M & J Polymers Ltd v Imerys Minerals Ltd [2008] EWHC 344 (Comm)

[2008] EWHC 344 (Comm)

Case No 2006 Folio 1050

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 29 2 2008

Before

MR JUSTICE BURTON

Between

M & J Polymers LtdClaimant

Imerys Minerals LtdDefendant

Mr Matthew Parker (instructed by Messrs DLA Piper UK LLP Sheffield) for Claimant

Mr Peter Brunner (instructed by Messrs Stephens & Scown) for Defendant

Hearing Hearing dates: 4, 5, 6, 7, 11, 12, 13, 14 and 15 February 2008

Judgment

[1]The Defendant company, Imerys Minerals Ltd, was formerly known as English China Clays, which group was acquired by the Imerys Group in April 1999. The Claimant company, M & J Polymers Ltd, had been supplying dispersants, which are chemicals used in the breakdown of clay and other materials, to English China Clays since 1991. From 1999, the Claimant company continued to supply Imerys, and the most recent contractual arrangements between them, made in July 2003, were to expire in December 2004. Imerys decided to put out a proposed new contract for tender in September 2004, but in the event negotiations for a new contract began direct in October between Mr Michael Yates, the founder and managing director of the Claimant, and M. Christophe Brode-Roger, the director of purchasing for Imerys Paper Europe, and subsequently also with his superior M. Christophe Daulmerie, general manager of pigments for the Europe division, and continued until January 2005.

[2]The new supply contract, dated 25 January 2005, was signed on 26 January 2005. It related to the supply by the Claimant to the Defendant of 4 dispersants, Jaypol 1183 (“1183”), Jaypol BTC2 (“BTC2”), Jaypol 1160 (“1160”) and, insignificantly, Jaypol 1140. 1183, BTC2 and 1140 are carbonate dispersants, used to liquidise high solids suspensions of ground marble, for the purpose of producing paper coatings required to enable high quality printing. 1160, which will feature significantly in this judgment, is a kaolin dispersant, which is used to similar effect in relation to suspensions of kaolin (often referred to as clay), again for the purpose of producing paper coating. The 1160 is used in two processes, first in the refining of the kaolin and then in slurrying, the production of a liquid slurry to be used for coating high quality paper. An essential ingredient in all the dispersants as produced by the Claimant company is acrylic acid, which was in short supply by the end of 2004, but which, due to its well established contacts, the Claimant company was in a position to access.

[3]The supply agreement as finally negotiated recited that:

“The Buyers want to ensure a regular and reliable supply of the Products and the Supplier agrees to guarantee such supply under the terms and conditions of this Agreement.”

[4]Subject to various provisions for termination, the agreement had a three-year minimum term. The clauses which are material to the outstanding issues to be dealt with in this judgment are as follows:

“Article 5: Stock Level and minimum purchase 5.3. During the term of this Agreement the Buyer will order the following minimum quantities of Products: … 5.5 Take or pay: the Buyers collectively will pay for the minimum quantities of Products as indicated in this Article at 5.3 of Jaypol 1183, Jaypol BTC2 and Jaypol 1160 even if they together have not ordered the indicated quantities during the relevant monthly period. … Article 10: Warranty 10.1. Supplier warrants that the Product shall be (i) of the specified and ordered quality, (ii) free from defects, (iii) in strict accordance with any specifications or standards attached to this Agreement or to any Buyer Order and (iv) free from any and all liens and encumbrances. … 10.3 The purpose for which the Product are required has been made known to Supplier expressly. Supplier, based on the then state of the art shall make sure that the Product [sic] are compatible for that purpose. However, the Buyer shall make sure that the Supplier’s Product fit [sic] with its own application. … Article 16: Termination … 16.3 The Buyer may at its option terminate this Agreement with immediate effect and without incurring any liability to the Supplier in the event that the Supplier (i) delivers Product which fail [sic] to meet the significant specification requirements (physical and chemical properties) on more than two occasions in any given three month period, provided Supplier is informed timely [sic] of such breaches and such breaches are confirmed by an independent analytical laboratory ...”

Article 10: Warranty

Article 16: Termination

[5]The supply contract was purportedly terminated by the Defendant in May 2006 by a notice which was treated by the Claimant as an unlawful repudiation of the contract, which repudiation the Claimant accepted on 19 May 2006. These proceedings have followed, in which the Claimant company has been represented by Matthew Parker of Counsel and the Defendant company by Peter Brunner of Counsel. Both Counsel and their solicitors have worked hard and successfully to render the issues manageable and comprehensible, and in particular, with the assistance of accountancy experts who have not in the end needed to be called, all factual issues as to quantum have been most helpfully agreed.

[6]In circumstances which I shall explain, there are now only three issues for me to resolve in this judgment: i) Whether the 1160 dispersant delivered by the Claimant in 2005 was fit for its purpose and whether the Defendant company was entitled to refuse to accept any further deliveries of it as from 31 August 2005 (“the 1160 issue”). ii) Whether the sums due to be paid by the Defendant to the Claimant in respect of the period prior to what is now accepted to have been the repudiatory breach by the Defendant in May 2006 are recoverable in debt, in respect of the price of the minimum quantities of dispersants pursuant to the “take or pay” clause set out in paragraph 4 above, or by way of damages (the “penalty issue”). iii) Whether there was a shortfall in orders placed by the Defendant for 1183 in the month of January 2005, and if so in what amount (the “January orders issue”).

[7]Before I deal with these three surviving issues, it is necessary to set out the six issues, all of which were in play during the course of this hearing, but which before the end of it had been abandoned by the Defendant. They were as follows: i) Three fraudulent misrepresentations. The Defendant company pleaded and alleged as against Mr Yates of the Claimant company three fraudulent misrepresentations(a) as to the underlying cost of raw materials, said to be a relevant factor in the agreement of the price

(b) as to whether the Claimant company had or had not entered into a contract with its suppliers for the acquisition of acrylic acid

(c) as to the term of such acid supply contract. Substantial damages for deceit were claimed in respect of each of these three fraudulent misrepresentations, which were also relied upon as retrospectively discharging the Defendant company from liability in respect of its (not then admitted) repudiation. ii) Agreed variation. The Defendant asserted an oral variation by Mr Yates so as to excuse them from what was otherwise a very substantial shortfall in orders for BTC2 in January and February 2005. iii) Further oral variation. Again an alleged oral agreement by Mr Yates was relied upon in August 2005 so as to excuse a substantial shortfall in the placing of orders for 1183 between August and December 2005. iv) Implied term/variation/estoppel. The Defendant asserted a case excusing them in respect of the shortfall in the placing of orders in January 2005, in respect of 1183 (in the alternative to the January orders issue), BTC2 (in the alternative to (ii) above) and 1160. v) May 2006 termination. The Defendant asserted that it was entitled to terminate the contract by its notice in May 2006 referred to in paragraph 5 above pursuant to a clause, Article 5.6, described as the “meet or release clause”. This would have discharged them from any liability under the contract from May 2006 until the expiration of the minimum 3-year term in December 2007. vi) Mitigation of loss. The Defendant made a positive case that the Claimant failed to mitigate its loss resulting from its (then unadmitted) repudiation, based upon the Claimant’s failure to sell the Defendant dispersant after May 2006, at the lower price specified in the meet or release clause or at all.

[8]All of these defences or counterclaims were abandoned at various stages during the hearing. Mr Parker of Counsel places significance on the fact that some in particular of these allegations were ever made or pursued or persisted in as a significant factor in assessing the credibility of the Defendant company, which is material to the resolution of the outstanding 1160 issue. In particular: As to (i): The allegations of fraud against Mr Yates were, I am entirely satisfied, wholly unfounded. They were pursued through cross-examination of Mr Yates, which he dealt with with complete integrity, and up until just prior to the calling of M. Brode-Roger for the Defendant company, who would have been, as had been M. Daulmerie, severely taken to task in cross-examination, but in the event was not called at all. As to (ii): The allegation of the oral agreement in respect of the January/February BTC2 orders was again clearly unfounded, and once again Mr Yates was cross-examined on the basis of there being such an oral agreement, and by virtue of its abandonment M. Brode-Roger did not go into the witness box to support it. Had he done so there were documents, particularly his own email of 14 March 2005, which he would have had great difficulty in explaining as anything other than inconsistent with the existence of such an alleged oral variation. As to (v): The case put forward to justify the purported notice under the meet or release clause, Article 5.6, seemed, from the very outset of this hearing, to be completely unsupportable. In the light of the abandonment of the case I need say no more, but it is of a piece with the matters to which I refer below, which indicate that, from the very moment in January 2005, when the Defendant company realised that it had no alternative but to enter into the supply contract with the Claimant in order to obtain the dispersant required, it sought to find methods to extricate itself from that contract. As to (vi) The assertion of failure to mitigate was an extraordinary one. Although the document was not in the trial bundle, Mr Yates, when cross-examined, referred to an email sent to him in June 2006, with a copy to M. Brode-Roger, in which it was made clear in terms that the Imerys Group would have no further business dealings with the Claimant company unless it abandoned its claims against them arising out of its supply contract. That revealed the mitigation argument to be totally unsustainable.

The 1160 Issue

[9]The dispute is whether the 1160 delivered in 2005 was supplied in breach of the Defendant’s obligation under Article 10.3 above to supply product compatible for its purpose, and if so: i) Whether the Defendant was entitled to refuse, at a meeting on 31 August 2005, to take any more 1160 and is thereby absolved from any liability thereafter to order/take the minimum quantities of (or any) 1160 until the determination of the supply contract in May 2006. ii) Whether the damages for the Defendant’s repudiatory breach of contract, as it is now admitted to be, in May 2006, namely the Claimant’s loss of profit until what would otherwise have been the expiry of the minimum term of the supply contract, must exclude any loss of profit in respect of non-acceptance by the Defendant of the 1160. iii) Whether the Defendant is entitled to counterclaim for breach of Article 10.3, the sum it allowed to Arjo Wiggins, one of its customers, in respect of a delivery of slurry, in the sum of £11,300 (“the Arjo Wiggins counterclaim”). For all these sub-issues, the central question is whether the Defendant can establish that the 1160 delivered by the Claimant was unfit for its purpose, in breach of Article 10.3, and whether the Defendant was justified in what was effectively its anticipatory rejection in August 2005 of any further deliveries.

[10]There are some distinctly unusual features in this case, which render the credibility of the Defendant and its witnesses all the more significant in a case such as this: i) The Claimant had delivered 1160 to the Defendant company and its predecessor for 10 years or more, and there had never been any complaint. Significantly there were no complaints or problems since 1999, when the ingredients of the dispersants were altered at the Defendant’s request (to comply with the US Food and Drugs Administration’s requirement in relation to the content of paper which might be used in contact with food) to include acrylamide. Mr Kostuch, the Defendant’s Technology Development manager, confirmed in evidence that, over the 5 years prior to the events in issue in these proceedings, there had never been a problem with the 1160. ii) There was, it is accepted (and unchallenged between the expert witnesses), no material change between the 1160 that had been delivered over those many years and the 1160 supplied in 2005. iii) The Defendant did not in fact reject any delivery of 1160 (of which they took, under the January 2005 contract, 1522 tonnes) prior to 31 August 2005 (indeed they did not reject the 42 tonnes which were ordered in August and still in shipment as of that date): nor did they raise any complaint, problem or query with the Claimant at all in relation to those deliveries until in an email, sent on 30 August to Mr Yates at his office, when he had already left and was on his way to the quarterly meeting fixed in Cornwall for the following day, there was simply listed an agenda item:

“1160 quality issue”. iv) They used all the 1160 that was delivered (including the 42 tonnes) as above. None was returned. v) The Defendant has not even alleged that the 1160 delivered was in breach of its specification (set out in a “Confidential Production Specification” as a signed annexure to the January 2005 contract, by reference to e.g. pH content, active sodium acrylate content, viscosity, specific gravity and compliance with FDA). Had the Defendant done so, i.e. alleged a breach of Article 10.1 of the contract set out in paragraph 4 above, then, in order to terminate its obligation under Article 16.3, it would have had to establish failure “to meet the significant specification requirements (physical and chemical properties) on more than two occasions in any given three-month period”, given timely notification of such alleged breaches and had them confirmed by an independent analytical laboratory. vi) As set out in paragraph 2 above, there were two uses for 1160, first in the refining process and then in the slurrying process. Even now the Defendant has not suggested (subject to a matter relating to Mr Kostuch to which I shall refer below), and certainly not established, that the 1160 was unfit for its purpose in relation to the refining process: and Mr Kostuch agreed that two thirds of the 1160 would in fact have been used for refining. vii) It is now known that the Defendant has internal specifications by way of a yardstick for the slurry produced from kaolin after the slurrying process, by way of a measurement of viscosity of the slurry. One such specification relates to the measurement of the difference in viscosity (measured in centipoise) as between the start of the process (To),as at one hour later (T 1), the requirement being that the difference should be 150 centipoise or less. A second yardstick, that the viscosity in centipoise should not measure more than 1000 24 hours later (T 24), does not appear, on the evidence, to have featured even as an internal specification for the Defendant’s purposes until sometime after August 2005. However, what is of considerable significance is that at no time prior to 31 August meeting and the refusal to take any further delivery of 1160 was any domestic specification with regard to the slurry produced with 1160 (or at all) ever disclosed to, or discussed with, the Claimant company, whether by reference to To, T 1, or T 24. viii) It is common ground that the performance of a kaolin dispersant can be affected by the clay itself – its rheology (or flowability). Clay is variable and, for example, in evidence before me was a schedule of “Pit wash data – flowability (% solids) – weekly mean 2005” in respect of relevant pits, showing reduced flowability levels in a number of those pits during relevant weeks in 2005. It is common ground that a different dispersant, Acumer 9300, which was used from time to time by the Defendant, was a superior product to 1160 for this purpose. A test carried out in 2005 by the Defendant’s investigators, including Mrs Dawn Roberts (who gave evidence before me), looking into “slurry rheology issues at Tunadal” (which had nothing to do with the Claimant, or 1160) reported, after a test on the slurry using Acumer 9300, that “the adverse rheology was a function of the clay and not the dispersant”. ix) Article 10.3, set out in paragraph 4 above, which is the central obligation in this case, contains a two-way obligation: a) The “purpose for which the product [is] required has been made known to [the] supplier expressly”. b) The “supplier, based on the then state of the art, shall make sure that the product [is] compatible for that purpose”. c) “However, the buyer shall make sure that the supplier’s product [fits] with its own application.”

In that context, what is set out above, particularly at subparagraphs (i), (ii), (v), (vii) and (viii), is even more significant.

[11]It is against that background and, as will be seen, in the light of the skimpy evidence, if any, of any relevant customer complaint, that the credibility of the Defendant’s assertion of the unfitness for purpose of 1160 in 2005 falls to be considered, but also in the context of the following: i) I have already set out in paragraph 8 above the unsupported nature of many of the other allegations against the Claimant which have now been abandoned, but very belatedly. ii) The Defendant was determined from a very early stage to find a way out of its contractual obligations to the Claimant. On 20 January 2005, M. Daulmerie sent an email to his colleague M. Willaert, with a copy to M. Brode-Roger, which (in translation from the French original) reads as follows in material part:

“Have you got any ideas about any solutions (legal if possible!) of signing this contract without getting Imerys committed? What would happen if for example the contract was signed by a shell company that “would disappear” when we don’t have any further need of M & J. I imagine that your long experience has given you the opportunity to see all the twisted moves ... any ideas for us?”

In a further email sent by him to the same parties 20 minutes later, M. Daulmerie said “At the worst, it seems to me that we’ll have to sign the contract to have the product... and we will not honour it as soon as we can and therefore we will leave M & J to start the legal battle”. M. Brode-Roger the following day prepared an action plan whose target was to “stop business with M & J (asap)”. In the evening of the very day the contract was signed M. Daulmerie circulated to seven recipients, including M. Brode-Roger, the Defendant’s in-house lawyer M. de Voghel and Mr Kostuch, an email concluding “we must register all acts from M & J that could constitute breaches of its obligations so that we build our case”. iii) This presumably was the starting point for what was subsequently described in an email of 7 June 2005 between a Mr Pring of the Defendant and a Mr Oak, the Defendant’s Sales Manager, as a “dossier of problems caused by the dispersant that was used” which Mr Kostuch was said to be “trying to compile”. As will be seen, there was not much to put in that dossier, which does not seem, in the event, to have been produced. Significantly, in April 2005, when there were some rheology problems being discussed between members of the Defendant’s team, one of the managers suggested that Mr Kostuch should get in touch with Mr Yates – Mme Briand, in an email to Mr Kostuch with copy to M. Brode-Roger, said “If it is a quality problem from M & J we should meet him [Mr Yates] and talk about this problem”. No one ever did contact Mr Yates, and it became clear why that was so, in the course of evidence, when Mr Kostuch accepted that he had express instructions not to get in contact with Mr Yates. At Day 5, pp74 to 75 of the transcript, Mr Kostuch told me that he “was not allowed to contact” the Claimant. It was put to him by Mr Parker of Counsel that the reason why he did not contact Mr Yates is “because Imerys wanted to build as much evidence as it could about a potential breach of contract on the part of M & J without giving M & J any opportunity to redress it”. Mr Kostuch replied “That is right”. iv) I have already set out in paragraph 10(iii) above the fact that there was no mention to the Claimant of any complaint right up to the day before the 31 August meeting, and then only in the briefest of references in the proposed agenda belatedly sent on 30 August. On the day before this, 29 August, the in-house lawyer, M. de Voghel, sent an email to, among others, M. Brode-Roger and Mr Kostuch, referring to a technical report that Mr Kostuch had prepared, saying “I think that it is better not to refer to the technical report at this stage. We don’t want to give them more information than required”. In fact, the report, such as it was, was in the event handed over, but only after a significant change in it. Mr Kostuch’s first draft stated “Contractual obligations (‘take-or-pay’) forced us to continue to use the contracted amount in our refining process, where we could use other parameters to address any deficiencies in the performance of the dispersant”. To Mr Kostuch’s discredit, before the report was given to Mr Yates, a change was made in this passage, so as to read:

“Use of the dispersant in refining has shown similarly disturbing effects. With consequent impact being increased dose being required, drop in refining efficiency and cumulative impact of final product rheology when made into a high solids slurry (as required by end application).”

This statement Mr Kostuch accepted in evidence was untrue, and hence a falsification of his earlier draft. Although he sought to say that there might have been a problem in the continued use of 1160 in the refining process (where, as set out in paragraph 10(vi) above, two thirds of it was in fact used), because of the possibility of a risk of some unspecified reaction between 1160 and any different dispersant that might be used in the subsequent slurrying process, the Defendant did in fact go on using 1160 for refining. There is no evidence, expert or otherwise, to support Mr Kostuch’s latest suggestion; and, on any basis, what he said in the report was wholly unjustifiable. v) In the letter which was handed over to Mr Yates at the 31 August meeting, when the existence of the alleged problems and the anticipatory rejection were sprung upon him, the following statement was made:

“Until such time as you can supply us with Jaypol 1160 which delivers the same kaolin slurry properties as the product which you were supplying previously, and can be used for the same purposes for which it was successfully used previously, we will no longer take any more of this product from you. We will not be paying for such product either. It is not fit for the purpose to which we want to put it, and you were aware of that purpose. It no longer meets with the description of Jaypol 1160, the product with which you have supplied us for some considerable time.”

As I have set out above, there is no suggestion whatever that the 1160 did not comply with its description/specification.

[12]It is in those circumstances that Mr Brunner accepted in his closing submissions that his clients would be facing considerable scepticism in their attempt to establish their case on the 1160 issue.

[13]The legal structure for resolution of the 1160 issue was in the event common ground, although it is not one whose analysis, though logical, has any particular support in the reported cases. I have been referred to Simpson v Crippin [1872] LR 8 QB 14, Repetto v Millar’s Karri & Jarrah Forests Ltd

[1901] 2 KB 306

and Taylor v Oakes, Roncoroni & Co

[1922] 127 LT 267

, though none of these is particularly on all fours. The legal analysis, effectively propounded by Mr Parker and agreed by Mr Brunner is as follows: i) This supply contract can be seen as consisting of severable instalment contracts, not only in respect of each monthly call off, but in respect of the deliveries of the four separate products, so that e.g. a September 2005 delivery of 1160 can be seen as a severable contractual obligation, even though the supply contract continued in respect of the monthly orders of the other three products (until its repudiatory termination in May 2006). ii) The Defendant can establish an anticipatory right to reject each instalment of 1160 if it can show that the product had been delivered in such breach of contract that it amounted to a repudiatory, fundamental or very serious breach and/or that it was more probable than not that future instalments of such product would be so delivered (and for so long as they would be so delivered).

[14]The effect of this, on the facts of this case, must be seen in the context of the unusual nature of Article 10.3 as set out above (particularly where there is no breach alleged of Article 10.1). Mr Parker points out that the whole of Article 10 is headed up “Article 10: Warranty”, and it is apparent that Article 10.1 would be likely to be construed as only a warranty, as opposed to a condition, by virtue of the limitation on the right to terminate by virtue of the procedures prescribed in Article 16.3, set out in paragraph 4 above. But with regard to Article 10.3 Mr Parker, accepting, as he does, that its statutory equivalent – s14 of the Sale of Goods Act 1979 – would be a condition, does not dissent from the formulation above.

[15]What this means therefore is that the 1160 delivered prior to 31 August 2005 (albeit never complained about) must be proved to have been, if and when further supplied, in serious breach of Article 10.3, and it must be shown that it is more likely than not that such serious breach would continue if further deliveries were made and accepted. The further unusual feature of this case is that Mr Yates, such was his desire to keep an important commercial relationship alive, did not argue with the Defendant, but from September onwards concentrated his efforts on producing a different dispersant, Jaypol 9160, which could, on any basis, meet the Defendant’s requirements. Mr Kostuch accepted in evidence that the 9160 was found to be effective in laboratory tests in November 2005. Even though 9160 was thus available, and Mr Yates was prepared to supply it to the Defendant at the same price as the 1160 and otherwise in accordance with the supply contract, the Defendant still found a way to string Mr Yates on until they felt able (unsuccessfully as it has turned out) to terminate the whole contract in May 2006, by purported operation of the meet or release clause. The correspondence, and consequently Mr Yates’ efforts to resolve the position, petered out in January 2006, when M. Brode-Roger failed to respond to an email from Mr Yates of 17 January 2006, which posed a question as to what tests the Defendant had carried out which the Defendant was going to find it difficult to answer, and suggested a meeting to resolve misunderstandings. To this email M. Brode-Roger did not reply, cheerfully communicating to a number of people, including Mr Kostuch, by internal email “I do not intend to respond”.

[16]What then is the evidence of whether the 1160 was delivered in such serious breach in 2005 (after the previous problem-free period and with no change in its nature or content)? Of the 1522 tonnes delivered, Mr Kostuch calculates (as set out in paragraph 10(vi) above) that two thirds were used in the refining process as opposed to slurrying. I have already referred in paragraph 11(iv) above to Mr Kostuch’s acceptance that he cannot justify the statement he made in his altered technical report, and the evidence, including contemporaneous documents, shows that 1160 was satisfactory for refining: see for example the statement made by Mrs Dawn Roberts, the Defendant’s very experienced Process Technician in her email of 3 June 2005, where she says that “lab tests suggest that, when used for refining, Jaypol 1160 works as well as the other dispersants trialled”. Only approximately one third therefore was used for slurrying, and Mr Kostuch estimates that such 500 or so tonnes would have produced about 100,000 tonnes of slurry. It is that 100,000 tonnes of slurry therefore which must form the basis of any case that the dispersant, 1160, used in producing it was unfit for its purpose within Article 10.3.

Customer Complaints

[17]These normally form the basis of claims of this kind, where an ingredient used in the manufacture of a product for onward sale is said to be unfit for its purpose, such as to render the onward product defective. Allowance will always be made for the absence of any actual witness from third party purchasers, because the court recognises the potential damage to goodwill that can be caused if a valued customer has to be dragged along to court to give evidence of some historic complaint. However, in this case, not only is there no evidence from any such customer, but there are no letters of complaint whatever. Mr Pinder was, at the time, the Defendant’s Commercial Services Manager, one of whose duties was to collate information of complaints and to have them investigated, and to deal with what are called “concession sales”. He gave evidence, and confirmed that: i) there were no occasions in the relevant period when any slurry was sold on to a customer other than at full price, nor any occasion when a customer failed to pay: and only in the one case of Arjo Wiggins, to which I shall refer, was any credit given. ii) there were only, in the relevant period, six complaints relating to quality issues with regard to slurry supplied, out of 171 complaints in all – plainly a tiny proportion of total complaints.

[18]He gave evidence in relation to those six, and it is fair to say that a combination of his own very fair approach towards the Claimant and the robust and penetrative cross-examination by Mr Parker effectively neutralised any support that the Defendant’s case might otherwise have drawn from them. i) Arjo Wiggins. Although Mr Pinder did not recollect the email which he sent on 3 May 2005 so stating, Mr Pinder confirmed in evidence that he accepted that the Arjo Wiggins matter was of “little consequence at the time”. Significantly, he was not able to say - nor was there any evidence from any other witness in that regard - that the problem with the Arjo Wiggins slurry was caused by 1160. ii) Sappi Mastricht. Mr Pinder accepted in evidence that the clay was slurried at Lixhe, not in Cornwall, and hence had nothing to do with 1160. iii) Iggesunds. Mr Pinder accepted that the consignment had not been slurried with 1160. iv) MD Plattling. The complaint, as recorded in the Defendant’s internal report, did not relate to viscosity, but to lumps in the product. In any event, Mr Pinder was not able to say either that this was a relevant complaint or that it related to 1160. v) Caledonian Paper. There are two separate internal reports from August/ September 2005, but Mr Pinder was unclear as to whether this related to the same delivery or to two separate deliveries. As each delivery was of 1000 tonnes, the complaint related either to 1000 or 2000 tonnes. The significant factor is that Mr Pinder was not only not able to confirm that the problem related to viscosity (indeed Mr Pinder confirmed – a matter to which I shall return – that his own belief was as recorded in one of the Caledonian reports, namely that the slurry supplied was not out of specification), but in fact another cause of any problem was expressly recorded in the complaint form: Mr Pinder confirmed that the customer itself was suggesting that the complaint was not in fact the Defendant’s fault at all, but was a problem with the customer’s own equipment – “they discovered that they had been having problems with the sealing water on one of the transfer pumps ... this is assumed to be the reason for the discrepancy”.

[19]Mr Kostuch gave evidence that, at the end of March/early April, two consignments of slurry delivered to Sappi Blackburn were rejected, and were resold to somebody else. There were no documents at all relating to this, and Mr Pinder, the man who would have been responsible and knowledgeable in this regard, did not give any evidence about it. The only other evidence bearing on customers came from Mr Bell, the Defendant’s Quality Control and Planning Manager. He gave evidence of four “concessionary sales (customer concessions) granted to ship at lower than specification solids content, a consequence of overcoming the gelling problem via over-dilution of the slurry”. Mr Bell did not identify these customers, who may or may not have been the same, in whole or in part, as those listed and identified by Mr Pinder, but Mr Pinder certainly identified no other customers, and he confirmed, as set out above, that, save in respect of Arjo Wiggins, full price was charged and received in respect of all deliveries during the relevant period. It is in this regard significant that both Mr Kostuch and Mr Pinder in evidence confirmed their agreement with the statement of Gary Oak the Sales manager, recorded (as referred to in paragraph 18(v) above) in the internal report relating to Caledonian Paper that:

“During August Imerys were experiencing a problem with the effectiveness and reproducibility with its dispersant. To the point that keeping viscosity at an acceptable level meant that solids was compromised. At no point during this period did Imerys supply out of specification or more importantly believe that the product was not fit for purpose.”

[20]I have mentioned above the Defendant’s own internal specifications, relating to the “spread” between To and T 1 and – although not during any relevant period – to T 24. Mr Bell explained how there was a system operated whereby production managers would approach a commercial manager for permission to sell product “out ofproduction specification”. He described how, during the whole of 2005, there were 72 production concessions from Par slurry plant, of which 36 were “rheology issues”: we have a sheet listing such production concessions, although there only appear to be 28, of which one apparently relates to solids content as opposed to a deviation from the centipoise measurement at To – T 1 (there are seemingly none re T 24). They do not identify whether all the viscosity issues relate to production using 1160. The 2005 list is certainly very considerably longer than the list, for example, for 2002. The total tonnage involved is something under 39,000, which means that, if it all relates to slurry produced with 1160, approximately two fifths of the 100,000 tonnes estimated by Mr Kostuch were produced in non-conformity with the Defendant’s internal viscosity specification during 2005. However: i) As discussed in paragraph 10(vii) above, that internal viscosity specification was never at any material time disclosed to the Claimant, nor made a requirement. ii) As confirmed by Mr Oak, Mr Kostuch and Mr Pinder, no slurry was supplied to a customer which the Defendant believes to have been out of the customer’s specification (see paragraph 19 above). Certainly save as above, there is no evidence of any customer complaint. iii) All sales to customers were at full price.

Internal Investigations and Tests

[21]Leaving aside any question of impact on customers, I turn to the Defendant’s internal investigations and tests, always bearing in mind that, until September 2005,(a) no mention of them nor of any complaints was made to the Claimant

(b) no indication was given to the Claimant of what the Defendant’s internal viscosity specification was, not to speak of any suggestion that the slurry produced by 1160 did not comply with it. The tests were largely carried out by Mrs Roberts. The starting point is a report by Mrs Roberts dated 28 May 2004, when she carried out a test using 1160 and, by way of comparator, another dispersant, CED 3546. It is significant that both dispersants were regarded as acceptable, even though both dispersants at the optimum dispersant dose recorded a centipoise measurement at T 24 of more than 1000.

[22]There is a number of Mrs Roberts’ reports in the bundle, which were fully considered during the course of the hearing, dated 22 March, 20 May, 24 May, 26 May, 3 June and 9 June 2005. While recording a problem with viscosity of slurry, by reference to the Defendant’s internal specification, the reports are largely inconclusive as to the role played by 1160 or its comparative performance. By 7 June 2005 there is the first reference, referred to in paragraph 11(iii) above, to Mr Kostuch’s attempted dossier. On 20 June 2005, a memo is sent by M. Brode-Roger to M. Daulmerie stating “we are on the good way to have enough technical evidences showing that 1160 is not fit for use. This will give us the opportunity to terminate M & J contract”. M. Brode-Roger, in an email to, among others, Mr Kostuch and Mrs Roberts, states “My concern is to have solid arguments that can be used from a legal aspect if necessary”. A minute of an internal meeting of 26 June 2005, attended by M. Daulmerie, M. Brode-Roger, Mr Kostuch and Mme Salmon records “We need to stop the current contract with M & J and the only way is to [invoke] Article 16.3 ... we have problems with 1160 that could be enough to stop the contract. We need to have an official report about quality issue. Today, we do not have a written proof of a quality issue from M & J.” Consequently there was no sufficient proof, on the Defendant’s own case, as of 26 June 2005, two months before the 31 August meeting, and subsequent to the reports that I have set out above: and of course in the event there never was any attempt to go down the route of termination under Article 16.3.

[23]It is therefore necessary to look at what happened between 26 June and 31 August. A further report was sent by Mrs Roberts to Mr Kostuch and others on 6 July 2005. This too was inconclusive. So also was her further report of 19 August 2005, which included the following:

“Observations ... (a) Acumer 9300 outperformed Jaypol 1160. This is in line with other laboratory studies conducted by Production Chemistry ... Further investigation Historical data was viewed and it was noticed that the flowability of material from Blackpool pit had recently dropped from 61 to 58. Currently, the weekly average is 59.5. Recommendations 1. Par slurry plant to increase the dose of Jaypol 1160 ...based on knowledge of Jaypol 1160 gained during laboratory experiments. … 2. A plant trial with Acumer 9300 to be treated as a high priority ...”

Further investigation

Recommendations

[24]Mr Bell’s response to this report, in an email of 19 August 2005, was no doubt exactly what M. Brode-Roger wanted to hear:

“Dawn’s report ... proves beyond doubt that Jaypol 1160 is an inferior kaolin dispersant and produces a slurry product that does not meet Imerys’s specification. Therefore our slurry customers could construe the product as “not fit for purpose”.”

[25]But it was far from the “written proof” postulated in the meeting of 26 June, and in my judgment this is not a conclusion that can be properly drawn from Mrs Roberts’ report. Mr Kostuch was frank in his evidence that, from a scientific basis, by 31 August they had not established a case that 1160 was the cause of a quality problem: his evidence is that there was jeopardy to a business that was worth about £30m a year, and “we are talking about dispersant that costs significantly less than that, so it was a commercial decision”.

[26]Mr Brunner points to the only relevant subsequent internal reports, namely by Geoffrey Bennett, the group leader of the Physical Testing and Production Chemistry sections of the Defendant’s laboratory, dated 31 August and 9 November 2005. These add little by way of further tests, but contain a convenient summary of all the tests done. It is quite apparent that he was concentrating on the T 24 specification, which was certainly exceeded in the majority of the tests summarised, but which carries with it the problems referred to in 10(vii) and 20 above. His conclusion as at 31 August 2005 was that:

“The results of the Imerys laboratory investigation have shown that the performance of several consignments of Jaypol 1160 was inconsistent. In some instances it resulted in the Imerys product being outside of the marketing specification, as evidenced by the increase in viscosity after one hour ... Inconsistencies of this order are not conducive to Imerys Minerals producing products that are uniform and consistent in their physical properties.”

[27]He concluded his 9 November report: “It is believed that the findings described in this report demonstrate that, certainly between April and August this year, the composition and quality of Jaypol 1160 showed considerable variation. It is also believed that this variation in quality had an adverse [effect] on the quality of Imerys’ products. This in itself led to occasions when Imerys’ products were not in a state deemed fit for the customers’ purpose.

[28]Mr Bennett accepted in evidence that he at no stage designed or carried out a test to compare the quality or the performance of a sample of 1160 delivered during 2004, as to which no complaint had been made, as compared with the 1160 delivered during 2005.

The Independent Experts

[29]For the purpose of this litigation, both sides instructed independent experts, Dr Stephen Rimmer, who has considerable expertise in the fields of the synthesis, reactions and characterisation of polymers, and Professor Paul Luckham, the Kodak Professor of interface science at the Department of Chemical Engineering and Chemical Technology at Imperial College, London. Both experts are extremely eminent and carried out diligently a good deal of helpful work, although much of what they did was dedicated towards the meet or release issue on which, not least in the light of Dr Rimmer’s opinion, the Defendant belatedly abandoned their case, as set out in paragraph 7(v) above. In my judgment, Dr Rimmer’s expertise was the more relevant of the experts and, indeed, in many respects in the event it was the work of Dr Rimmer that was the more persuasive. That said, there was not, in the end, a great deal of difference between the two experts, and their conclusions can be summarised in the following way, not least by reference to very fair concessions made by Professor Luckham. i) There is no evidence of any change in the composition or nature of 1160 as between what was supplied by the Claimant before 2005 and that supplied under the 2005 supply contract. ii) Professor Luckham accepted that, when assessed, even in accordance with the Defendant’s internal specifications, the 1160 produced during 2005 produced broadly satisfactory results. He added the caveat that the real criterion which the Defendant has to use is customer satisfaction. So far as that is concerned, notwithstanding Mr Kostuch’s reference to potential jeopardy of business, referred to in paragraph 25 above, the evidence of lack of customer satisfaction is, as set out in paragraphs 17 to 20 above, on any view insignificant. iii) Professor Luckham accepted that natural variability in the clay could produce problems even for perfectly effective dispersants. iv) The tests carried out, particularly those during the hearing, by both Dr Rimmer and Professor Luckham, showed that there was a change in the nature of the clay in 2005 which created viscosity problems both for 1160 and indeed also for the superior product Acumer 9300.

[30]There were problems in the spring and summer of 2005 in relation to the production of slurry from some of the clay, at a time when 1160 was, as it had not previously been prior to the supply contract by which minimum quantities were required to be taken, the main dispersant used by the Defendant. That may have been due to increased pH content in the clay – see for example Mrs Roberts’ report of 3 June 2005:

“Before we jump to the conclusion that Jaypol 1160 is the demon, it has to be said that there is no doubt that higher slurry pH values = higher viscosity. Note that most of these samples are at the top end of the spec (7.2-7.8) or above.”

The impact of biocides, mentioned as a possibility by Mrs Roberts in her 3 June 2005 report, was ruled out by her in her 9 June report, although Professor Luckham left that open as a possibility. But the real issue is as to whether it was a requirement for the 1160 delivered by the Claimant to work equally well with any quality of clay. It is quite apparent that this was not the expectation as to Acumer 9300, as addressed by Mrs Roberts in September 2005, discussed in paragraph 10(viii) above. That very report shows that there were indeed serious flowability problems with the 2005 clay, which were accepted as absolving the Acumer dispersant from any criticism. The “poor rheology material that has been in the system” is referred to in the Caledonian Paper internal report in August 2005 (referred to in paragraph 18(v) and 19 above). I have already referred to the wash data in paragraph 10(viii) above, and the drop in flowability recorded by Mrs Roberts in her 19 August 2005 Report (paragraph 23 above).

[31]Mr Brunner accepts that it is not his case that 1160 would be expected to cope with extreme qualities of clay, although he is not able to give any indication of where in those circumstances the line is to be drawn. However, notwithstanding the absence of any contractual requirement in relation to the centipoise measurement of viscosity of the slurry, it is clear that, for the most part, 1160 did indeed cope very well, as is clear from the evidence above; and there is not in my judgment the beginnings of a case that, if the complaint against 1160 is simply that it was not coping during the summer months of 2005 because of, and notwithstanding, particular difficulties in the clay, that would itself justify the stance taken by the Defendant in August 2005 by way of anticipatory rejection – i.e. almost by definition any clay problems would be settling down again into the routine which had proved successful for so many years, so that the necessary probability for the future, as per paragraph 13(ii) above could not be established, at least without further trial.

[32]What the Defendant has therefore to establish is an entitlement to reject 1160 (unlike Acumer 9300) because it does not work perfectly with every kind of clay. Given the conclusions of the independent experts that 1160 worked satisfactorily with all save the 2005 clay, and that the 2005 clay (not least in the case of Professor Luckham’s tests on it during which, uniquely, a skin appeared on the top of the slurry) did appear to be inferior, such as to cause difficulties with any dispersant, not just 1160, this is the case which the Defendant must establish.

[33]The starting point must be Article 10.3. As discussed in paragraph 10(ix) above, this clause places obligations also upon the Defendant – obligations which I am entirely satisfied it was at all times normally – until there came the desire to extricate itself from the supply contract – content to fulfil e.g. by increasing dosages, diluting solids percentages and generally adapting to the variability of the kaolin. The approach of the two sides to their contractual collaboration, as it had previously been, had not been markedly different. Mr Yates said in examination-in-chief on Day 1 (transcript pp 127-8) as follows:

“Q: Mr Yates, what precisely was the purpose for which the product was required? A: Just the purpose that was explained in the request for information [at the time of the October 2004 tender] ... that it would act as a ... dispersant for the kaolin in general terms. There was never any specific information about which grade of product they were using it on or whether they were changing that grade from time to time or making changes to their process ... we had been supplying to them for at least 8 years.”

[34]He explained that the specification as to his product as far as viscosity is concerned was as to the viscosity of the dispersant, and not as to the viscosity of the clay or the slurry:

“If the kaolin changes, if the customer requirement changes, they do not come back to me and say “... You need to look at the dispersant”

. Imerys actually choose which dispersant they use on the applications. They have a whole laboratory devoted to testing new dispersant and products that are offered to them. They decide what they are using on which applications. It is not in my control what they do with it.”

[35]Mr Kostuch said (Day 4, page 169) as follows:

“... basically, as [Mr Yates] indicated in his evidence, we had worked together for many years and my feeling was that I could just take 1160 and use it because I had used it in the past. And that is the way, if we actually look in history, that is the way dispersants are developed, is that you work together and basically you say to the supplier “This product works. Identify the parameters within your own process which will deliver the same product consistently.”

[36]The best indication of this approach is by reference to Mr Kostuch’s first reaction to the problems, in an internal email widely distributed on 22 April 2005, at a time when there had been some problems with slurrying outside the UK (a matter which he at trial accepted he no longer ascribes as being the responsibility of 1160). “It appears that we are having a number of problems with makedown of kaolin slurries using M & J 1160 – this could be for a number of reasons but is not in line with what we would have expected from laboratory work. While this is studied further I would suggest:(i) M & J 1160 is used in Devon and Cornwall for refining and slurrying.

(ii) Acumer 9300 is used for kaolin slurrying in all other locations ... I apologise for yet another change but we need to act to (a) comply with our supplier’s contractual obligations to M & J (unless we find we can prove they are supplying product which is out of specification.”

I apologise for yet another change but we need to act to

[37]Right through to the letter delivered at the meeting on 31 August 2005, from which I have quoted in paragraph 11(v) above, the Defendant hoped or expected that they would be able to show that the 1160 was out of (its) specification. It was not. It is only belatedly, and in my judgment without justification, that the Defendant has sought to allege that 1160 was in breach of Article 10.3, inter alia by referring to internal centipoise specifications which were never disclosed to the Claimant as a requirement or at all. This approach is perhaps most clearly manifested in the evidence of Mr Kostuch, when he was cross-examined by Mr Parker by reference to Mrs Roberts’ May 2004 report when (as set out in paragraph 21 above) she regarded both 1160 and CD3546 as acceptable, even though they exceeded 1000 centipoise at T 24. I asked Mr Kostuch why such was the case and he said:

“Well ... at the time those numbers, those measurements were adequate.”

[38]I am satisfied that it was only when the Defendant was searching round for a way of avoiding its obligations that it sought to raise the hurdle and to assert a breach of contract. I am entirely satisfied that: i) The Claimant was not in breach of Article 10.3: it did not produce 1160 otherwise than in accordance with its contractually provided specification, and the 1160 it supplied was not incompatible with the purpose for which the Defendant required it. ii) The Defendant was not entitled to reject, anticipatorily or otherwise, any deliveries of 1160 after 31 August 2005. iii) The damages claim in respect of the Defendant’s repudiatory breach of May 2006 must be calculated on the basis that the Defendant would otherwise have remained liable to accept deliveries of 1160. iv) The counterclaim in respect of Arjo Wiggins fails. Not only am I satisfied that, in any event, the Claimant was not in breach of Article 10.3 but, for reasons which are clear from my assessment based upon the evidence of Mr Pinder, as set out in paragraph 18(i) above, I am not satisfied in any event that the £11,300 credited to Arjo Wiggins is established as consequential upon any breach by the Claimant, even if there were otherwise such a breach established.

The Penalty Issue

[39]This issue relates to the Claimant’s claim in respect of the shortfall of deliveries of 1183, BTC2, 1160 and (minimally) 1140 until the (repudiatory) termination of the supply contract in May 2006. The Claimant claims the price of such shortfall, pursuant to the take or pay clause, Article 5.5. The Defendant asserts that the claim pursuant to the take or pay clause amounts to a penalty, and that the Claimant must be limited to a claim for breach of the Defendant’s obligation under Article 5.3 to order the specified minimum quantities. It is common ground that, once the contract was terminated, i.e. after May 2006 and in respect of the balance of the supply contract, the Claimant’s claim is in damages only, as it did not seek to keep the contract alive.

[40]It is strange that, at least according to the researches of both Counsel, there is no previous authority as to whether a take or pay clause amounts or can amount to a penalty. A take or pay clause is a familiar provision in commercial contracts, and the Commercial Court has been dealing with commercial disputes for more than 100 years. It may be that there are such authorities, which have not been unearthed, although they are not known to me either. It may on the other hand be that it has never been previously suggested that a take or pay clause is or amounts to a penalty, which may count against the arguability of the Defendant’s case. Nevertheless, notwithstanding that it may be virgin ground, I shall decide the point de novo. The Claimant’s case is that, as this is a claim in debt for the price, the law as to penalties does not arise.

[41]This argument, by reference for example to White & Carter (Councils) Ltd v McGregor

[1962] AC 413

and its citation in Chitty on Contracts Vol I at 26-118 – “The law on penalties ... is not relevant where the claimant claims an agreed sum (a debt) which is due from the defendant in return for the claimant’s performance of his obligations” - is in my judgment too simplistic. It is clear that, for example, a minimum payment clause in a hire purchase agreement can be held to be a penalty, even though expressed as a claim in debt. The Claimant relies upon the decision of the House of Lords in Export Credits Guarantee Dept v Universal Oil Products Co

[1983] 1 WLR 399

, in which a payment provided to take place upon a specified event was held not to be susceptible to the law of penalties. That is what the Claimant asserts to be the case here pursuant to the supply contract. Mr Parker refers to the obligation to make payment for the minimum quantities “even if [the buyers] have not ordered the indicated quantities during the relevant monthly period”. He therefore submits that the sum is due as a price irrespective of whether they have ordered the quantities – or as it might alternatively be stated “whether or not they have ordered the quantities” or indeed “whether or not there has been a breach of Clause 5.3”. However: i) The central dictum of Lord Roskill, in the only speech in the ECGD case, with which the rest of their Lordships agreed is: “The clause was not a penalty clause because it provided for payment of money upon the happening of a specified event other than a breach of a contractual duty owed by the contemplated payor to the contemplated payee.” ii) I do not see how a payment obligation can arise under Article 5.5 in a case other than where there has been a breach of the obligation to order under Clause 5.3. If the goods are in fact ordered, then they will be delivered, and the price will be due quite irrespective of Article 5.3 or 5.5. iii) There may be an option for a claimant to pursue its claim either for damages for breach of Article 5.3 or for the price in respect of Article 5.5, but on the face of it the “specified event” in Article 5.5 is the same event as amounts to a breach of duty under Article 5.3.

[42]Mr Parker’s answer is by reference to the decision by the Court of Appeal in Euro London Appointments v Claessens International

[2006] 2 Lloyds Reports 436

. That case involved an employment agency contract. By clause 3.2 of that contract, the client was obliged to make payments of the agency’s invoice within 7 days of the date of the invoice, whereafter interest at 4% over base rate would be payable on the unpaid invoice (clause 3). By a different clause (clause 4) there was provision for a refund of fees in a case where the engagement of the employee introduced by the agency terminated prematurely. By clause 4.1 it was a pre-condition of an entitlement to a refund of fees that the client must have paid the agency’s fee within 7 days of the date of the invoice. It was argued that the provision depriving the client of the right of a refund if he had not paid the invoice within 7 days was a penalty, and it was accepted as a matter of principle that the loss of an opportunity for refund would qualify for the law of penalties just as much as a requirement to pay over a sum. Notwithstanding that the same event which founded the condition precedent of a loss of refund was a breach of an obligation under the contract, the Court of Appeal found that the clause did not qualify for the rule against penalties. Chadwick LJ said as follows:

“20. ... it can be seen that the condition precedent in the first limb of clause 4.1 reflects the obligation imposed on the client by clause 3.1(c). But it remains the position that the first limb of clause 4.1, of itself, imposes no obligation on the client. The question ... is whether the link between the condition precedent in the first limb of clause 4.1 and the obligation imposed by clause 3.1(c) brings the condition precedent within the rule against penalties. 21. In my view the answer to that question is “No”

. The condition precedent in the first limb of clause 3.1 and the payment obligation imposed by clause 3.1(c) are not interdependent. The point can be illustrated by supposing a case where the agreement provided, in clause 3.1(c), that the agency’s fee be paid within, say, 14 days; but that, to qualify for refund under clause 3.1, the fee must be paid within 7 days. The commercial effect of the agreement would be unaltered – save that the agency could not sue for its fee until the 14 days had elapsed. But, in that case, because failure to pay within the time limited by clause 4.1 would involve no breach of obligation on the part of the client, the rule against penalties ... would have no application. I can see no reason in principle why the position should not be the same in a case (such as the present) where the time limited by clause 4.1 happens to be the same as that imposed by the payment obligation in clause 3.1(c). Although there may be practical considerations – and some obvious convenience – in having the same time limit in both clauses 3.1 and 3.1(c) the fact that the time limit is the same in the two clauses is of no legal relevance.”

[43]I am not persuaded by Mr Parker that the decision in Euro London entitles me to depart from the apparent clear words of Lord Roskill. Whereas it can be seen that the two clauses in Euro London are sufficiently different that they can be said not to be interdependent (and, as Chadwick LJ suggested, there could have been different and inconsistent time limits as between the two, even though in the event there were not) the two Articles in the supply contract in this case, albeit not interdependent in the sense that they do provide alternative remedies, as Mr Parker has pointed out, nevertheless interrelate so far as their terms are concerned, and, for example, it would not be possible for there to be different minimum quantities specified in each of the two clauses, by analogy to Chadwick LJ’s suggestion in Euro London.

[44]I am satisfied therefore that, as a matter of principle, the rule against penalties may apply. However, it is certainly not the ordinary candidate for such rule, such as where, for example, a sum is specified which is found not to be a “genuine pre-estimate of damage” or a sum is stipulated as “in terrorem” of the offending party (see the seminal passage in Lord Dunedin’s speech in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd

[1915] AC 79

, 86-88. Mr Brunner submits that to impose an obligation to pay the price, albeit at the option of the innocent party, rather than to pay damages is bound to result in a sum being paid which is in excess of the innocent party’s loss by virtue of non-acceptance. I am far from persuaded that that is the case, for there may be situations (and Mr Brunner was not able to argue that that might not have been the case here) in which if goods have been manufactured they are simply unsaleable, and if their storage has been costly the price may even amount to a lesser sum than might have been recoverable by way of a damages claim: or if the goods have not been manufactured the outgoings, by way of expenditure upon raw materials, staff, equipment, utilities etc, perhaps at a time of industry downturn, may well have been expended in any event.

[45]But, although there is no direct authority on the impact of the law of penalties on a take or pay clause, the authorities to which I have been referred are of some assistance in this regard: i) In Phillips Hong Kong Ltd v Attorney General of Hong Kong 61 BLR 49 at 58, Lord Woolf, giving the opinion of the Privy Council approved the words of Dickson J in the Supreme Court of Canada in Elsey v J G Collins Insurance Agencies Ltd [1978] 83 DLR at p15 (itself approved by the Australian High Court in Esanda Finance Corporation Ltd v Plessnig [1989] ALJ 238) namely:

“It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression.”

Lord Woolf pointed out that those views were in accord with those expressed by Diplock LJ in Robophone Facilities v Blank [1966] I WLR 1428 at 1447 that the “court should not be astute to descry a ‘penalty clause’.” ii) In Lordsvale Finance plc v Bank of Zambia

[1996] QB 752

, in passages approved by the Court of Appeal in Euro London at 442-3, Colman J said at 762-4:

“The speeches in Dunlop ... show that whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. ... The question that has always had to be addressed is therefore whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss ... However the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach.”

Chadwick LJ in Euro London pointed out at 443 that “the test of “commercial justification” was endorsed by Mance LJ in the Cine Bes Case

[2003] EWCA Civ 1669

para 15 and by Buxton LJ in Murray v Leisureplay

[2005] EWCA Civ 963

para 117”. iii) In Alfred McAlpine Capital Projects Ltd v Tilebox Ltd

[2005] BLR 271

at 280 Jackson J stated:

“Because the rule about penalties is an anomaly within the law of contract, the courts are predisposed, where possible, to uphold contractual terms which fix the level of damages for breach. This predisposition is even stronger in the case of commercial contracts freely entered into between parties of comparable bargaining power.”

He states that he has only been able to note four cases where a clause was struck down as a penalty, and in each of those four cases “there was in fact a very wide gulf between (a) the level of damages likely to be suffered and (b) the level of damages stipulated in the contract.”

[46]On the facts of this case, I am entirely satisfied that the take or pay clause was commercially justifiable, did not amount to oppression, was negotiated and freely entered into between parties of comparable bargaining power, and did not have the predominant purpose of deterring a breach of contract nor amount to a provision “in terrorem”. The evidence was wholly clear. The negotiations took place between extremely well qualified, able and savvy commercial men against a very significant commercial background, including a background of previous dealings. At the time when they were negotiating there was, on the one hand, an extreme scarcity of acrylic acid, a willingness on the part of the Claimant to commit supply to the Defendant, notwithstanding the requirements of their other customers, but in return expecting an absolute commitment to take a minimum quantity of the product to be manufactured with that acid, and, on the other hand, a clear recognition of the difficult commercial position in which the Defendant found itself, a desperate need to secure supplies of the product and a desire to keep the contract as short as possible; with the result that there was give and take on both sides, a shorter term than the Claimant desired and a longer one than the Defendant desired, but so far as the Defendant was concerned, the significant advantage, as it then saw it, of a get out clause via the meet or release provision in Article 5.6.

[47]The most significant exchange between Mr Yates and M. Brode-Roger is that of 15 and 17th December 2004. Mr Yates said:

“I am not happy with a one year contract. I have said from the start of negotiations that it is not long enough if we are to be involved in technical collaboration. Also acrylic suppliers are insisting on long term supply contracts and I have to enter into such contracts in order to guarantee a supply and at a realistic price. Despite requesting a five-year contract, I understand your difficulties and I am prepared to accept a minimum of a 3-year contract. … If you want [identified quantities] then there has to be a guarantee in the form of Take or Pay for a minimum of 8500 tonnes. Also I cannot hold 30% of my capacity in case you decide not to take it.”

M. Brode-Roger replied:

“Thank you for your new proposal and I understand your points ... Taking into account the fact that a longer term contract would help you in your business with Acrylic Acid suppliers, we could agree with a contract duration of 2 years instead of 1 year. About your take or pay proposal, I understand that you cannot hold 30% of your capacity in case we decide not to take it for no particular reason. However we have to take into consideration that according to your difficulties to get Acrylic Acid on a regular quantity basis we cannot accept a whole year take or pay condition ... Therefore I suggest that we provide for a take or pay agreement based on a monthly basis.”

[48]There is more of the same. I am entirely satisfied that the take or pay provision does not offend against the rule against penalties and that the Claimant is entitled to recover the price of the shortfall pursuant to Article 5.5. This enables me to be satisfied that I can uphold and enforce a clause which might be described in similar terms to those used by Millett LJ in Jervis v Harris

[1996] Ch 195

at 207 “where the Court [was] asked for the first time to strike down [as a penalty] a standard claim which has been familiar to … lawyers for generations”.

The January Orders Issues

[49]There are two sub-issues contained within this: i) The main question is whether the shipments of 1183 which were ordered in December 2004, prior to the conclusion of the 26 January contract, can be included as satisfaction of the Defendant’s obligation to place orders in January. There was a shortfall of 181 tonnes in January orders. There were 203 tonnes ordered in December, so that, if they count, that would eliminate the shortfall entirely. ii) The second sub-issue only arises if the first sub-issue fails, because it relates to two orders of 1183, totalling 54 tonnes, for delivery to Lixhe, for which the Defendant claims it is entitled to, but has not received, credit in respect of January.

[50]I deal first with the orders for 203 tonnes, which were placed by an email from Mr Hawken of 22 December 2004. They form part of the subject matter of an email of the same day, sent by M. Brode-Roger to Mr Yates, in which he stated as follows:

“I have just been talking to Barry, who informs me that you have confirmed that you are able to recommence dispersant production for us on the 4th Jan and that you will be able to produce 25 ... 27 tonne loads for us, with the first load available for collection/dispatch with effect from the 6th Jan ... With the complications of the Christmas period I am trying since yesterday to contact my lawyer, but I am still not able to reach him. I then suggest we postpone the final negotiation until January. ... I can confirm however that until we conclude our discussions that we will pay your new proposed price of GBP 795/t ex works for 1183, GBP 640/t ex works for BTC2 and GBP 640/t ex works for 1140 for the above mentioned January loads using the Acrylic Acid base of £1120.”

[51]This was against the background of what, in the light of the evidence I heard in relation to the abandoned misrepresentation claims, was a deliberate attempt by the Defendant to string out the negotiations in the hope of softening up Mr Yates for better terms.

[52]The agreement, even if in its draft form at that stage, but in any event in the form in which it was finally concluded, provided for minimum orders to be placed each month. This was well understood by the Defendant at any rate once the contract was entered into, as can be seen from, for example, an email generally distributed to her colleagues by Mme Salmon of 14 June 2005 in which she points out:

“According the contract with M & J we have to order each month minimum 500t of Jaypol 1183, 160t of Jaypol 1160 and 160t of Jaypol BTC2. In order to reach these quantities, we have to be very careful when placing orders and in particular place orders from 1st of each month and not before. The contract with M & J is based on the ordered dates and not the delivery dates.”

[53]There is no dispute about this construction. What Mr Brunner suggests is that, by one or other legal route, the shipments in fact ordered in December can be treated as if they had been ordered in January, so as to make up the shortfall. It is not in dispute that the prices were calculated by reference to the December cost of acrylic acid (the contract provided for calculation of the price by reference to the cost of acid in the relevant month).

[54]The first way in which Mr Brunner puts his case is by reference to an implied term of the contract once entered into: it is said (by re-amendments to the Defence and Counterclaim) to be necessary to give business efficacy to the 26 January agreement that account would be taken, in computing the quantity of orders placed by the Defendant in January 2005 under Article 5.3, of orders placed in December 2004. As Mr Parker points out, of course there cannot be any implied term of a contract which is inconsistent with the express terms, and the cloak of “business efficacy” cannot be used simply to introduce what is said to be reasonable. I can for my part see, in relation to a contract entered into on 26 January, but said, as this one was, to be effective as from 1 January 2005, that if such contract had required that orders had to be delivered in a relevant month before account could be taken of them, then it might have been arguable, as a matter of necessity, never mind business efficacy, that, since it would or might be impossible in the last five days of a month to order and accept delivery of an entire month’s quantities, some implication might arise with respect to that month, which might possibly include, depending upon the precise facts of the case, the including of precontractual quantities in that month. But that was not the provision of this contract. All that was required to be done was to place orders in the relevant month, and there was nothing impossible about the Defendant placing orders in the required contractual quantities in the last few days of January. It did place orders – in the case of 1183 for 319 tonnes - but it placed insufficient orders to comply with its minimum order obligation. I am satisfied that no implied term is arguable or in the event arises.

[55]There is no basis for any other kind of case, whether by reference to estoppel by convention or waiver, insofar as either could be suggested – and neither is pleaded in the re-reamendment. It would have been possible in the course of the email from M. Brode-Roger of 22 December set out above for him to ask Mr Yates to treat the December orders as if they were placed in January. But he did not - indeed it was entirely possible at that stage that there would never have been a concluded January agreement – that was at least one of the options which at that stage M. Brode-Roger was keeping open. But it was neither agreed nor even discussed. As for waiver, again no such suggestion is pleaded, but there is no basis for any case that Mr Yates, whether for good consideration or otherwise, agreed not to invoice for the shortfall, by reference to the December deliveries. It was argued, until abandoned (see paragraph 7(ii) above), that he agreed to waive the January/February shortfall in BTC2 deliveries on some basis or other, but there is no available or arguable case in relation to waiver in respect to the January shortfall of 1183.

[56]Finally there is the small sub-issue in relation to the Lixhe orders. By an email dated 27 January 2005, Mr Channon of the Defendant company (with copy to Mr Hawken) sent confirmation to Mr Yates “of the 1183 orders we require for dispatch next week”. This amounted to three orders for delivery to Avezzano, two to Massa and two to Lixhe.

[57]There are order numbers subsequently applied to the three Avezzano and two Massa deliveries, but none to the Lixhe deliveries. There is a schedule of orders in the records of the Claimant company, which details what appear to be the three Avezzano deliveries and the two Massa deliveries (seemingly given the same dates for “delivery date required” as in the email), each with a specified Imerys order number; and in addition in that schedule there are two orders for Sundsvall, Sweden, with Imerys order numbers, and delivery dates required, which latter orders are not the subject, so far as has been capable of being traced, of any separate email request by the Defendant company. The date of order for the Avezzano and Massa deliveries is said to be 28 January, the day after Mr Channon’s email of 27 January. The date of order in respect of the two Sundsvall deliveries is recorded as 25 January (this can be seen from the actual orders themselves, although there is a typographical error in the schedule in relation to one of the Sundsvall orders).

[58]The Claimant has given credit to the Defendant in respect of the three Avezzano, two Massa and two Sundsvall orders, but has, as I have indicated earlier, not given credit for the two Lixhe orders, in respect of which there is no other documentation than the email. The Defendant simply states that, in calculation of the January orders, there must, in addition to the scheduled orders, be an allowance for two shipments to Lixhe, as per Mr Channon’s email. The Claimant asserts that, as there is no other record of the order, Mr Yates believes that the Sundsvall and Lixhe shipments were one and the same, and were simply redirected at the Defendant’s request. Either they were originally to go to Sundsvall (ordered on 25 January) and subsequently changed to Lixhe, or they were originally to go to Lixhe, as ordered on 27 January, and subsequently diverted to Sundsvall, with the date of 25 January incorrectly recorded on the orders.

[59]There is no direct evidence either way. No witness has been called by the Defendant to assert that there were orders for Lixhe as well as Sundsvall, and either that both shipments were delivered or that the Lixhe shipments were not delivered, and either the non-delivery was overlooked or some complaint was allegedly made. There was similarly no evidence from the Claimant, because Mr Yates had no direct knowledge himself, but there is no record of delivery both to Sundsvall and to Lixhe, and no record of any complaint of non-delivery to Lixhe. Mr Brunner points out that the Lixhe shipments in the 27 January email were required to be delivered on 2 and 4 February, whereas the orders in respect of Sundsvall, as recorded in the schedule and on the printed orders, were for delivery on 14 and 28 February. Mr Parker points to an email from Mr Hawken of 18 February specifically asking that a delivery of 1183 for Lixhe should be redirected to Sundsvall. Mr Brunner submits that this cannot be a relevant shipment, because it relates to a delivery date of 24 February, which is relevant to none of the shipments in issue: Mr Parker submits that this is simply indicative of the fact that orders once placed were from time to time redirected.

[60]I am wholly unable to resolve the position as to what in fact happened. Given that the supply contract was based upon orders placed in a month, I am satisfied that the Defendant is entitled to claim credit both in respect of the two shipments for Lix and the two shipments for Sundsvall, in that I am not able to be persuaded or to assume that they relate to the same shipments. Consequently, on this issue, the Defendant succeeds.

[61]Because, as I have stated in paragraph 5 above, through the considerable co-operation between the parties, there has been agreement as to the various figures, I can set out shortly the consequences of my conclusions: i) The claim pursuant to the take or pay clause, which is not a penalty, relates to the agreed shortfall in deliveries prior to May 2006, with no deduction in respect of the January orders, and no credit in respect of the purported rejection of deliveries of 1183 after 31 August 2005, but giving credit for the two orders of 1183 in respect of Lixhe in January 2005. The sum due amounts to £1,818,296. ii) The Defendant’s counterclaim in respect of Arjo Wiggins fails. iii) In respect of the damages for the period after May 2006, there is no credit in respect of any entitlement to stop taking 1160, so that the agreed figure is £3,897,982.

[62]I shall hear the parties on interest and costs.

Cited in 1 later judgment

Lancore Services Ltd v Barclays Bank Plc 2008