 14 days of the settlement
of the dispute by agreement or determination, with interest at that rate from
the date when the sum was originally payable.
Rights of termination
- Clause 14 provided for rights of termination.
Under clause 14.1 either party could terminate the agreement forthwith by
notice in writing if the other party ceased to trade or was wound up or
entered into liquidation or compounded with its creditors or had a receiver,
administrator, or similar officer appointed over all or a major part of its
assets or undertaking, or any resolution was passed relating to any of the
foregoing. Clause 14.2 provided:
"14.2. In the event of one of the parties (the "DEFAULTING
PARTY") being in material breach of any of its obligations hereunder or
under the LEASE being a breach which is capable of being remedied, and
failing to remedy such breach within one hundred and twenty calendar days
after receiving written notice of the failure from the other party (the
"NON DEFAULTING PARTY") requiring it to be remedied, or being a breach
which is incapable of being remedied and which has continued for one
hundred and twenty calendar days after written notice of such breach has
been given to the DEFAULTING PARTY, then the NON DEFAULTING PARTY shall
have the right to terminate this Agreement forthwith by notice in writing
to the DEFAULTING PARTY."
- Clause 14.3 gave Dalkia a right to terminate if by
reason of force majeure pursuant to clause 13 it was unable to proceed with
the construction of the New Plant for a continuous period of 12 months or more
or to provide the Energy Service for a continuous period of three months or
more.
- Clause 14.4, upon which Dalkia relied to terminate
the agreement, is in the following terms:
"In the event of the CLIENT being in material breach of its
obligations to pay the CHARGES the COMPANY shall have the right to terminate
this Agreement immediately".
Clause 1.6 defined "CHARGES" as "the charges to be paid by the Client to
the
Company in accordance with the provisions of clause 4 and Schedule
A".
- The remaining sub clauses of clause 14 gave Dalkia
rights of termination in various events such as:
(a) Celtech's failure to enter into the Agreement for Lease
(14.5);
(b) construction of the paper mill under the contract between
Celtech and Beloit Walmsley Limited not being completed by a specified date
(14.6);
(c) failure of Celtech to comply with its obligations to provide
Support Services (14.7);
(d) Dalkia receiving notice that Celtech was in material breach
of certain agreements (14.8);
(e) the credit facility agreement between Beloit and Celtech
being novated or assigned in such as way that Dalkia's security interest
or rights under the Agreement should in any way be prejudiced
(14.9).
- Clause 15 provided for the consequences of
termination, which differed according to the clause pursuant to which
termination took place and whether termination took place before or after the
Certification Date. Clauses 15.4 15.8. provided as follows:
"15.4. On a termination of this Agreement by the COMPANY
pursuant to clauses 14.1, 14.2, 14.4, 14.5, 14.6, 14.7, 14.8 or 14.9 on or
after the CERTIFICATION DATE.
(i) the CLIENT shall pay the COMPANY a sum equal to the
aggregate of:
- the TERMINATION SUM as specified in Schedule D.
- any expenditure incurred on the repair and/or replacement of
the NEW PLANT over and above that which has already been recovered
through the CHARGES defined in Schedule A up to the date of such
termination.
- any expenditure on labour, materials and subcontractors
incurred in the provision of the ENERGY SERVICE which would have been
recovered through the CHARGES defined in Schedule A but for the early
termination and for any redundancy, employment associated costs, or
other costs which the COMPANY may incur as a result of
termination.
- any other costs and losses incurred by the COMPANY in relation
to the fulfilment of its obligations under clause 3 and otherwise as
provided for under this Agreement up to and including the date of
termination.
(ii) On receipt of such sums stipulated under clause 15.4.
(i) the LEASE shall terminate. For the avoidance of doubt, the CLIENT
shall keep the INTERIM ENERGY PLANT and the NEW
PLANT.
15.5. On a termination of this Agreement by the CLIENT
pursuant to
clause 14.1 or 14.2, or by the COMPANY pursuant to clause
14.3. on or after the CERTIFICATION DATE the following shall
apply:
(i) The CLIENT shall pay the COMPANY the TERMINATION SUM as
specified in Schedule D.
(ii) On receipt of such payment stipulated under clauses
(sic) 15.5. (i) the LEASE shall terminate. For the avoidance of doubt, the
CLIENT shall keep the INTERIM ENERGY PLANT and the NEW PLANT.
15.6. In the event that this Agreement is terminated for
whatever
the cause the following shall apply:
(i) The CLIENT shall pay for the provision of the ENERGY
SERVICE up to the date of termination including any pro rata proportion of
the CHARGES for the period up to that date together with any other sums
payable hereunder in respect of activities or other matters prior to that
date.
(ii) Save for consequences of termination pursuant to
clause 15.3. (i), the CLIENT shall purchase at the election of the COMPANY
any spare parts relating to the INTERIM ENERGY PLANT and NEW PLANT which
are the property of the COMPANY, remaining at the PREMISES at the
documented cost.
(iii) The COMPANY shall be entitled to enter upon the
PREMISES and to remove any property of the COMPANY other than the INTERIM
ENERGY PLANT and NEW PLANT or otherwise to perform its obligations and
exercise its rights under this Agreement and the CLIENT shall ensure that
the COMPANY is not hindered from doing so.
(iv) The COMPANY shall have no liability for the condition
of the INTERIM ENERGY PLANT or NEW PLANT, its operation or otherwise in
connection with the aforementioned plant after the termination of this
Agreement for whatever cause.
15.7. The consequences of termination set out in this clause
represent
the full extent of the parties' respective rights and
remedies arising out of any termination save for those rights remedies
and liabilities which arise prior to
termination.
15.8. On termination of this Agreement for whatever cause the
provisions of clauses
1,4,5,6,7,8.2,9.4,11,12,15,17,18,19,20, 21,22,23.1,23.5, Schedule A,
Schedule B, Schedule C of this Agreement shall apply mutatis mutandis as
if a new Agreement had been entered into containing only those clauses,
but all other obligations of the parties shall
cease".
Does clause 15.7 apply to an accepted repudiation?
- It is necessary to determine whether or not clause
15.7. should be interpreted to mean that clause 15 provides a complete code as
to the rights and remedies which either side shall enjoy in the event that
there is any form of termination or purported termination of the agreement,
whether by a notice given under any of the sub-clauses of clause 14, or by
reason of the acceptance by one party to the agreement of a repudiatory breach
(e.g. a total refusal to perform) committed by the other. Dalkia submitted
that the answer was "yes"; Celtech submitted in its written opening (paragraph
59) that the answer was "yes" (whilst allowing for either possibility in oral
submission), and in closing that the answer was "no" (paragraph 41 b).
- In my judgment clause 15.7 should not be so
construed. First, although the word "any" is a word of wide import, the clause
must be looked at in its context. Clause 14 contains 9 separate categories of
circumstances in which one party or the other may terminate the agreement. In
all of these categories the right to terminate would or could arise in
circumstances which did not give rise to a right of termination at common law.
Clause 15 deals with the consequences that will follow according to which
ground for termination has been invoked. The natural reading of clause 15.7,
in that context, is that the only rights or remedies that will arise in
respect of a termination on any of the bases provided for by clause 14 will be
those specified in clause 15. Secondly, clause 15.7 does not seem to me
sufficiently clear, as it would need to be, to exclude the parties' common law
right to accept a repudiatory breach of contract (e.g. an outright refusal to
perform) as discharging the innocent party from further liability and to claim
damages for the loss of the contract. The presumption is that it does not
unless there are clear express words to that effect: Modern Engineering
(Bristol) Ltd v Gilbert Ash (Northern) [1974] A.C. 689,717.
The Termination Sum
- Clauses 15.4 and 15.5 provided that, in respect of
terminations, whether by Dalkia or Celtech, after the Certification Date,
payment should be made by Celtech of a Termination Sum (and, in the case of a
termination by Dalkia, certain other sums). Upon payment of that sum Celtech
was "to keep the plant". The Termination Sum was defined in Schedule D
as a figure varying between £4,121,330 and zero as at each of the yearly
anniversaries of the Certification Date from the first to the fifteenth, with
provision for the figure to be adjusted for terminations occurring between two
anniversary dates. The sums contained in the Schedule are the net present
value (at a 5% discount rate) of the instalments payable under Schedule J,
i.e. the instalments due in respect of the finance element as from the
Certification Date[5].
- The intention behind the Agreement was that Dalkia
would obtain capital allowances which would reduce the tax payable by it. It
was to the advantage of Celtech that Dalkia should be able to obtain such
allowances since, if it did, that would reduce the charges that would
otherwise have been payable. Further Celtech, which was a start up company,
would only be able to obtain capital allowances (if otherwise eligible) when
it started making profits. In order for Dalkia to claim capital allowances it
had to show that it was the owner of the asset for which an allowance was
sought. A number of provisions of the agreement were drafted in order to
ensure that Dalkia remained the owner of the Plant at least until the
termination of the agreement. Clause 1.24 defines "Owner" as the person who
properly incurs the expenditure on the two Plants, which, under clause 3.1.
Dalkia was to supply. By clause 9.5 Celtech was not to attempt to transfer any
title to, or any other interest in, either of the Plants or the Property
(defined as the property demised by the lease), or create any charge lease or
other encumbrance of any type over them with one exception. Under clause 9.5.
Dalkia was to have the right at any time throughout the Initial Period and any
successive period to replace, modify, adapt, or alter either Plant provided
that the Energy Service was maintained. Under clause 10.1 Dalkia was to insure
the Plants. Clause 17.1 provided in terms that for the duration of the
agreement the Plants were "not and shall not become the property of the
client". Under clause 17.3 Celtech was bound to provide Dalkia with any
necessary consents by mortgagees or debenture holders or others having an
interest in or charge over the Premises (i.e. the mill) for the provision of
the Energy Service, such consents to be upon terms which would ensure that
those giving them should not be able to claim title to, or prevent Dalkia from
removing, the Plants from the Premises in accordance with the terms of the
Agreement. Clause B4 of Schedule B recorded that it had been assumed that a
writing down allowance "shall be made otherwise than to the CLIENT" in
respect of the accounting period in which expenditure was incurred and
subsequent periods and provided that Dalkia should be able to adjust the
Charges should that assumption turn out to be incorrect.
- As is apparent from these provisions the agreement
between the parties was that Dalkia should be the owner of the Plant during
the duration of the agreement but that when the agreement terminated Celtech
would, on paying the Termination Sum, keep the Plant. Notwithstanding that
agreement Dalkia contend that the Plant became annexed to the Land so as to
become part of it and so that it could not be removed by them after the
termination of the lease.
Right of suspension
- Clause 16 provided for a right of suspension in
the following terms
"If the CLIENT fails to comply with any of their obligations
pursuant to this Agreement the COMPANY shall serve written notice on the
CLIENT outlining the failure and requesting the same to be remedied within
24 hours.
If the failure remains unremedied after the 24 hours has
elapsed the COMPANY shall be entitled forthwith to suspend the performance
of any or all of its obligations until such time as the failure is remedied.
The entitlement of the COMPANY to suspend its obligations shall be without
prejudice to any other rights or remedies that the COMPANY may have pursuant
to this Agreement".
The Agreement for Lease
- The Agreement for Lease was executed on
24th October 1995. It provided, by clause 5, that it should cease
and determine and cease to be of effect forthwith upon the determination of
the Operating Agreement (i.e. the Principal Agreement). Under the Lease, which
is annexed to the Agreement for Lease, Celtech leased to Dalkia for a
peppercorn rent the parcel of land within the mill on which the Plant was to
stand until the end of the Initial Period (within the meaning of the Principal
Agreement), and thereafter for successive periods of one year until the
Principal Agreement (in the Lease described as "the Commercial Agreement") was
determined.
- Clause 3.4. of the Lease provides as follows:
"Yielding Up
At the expiration or sooner determination of the Term quietly
to yield up unto the Landlord the Property together with all fixtures which
during the Term may be affixed or fastened to or upon the Property (the
NEW PLANT and any other tenant's fixtures and fittings only excepted) in
such state and condition as shall in all respects be consistent with the
full performance by the Tenant of the covenants contained in these presents
and where the Commercial Agreement requires the Tenant to remove any item to
make good all damage caused by such removal to the Landlord's satisfaction".
(underlining added)
- Clause 5.7. of the Lease provides:
"5.7. Relationship between this Lease and the Commercial
Agreement
This Lease and the Commercial Agreement are interdependent.
Accordingly:
5.7.1. neither party shall be entitled to forfeit or
terminate (as the case may be) this Lease without also terminating the
Commercial Agreement (and vice versa) and
5.7.2. (for the avoidance of doubt) termination of the
Commercial Agreement by notice pursuant to the provisions of the Commercial
Agreement shall (subject to payment by the Landlord of any sums due to the
Tenant under Clause 15 of the Commercial Agreement and subject also to the
provisions of Clause 15.3 (iii) thereof) also operate to determine this
Lease but without prejudice to any right of action either party may have in
respect of any breach non-observance or non-performance of the other party's
covenants agreements or obligations herein or in the Commercial Agreement
contained AND SO THAT for the purposes of this Clause 5.7.2 termination of
this Lease and the Commercial Agreement in consequence of this (sic)
exercise by the Landlord of its rights under Clause 5.1. of this Lease shall
rank as a termination of the Commercial Agreement by the CLIENT pursuant to
Clause 14.2. thereof."
- Clause 6.6. of the Lease provides:
"Where the terms of this Lease and the Commercial Agreement
conflict the provisions of the Commercial Agreement shall
prevail".
- As is apparent the Lease treats the New Plant as a
tenant's fixture which Dalkia is not bound to yield up at the expiry of the
lease. It was submitted on behalf of Dalkia that since clause 15.6 (iii) of
the Principal Agreement provides that Dalkia shall be entitled on termination
for whatever cause to enter upon the premises and to remove any property
other than the New Plant there is an inconsistency between the Lease
and the Principal Agreement and that it is the latter that is to prevail. I do
not, however regard clause 15.6 (iii) as creating such an inconsistency. If
there is a termination under clause 15.4 or 15.5 and Celtech pays the
Termination Sum they are entitled to keep the plant. For that reason clause
15.6 could not provide that in the event that the Agreement was terminated
for whatever cause Dalkia should be entitled to remove the plant. But if
that sum is not paid then the Principal Agreement and the Lease, taken
together, contemplate, as it seems to me, that Dalkia will be able to remove
the plant, of which, according to the terms of the Principal Agreement it was
always the owner, and which, according to the terms of the Lease, was a
tenant's fixture that it was entitled to remove.
- The plant is removable. It was originally
delivered to the factory in sections and assembled and installed in the plant
room. The major components (Turbine Gearbox Assembly, Waste Heat Boiler, and
Standby Boiler) are mounted on skids which can be manoeuvred and lifted on low
loaders and the ancillary items (pumps, ducting etc) can be disassembled and
loaded onto suitable transport by crane. It was installed on concrete
foundation plinths; see Schedule H 1 (2). It can, for the most part, leave the
premises in the same way as it came in, although some pieces of equipment,
such as a high voltage breaker, would have to be replaced, at a cost probably
not more than £100,000. I have no further information as to the degree of
annexation of the Plant to the land, nor has authority been cited to me other
than Megarry & Wade. I do not think it necessary for me to decide
whether the degree of annexation of the Plant was prima facie sufficient to
make it a fixture, or whether, if that is so, the Plant is not to be treated
as such because the purpose of the annexation was for the better enjoyment of
the plant as a chattel rather than a permanent improvement to the land; or
whether, like the looms in a worsted mill fixed by nails to wooden beams and
plugs in the floor in Mills v Stockman [1967] 116 CLR 61 it remains
part of the land. If it is necessary for me to do so I hold that the Plant was
a fixture. That is how the parties treated it in the Lease. Further since the
Plant was to generate the power and heat needed for the mill, it seems to me
that it was intended as an integral part of the premises and a permanent
improvement to them. It is true that the provisions of the Principal Agreement
treat the Plant as belonging to Dalkia. But:
"the intention of the parties as to the ownership of the
chattel fixed to the land is only material so far as such intention can be
presumed from the degree and object of annexation. The terms expressly or
implicitly agreed between the fixer of the chattel and the owner of the
land cannot affect the determination of the question whether, in law, the
chattel has become a fixture and therefore in law belongs to the owner of
the soil"
Hobson v Gorringe [1897] 1 Ch 182, 192-3; approved in the House of
Lords in Reynolds v Ashby & Son [1904] A.C. 466 and Melhuish v
BMI (No 3) Ltd [1996] 1 A.C. 454,473 from which the words quoted derive.
But even if the Plant was a fixture it was a tenant's fixture. By virtue of
clause 3.4 of the Lease Dalkia was not bound to yield it up on termination. It
seems to me implicit from that, and the provisions of the Principal Agreement
in relation of Dalkia's ownership of the Plant, that, on the termination of
the Principal Agreement and consequent expiry of the Lease Dalkia would be
entitled to remove the Plant if Celtech failed to pay the Termination Sum as
the agreement required. I do not need to determine whether Dalkia was entitled
to capital allowances, although the provisions of section 85 and Schedule 17
of the Finance Act 1985, as interpreted by the House of Lords in Melhuish
would appear to indicate that the fact that the Plant had become a fixture
would not, of itself, be a bar.
The First Amendment Agreement
- In 1996 Celtech wished to carry out certain works
which Dalkia agreed to finance. The First Amendment Agreement of
17th April 1996 defined those works as the "New Works" which
were in two parts: the Part 1 and the Part 2 Works. The Part 1 Works consisted
of certain gas supply installation work to the value of about £300,000. The
Part 2 Works consisted of some relatively minor works relating to noise
abatement and fire protection and other items to the value of about £50,000.
The charges for the two Works were described as the Part 1 and Part 2 Charges,
or, together, the New Works Charge. The First Amendment Agreement added a new
clause 9A to the Principal Agreement whereby Dalkia agreed to advance to
Celtech the cost that Celtech incurred in completing the New Works by paying
the relevant contractors in instalments. Clauses 9A.5 9A.8 provided as
follows:
"9A.5. On each Payment Date from the Certification Date until
the Final Payment Date for the Part 1 Charge, the CLIENT shall pay the
COMPANY an amount equal to one twelfth (1/12) of the Part 1
Charge.
9A.6. On each Payment Date from the Certification Date until
the Final Payment Date for the Part 2 Charge, the CLIENT shall pay the
COMPANY an amount equal to one twelfth (1/12) of the Part 2
Charge.
9A.7 The CLIENT shall pay interest on demand on any part of
the New Work Charge and/or interest thereon which is due and unpaid, at the
rate of 4% above the base rate for the time being of the National
Westminster
Bank Plc from the date on which such sums were due for
payment until the date of actual payment. Interest payable under clause
9A.5, 9A.6 and 9A.7 shall be compounded monthly.
9A.8 In the event that (a) the COMPANY is or becomes entitled
to terminate this Agreement or (b) any sums are due and unpaid by the CLIENT
under this clause 9 A three (3) Banking Days after the due date for payment
thereof, the COMPANY may declare the full New Works Charge (with a deduction
therefrom in the amount which the Company conclusively certifies to be the
portion thereof attributable to interest which has not yet accrued)
immediately due and payable."
- The "Part 1 Costs" were defined as the cost
of the Part 1 Works plus interest from the date that the relevant portion of
the advance was made until the Certification Date at National Westminster
Bank's base rate. The "Part 1 Charge" meant an annual sum equal to £390
per £1,000 of the Part 1 Costs. The "Part 2 Costs" meant the cost of
the Part 2 Works plus interest as aforesaid. The "Part 2 Charge" meant
an annual sum equal to £123 per £1,000 of the Part 2 costs. The "Payment
Date" was defined as the first banking day of each month commencing with
the first banking day of the month following the month of the Certification
Date i.e. the first banking day of January 1997. The "Final Payment
Date" was, in the case of the Part 1 Charge the third, and, in the case of
the Part 2 Charge, the fifteenth anniversary of the Certification Date.
- Clause 3 of the First Amendment Agreement provided
that for the purposes of Clause 14.4 of the Principal Agreement "Charges"
should include any part or all of the New Works Charge.
- Accordingly, under the terms of the Principal
Agreement as amended by the First Amendment Agreement, Celtech were bound to
pay by way of charges the following amounts monthly:
(a) from the Certification Date (2nd December
1996):
1/12th of the operational element of the annual
charge (£540,306) namely
£45,025.50[6]
(b) from six months after the Certification Date:
1/12 of the finance element of the annual charge (£424,226,
increased from £409,926) namely
£35,352.17
(c) from the first banking day of January 1997:
1/12th of the Part 1 Charge and 1/12th of
the Part 2 Charge
- Further, upon a termination by Dalkia under clause
14.4 (and other clauses) the Termination Sum specified in Schedule D i.e. the
net present value (at a discount rate of 5%) of the instalments due in respect
of the finance element as from the Certification Date was recoverable. In
addition by virtue of clause 9A.8. if Dalkia became entitled to terminate the
Agreement it could declare the full New Works charge due with a deduction in
respect of unaccrued interest.
The Second Amendment Agreement
- The Plant became operational in about January
1997. On 27th June 1997 the parties entered into the Second
Amendment Agreement. There were four recitals to the Agreement. The first
three recorded (i) the making of the Principal and First Amendment Agreements;
(ii) Celtech's entitlement under the former to elect to make a deferral of
payment of the finance element; (iii) the Certification Date of 2nd
December 1996, and the making of such an election by Celtech by its letter of
14th January 1997. The fourth recital then read:
"The Company accepted the Election Letter as a valid election
under paragraph B1.7 of Schedule B of the Principal Agreement and CLIENT and
the COMPANY have entered into this Amendment Agreement for the purpose of
providing for the rescheduling of the Finance Element and the New Works
Charge."
- Paragraph 1 defined the expression "Original
Charges" so as to mean the £35,352.17 referred to above and, in relation
to the Final Payment Date to mean £247,465.19 being the product of £35,352.17
and £212,113.02, (i.e. the final deferred payment in respect of the Finance
Element). The Original Charges are, thus, the finance element of the existing
charges. Paragraph 2.2 of the Agreement replaced some of the definitions in
the Principal or First Amendment Agreement. The Part 1 and Part 2 charges were
given a definition in figures (£9,887 and £542.70 respectively[7]) with provision for a final payment of £59,332 and £3,256. The
"Initial Period" was defined as the period from the Certification Date
to 31st December 2011 (cp the original definition where the period
ended on 2nd December 2011). The "Payment Date" is defined
as the last day of each month commencing on 31st July 1997 and
ending with the Final Payment Date, which means, in relation to the Part 1
Charge, 31 December 1999 and, in relation to the Original Charge and the Part
2 Charge, 31 December 2011. The "Payment Due Date" means the
25th day of the month following the payment Date. By paragraph 2.3
clauses 9A 5 and 9A.6 are replaced with the following.
" 9A.5. On each Payment Date, the COMPANY shall invoice the
CLIENT an amount equal to the aggregate of the Original Charge, the Part 1
Charge and the Part 2 Charge due on that date, in accordance with the
provisions of this Agreement (as amended).
9A.6. The COMPANY shall make payments by direct debit on
the Payment Due Date or should such date not be a Banking Day, on the
first Banking Day thereafter."
- The effect of the amendments to which I have so
far referred was that Celtech was to pay to Dalkia the following monthly
charges (save in respect of the Final Payment Date), to be invoiced on the
last day of the month in the amount due on that date and paid on the
25th day of the next month:
(a) the Operational element of the Annual Charge as
before
(b) the Original Charges £35,352.17
(c) Part 1 Charge £9,887.00
(d) Part 2 Charge £542.70
- In addition, however, the expression
"Charges" was by clause 2.2.1 henceforth to mean "the charges to be
paid by the Client to the Company in accordance with the provisions of this
Agreement". These were now the charges set out in the previous paragraph.
Further clause 2.4 of the First Amendment Agreement provided:
"In clause 9A.7 and 9A.8 of the Principal Agreement, the
expression "New Works Charge" shall be replaced by the word "
Charges".
- Most significantly of all, clause 2.2.8 amended
the definition of "Termination Sum" to mean:
"the sum described in clause
9A.7."
- If clauses 9A.5 8 are set out in extenso as
amended they read as follows:
" 9A.5 On each Payment Date, the COMPANY shall invoice the
CLIENT an amount equal to the aggregate of the Original
Charge, the Part 1 Charge and the Part 2 Charge due on that
date, in accordance with the provisions of this Agreement (as
amended).
9A.6 The COMPANY shall make payments by direct debit on the
Payment Due Date or should such date not be a Banking Day, on the first
Banking Day thereafter.
9A.7 The CLIENT shall pay interest on demand on any part of
the Charges and/or interest thereon which is due and unpaid, at the rate of
4% above the base rate for the time being of the National Westminster Bank
Plc from the date on which such sums were due for payment until the date of
actual payment. Interest payable under clause 9A.5, 9A.6 and 9A.7 shall be
compounded monthly.
9A.8 In the event that (a) the COMPANY is or becomes entitled
to terminate this Agreement or (b) any sums are due and unpaid by the CLIENT
under this clause 9 A three (3) Banking Days after the due date for payment
thereof, the COMPANY may declare the full Charges (with a deduction
therefrom in the amount which the Company conclusively certifies to be the
portion thereof attributable to interest which has not yet accrued)
immediately due and payable."
- If the Second Amendment Agreement is to be
understood in accordance with its literal meaning the termination sum that is
to be paid by Celtech upon a termination by Dalkia under clause 14.4 is the
unpaid interest on any part of the Charges: clause 9A.7. This may be nothing
or a very small amount. On the other hand clause 9A.8 provides that if Dalkia
becomes entitled to terminate the agreement the amount that it can declare to
be payable is "the full Charges" i.e. (a) the operating charges that
are to be paid in accordance with the agreement, (b) the Original Charges; (c)
the Part 1 and (d) Part 2 charges with a deduction in respect of interest that
has not yet accrued. Accordingly, under the former clause Celtech would be in
the fortunate position of being able to obtain the Plant for nothing more than
the outstanding interest, if any. The instalments due but unpaid would be an
accrued obligation but no further payment would be due. Under the latter
clause Dalkia would be entitled to an amount that would include all the
operational charges even though it was no longer going to operate the plant.
- Clause 15.8 of the Principal Agreement provided
that on termination of the agreement for whatever cause the provisions of some
but not all of the clauses of the agreement should apply "mutatis mutandis
as if a new Agreement had been entered into containing those clauses, but all
other obligations of the parties shall cease". One of the clauses that was
to survive was clause 15 itself, including, therefore, clause 15.4 which
contains the obligation to pay the Termination Sum. Another clause was 9.4.
However, no mention was made in the Principal Agreement of any other
sub-clause of clause 9, and neither the First nor the Second Agreement
provided for clause 15.8 to be amended so as to include clause 9A. The
potential significance of this will later appear.
Invoicing
- Dalkia's invoices were, at any rate by 2003,
expressed to be for the "Energy Service" for a four or five week period,
ending on a date during the month in question. Thus the invoice of
31st May 2003 was in respect of the Energy Service from 21.04.03 to
19.5.03 and that for 30th June was for the period 19.5.03 to
23.6.03. The invoices contained 3 elements:
c. The "Standing Charge", which was the operational element of
the charges and was calculated by dividing the annual charge by 365 and
multiplying it by 28 or 35 days depending on the period of the Energy
Service the subject of the invoice, the resulting figure in 2003 being
either £46,451.24 or £58,064.04 for the 28 and 35 day periods.
d. The "Additional Service Charge" pursuant to the Supplemental
Agreement of 22nd May 1996, which was £1,868.07 (the charge per
week) multiplied by 4 or 5 weeks;
e. The "Capital Service Charge" which was £35,894.87 each month.
This sum is the product of the Original Charge of £35,352.17 and the Part 2
Charge of £542.70. The Part 1 Charge had by now been paid.
The Invoices would claim the total amount (together with VAT) as due on the
last day of the succeeding month, although the Payment Due Date is in fact the
25th.
- The Plant did not produce for Celtech the savings
that had been hoped for. The parties dispute the causes of this. Dalkia
contend that one of the reasons that the hoped for efficiencies were not
secured was that the Plant, which was designed so as to be able to be run flat
out all the time, was not run at full, or close to full, capacity[8] because the mill was not producing paper at full capacity; and
that there were further cost saving measures that could have been taken but
were not[9]. Further the relative prices of gas and electricity moved
unfavourably to Celtech. The price of gas went up and the price of electricity
went down (although after 2003 electricity prices gradually went up again).
Celtech contend that the terms of the agreement were unfair and uncompetitive
and that there were deficiencies in the operating capability and service
performance of the Plant. From at least as early as 2001 Celtech attempted to
renegotiate the Principal Agreement but without success.
Payment of invoices
- Payment of Dalkia's invoices was not always made
on the due date. In respect of all the monthly invoices issued between January
2000 and March 2003 there was always a delay in payment. The interval between
the date when the invoice said that the amount was due (i.e. the last day of
the next month) and the date when the cheque cleared the bank varied from
about 10 days to 73 and was, from about mid 2001 generally in the 30 40 day
range. The average number of days overdue for invoices dated between June 2001
and 31st March 2003, all of which were paid by 7th July
2003 was 37.7 days.
- On 28th February 2003 Dalkia issued
invoice S 2002536 in the sum of £105,536.58, due for payment by
31st March. Celtech paid Dalkia that sum by cheque dated
3rd June 2003, which cleared on 11th June (72 days after
the due date according to the invoice). On 31st March 2003 Dalkia
issued invoice S 2002585 for £121,376.60 for payment on 30th April.
That was paid by transfer on 23rd June 2003, 54 days later.
- On 30th April 2003 and 31st
May 2003 Dalkia issued Invoices numbered S 2002635 and S 310000113 in the sums
of £105,536.58 and £105,536.61, calling for payment by 31st May and
30th June.
A prospective purchaser
- The paper industry operates in a volatile market.
Pulp prices fluctuate. Consolidation amongst retailers put pressure on
suppliers. In June 2003 prices were lower than they had been for some time. By
then Celtech's parent company and Mr Perini had come to realize that only
large volume suppliers could survive in the paper market and that Celtech's
future could only be secured if it either merged with another paper
manufacturer or was sold. A potential purchaser was found in the form of the
LPC Group PLC ("LPC"), which is one of the largest tissue manufacturers in the
UK. On 12th June 2003 a meeting took place at Dalkia's premises in
Manchester. Present were representatives of Dalkia, namely Mr John Elliott,
the Finance Director, who prior to this date had had very little involvement
with Celtech[10], Mr Ray Howell, the National Sales Manager and Mr Graham
Anderson, the National Sales Director, and, on the other side, Mr Antonio
Veronesi, a Director of Celtech, Mr Chris Sear, the Managing Director of
Tissue Tech, a shareholder in Celtech, and Mr John Danton, the Group Business
Development Director of LPC. Mr Sear explained that the paper market was very
difficult with prices at their lowest for years, that the Plant was not fully
loaded, and that the quality of output was not delivering good enough margins.
He said that Celtech had attempted for a few years, but had failed, to perform
in the market, that the Plant was not producing at a level that could produce
profits and that financial support was being given monthly by the shareholder
i.e. Mr Perini, who about two years previously had bought out David Brown,
Celtech's former owner and Managing Director - and that that state of affairs
could not continue. Celtech's note records, no doubt truthfully, that Mr Sear
said that Celtech's shareholders were tired of providing monthly cash
injections. As a Dalkia note records, he indicated that there was little
prospect of the new management achieving the goal that Mr Perini had set them
and that it was time to sell Celtech or to put it into administration.
- Mr Danton told the meeting that LPC had been in
protracted negotiation to acquire Celtech but that LPC was not prepared to
take Celtech on if the cost of electricity at Celtech was, as he believed it
to be, about £70 - 78 per tonne of paper produced compared to £21 - 24 at LPC.
He indicated that a first review of Celtech's accounts showed a
"competitive disadvantage in energy costs of over £ 1 million a year".
Mr Veronesi made some reference to the prospect of Celtech going into either
liquidation or administration it is not clear which. One of the Dalkia notes
of the meeting indicates that he said that if the merger did not go forward
"more precipitative action would need to be taken (liquidation)" but
the words in brackets may be the note taker's interpretation rather than the
actual words. Mr Veronesi said that the purpose of the meeting was not to
negotiate but to put the problem on the table with a view to finding a
solution. Mr Danton inquired whether, if the acquisition went forward, Dalkia
would wish to continue supplying energy on a CEM (contract energy management)
basis[11] selling electricity at market prices. He indicated that he
would consider signing a contract to last until 2011 whereby he would take
electricity at Grid prices but with no minimum take and a "meet or release"
clause in the case of offers to supply electricity at prices below those of
Dalkia. Mr Howell indicated that Dalkia was keen to find a way forward
acceptable to all parties and suggested that Dalkia could sell excess
electricity made in the Plant to its own customer base at better prices than
those at which the Grid would be purchasing and this income could be used to
amortise the cost of running the plant. Mr Anderson broached the question of
the Termination Sum. Mr Veronesi observed that there seemed to be an
inconsistency between Schedules J and D and suggested that Dalkia could
consider a more realistic termination sum taking account of the payments
received to date, the current carrying value of the plant in Dalkia's books
and the interest movements since the deal was done. Mr Howell indicated that
modelling a proposal would take some time. It was agreed that he would respond
as soon as possible but in any event by Tuesday 17th.
The correspondence and communications prior to termination
- In the event no proposal was forthcoming. On
20th June Wayne Tierney, Celtech's finance director sent Mr Elliott
the Celtech Group Trading results for the 5 months ending 31st May
2003. These showed Group losses increasing for the first 4 months but reducing
for May. On 23rd June Celtech paid £121,376.60. On 24th
June a meeting took place at Dalkia's offices in Staines attended by Messrs
Elliott, Howell, Veronesi and Sear. The meeting did not go well. Celtech did
not appear to Dalkia to be prepared to make any significant capital payment
for the Plant. Whilst Mr Howell was in the course of putting forward a
proposal Mr Elliott received a telephone call from Mr Faulkner, who was
speaking on the instructions of Mr Pascal Guillaume, Dalkia's managing
director, telling him to stop the meeting, which he did. This happened because
the proposal, which appears never to have been reduced to writing, was not
going to be satisfactory to the management team. It involved a capital payment
from Celtech and the supply by Dalkia of power and heat pursuant to a formula
reflecting or relating to market pricing. Mr Elliott was stopped because
neither Mr Guillaume nor Mr Faulkner understood exactly what was involved. Mr
Elliott said that he would get back to Celtech. On 26th June Mr
Tierney sent the draft statutory accounts for Celtech Holdings, Celtech
International (i.e. Celtech) and Celsoft Tissue for the year to
30th June 2002. The accounts in respect of Celtech showed turnover
for 2002 to be almost identical to that for 2001, but they also showed a
sizeable reduction in the cost of sales and administrative expenses turning an
operating loss of £1.14 million into an operating profit of £1.014 million.
The Balance Sheet as at 30th June 2002 showed a technical
insolvency since the equity shareholder's deficit was £1,058,649. But it also
contained a note of a Post Balance Sheet Event namely the purchase of one of
the group's loans by Ticassa SA, the immediate parent of Celtech Holdings, on
behalf of UK Tissues SA, and the waiver of that loan in exchange for share
capital in Holdings. The effect of this was to reduce the liabilities in the
Balance Sheet by £9 million. On 27th June 2003 Mr Elliott e-mailed
Mr Veronesi and Mr Sear to say that Dalkia were happy to explore any
reasonable options but that they were not currently in a position to suggest
any change of the situation regarding ownership of the asset (a payment from
Celtech with Dalkia ending up owning the Plant or a joint sale to a third
party had been mooted) and added:
"Given the dramatic changes that you are requesting, we
need to fully understand Celtech's position. We have briefed our lawyers
& advisors and we will work with them in the coming
days.
If you have any more information that might be useful at
this stage please let me know".
- Before Mr Elliott or Mr Veronesi sent a letter to
each other they would telephone and inform each other. In the course of these
courteous conversations they would agree that they should be trying to sort
out the problems between their companies, although Mr Elliott was eager to
make sure that Mr Veronesi understood that Dalkia needed some money to keep
things going. It was Mr Veronesi's evidence that in the course of most of
these conversations he assured Mr Elliott that Dalkia would be paid, the
implication being that Mr Perini would see that the necessary funds were
provided. Mr Elliott's evidence was that Mr Veronesi did not say this. He did,
however, recall him saying in their conversations that Celtech was not able to
pay at that point and, also, a discussion on one occasion about the provision
of security. He also recalled him saying that he was not prepared to go back
to Mr Perini to get a cheque to pay Dalkia without having a long term solution
to put forward. I am not convinced that Mr Veronesi gave repeated assurances
that Dalkia would be paid. On this point I prefer the evidence of Mr Elliott,
whom I found a quietly convincing witness. I doubt that Mr Veronesi would be
giving repeated and unqualified assurances of this kind at a time when he was
negotiating for a markedly different deal, including references to the
possibility of insolvency, and when it cannot have been certain that Mr Perini
would ensure that Celtech was enabled to comply with the agreement. Mr
Veronesi's evidence was that communication between Celtech and Dalkia was on
two levels. One was the correspondence. The other was represented by the
telephone conversations with Mr Elliott in which he was giving the message
that Mr Perini would not let Celtech down but that it was necessary to try and
work things out in the first instance without reference to the possibility of
funds coming from the ultimate shareholder. If Mr Veronesi was giving repeated
assurances that Dalkia would be paid, by Mr Perini arranging it if necessary,
it seems to me likely (a) that Mr Elliott would not have forgotten them and
(b) that the correspondence on both sides would have contained some reference
to them. In saying that I do not intend to suggest that Mr Veronesi, who
struck me as a suave and experienced businessman, was not seeking to give
truthful evidence. But he was not, as I find, as positive as he now
recollects.
- On 30th June Dalkia invoiced Celtech
another £121,376.63.
- On Friday 4th July 2003 Mr Elliott
wrote to Mr Veronesi a letter which included the following:
"I am, of course, commercially aware that if Celtech
International Limited do not pay the sums due under the contract to this
company then we will make a substantial loss. But it also follows that, if
we are satisfied that there is no reasonable prospect of us being paid and
that there is a risk of some form of insolvency, then it would make more
sense for us to try to agree a different arrangement from that which
currently exists. Also, I would not wish for this contract to be a
particular blockage to any new arrangements with LPC or any other potential
buyer.
Because I do not know your precise plans I find it difficult
to make a proposal as to precisely what we should do but I do have the
following suggestion. In the course of your negotiations with third parties
it will obviously become clear what payments would be able to be made under
our contract, or the basis of a new contract, to the end of the initial
period which would have expired in December 2011. If such an arrangement is
not possible or appropriate with a new owner or purchaser of the business
then we would need to understand not only why that was, but as well as
looking at the value of the covenant from any new owner we would also want
to know what arrangements they would be willing to make for usage. It will
obviously be a matter for you as to the extent to which we are involved in
those negotiations.
If we can receive a clearer idea of the best arrangement that
will be possible going forward, we will then respond to you with an
indication of the capital payment which we would seek in order to amend our
contract agreement to those terms.
I am sure you will appreciate, in the interests of goodwill,
that we would expect the current arrangements to be respected in accordance
with their terms (notably as to payment ) until such time as a new
arrangement is entered into,
I should stress that we are keen to make an arrangement which
supports the business going forward but you will of course appreciate that
we also have a duty to ensure that the interests of this Company, so far as
commercially realistic, are protected.
I look forward to receiving your early thoughts on the new
arrangements to enable us to respond"
- On Monday July 7th Mr Veronesi wrote to
Mr Elliott saying that the buyers had estimated that the current contract
produced a competitive disadvantage in terms of energy costs of about £1.1.
million per annum "compared to industry standards" and that for that
reason they would not proceed with the purchase unless the contract could be
renegotiated in such a way as to assure them that no further payments would be
due for capital and interest; but they would be willing to make an agreement
with Dalkia until 2011 to purchase energy from the CHP plant if this would
result in their power costs being at or lower than their Group grid prices up
to that date. He said that Celtech would be willing to reach the same
agreement and that it would "make sense for Celtech to operate this system
as from today. This would remove one of our major competitive disadvantages,
and would certainly assist in the recovery of the company". He added:
"As for the amounts due by Celtech to Dalkia, we are making
every effort, in the light of the current financial situation of the
Company, to pay the outstanding invoices, and will inform you as to when
this can happen. Meanwhile, we do hope that it will be possible to come to a
sensible agreement which will cut the losses for all parties involved.
"
- Also on July 7th Mr Elliott wrote to
Celtech informing them that Dalkia calculated that the April and May invoiced
sums of £105,536.58 and £105,536.61 were due to be paid on the 25th
of May and 25th June and asked for immediate payment of the total
of £211,973.19.
- On 17th July Mr Elliott wrote to Mr
Veronesi expressing surprise at, and an inability to understand, the £1.1
million figure of competitive disadvantage, and expressing the view that
changes to the operating regime of the CHP coupled with a small capital
investment could generate annual savings of around £250,000 on energy costs.
He suggested a meeting to establish a project team to bring this about. (This
proposal involved the use of waste exhaust gases from the CHP to dry the
paper[12]). He added:
"On the subject of our outstanding debt, I must insist that
we receive full payment immediately. We have discussed this matter on many
occasions now, and unless we receive immediate payment of the sums due under
our contract, we will be forced to take further steps to recover our
money.
I look forward to receiving your comments and payment of your
outstanding debt."
- On 23rd July Mr Veronesi sent Mr
Elliott a calculation by "our potential buyer" of the competitive
disadvantage. This showed a difference in Celtech energy costs compared with
industry energy costs of between £43 and £53 per ton, making a yearly
difference on 25,000 tons of £1,075,000 to £1,325,000. The comparison was not,
in fact, a comparison of like with like, because included within the Celtech
charge was the cost of financing the acquisition of the plant[13]. The letter indicated that a potential administrator would
"not take a very positive view" about the Agreement; and that he might
well start looking around for a case for damages against Dalkia on competition
grounds. Mr Veronesi said that he could not understand the relationship
between Schedules D and J, or how savings of £250,000 p.a. would be achieved
and that it seemed that there had been significant overcharging of the service
element. He expressed a wish to find a commercial solution involving either
Celtech operating the CHP plant at competitive grid costs or a purchaser being
found for the Plant and its location elsewhere. He added:
"We are sure you will appreciate that the current scenario,
with the £ 6 million liability, can only lead Celtech International to
bankruptcy. It is quite difficult for us to understand why your company
would wish for the sake of one highly lucrative but unfair contract to
bring our relationship to such a dramatic conclusion.
We have now reached a point where the position of Celtech's
Directors must be protected, and its shareholders must decide whether to
abandon the project. Dalkia is a major impediment to its continuation in any
form.
We must therefore request that Dalkia puts to one side all
its claims on the current contract, clearly and openly identifies a new way
forward that could potentially bring benefit to both parties, and makes the
best of a situation which has become highly critical, and potentially
irreversible. This is your market."
- On 24th July Mr Elliott wrote to Mr
Veronesi expressing disappointment that his letter of 23rd July did
not mention payment of overdue debts. He insisted on immediate payment of
£372, 416.04 consisting of the April, May and June invoices (in fact the June
invoice was not due until 25th July or, according to the invoice,
31st July), together with a 2002 invoice in the sum of £39,966.22
for certain modifications to the generator set. He indicated that, unless that
sum was transferred by close of business on 25th July 2003 Dalkia
would be forced to issue a notice of suspension under Clause 16.
- On 25th July Mr Veronesi replied
telling him that he could not see what Dalkia would gain by suspension and
that it would only invite the shareholders to react defensively "and my
last letter gave an indication of some of their thoughts on this". He
pointed out that Celtech would almost certainly have to shut the Plant down in
the short term which would quickly lead "in all probability as we see
it" to the appointment of an administrator or put the company into
liquidation. He pointed out that only two payments could really be said to be
in arrears, the third having only just fallen due. He added:
"It seems inevitable that CIL will have to request a six
month moratorium at the least. During this period CIL would use the grid
directly, and Dalkia could suspend the power supply. This economy alone
would enable CIL to generate some cash flow, that the Company would commit
to apply to meeting the current Dalkia outstandings. The savings involved
would be very substantial, and this only goes to demonstrate the absurdity
of our present arrangements.
We look forward to your detailed responses, and once again,
concrete proposals as to how best and realistically to rescue the mill. It
now lies more in your hands than in ours."
As is apparent this proposal involved paying Dalkia's existing invoices by
not paying its future ones.
- On 28th July Mr Elliott wrote saying
that:
"Having considered your letter dated 25 July we are willing
to accept a delay in collection of our June invoice, amounting to
£121,376.63 by 30 days. However we cannot continue to supply service without
any payment"
He then informed Mr Veronesi that, unless £251,039.41 was paid by 4.00 pm
on Thursday July 31st, he intended to issue a formal notice of
suspension to take effect from 5.00 pm. The question arises as to whether the
effect of that letter was to make postponement of the date for payment of the
June invoice conditional on receipt of payment for the other two. I do not
think it was. It was put to Mr Whiteley that he knew from the letter of
28th July that Dalkia "were requiring £250,000 as a condition of
the agreement to give 30 more days on the June invoice", to which he
replied "That is correct". But I regard that as a slight gloss on the
letter. The point that was being made by the second sentence of the paragraph
quoted above was that unless the overdue amounts other than the June invoice
were paid Dalkia would not continue to supply.
- On 29th July 2003 Mr Elliott replied in
detail to Mr Veronesi's letter of 25th July. He suggested that the
industry figure of £35- 45/tonne was too low because it did not take account
of the cost associated with the provision of energy. He said that Schedule J
was not referred to in the body of the agreement[14] and was redundant. He refuted any suggestion of overcharging;
and repeated his suggestion of a meeting to establish a project team to work
on generating energy savings, adding:
"To threaten insolvency is not a helpful way to resolve any
difficulties that you may face. I look forward to receiving your
constructive suggestions."
- On 30th July Celtech wrote to Mr
Elliott informing him that the directors of Celtech had had to take a view on
the company's ability to pay £251,039.41 by the deadline and stating that Mr
Elliott was well aware of the difficulties of Celtech "mainly due to the
losses resulting from the contract with Dalkia". He said that "in the
light of these difficulties it is the Directors' opinion that CIL cannot meet
the deadline and must therefore expect to receive formal notice of suspension
with effect from Friday 1st August at 5.00 pm". The letter said
that Celtech would be procuring alternative means of ensuring that the mill
continued by hiring external equipment.
- On 31st July Mr Elliott wrote to say
(i) that it was Celtech's wilful refusal to pay anything whilst expecting
Dalkia to continue supply that had precipitated the imminent suspension; (ii)
that a request for a delay for a further six months without any offer of any
form of payment or suggested proposal was not acceptable. He expressed
surprise that Celtech preferred to spend money on alternative supply rather
than try to use available funds to satisfy their obligations to Dalkia. He
also warned that suspension might be followed by a termination of the contract
in which case sums in excess of £3,000,000 would become due. He urged payment
of £251,039.41 by the end of banking hours on the morrow. Mr Veronesi, who was
at the zoo in Salzburg, spoke to Mr Elliott on the telephone: it was probably
in this conversation that the possibility of Celtech giving security was
raised by Mr Veronesi. Such discussion as there was appears to have been
inconclusive.
- Later the same day he wrote to Celtech giving
notice of Dalkia's intention to suspend performance of its obligations from
5.00 p.m. on Friday 1st August unless £251,039.41 was received
within 24 hours.
Friday 1st August
- As at 1st August the amounts
outstanding, by way of charges, and the period for which they had been
outstanding were, according to the invoices rendered, as follows:
| Invoice Number |
Invoice Date |
Amount |
Days outstanding |
| S2002635 |
30/04/2003 |
£ 105,536.58 |
62 |
| 310000113 |
31/05/2003 |
£ 105,536.61 |
31 |
| 310000719 |
30/06/2003 |
£ 121,376.63 |
1 |
| |
|
£ 332,449.82 |
|
The last column represents the number of days outstanding since the date
specified in the invoice as the date upon which payment was due namely the
last day of the succeeding month. If the date specified in the Second
Amendment Agreement is taken (namely the 25th of the succeeding
month) a further 5 or 6 days would have to be added.
- On 1st August Mr Whiteley on behalf of
the board of directors of Celtech wrote to Mr Elliott a long letter in which
he asserted that Clause 16 was disproportionate and in the nature of a
penalty; that the suspension would make it extremely difficult, if not
impossible, for the mill to continue to operate; and that Celtech would be
claiming damages and reporting the matter to the Office of Fair Trading. He
went on to say:
"Finally, from your letter it would appear that you have not
clearly read our last letter to you. You are fully aware that CIL simply
does not presently have it within its power and cash resources to make these
payments. On the other hand CIL has offered to pay to Dalkia the equivalent
sums they would otherwise have to pay to the external supplier of the boiler
unit[15]. You have not responded to this proposal. This is
unreasonable
It is an indication of the disproportionate cost of your
service contract that by seeking alternative sources of steam and by using
the electricity supply of the grid I am informed that we would be saving
over £50,000 a month compared to your service charge alone.
Moreover you say that our proposal of a six month moratorium
does not include any form of proposal of payment of your overdue invoices.
This is not correct, as we have twice stated[16] that we would use the extra cash flow generated by the
suspension of your service precisely to that effect, and we are confident
that without the monthly cost of your service, payment of the outstanding
invoices would be possible. Should you accept this proposal, we could lay
out a reasonable and realistic repayment schedule. We could also utilise
that time to successfully negotiate an agreement which would allow us to go
forward and minimise losses for both parties.
CIL is not threatening insolvency. It is facing insolvency as
your threats as to wrongful trading fully recognise. For this reason CIL
must consider the appointment of an administrator
..
- Later on the same day Mr Whiteley wrote another
letter in which he made a formal offer to settle the outstanding invoices. The
terms proposed were that Dalkia would suspend the service for six months but
cooperate with Celtech to ensure that Celtech had full access to all utilities
and could continue operations. Celtech would pay a monthly fee for the use of
the package boiler (i.e. the standby boiler supplied as part of the Plant)
equivalent to the sums which would be paid to the external boiler suppliers,
excluding the sums already committed to them for the first month. Celtech
would continue with the supplementary service contract (i.e., the Supplemental
Agreement of 22nd May 1996) at £1,868.07 per week, paid monthly, in
order to avoid Dalkia having to make the relevant employees redundant. During
the six months a moratorium would apply on all monies due but interest would
apply at a rate to be agreed and Celtech would pay the outstanding sum of
£372,416.01[17] in six equal instalments plus interest starting from
September 1st in the form of post dated cheques; and the parties
would enter into constructive negotiations with a view to reaching final
agreement.
Suspension
- On Friday 1st August Dalkia suspended
the performance of its obligations under the agreement. Mr Elliott had taken
the decision to suspend in order to bring matters to a head, in the light of
what he regarded as conflicting messages from Celtech, and to discover whether
or not Celtech would pay. His view was that, if they did, the relationship
would continue and, if they could not, it would be better to know sooner
rather than later.
Change of personnel
- At the end of the week ending Friday
1st August Mr Elliott of Dalkia went on holiday. Before he did so
he had had no intention of terminating the contract or issuing a statutory
demand, and expected to return to continue sorting out the problem, which
would be dealt with in his absence by Mr Faulkner. Mr Veronesi was also on
holiday. So was Mr Pascal Guillaume. The running was taken up by Mr Laurent
Bermejo, the Chairman/Chief Executive Officer, and Mr David Faulkner, the
Commercial Director. Mr Faulkner came back from holiday on Monday
4th. Their attitude was to prove less accommodating. Mr Bermejo had
been concerned about what he regarded as Dalkia's £3,000,000 exposure and the
losses that Dalkia would suffer if it went on supplying Celtech without
payment. He was concerned that Celtech might be trading whilst insolvent[18]; and he believed that the only solution for Dalkia was to
suspend performance. He had seen Mr Veronesi's letter of 23rd which
indicated that, if that was done, he would probably have to appoint an
Administrator, a course which he favoured. At a meeting at Dalkia's London
offices Mr Bermejo told Mr Faulkner that, having taken legal advice from
Beachcroft Wansbroughs, he had decided to issue a statutory demand for the
outstanding sums. In the evening of Monday August 4th Mr Bermejo
called Mr Veronesi. In the course of the conversation Mr Bermejo, whose tone
was aggressive, said that he would prefer to deal with an administrator of
Celtech rather than Mr Veronesi since the administrator would be representing
the interests of creditors and not Celtech's ultimate shareholder[19] and that CIL was trading whilst insolvent. He informed Mr
Veronesi that Dalkia would be serving a statutory demand for £390,000 the next
day, and would then serve a petition to wind up the company, in which they
would be successful, and Mr Veronesi would cease to be a director. Mr Veronesi
referred to the Celtech proposal. Mr Bermejo said that post dated cheques were
totally unacceptable and that the Celtech proposal was the same as that of an
administrator, and repeated that he would prefer dealing with an administrator
rather than Celtech. Mr Bermejo said that Dalkia would request the
administrator to re-qualify all related party transactions with the group[20]. Mr Veronesi said that all transactions had been approved by
the auditors and he was not losing any sleep on that account. Although no
reference to this appears in Mr Veronesi's note of the telephone call I accept
Mr Bermejo's evidence that Mr Veronesi said something to the effect that
Celtech were not in a position to pay the outstanding debt. But this was not a
statement to the effect that Celtech would never be able to pay. The tenor of
his statement was the same as that contained in his letter of 1st
August.
The statutory demand
- On Monday 4th August Beachcroft Wansbroughs, on
behalf of Dalkia, drafted a statutory demand on Celtech under sections
123(1)(a)/221(1)(a) of the Insolvency Act 1986 in which Dalkia claimed that
Celtech owed it £390,915.45. That sum was made up of the April, May and June
invoices, the invoice for the 2002 generator modifications, and a number of
2002 invoices in respect of interest for late payment totalling just below
£18,500.
- The form of the statutory demand has on its face
the words:
"Warning
- This is an important document
This demand must be dealt with within 21 days after its
service upon the company or a winding-up order could be made in respect of
the company"
and, on the last page:
"REMEMBER! The company has only 21 days after the date of
service on it of this document before the creditor may present a winding-up
petition."
On the same day Mr Whiteley of Celtech wrote to Mr Elliott of Dalkia
threatening legal proceedings.
- A copy of the demand was enclosed with a letter
from Mr Faulkner of 5th August 2003. In that letter Mr Faulkner
pointed out that Celtech had made no proposal which would result in a
reduction of the outstanding debt but had proposed that Dalkia continue to
supply on an unsecured basis; stated that Dalkia intended fully to exercise
its rights if the statutory demand was not satisfied shortly; and reserved all
rights that Dalkia might have under the contract. He confirmed that the
service could be reinstated within 24 hours once the Statutory Demand was
satisfied. He strongly urged payment of the outstanding sum in accordance with
the demand, adding "we can then look forward to discussing realistic
options for the future". For the reasons set out in paragraph 86 below
Dalkia was, in my judgment, entitled to demand payment of all three invoices
despite the statement in its letter of 28th July that it was
prepared to accept a delay in the collection of the June invoice by 30 days.
- Mr Whiteley took steps to ensure that Celtech
could continue to operate by taking electricity off the grid and hiring in a
boiler, which could be powered by oil or gas, to make steam. This boiler,
which weighs about 20 tons, had to be installed outside the mill. The activity
of closing down the mill and installing a new boiler in order for it to
re-open (as it did on 7th August) was a sizeable task and Mr
Whiteley was under very great pressure at this time. Mr Faulkner learnt that
this was going on and informed Mr Bermejo. As a result, after taking legal
advice, he took the view that Celtech were not going to make any attempt to
pay and that termination should take place if payment remained outstanding.
Dalkia terminates the contract
- On Monday 11th August Mr Faulkner of
Dalkia wrote to Mr Whitely of Celtech informing him that if Celtech did not
make full payment or "make a significant move to persuade us that you
intend to pay us promptly" by 4 pm on Tuesday 12th Dalkia would
have no alternative but to issue a notice of termination under clause 14.4 and
would take immediate steps to wind up the company.
- On Tuesday 12th August Mr Whiteley
repeated the offer made in 1st August with the variation that the
first of the six instalments would be paid on August 15th and
negotiations would start on Tuesday 19th. A telephone conversation
took place between Mr Whitely and Mr Faulkner at 3 o'clock in the afternoon at
which Mr Faulkner said that he intended to reject the offer because it was no
different to the previous proposal. Mr Whitley pointed to the fact the first
payment was to be earlier and said that it could be possible to pay it by bank
transfer. Mr Faulkner described the £62,000 offered as derisory; his proposal
was that Celtech pay £390,000 forthwith. He said that he saw Celtech as a risk
and the offer as a delaying tactic. By a letter sent by e-mail at 3.20 Mr
Faulkner rejected the new proposal and stated that a termination notice would
be issued at 4.00. At 3.45 there was a further telephone conversation between
the two of them. Mr Faulkner expressed concern that Mr Whiteley had not
replied to his letter of 5th August enclosing the statutory demand.
Mr Whitely said that he had been under the impression that the statutory
notice would run for 21 days and that Celtech had expected to respond to him
early in the following week. Mr Faulkner repeated that he saw Celtech's
proposal as a £60,000 contribution to a debt which was close to £600,000,
being "390k overdue, £105k plus extras due at the end of July and circa
£60k for additional services, which will become due when notice is
given"[21]. He said that if Celtech were able to offer a bit more that
week and a payment in the next week that would be enough to get the parties to
a meeting in the next week but declined to make a proposal that would satisfy
him. He agreed to extend the deadline until 5 pm. A further telephone
conversation took place at about 4.30 4.40 pm in which Mr Faulkner stated
that what Dalkia wanted was £3,000,000 in termination charges plus the
outstanding £500,000 receivables and indicated that, if Celtech could make
some proposal for, e.g. £60,000 that week, £60,000 on Monday, £60,000 next
Friday, he would be prepared to consider it but that he needed the proposal
then in order that he could respond by the 5 p.m. deadline. When Mr Whitley
said that he was not able to make a proposal that day Mr Faulkner said that
there was no more time.
- At 5 50 pm Mr Faulkner e-mailed to Mr Whiteley a
letter of termination. The letter included the following:
"
we are exercising our right to terminate the Agreement
under clause 14.4. of the Agreement.
Termination of the Agreement is effective immediately and
your attention is drawn to the provisions of Clause 15.4. of the Agreement
which provides for the consequences of termination and in particular Clause
15.4 (i)."
Attached to the letter was a schedule of Termination Sums due. The
principal Termination Sum of £3,131,732.26 was described as:
"Termination Sum as specified in Schedule D £
2,780,117.
As is apparent Dalkia had forgotten about the Second Amendment Agreement.
At this stage the two amending agreements were in a locked cabinet in Dalkia's
Staines office with the company's other contracts.
- The final decision to terminate was, according to
Mr Bermejo, who sanctioned it, made on the day the letter was sent, on the
recommendation of Dalkia's lawyers as the route whereby Dalkia' exposure would
be crystallized and its rights as creditor established. It is clear that he
was concerned to safeguard what he saw as Dalkia's entitlement to about
£3,000,000.
Constant & Constant's letter
- On 14th August Constant & Constant,
who had been instructed on behalf of Celtech wrote to Beachcroft Wansbroughs.
They asserted that Clause 16 was in the nature of a penalty insofar as it
inhibited access by Celtech to the mains gas supply. They required Dalkia to
allow Celtech access to the mains gas supply in order to operate the
substitute boiler. They contended that Celtech had not repudiated the contract
and was not in breach of any condition and said:
"On the contrary, your client's notice of termination is a
wrongful repudiation by your client of the Contract, which wrongful
repudiation our client hereby accepts, such that the Contract is at an end
and Clause 15.4 has no application".
They also contended that Celtech was not in material breach, having
"merely failed to pay three instalments, which your statutory demand
specifies as being (sic) together with late payment charges, and the provision
of island mode modifications, in the total amount of £390,915.45"; and
that the statutory demand altered the due date for the payment demanded to 21
days after its date. In addition they said that clause 15.4 operated as a
penalty and raised a number of competition issues. They invited confirmation
that, in view of the notice of termination, Dalkia was no longer seeking
payment of the sums claimed in the statutory notice and asked, in the absence
of such confirmation, for the material breach relied upon to be identified.
They also indicated that arrangements were then being made to enable Celtech
to meet the total amount demanded in the Statutory Demand.
- Constant & Constant had not been provided with
the Second Amendment Agreement and were, like Dalkia, labouring under the
misapprehension that Schedule D was still in operation. They must however have
been told that some agreement had been made in July 1997 because their letter
refers to "the July 1997 minor adjustment" and "the 27 June 1997
variation (the precise terms of which we have not seen but we understand they
arise from exercise of a 6 month moratorium arrangement and some adjustments
to the payment schedule in consequence)".
- On 15th August Beachcrofts wrote
joining issue with Constant's letter and making clear that Dalkia still sought
payment of the sums claimed in the Statutory Demand.
- In the event Celtech paid the following sums by
bank transfer on the following dates:
18th August £ 100,000
22nd August £ 290,915.45
£ 390,915.45
These transfers paid the outstanding invoices, namely the invoices for
April, May and June, which when paid were 73, 42 and 12 days overdue[22], and the invoices for interest and modifications, all of
which comprised the sum claimed in the Statutory Demand. The July invoice was
paid on 31st August 2003. These payments were made because the
Perini Group had arranged for funds to be made available. Mr Veronesi had
contacted either Mr Perini or the relevant finance people within his Group in
the latter half of July to put arrangements in hand to make money available to
pay the total sum outstanding. Dalkia were not, however, told this because
Celtech hoped to be able to negotiate out of their difficulties without
recourse to their ultimate shareholder.
The second statutory demand.
- On 15th October 2003 Dalkia served a
further statutory demand on Celtech for £3,648,367.29. This sum included:
(a) the Termination Sum specified in Schedule D to the
Principal Agreement calculated at £3,266,183 inclusive of VAT;
(b) a sum of £330,329.59 for expenditure on the matters
specified in the third bullet point under clause 15.4 (i)
and
(c) costs and losses said to be £51,844.70 under the fourth
bullet point of that clause.
This demand was obviously composed in the erroneous belief that Schedule D
was still applicable.
The Chancery proceedings
- On 5th November 2003 Celtech applied in
the Chancery Division to restrain the presentation of a winding up petition.
In the course of those proceedings Dalkia abandoned a claim in respect of the
Termination Sum under the first bullet point of clause 15.4 (i). But it
claimed to be entitled to a sum larger than that contained in the statutory
demand on the basis of clause 15.1, bullet point 3, a claim which Richards J
held was at the very least disputable.
- In the course of his judgment Richards J held that
Dalkia was entitled to withdraw the concession made in the letter dated
28th July extending time for payment of the June invoice by 30 days
on the ground that the extension was agreed in the context of requiring
immediate payment of the earlier invoices and was not supported by
consideration. I respectfully agree. There was no binding agreement for an
extension of the time for payment of the June instalment; and, insofar as the
letter constituted a representation that Dalkia would not seek to enforce
payment in accordance with the strict terms of the contract it was open to
resile from the concession, given that, as Mr Gibson accepted, there was
nothing that Celtech did in reliance upon it which made it inequitable for
them to do so.
- Richards J expressed the view that whether the
breach relied on was material came into a "grey area" where the contentions of
both sides were arguable.
- But he rejected the contention that the effect of
the statutory demand and Dalkia's accompanying letter of 5th August
2003 was to extend Celtech's time for payment by 21 days thereby suspending
any contractual right to terminate for that period. As to that contention he
said this:
"It is said that the demand and the letter constituted a
waiver or forbearance by Dalkia of its contractual right to require
immediate payment. This involves a basic misunderstanding of the nature
and purpose of a statutory demand. Although not a necessary precursor to a
presentation of a winding-up petition, it is a means provided by section
123 (1) (a) of the Insolvency Act 1986 of proving that a company is unable
to pay its debts for the purposes of a winding-up petition. Neither its
statutory purpose nor its wording provide a basis for treating it as an
extension of time to pay the debt detailed in it or as a waiver of other
rights in the meantime. As the warning printed prominently on the first
page makes clear, failure to deal with the demand within 21 days means
that a winding-up order could be made in respect of the company, and the
same message is conveyed in the third page of the statutory
form.
Moreover, the letter from Dalkia which accompanied the
statutory demand stated in terms that Dalkia intended to exercise fully
its rights if the demand was not satisfied "shortly" and that "for the
avoidance of doubt, we reserve all rights we may have whether arising from
our contract or otherwise". Whilst I do not consider that a statutory
demand can in any event be treated as a waiver of right or extension of
time for payment, the terms of the letter seem to me to be clear that this
was not the case here. [Celtech] made much of the last paragraph of the
letter in which it was urged by Dalkia to make "payment of the outstanding
sum of £390,915.45 in accordance with the Statutory Demand". Even on their
own they are a very weak basis for suggesting a waiver of contractual
rights, but when those rights are expressly reserved in the same letter
they cannot in my view form any basis for a
waiver".
I agree. It is also material to note that the demand, whilst containing the
warning to which I have referred, also contains the following sentences on its
face:
"The creditor claims that the company owes the sum
of £390,915.45, full particulars of which are set out in page
2.
The creditor demands that the company do pay the
above debt or secure or compound for it to the creditor's
satisfaction".
In addition the notes for the Creditor in the box on the left hand side of
the first page indicate that "the amount claimed must be limited to that
which has accrued due at the date of the demand"; and the Particulars of
Debt on page 2 state that "Despite repeated requests from (sic) the Debtor
for the said sum [i.e. £390,915.45] the amount still remains outstanding".
I am also not convinced that, in consequence of the statutory demand, Celtech
believed that time for payment of the amount due had been postponed. Mr
Whiteley understood that that amount had to be paid within 21 days in order to
avoid winding up proceedings but his evidence did not indicate to me that he
understood that during that period it was not in fact payable at all. I note
that on 12th August, according to his own note, he indicated that
£390,000 was due and that his response to Mr Faulkner's proposal that Celtech
pay the £390,000 "now" was that he could not then pay it not that it was not
then due. He said in evidence that Celtech knew that the sum was due.
The clause 9A.8 declaration
- Richards J's judgment was given on 12th
February 2004. On 26th March 2004 Dalkia purported, pursuant to
clause 9 A.8 of the First Amendment Agreement, to declare the full Original
and New Works Charges to be immediately due and payable in the sum of
£2,633,832.04 plus VAT. That sum consisted of £3,826,549.83, the charges
unpaid as at 12th August 2003, less £1,192,757.75 which Dalkia
certified as the interest which had not yet accrued on that date. Dalkia also
claimed £110,324.59 under Clause 15.4 (i) and interest on the amount of the
two claims (net of VAT).VAT was claimed in addition to these amounts.
Was there a material breach?
- Clause 15.4 of the Agreement gave Dalkia a right
of immediate termination in the event that Celtech was "in material breach
of its obligations to pay the Charges". As at 12th August those
breaches consisted of a failure to pay the following invoices:
| Invoice Number |
Date of Invoice |
Amount |
Days overdue from date for payment specified
in the invoice |
| S 2002635 |
30/04/2003 |
£ 105,536.58 |
73 days |
| 310000113 |
31/05/2003 |
£ 105,536.61 |
42 days |
| 310000719 |
30/06/2003 |
£ 121,376.63 |
12 days |
| TOTAL |
|
£ 332,449.82 |
|
- As at that date Celtech had told Dalkia that it
did not presently have it within its power and cash resources the ability to
make the payments claimed under the Agreement and was facing insolvency. It
had proposed a six month moratorium on payment on the basis that a sum of
£372,416 (covering the invoices and the amount for generator modifications)
would be paid by post dated cheques in six equal instalments of £62,069.13
plus interest, beginning on 15th August. During this period further
charges would accrue from month to month amounting to over £600,000. Celtech
had indicated that the cost savings which would result from suspension would
generate some cash flow (of unspecified amount) which Celtech would apply to
meeting current outstandings.
- It is common ground that the expression
"material breach" does not mean a repudiatory breach. If
"material" was synonymous with repudiatory", the clause would
add nothing to Dalkia's remedies at common law. Mr Michael Soole Q.C., for
Dalkia, submits that "material" covers any breach which is more than
trivial or, to put it another way, which is not immaterial. Mr Charles Gibson
Q.C., for Celtech, submits that the materiality of the breach must be judged
by reference to the nature of the contract. Whilst the breach need not be
repudiatory it must be of seriousness sufficient to justify bringing to an end
a long term contract involving something of a partnership endeavour between
the parties.
Authorities
- In Fortman Holdings Ltd v Modem Holdings [2001] EWCA Civ 1235 Fortman sold to Modem the entire share capital of Tele Links Holdings
Ltd for £30 million. £20 million was payable immediately. Payment of the final
£10 million was to be made in four instalments. Modem issued loan notes in
respect of the £10 million. Under the notes the instalments were payable as
follows:
30 April 2000 £ 1 million
30 April 2001 £ 2 million
30 April 2002 £ 3 million
30 April 2003 £ 4 million.
- The loan notes provided that the principal sum
should become immediately repayable in a number of events, one of which was:
"4.5. The Company being in material or persistent breach of
any obligation under these Notes and failing to remedy the same within
fourteen days of it becoming aware of such
breach;"
- 30th April 2000 was a Sunday. The
parties agreed that payment could be made on Tuesday 2nd May. The
instalment then due was not paid. Modem's solicitors told Fortman's
solicitors, in a letter of 4th May, that Modem had received funds
in the UK to meet the loan notes but was holding them pending clarification of
whether it had some claim against Fortman in respect of a building contract.
The period of grace allowed by clause 4.5 ended on 16th May. On
22nd May proceedings were begun in respect of the whole £10
million. At first instance the judge, having rejected a claim that Modem was
entitled to a set off and decided that £1 million was due on 2nd
May 2000, held that the failure to pay was not a "material" breach
because (a) it related to only 1/10th of the £10,000,000 due; (b)
the reason for non-payment was that Modem believed that they enjoyed a bona
fide right of set off; and (c) clause 4.5 was apt to cover deliberate action
by Modem to frustrate its contractual obligation to pay under the Loan Notes.
- Before the Court of Appeal counsel for Modem
submitted that the non-payment was not material since (a) an explanation for
non payment had been provided in the letter of 4th May, which
provided a sufficient undertaking that funds were available so that the risk
of non payment was minimal; and (b) the non payment represented only 10% of
the total due. The Court rejected this contention. Judge L.J. said:
"21. In my judgment this argument did not focus
sufficiently on the commercial context. This was an unsecured instalment
agreement to repay an agreed debt. The payment of each instalment
represented a separate obligation and the non-payment on 2 May 2000
represented total non compliance with that obligation. While acknowledging
the serious consequences of the breach from Modem's view that an
immediate liability to pay 10% of the balance still unpaid would be
triggered into a liability to pay the whole of it, the significance of the
breach to Fortman was undeniable. It was non payment of the whole of an
agreed instalment, at a time when Modem enjoyed an unrestricted right to
the benefits of the sale agreement, without any contemporaneous purported
justification which fell within the terms of the contract which permitted
postponement or reduction of payment. In my judgment, for the purposes of
clause 4.5. of this agreement, the breach was
material".
- Lord Justice Pill said:
"7. The wording of Clause 4.5, and its departure from that
of a conventional acceleration clause, is in some respects curious.
Construed objectively and in the commercial context, however, the wording
relied on by Modem was in my judgment intended only to protect the company
against trivial breaches (unless persistent) or breaches of which, by
failure in the post or in banking procedures, for example, they were
unaware. I am far from persuaded that the wording confers on Modem
protection against a breach of contract provided that only that there is a
genuine belief there is no breach."
- In Glolite Ltd v Jasper Conran Ltd, 28
January 1998, The Times, Neuberger J, as he then was, observed that :
"Whether a breach of an agreement is "material" must depend
upon all the facts of the particular case, including the terms and
duration of the agreement in question, the nature of the breach, and the
consequences of the breach".
and that:
"when judging what the parties meant when they referred to
a breach having to be "material" and "remediable" (sic) it seems to me
that they must have had in mind, at least to some extent, the commercial
consequences of the breach".
He held that there had been neither a "material" nor an
"irremediable" breach of a 10 or, if extended, 20 year agreement
whereby the claimant was to enjoy an exclusive licence to manufacture products
designed by Mr Conran. The breach complained of was the use by the claimant