Primus Telecommunications Plc v MCI Worldcom International Inc. [2004] EWCA Civ 957

Case No A3/2004/0300 & 0302[2004] EWCA Civ 957
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
[2003] EWHC 2182 (Comm)
ON APPEAL FROM THE QUEEN’S BENCH
DIVISION (COMMERCIAL COURT) (COLMAN J.)
Venue Royal Courts of JusticeDate Friday 23th July 2004
Strand,
London, WC2A 2LL
Before
LORD JUSTICE WARDLORD JUSTICE MANCESIR MARTIN NOURSE
Between
PRIMUS TELECOMMUNICATIONS PLCAppellantMCI WORLDCOM INTERNATIONAL INC.Respondent
(Transcript of the Handed Down Judgment ofSmith Bernal Wordwave Limited, 190 Fleet StreetLondon EC4A 2AGTel No: 020 7421 4040, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr. Thomas Ivory QC & Philip Roberts (instructed by Bird & Bird) for AppellantMr. Richard Salter QC & Michael Lazarus (instructed by DLA) for Respondent
Judgment

Introduction

[1]This is an appeal by the defendants, Primus Telecommunications plc (“Primus”), with the permission of Tuckey LJ, from a judgment of Colman J given 25 September 2003 and his subsequent orders dated 25 September 2003 and 30 January 2004. Colman J inter alia refused an application by Primus to amend its defence and counterclaim and gave summary judgment in favour of the claimant, MCI WorldCom International, Inc. (“WorldCom”), in each case on the ground that that Primus had no real prospect of succeeding in any defence and counterclaim raised or sought to be raised. He made consequential orders relating to costs.[2]WorldCom and Primus are United States corporations supplying telecommunication services by land and underwater lines. WorldCom sold circuit capacity to Primus on a capitalised lease basis for fixed terms of years. Each lease provided for the initial payment by Primus to WorldCom of a capital sum, followed by annual payments until the end of the term. There were three such lease agreements:(1) The First Agreement made on 29/30 April 1999 was for 10 years, in respect of two STM1 circuits, between London and Frankfurt and between London and Paris. The capitalised price was US$10m, which Primus paid. The annual charge was US$150,000, which Primus paid for 1999, but not for 2000 and 2001.(2) The Second Agreement made on about 30 September 1999 (in the case of Primus through one of its directors, Mr Hazard) was for 20 years for a type STM1 circuit (with a capacity of up to 155 Mbps) between Frankfurt and Amsterdam. Primus paid the capital cost and the annual charge for 1999, but not for 2000 and 2001.(3) The Third Agreement, also made on about 30 September 1999 (again in Primus’s case through Mr Hazard), was for 10 years for three further STM1 circuits and, according to its terms, for a smaller DS3 circuit (with a limited capacity of 45 Mbps), between Zurich and Paris. Primus again paid the capital cost and the annual charge for 1999, but not for 2000 and 2001.[3]In December 1999 Primus, through its European Network Service Division general manager, a Mr Hugh Murray, signed two WorldCom service orders (“the Upgrade Agreement”) requesting and agreeing an upgrade of the smaller DS3 circuit to the larger bandwidth represented by STM1 for an additional US$1.2m payment. The upgrade was provided, though the extra capacity was according to Primus’s evidence never used. Primus never paid the extra US$1.2m.[4]On 21 July 2002 WorldCom went into Chapter 11 reconstruction, following revelations of apparent fraudulent practices and accounting at its highest level of management. This on any view gave Primus a right to terminate under clause 9.2 of the lease agreements. Primus gave notice accordingly on 2 December 2002 that (if the lease agreements were still then running) it terminated them. WorldCom asserts that this is how the agreements came to an end. In fact, Primus had already stopped using the First Agreement circuits on about 30 November 2001 and the remaining circuits on about 21February 2002, allegedly because of their unreliability; and Primus claims that it had already given valid notice of cancellation in respect of the First and Third Agreement circuits on that ground on 27 March 2002.[5]In the present action WorldCom claims the outstanding lease rental and the additional US$1.2m agreed under the Upgrade Agreement. Primus denies liability and seeks by counterclaim restitution of a proportion of the capitalised cost paid in respect of each circuit (amounting in total to about US$9.5m or US$13m) following its termination of the lease agreements on 27 March and/or 2 December 2002. Primus’s original defence and counterclaim served on 3 January 2003 claimed, in summary:(i) that, prior to the signing of the Second and Third Agreements by Primus (through its director, Mr Hazard) there were already in existence (unbeknown to Mr Hazard) binding service orders agreed on 2 August 1999 covering the supply of the four STM1 circuits and a smaller bandwidth DS3 circuit between Zurich and Paris with optical interface configured as 21 x VC12s; that the Second and Third Agreements, covering similar equipment, were accordingly void for mistake or absence of consideration or induced by misrepresentation (in which connection the defence pleads specifically that Mr Hazard relied on the alleged misrepresentation and signed these Agreements in the belief that without them there would be no agreement for the relevant circuits); that WorldCom delivered a circuit between Zurich and Paris that did not comply with the original specification in the service orders; that Worldcom misrepresented that it could not comply and that Primus would have to enter into the Upgrade Agreement and pay the additional US$1.2m for a full STM1 circuit, whereas WorldCom could have simply supplied a circuit to the original specification; and that Primus was accordingly entitled to rescind the Upgrade Agreement and any liability to pay the additional US$1.2m;(ii) that Primus was entitled to rescind all the Agreements for alleged misrepresentation to the effect that WorldCom was “duly organised”; this statement was said to be untrue, because Worldcom’s organisation was involved “at the highest level of management” in fraud, “in that expenses of about US$9 billion were fraudulently concealed from investors and customers.” The defence also alleges in paragraph 7.1.1 that the service provided by WorldCom was, in breach of clause 4.1 of each Agreement, deficient in respects particularised in a schedule and alleged to have given rise to Primus’s cessation of user of the circuits and purported termination of 27 March 2002. But it contains no attempt at quantification of any damages in respect of any such breach.[6]WorldCom issued an application for summary judgment on 24 February 2003. In response Primus served a witness statement from Mr Hazard dated 8 May 2003, in which he confirmed the pleaded case regarding the Second and Third Agreements, but made new factual allegations to justify rescission of all three Agreements. He said that, after comparing accounting information on various tenderers, he had decided to pursue negotiations with WorldCom “because [it] seemed to be a very substantial and sound company and therefore most likely to survive for the ‘life’ of any agreement”, and had had an exchange of emails with Ms McKibbin, an in-house lawyer acting for WorldCom, in which he had suggested an addition to clause 9.2.1 of the Agreements providing for a pro rata refund of the capitalised payments in the event of termination, to which Ms McKibbin had responded that “…. clause 9.2.1 …. is a relatively standard provision to protect each party in the event that either were to have a contractual claim against an insolvent estate. We would be happy to discuss this issue with you to better understand any specific concerns that you may have. We would not, however, be willing to agree repayment of the initial up-front payment.”[7]According to Mr Hazard’s statement, matters proceeded as follows:
“10. …. I do not remember having any formalised conference call, however, I do remember discussing the draft agreement with Ms McKibbin, after her fax, on a number of occasions. In particular, I recall pursuing my concerns over the insolvency aspects of clause 9. I explained to Ms McKibbin that although Worldcom’s accounts seemed to show that it was a very large and sound company, Primus was proposing to contract for 10 years and was concerned that it would lose the benefit of all its capital payment if Worldcom became insolvent. 11. Ms McKibbin was dismissive regarding my concerns. She said that I was silly and that Worldcom was a giant company. She explained that it was strong and said words to the effect that it would be ‘here for the full 10 years’. She assured me that Worldcom would not become insolvent and said that in the circumstances Worldcom would not change the provisions relating to insolvency. 12. Relying upon Ms McKibbin’s statements, I did not pursue my concerns over clause 9 and at the end of April 1999 I signed the first agreement.”
[8]This account in Mr Hazard’s statement was the subject of an application dated 23 May 2003 by Primus to amend its defence and counterclaim. The proposed amendment asserts in support of Primus’s claim to rescind all the Agreements that Ms McKibbin’s statements involved(i) express (mis)representations by WorldCom that it was “a giant and sound company” and “would not become insolvent in the next 10 years”,(ii) implied (mis)representations that there did not exist circumstances (particularly concerning accounting practices) which, when revealed to the public, would so damage WorldCom’s goodwill and standing and create such uncertainty about its true position as to cause it to become insolvent or be likely to have that effect and/or(iii) partial and misleading disclosure of WorldCom’s true position; that Primus was thereby induced to enter the Agreements; and that the representations were false and the disclosure partial since the fraud revealed in 2002 had begun at least by 1999.[9]The proposed amended pleading also raised new points in support of Primus’s claim to rescind the Third Agreement, to the effect that the Third Agreement provided in terms for an electrical DS3 interface between Zurich and Paris, and said nothing about its configuration, whereas Primus’s equipment required an optical interface configured (or “channelised”) as 21 x VC12s (with a bandwidth of just over 2 Mbps each). The proposed amendment claims rectification, if necessary, of the Third Agreement to accord with the prior alleged discussions between the parties’ engineering teams to provide for an optical interface with such a configuration.[10]By an additional proposed amendment put before us, Primus wishes to allege that it was anyway to be implied under s.9 of the Sale of Goods and Service Act 1982 that the circuit would, in order to be useable and fit for Primus’s known needs, be configured as 21 x VC12s. Primus also wishes to assert that the Upgrade Agreement was induced by economic duress, consisting of WorldCom’s refusal to supply the originally contracted circuit in circumstances where Primus would have suffered severe financial harm, if it had attempted to obtain capacity from another supplier at so late a stage.[11]The applications for summary judgment and to amend came before Colman J on three days in June and July 2003, and he handed down his judgment on 25September 2003, giving summary judgment and refusing the applications to amend. He considered, understandably in my view, that there was nothing in the original misrepresentation case based on the allegation that WorldCom was not “duly organised”, and that case has not been pursued by Primus before us. He examined the proposed new misrepresentation case by considering(a) Ms McKibbin’s authority;(b) whether she made any and what representation; and(c) whether any representation that she made was misleading. He concluded that (i) Primus had no real prospect of succeeding on any of these grounds, but that, if it had had, then (ii) that prospect would not have been undermined or excluded by the lapse of time, by the possible difficulties about restitutio in integrum, by Primus’s purported termination of the Agreements on other grounds or by clauses in the Agreements addressing representations or agreements relating to “capacity”; and that Primus would also have had a real prospect of making good its counterclaim for damages under s.2(1) or alternatively s.2(2) of the Misrepresentation Act 1967. None of the points identified in (ii) has been revisited before us. So we are concerned simply with the judge’s rejection of the proposed new misrepresentation case on grounds (a), (b) and (c). If he was wrong to reject it, then both Primus’s defence and its counterclaim should go for trial.[12]The judge also rejected Primus’s claim to rescind the Second and Third Agreements, on the ground that, far from making these unnecessary and inappropriate, the earlier service orders were themselves entered into pursuant to a still earlier Option Agreement, on a basis which contemplated and required the later execution of the later Second and Third Agreements. Primus has not challenged that conclusion before us.[13]As to the Upgrade Agreement, the judge analysed the effect of the documents and witness statements as being that both parties were in mutual error in including in the schedule to the Third Agreement a reference to a DS-3 electrical, rather than an optical, interface; that, when the mistake was discovered after installation and testing of the circuit, they discussed how to resolve it; that WorldCom told Primus that it “did not and would not provide the permanent solution by re-mapping as suggested by Mr Murray” of Primus, but would “provide an upgraded circuit type STM1, optical”, but that, after Mr Murray had agreed this, Worldcom did respond to Primus’s urgent need to bring the circuit on stream, by agreeing as an interim expedient to re-map the existing DS3 interface to 21 x VC12s. Colman J concluded on this basis that(a) the Third Agreement as executed was incapable of being performed, because no signal could pass;(b) this did not involve any arguable breach by WorldCom;(c) the parties agreed a solution by the Upgrade Agreement supplemented by the interim expedient and “it was not asserted at any time that WorldCom was in breach of contract or that they would be if the Agreement were rectified”; and(d) Worldcom’s concession of the interim expedient was no evidence of any misrepresentation by Worldcom as to either its (un)willingness or its (in)ability to provide a DS3 interface re-mapped as 21 x VC12s on a permanent basis. The judge went on to say that, having regard to these considerations, there was in his judgment, “no basis for a claim for rectification of the Third Agreement”, no arguable basis for a claim for damages for breach for breach of the Third Agreement or for rescission of the Upgrade Agreement and no arguable foundation for any claim for damages under s.2(1) of the 1967 Act.

The Third Agreement and the Upgrade Agreement

[14]I propose to start with Primus’s defence and counterclaim relating to the Upgrade Agreement, even though this goes only to about half of WorldCom’s total claim. This has been argued before us on a more confined basis than was evidently the case before the judge. Primus starts by criticising the judge’s judgment for failure to distinguish between Primus’s optical requirement and its channelised requirement, and failure correctly to identify the circumstances under which Primus entered into the Upgrade Agreement. Primus points out that, although the schedule to the Third Agreement provided in terms for an electrical interface, WorldCom never purported or sought to supply anything other than the optical interface which truly Primus required. The problem arose from the fact that this interface was not channelised to meet Primus’s separate requirement for a 21 x VC12s configuration. This separate requirement is (by the additional proposed amendment put before us) now said to have been implicit (so that the circuit would match Primus’s known equipment) or, if necessary, to have been agreed between the parties’ respective technical departments (so that it should be imported into the Third Agreement by rectification). To this Mr Salter QC for Worldcom replies that an electrical interface is inconsistent per se with an optical interface channelised to 21 x VC12s, so that there could be no such implication, so long as the provision in the Third Agreement stipulating for an electrical interface remained unrectified.[15]Before us, Mr Salter underlined the strength of WorldCom’s case that there had been no relevant contractual mistake, which alone could justify rectification, rather than a mere difference in understanding between that held by the technical personnel on each side and that held by the commercial and legal personnel on each side who actually made the Third Agreement. The agreement, he submitted, reflected accurately the understanding of the latter. But at the end of the day, despite these points, he was prepared to accept that Primus does have a real prospect of showing that the Third Agreement was, as executed, liable to be rectified to provide for an optical interface and, if that would not then be implicit, to provide also for a 21 x VC12s configuration. In this situation, the only reasons he advanced to support the judge’s conclusion related to the parties’ agreement to the Upgrade Agreement and Primus’s delay in pursuing any case based on rectification or on any such implication. In this regard, as I have already recorded, the judge stated that “it was not asserted at any time that WorldCom were in breach of contract or that they would be if the Agreement were rectified”, and treated the Upgrade Agreement as an agreement to solve a problem arising from a “mutual error”.[16]Mr Salter observes forcefully that the effect of the Upgrade Agreement was to give Primus a much larger capacity (155 Mbps) STM1 circuit, which is why Primus was required to pay the additional US$1.2m (based on a full price for a STM1 circuit of US2.4m, which, Mr Salter points out, was itself $100,000 less than WorldCom had charged Primus for the STM1 circuits previously supplied). Mr Ivory QC for Primus responds that, on Primus’s evidence (which must for present purposes be assumed to be true), Primus neither wanted nor used the larger capacity. Further, according to Mr Murray’s witness statements dealing with events leading to the Upgrade Agreement: Statement of 13 May 2003:
“7. …. I spoke to Mr Wright until I was blue in the face. He knew this circuit was overdue for delivery. They knew precisely what I wanted, but they now insisted that this was not a product they sold or supported and refused to deliver it unless we signed up for a $2.1m upgrade for equipment three times more powerful that our requirements and at double the O & M charges. If this was the case they should never have accepted the order in the first place. …. 12. …. they had us over a barrel.”
Statement of 30 June 2003: 23. …. (v) As WorldCom well knew, Primus was under great commercial pressure to get the Paris-Zurich circuit operative. In my dialogue with WorldCom, particularly with Mr Wright, I continued to protest that I had not been provided with what WorldCom had agreed to provide. Any “agreement” that I made with WorldCom was simply in respect of, what I am told is, mitigation of damage. ….” The judge must have overlooked these passages when he stated that “it was not asserted at any time that WorldCom were in breach of contract”. It is true that there appears to be no contemporary documentary record of protests, but for present purposes one cannot discount the prospect that Mr Murray’s statements may be accurate. Statement of 13 May 2003:

Statement of 30 June 2003:

[17]On that basis, I do not consider that it can be said that Primus has no real prospect of success at a trial in establishing that the Upgrade Agreement was forced on Primus in the face of a refusal by WorldCom to perform what Primus was maintaining was WorldCom’s prior duty and despite Primus’s protests about such refusal; and that it therefore represented a contract entered into in consequence of WorldCom’s prior breach, rather than a compromise or bar to the assertion of any such prior breach or of any right to seek rectification in order to pursue an allegation that there was such a breach. The Upgrade Agreement consisted in form of no more than a service order. It contained no words of compromise and nothing on its face affirming or acquiescing in the Third Agreement or abandoning any right to complain that WorldCom had not performed their prior obligations. On the contrary, on Mr Murray’s evidence, it was made after and under protests about non-performance, which would be inconsistent with any acknowledgement that the Third Agreement either permitted WorldCom to supply an electrical interface (something which WorldCom was not even purporting to be entitled to do) or permitted WorldCom to refuse to configure the optical interface actually supplied so as to provide 21 x VC12 channels. It is true that it involved a larger circuit which might have had value for some users, but Mr Murray says that this was of no interest or value to Primus. If it had objective value that Primus could nonetheless have realised (e.g. by selling capacity to third parties), then no doubt arguments might be open to WorldCom that, even if the Upgrade Agreement was entered into in mitigation of Primus’s claim for damages for breach of the Third Agreement (as liable, if necessary, to be rectified), the damages should not amount to the whole of the additional US$1.2m, but should be reduced by whatever is the amount of that objective value.[18]Mr Salter submitted, however, that the necessary or implied effect of the Upgrade Agreement was to affirm or acquiesce in the Third Agreement in its apparent form and to abandon any claim to rectify or claim damages for its breach, and that this was so even if Primus would otherwise have had a right to rectify and even assuming that Primus made and faced the dilemma which Mr Murray affirms. I need only say that I consider the contrary to be sufficiently arguable for us not to be able to exclude it at this stage.[19]I would accept that, if Mr Murray’s statements are accurate, one might have expected Primus to have protested much sooner about being forced to enter the Upgrade Agreement. The first formal protest of which there is any evidence consisted in Primus’s solicitors’ letter of 29 May 2002. This refers to the circuit being unusable and to Primus requesting that it be channelised “as 21 x VC12 as technically agreed”; and states that Primus was “forced into the upgrade as it had an urgent business need that was already well overdue ….”. Further, on 2 December 2002 Primus gave notice to terminate under clause 9.2 of the Third Agreement. Mr Salter submitted that, in the light of these circumstances also, any claim to rectify would be bound to fail on the grounds of affirmation, acquiescence and/or laches. He points out that acquiescence and laches, at any rate, do not depend on knowledge of legal rights, but upon whether Primus’s conduct has made it inequitable for Primus to pursue any claim to rectify. The judge did not express any view on such questions. I do not consider that we can decide any of them finally at this stage. In particular, as Mr Ivory observes, the question what is inequitable requires a more detailed consideration of the parties’ conduct and circumstances. Further, I do not consider that it is at all clear that the mere giving notice of termination of the Third Agreement under clause 9.2 can or should be treated as barring a claim to rectify that Agreement in order to pursue a claim for damages which is alleged to have arisen from circumstances pre-dating and unrelated to such termination.[20]I therefore conclude, in the light of the issues argued before us, that Primus has shown a sufficiently real prospect of establishing, so far as necessary, that the Third Agreement is liable to be rectified and that Primus had and retains a claim for damages of the Third Agreement, consisting in WorldCom’s alleged failure to supply a suitable circuit as originally agreed, at least between the parties’ respective technical people, and allegedly forcing Primus as a consequence to enter into an unwanted upgrade. I would set aside the judge’s decision to the contrary, allow the amendment to the defence and counterclaim proposed before Colman J in this regard and return this aspect of the case to the Commercial Court for trial.[21]I would allow the application to amend put before us by which Primus wishes to allege that it was anyway to be implied under s.9 of the Sale of Goods and Service Act 1982 that the circuit would, in order to be useable and fit for Primus’s known needs, be configured as 21 x VC12s. With regard to the further application before us to amend to plead that the Upgrade Agreement should be set aside on grounds of economic duress, had I been otherwise minded to dismiss this appeal, I would have refused such amendment, on the ground that it was inappropriate and unfair to WorldCom to seek to raise such a point, as an answer to an application for summary judgment, for the first time in this court. To do so deprives WorldCom of any opportunity to respond to the point with its own evidence. As it is, and because there will now anyway be a trial in relation to the circumstances leading to the Upgrade Agreement, the matter takes on a different complexion, and I would therefore remit to the Commercial Court this aspect of the further application to amend.

Misrepresentation

[22]I turn to the defence which Primus seeks to assert in relation to all three Agreements, so as to defeat the whole of WorldCom’s claims for sums unpaid under such Agreements and, furthermore, to give rise to a claim by Primus to restitution of sums already paid under such Agreements (less, presumably, the value of any benefits received thereunder). Mr Salter accepts, as he must for present purposes, the accuracy of Mr Hazard’s factual account of his conversation with Ms McKibbin. In fact all that she was able to say in response in a statement dated 11 June 2003 was:
“I must say at the outset that although I did have discussions with Mr Hazard I cannot recall with any certainty the precise details of what we discussed. In fact, reading Mr Hazard’s statement I am surprised at his detailed recollection of that which I allegedly said. I do however find it hard to believe that I would have made the comments attributed to me. Furthermore, even if I did make them, I am very surprised that a man of Mr Hazard’s experience would place such great reliance on what really seems to be an alleged off the cuff expression of opinion and prediction regarding future events. One must remember that the value of these transactions ran to millions of dollars.”
[23]The strength of Mr Salter’s submissions lies in the limited nature of the conversation asserted by Mr Hazard. This is, he submits, the highest that Primus can put its case. Nothing in any surrounding circumstances or in anything about the way in which the words were said is relied on to colour their meaning or significance for a listener like Mr Hazard. The court can and should, therefore, make up its mind now about(a) the meaning of the words and of any representation of present fact that they may have involved,(b) the extent to which a director in Mr Hazards’ position could justifiably rely on them for any purpose and(c) the extent to which Mr Hazard has, on his own account, shown that he did rely on them in any relevant sense. What would be the purpose therefore of any trial on this aspect, when it could add nothing to the pleaded case? I have some sympathy with these submissions as a matter of pure logic, but I cannot help feeling that it will in practice be easier for a judge who has seen the witnesses to form a view as to the likelihood of the words used having or being understood to have the meaning or significance, or being relied on in the way, which Primus asserts. And, as Mr Ivory submits, if Mr Hazard were able to substantiate his case that he relied on Ms McKibbin, this could itself also have some impact on a judge’s conclusion about the meaning or significance of what was said.[24]In these circumstances, I have come to the conclusion that, if (as is the case) the matter is going to trial on the issues relating to the Third and Upgrade Agreements, the present issue should also go to trial. In most respects, it is a simple issue which will take little time. If it were to become necessary to consider how far any fraud had developed by the time of Mr Hazard’s conversation with Ms McKibbin or by the dates later in 1999 when each of the Agreements were entered into, so as to make any representations false, that could involve more contentious and difficult issues. But it may also be possible to leave over such issues for subsequent trial only if they arise, which they may never do.[25]The judge’s reasoning for rejecting any possible defence and counterclaim based on Ms McKibbin’s alleged statements was that her authorised function as an in-house lawyer was to negotiate the contract wording with Primus, that she had no authority to bind WorldCom and did not sign the Agreements on its behalf and it was “so unconvincing as to be completely fanciful” to suggest that Mr Hazard or Primus was reasonably entitled to treat what she said as a representation as to its financial position by WorldCom to be relied upon by them. This reasoning invokes a number of admittedly connected considerations. I would accept that Ms McKibbin’s known role as an in-house lawyer (as well as the apparent brevity and spontaneity of the discussion during which the alleged representations were made) are relevant when considering both how to understand what she said and how it was reasonably capable of being (and may have been) relied on. But, in so far as it derives from her position or her inability to sign the Agreements that she cannot have had WorldCom’s authority to make any representations relating to WorldCom’s financial position or strength, this seems very likely to go too far, since:
“…. the law recognises that in modern commerce an agent who has no apparent authority to conclude a particular transactions may sometimes be clothed with apparent authority to make representations of fact”
. See First Energy v. HIB [1993] 2 Lloyd’s R. 194, 204 per Evans LJ; and also Australasian Brokerage Ltd. v. Australian and New Zealand Banking Corp. [1934] CLR 430 (High Court of Australia) esp. at pp. 441 and 450-1. Further, the fact that Ms McKibbin was employed by a WorldCom subsidiary seems to me only a very minor matter deriving from the group’s internal corporate structure, in circumstances where she was plainly entrusted with the negotiation of terms on behalf of WorldCom.[26]Want of authority was not as such ever pleaded or relied upon by WorldCom in response to the proposed case based on Mr Hazard’s second statement. WorldCom’s case was and is that what Ms McKibbin said cannot possibly be or have been understood as more than(a) mere puff or(b) a personal view based on her own knowledge or, alternatively, on such knowledge as she might as an in-house lawyer sensibly be expected to possess and be given. Mr Salter points out with obvious force that, if anything which she said had had any greater force or impact, then it would surely have come forward at the time of the original defence and counterclaim (which, since it refers to Mr Hazard’s involvement and belief in relation to the execution of the Second and Third Agreements, must have been served after discussion with him), rather than five months later in response to an application against Primus for summary judgment. This is a matter that will doubtless be deployed both to challenge the accuracy of Mr Hazard’s account and to challenge the meaning and significance now sought to be attached to it, if accurate. But it is not possible to pre-judge a court’s reaction on such points.[27]Mr Salter submits that what Mr Hazard wanted was a variation of or addition to standard clause 9.2, not an assurance about WorldCom’s position. I do not think that that it is quite right. Mr Hazard certainly wanted a variation or addition (though his thinking may be open to question, since, if WorldCom became insolvent, it would be unlikely to assist Primus to have a bare legal right to a pro rata refund). But the reason he wanted this was concern that WorldCom’s apparently strong position might not represent the whole picture. Ms McKibbin on his account sought to alleviate that concern. That seems to me also why it may be hard to accept the judge’s view that all Ms McKibbin can have been doing or could be treated as doing was make “a comment obviously by way of opinion derived from matters of public knowledge as to the size and viability of the parent company”, and not to put forward views “as WorldCom’s appraisal of its present financial position”.[28]Mr Salter also points out that much of what Ms McKibbin said constituted on its face no more than an assurance as to the future, although he accepts that the statement that WorldCom was a “giant” company went to the present, and that it is in some situations possible to derive from statements as to future expectations an assurance that there is nothing in present circumstances (or present circumstances known to the representor) that would, or would be likely to, falsify such future expectations. Mr Salter observes that Primus’s case involves the proposition that Ms McKibbin made representations about matters the inaccuracy of which was at the time unknown even to WorldCom’s auditors. That is no doubt so, but their inaccuracy was of course known to WorldCom’s highest management - or so it has at least been assumed for present purposes in the arguments before us. (That may possibly be so because the alleged fraud, as described to us, may have been as much by WorldCom on the public at large as on WorldCom by its senior management, but we have not had to go into such aspects.) The proposition that Ms McKibbin made representations to the effect that WorldCom was a “giant” company, or, if this be implied, that there was nothing likely to bring it down within 10 years becomes, as it seems to me, somewhat less surprising, if one bears in mind that this is probably what the senior management were holding out externally and internally and would have told Ms McKibbin if she had asked them, or if she had happened (say) to have attended an internal briefing seminar with other employees regarding the group’s affairs the day before her conversation with Mr Hazard. I see the strength of the point that Ms McKibbin cannot have been representing, and Mr Hazard cannot have been expecting her to represent, that nothing, including matters in existence but presently unknown to anyone in WorldCom’s senior management, would or would be likely to upset WorldCom’s prosperity and continued existence. But that is irrelevant here, where we are concerned with matters which are for present purposes to be treated as known to senior management, although not to Ms McKibbin. There is much less apparent incongruity in treating an employee as able to represent and as representing to a third party that matters do not exist to the company’s knowledge, when if they existed senior management would know of them and ought (as the arguments before us for present purposes also assumed) to have communicated them to the employee.[29]As to reliance, Mr Salter submits that Mr Hazard fails to say how he understood the representations. I see the force of this point also. Mr Hazard may simply have accepted them as comfort for his own views, or have regarded them as puffing assurances which would be sufficient to satisfy his superiors that he had done the best he could. No doubt Mr Hazard would be closely questioned on such matters. But I do not think that it would be right at this stage to conclude that he cannot have understood the statements in the sense which it is pleaded that they objectively bore, particularly that set out in (iii) in paragraph 8 above.[30]I should record that Mr Ivory submitted that, if Mr Hazard understood the representations in such a sense, then it was irrelevant whether a reasonable listener in his position would have understood them in that sense. That seems to me a somewhat surprising proposition. As Cartwright states in his work on Misrepresentation (Sweet and Maxwell 2002), paragraph 2.12 dealing with “sales talk”, “the core question is whether the representee was entitled to take the statement seriously and so rely on it in deciding whether to enter into the contract”. As I presently see the position, whether there is a representation and what its nature is must be judged objectively according to the impact that whatever is said may be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee (just as contractual interpretation depends on ascertaining “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”: Investors Compensation Scheme Ltd. v. West Bromwich B. S. [1998] 1 WLR 896, 912 per Lord Hoffmann). Chitty on Contracts (29th Ed.) Vol. 1, para. 6-036 appears to me, as at present advised, to put the position too cautiously. The position in the case of a fraudulent representation may of course be different.[31]The third ground on which the judge rejected Primus’s misrepresentation case was very briefly stated. He said simply that the argument that the existence of WorldCom’s unlawful accounting practices commencing with the first quarter of 1999 rendered Ms McKibbin’s statements misleading did not stand up to investigation on the evidence of the position at the time, since the accounts for the first quarter of 1999 “show only an over-statement of US$85m” and this is “not an immense exaggeration compared with the total earnings of the company”. The judge could not accept that either this unlawful accounting or that (of US$65m) in the later third quarter accounts (relevant to the Second and Third Agreements) “would suggest any significant risk of corporate total collapse over a 10 year period”. In my view a contrary view is well arguable. The accounting deception appears also to have involved substantial understatement of costs in 1999. It was undertaken to enable the group to appear to maintain apparent growth. Accounting deception of this nature is inherently likely to continue and on its face quite likely to be accompanied by failure to tackle underlying problems affecting the actual lack of growth or profits and, not infrequently, fraud on the company, and to lead to wholesale collapse of confidence as and when discovered.[32]Whilst I have considerable scepticism about Primus’s prospects of establishing that representations were made on which it could or did rely in any relevant sense, I do not consider in all these circumstances that it would be right to preclude Primus from going to trial on this aspect of its proposed case either. I would therefore allow the appeal on it also, and grant permission for the proposed amendments relevant to it.

Defective performance

[33]The judge did not expressly address the question whether Primus’s pleaded case could offer any defence or any grounds for a trial on the counterclaim, which repeated the defence and claimed damages generally. In the absence of any quantification at all of any claims, it is difficult to see how he could have given it effect as a defence or set-off. He might still have left it open as an (unparticularised) counterclaim. If the action is to go back anyway to the Commercial Court for trial on the aspects which I have already considered, then it seems to me that it should be open to Primus to apply to the Commercial Court to amend its existing pleading to include allegations regarding damage (and/or, if so advised, to apply to stand over issues as to damage for the time being). Primus also wishes to amend to add a plea that the pleaded “outages” are evidence of breach of clause 4.1, and that aspect of Primus’s application to amend can also be renewed to the Commercial Court.

Conclusions

[34]I would allow Primus’s appeal against the judge’s decision to give summary judgment on WorldCom’s claim and to dismiss Primus’s counterclaim.[35]I would allow Primus’s application to amend its defence and counterclaim in relation to the Third Agreement and the Upgrade Agreement as I have indicated in paragraphs 19 and 20, and direct that Primus’s further applications to amend relating to economic duress and defective performance be renewed in the Commercial Court as indicated in paragraphs 21 and 33.[36]If and so far as Primus requires an extension of time to validate its notice of appeal against Colman J’s order of 25 September 2003 to enable the appeal against that (his principal) order to be determined, I would grant it. No submissions were presented in opposition to such an extension.[37]We will need submissions on the issues of the judge’s orders for costs below as well as the costs before us.

Sir Martin Nourse:

[38]I agree.

Ward LJ:

[39]I also agree.

Cited in 24 later judgments

and 15 more of the most senior