C&S Associates UK Ltd v Enterprise Insurance Company Plc [2015] EWHC 3757 (Comm)

[2015] EWHC 3757 (Comm)Case No CL-2014-000400
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 21/12/2015
Before
MR JUSTICE MALES
Between
C&S ASSOCIATES UK LIMITEDClaimantENTERPRISE INSURANCE COMPANY PLCDefendant
Mr Jawdat Khurshid and Ms Clara Benn (instructed by Sidley Austin LLP) for ClaimantMr Timothy Dutton QC and Mr Richard Harrison (instructed by Ozon Solicitors Limited) for DefendantHearing Hearing dates: 30 th November – 3 rd December 2015
JudgmentMr Justice Males :Introduction
[1]The claimant C&S Associates UK Ltd is a motor insurance claims handler based near Fareham in Hampshire. The defendant Enterprise Insurance Company Plc is an insurance company incorporated in Gibraltar which provides among other things specialist motor insurance for fleet vehicles, taxis and high value or classic cars.[2]With effect from 2 July 2012 C&S provided claims handling services to Enterprise pursuant to a Claims Management Delegated Authority Agreement. However, the contract between the parties was terminated in January 2014. Enterprise contends that it was entitled to terminate the contract for repudiation on one or both of two grounds: either because of C&S’s refusal to send claims files to it for the purpose of an audit of open files which it was conducting or because of the seriously negligent performance by C&S of its services under the contract. C&S contends that Enterprise was not entitled to terminate the contract on either ground and that its conduct in doing so was itself a repudiatory breach, which C&S has accepted.[3]This is my judgment following the trial of seven preliminary issues:

Repudiation

[1]whether C&S committed a repudiatory breach of the contract by refusing to deliver a further batch of 1,500 claims files off-site to Enterprise’s solicitors, Ozon Solicitors Limited;[2]whether the pleaded allegations of breach of C&S’s duties are sufficiently substantial (whether taken individually or in combination) to be capable of amounting to a repudiatory breach of the contract;[3]if the answer to issues(1) and/or(2) above is ‘no’, whether Enterprise’s purported termination of the contract by Ozon’s letter dated 13 January 2014 was itself repudiatory;[4]if Enterprise’s purported termination of the contract amounted to a repudiatory breach of the contract, whether such repudiation was accepted by C&S; Variation (5). whether the contract was varied by an exchange of emails in October 2013 so as to:a. increase the fees payable to C&S; andb. provide that the contract should continue for a minimum term of two years from 1 October 2013;

Volume

[6]whether:(i) by agreeing to the variation of the contract Enterprise impliedly represented that it would continue to pass claims to C&S in the ordinary course of business up to 1 October 2015; and/or(ii) the contract as varied included an implied term that Enterprise would continue to pass claims to C&S in the ordinary course of business up to 1 October 2015; and[7]whether Enterprise was entitled to:(i) restrict the number of claims to be handled by C&S on its behalf to whatever level it saw fit;(ii) refuse to allow C&S to handle any new claims on its behalf; and/or(iii) withdraw from C&S claims which C&S had hitherto been handling on Enterprise’s behalf.

The contract

[4]C&S is a third party desktop motor insurance claims handler, acting mainly in relation to personal injury, property damage and credit hire claims. Its business was established by Christopher Chamberlain and Michael Smith in 1995. It provides its services to insurance companies who wish to outsource the handling of what are usually high volume and relatively low value claims.[5]As a Gibraltar company, Enterprise is regulated by the Gibraltar Financial Services Commission. As it writes business in the United Kingdom, it must also comply with the requirements of the Financial Conduct Authority here. Until 2010 Enterprise’s main business was legal expenses insurance. From 2010 it began to write other business including motor insurance, specialising in providing fleet cover and cover for taxis and high value and classic cars. Claims handling was outsourced. The main external handlers for motor business from 2010 to July 2012 were two companies, IV Assure Limited and GAB Robins UK Limited. Claims would be reported by policyholders to FNOL (“first notification of loss”) agents appointed by Enterprise who would then provide notification details to one of the claims handling companies.[6]The parties were introduced to each other in December 2011. C&S was told that Enterprise was dissatisfied with its existing motor claims handlers and that it was hoping to grow its business, which would lead to an increase in the volume of claims. It was therefore looking for a new claims handler with the capacity to handle its third party motor claims. Negotiations ensued which resulted in the conclusion of the Claims Management Delegated Authority Agreement. Although executed later in the month, the contract was stated to take effect from 2 July 2012.[7]It provided for a continuing agreement with no fixed term which could be terminated by either party at any time on giving three months notice.[8]The tasks to be performed by C&S were set out in clause 2 of Schedule 1:
“Following notification of a claim, C&S shall: • Check that all claim documents are correctly completed; • Ensure that the claim falls within the terms of the Enterprise policy; • Investigate liability; • Process the claim in a timely fashion; • Liaise, as necessary, with the Enterprise Customer; • Agree the validity and/or quantum of the claim; • Defend claims where the Enterprise customer is not considered liable; • Negotiate settlement; • Arrange for settlement to be made with prior authorisation of Enterprise; • Ensure and maintain a full and correct record of the claims details and amounts paid.” • Check that all claim documents are correctly completed; • Ensure that the claim falls within the terms of the Enterprise policy; • Investigate liability; • Process the claim in a timely fashion; • Liaise, as necessary, with the Enterprise Customer; • Agree the validity and/or quantum of the claim; • Defend claims where the Enterprise customer is not considered liable; • Negotiate settlement; • Arrange for settlement to be made with prior authorisation of Enterprise; • Ensure and maintain a full and correct record of the claims details and amounts paid.”
[9]In addition C&S was responsible for setting reserves. Clause 3.3 of Schedule 1 provided that:
“The claim reserve rationale will be documented in the file and supported by adequate information. There will be appropriate scope of loss details. Reserves will be set at notification based on the information known at that time. Accurate reserves recommended will be set as soon as practical for each feature but no later than 30 days from initial claims notification. Reserve changes will be promptly made and rationale documented if circumstances are identified to support the change.”
[10]Further provision as to reserves was contained in clause 1.3 of Schedule 3:
“Reserving: C&S will reserve all claims on a realistic basis and review the reserve when any new information comes to hand. Enterprise will be separately notified of any new claim where the overall reserve is £15,000 or more and of any claim where the existing total cost of the claim is increased by £10,000 or more. In the absence of information on which to base an accurate reserve, the following ‘day one’ reserves will be created until such time as further information becomes available: - Third Party Property Damage - £1,002 - Third Part Credit Hire - £1,502 - Third Party Personal Injury - £2,500 - Third Party Legal Costs - £2,500” - Third Party Property Damage - £1,002 - Third Part Credit Hire - £1,502 - Third Party Personal Injury - £2,500 - Third Party Legal Costs - £2,500”
[11]The standards which C&S was required to achieve in performing these services was set out in clause 7 of the contract which included the following provisions:
“7.1 C&S warrants that it shall provide the Services using all reasonable skill and care as is consistent with C&S being specialists in this field. 7.2 C&S warrants that it shall use competent, appropriately qualified skilled and experienced personnel in the provision of the Services. … 7.6 Enterprise is regulated by the FSC in Gibraltar and as such is required to observe and comply with the standards issued by the FSC and in so far as and to the extent that C&S is providing the Services described in this Agreement it shall observe and comply with the FSC Standards as if it were regulated by the FSC itself. In the event of any conflicts or inconsistency between (i) the FSC (ii) the provisions of this Agreement, the provisions of the FSC Standards shall prevail. 7.7 C&S will observe and comply with the Association of British Insurers Insurance Claims Code (the “ABI Code”) unless the standards set out in this Agreement are greater than those set out in the ABI Code, in which case the provisions of the Agreement shall prevail.”
[12]Thus C&S held itself out as being a specialist in the field of claims handling, as indeed it was, and was required to perform accordingly.[13]As both parties expressly recognised at the time, the contract contained no obligation on Enterprise to refer a minimum number of claims, or indeed any claims, for handling by C&S. It was understood also that C&S would not be the only motor claims handler used by Enterprise. The contract provided, by clause 1 of Schedule 3, that “C&S will handle all claims as required by Enterprise”. It was therefore for Enterprise to choose how much (if any) business to send to C&S, although it was of course expected on both sides that Enterprise would transfer to C&S the files currently being handled by IVA and GAB Robins and that it would send at least some new business to C&S.[14]The fees which C&S would earn for its services were set out in Schedule 2. There was to be a fee per claim, payable only once a claim was settled, which varied according to the type of claim. Clause9.1 of the contract imposed an obligation on Enterprise to make payments in accordance with this agreed fee scale, which Clause9.2 provided would “operate for a minimum period of one year from the Effective Date”.[15]The effect of these provisions was that once a claim was sent to C&S to handle, C&S was under a duty to handle the claim, and to do so to a proper standard, but it also had a right to handle the claim in order to be able to earn its fee.[16]The contract provided for Enterprise to audit from time to time the work being done on its behalf by C&S. I examine those provisions in the context of the first preliminary issue.[17]It contained also clauses providing for termination in the event of breach and for the consequences of termination. These clauses are relevant to the arguments on repudiation.

Aspects of claims handling

[18]It is convenient at this point to describe some aspects of claims handling about which the parties and their experts were agreed.[19]Motor insurers spend a substantial proportion of premium on claims, on average 70% according to Enterprise’s expert. The sector is both highly regulated and very competitive. Effective claims handling is therefore extremely important. It can make the difference between profit and loss. To some extent this is obvious, but a few points should be noted. First, prompt handling and settlement of claims is a regulatory requirement of the FCA. To similar effect the Gibraltar FSC requires insurance companies to maintain strict control and supervision over claims handling and associated data. Second, delay in settling third party damage claims may prolong the period in which credit hire charges are incurred, resulting in increased exposure for an insurer. Third, failure to meet time limits may mean that a case falls to be excluded from the Ministry of Justice electronic claims portal where a regime of fixed costs would apply, or that there is a failure to comply with the Pre-action Protocol for Low Value Personal Injury Claims. In either case this may increase a third party’s legal costs for which an insurer is liable. Fourth, once lawyers are instructed, the costs payable will tend to increase the longer the claim remains unsettled. All of this suggests that early settlement is desirable. On the other hand, proper investigation of claims is needed, in order to avoid settlements at too high a level which will eat into the insurer’s profits. While efficiency is always important, in some respects there is a balance to be struck, requiring an exercise of judgment whether to settle or to investigate further, particularly but not exclusively in cases of suspected fraud.[20]Accurate reserving of claims is also important. When a claim is made a reserve needs to be entered on the insurer’s books. This represents a potential liability. The amount of the reserve will therefore affect the insurer’s compliance with regulatory solvency requirements and its ability to write new business which is limited by its capital reserves. A claim which is under reserved will mean that funds have to be provided when the claim is eventually settled for which no provision has been made. Conversely, over reservation will create an unduly adverse view of the insurer’s solvency, will suggest that it is less profitable than in fact it is, and may cause it to lose the opportunity to write new business. Moreover, over-reservation followed by a settlement below the reserve may give a false impression of a claims handler’s performance in achieving what appear to be favourable settlements compared with the amount of the reserve.[21]Typically, and as provided by the contract in this case, the initial reserve will be a standard amount according to the type of claim. This reserve then needs to be monitored as the claim proceeds, in order to ensure that it remains accurate in the light of circumstances as they develop. On the other hand, if a claim is dormant and unlikely to be pursued further, the file can be closed and the reserve removed, thus releasing the funds notionally tied up in the reserve. Some provision will need to be made for the possibility that dormant claims may be revived, but that will be a matter for the insurer and its actuaries to determine in the light of its overall claims experience.[22]The amount of any reserve, including adjustments to be made from time to time and the stage at which it is prudent to close a file by reason of dormancy, are further areas where an exercise of judgment is required. In many cases there will be no single right answer and a range of views may reasonably be held. An insurer using the services of a claims handler may leave these decisions to the reasonable judgment of the claims handler or may choose to give more precise instructions, for example as to the initial reserves to be entered for certain types of claim or as to the period of dormancy after which a file should be closed. The claims handler will then be expected to follow the insurer’s instructions.[23]“Leakage” is a term used in the context of claims handling. It refers to overspending as a result of incompetent claims handling, or (depending on the context) a failure to accord with best practice. It encompasses not only settlements made at too great a level when compared to what a claim is worth, but also increasing the amount which an insurer has to pay because of inefficient or incompetent handling. It is not a term of art, so caution is required to ascertain the standard against which “leakage” is measured in any particular circumstance. It is important to remember also that there may be no single figure which represents the right level of settlement for any given claim and that a range of settlement figures may be reasonable. Subject to that, however, a high level of leakage or a high frequency of leakage incidents may indicate that something is going seriously wrong in the performance of its duties by a claims handling service.[24]An insurer which uses an external claims handler will usually wish to carry out audits from time to time in order to satisfy itself that claims are being efficiently handled, that appropriate reserves are being set, that sensible dormancy procedures are being applied (or, where instructions have been given, that they are being followed) and that leakage generally is being minimised. Such audits will involve the examination of a representative sample of claims files and are regarded as important. Any action then taken will depend on what is found but typically, where the parties’ relationship is good, the result will be a dialogue with any errors being picked up and any necessary improvements being made. Performance and termination of the contract The evidence

Performance and termination of the contract

[25]There is no statement of agreed facts by reference to which the preliminary issues are to be decided and the parties’ evidence ranged widely. In particular, the order for the trial of the preliminary issues provided expressly that Enterprise was not required to prove its allegations of defective performance by C&S and that the court would make no determination as to C&S’s liability on Enterprise’s counterclaim. Despite this both parties adduced evidence going to this issue, in particular from Michael Smith (a director and founder of C&S) and from Andrew Flowers (the CEO and a principal shareholder of Enterprise), no doubt because it is an issue which gives rise to strong and (as I accept) genuinely held feelings on both sides. Moreover C&S’s expert, Mr Stephen Lewis, included a lengthy section in his report which analysed and expressed his views about the merits of the allegations made by Enterprise, although there was no permission given for such evidence to be served. I required a version of the report to be served with these paragraphs deleted. The result was that a report running to 57 pages was reduced to less than half that length.[26]In these circumstances I propose to make no findings about whether or to what extent C&S’s performance of its claims handling duties was in accordance with the requisite standard of care. That issue will if necessary have to be determined on another occasion. In this section of my judgment I set out only those facts which, in my view, are necessary for an understanding of the circumstances in which the preliminary issues arise and for their determination. For the most part these findings do not depend on the oral evidence. I will, however, record that I found the claimant’s witnesses, Mr Smith and Mr Lee Roberts, a manager at C&S, to be obviously honest and reliable witnesses, but had some reservations as to the reliability of the defendant’s witnesses, Mr Flowers and Mr Myles Ellis, who was at the time Enterprise’s Head of Claims (UK). Both of these witnesses had a tendency to argue Enterprise’s case, both in their witness statements and in oral evidence. On the matters relevant to determination of the preliminary issues there was no material difference between Mr Lewis and Enterprise’s expert Mr Christopher Wylde.

Transfer of the files to C&S

[27]On 4 July 2012 C&S received the first batch of approximately 1,500 files previously handled by IVA and GAB Robins. Several thousand more files were transferred to C&S over the following months, with the final batch arriving in October 2012. C&S also began to handle new claims. Subsequently, in June 2013, more files were transferred to it from another claims handler, Motor Support, which had previously been engaged by Enterprise. In all C&S handled a total of 11,995 claims on Enterprise’s behalf in the period between July 2012 and January 2014 when the contract was terminated, at which time about half of these claims were still live.[28]Many of the files transferred from IVA and GAB Robins were in poor condition and needed to be put in order. Particular concerns were that many of these claims had been under reserved, while other claims which appeared to be dormant still carried an outstanding reserve. Management information about these claims, and about Enterprise’s probable liability, was poor.

The November 2012 audit

[29]By about November 2012 C&S considered that it had managed to put the claims transferred to it in order and an audit of 154 files was conducted by Enterprise at C&S’s premises in Hampshire between 13 and 16 November. The focus of this audit was C&S’s approach to reserving. Based on this sample, Enterprise’s conclusion from the audit was that C&S’s approach to reserving was generally “accurate, rational and well-considered” and, albeit with a small number of exceptions where a tendency to over reserve was noted, “professional and efficient”. These findings were discussed between the parties and a “reserving matrix” was put in place to deal with the small number of cases where there had been a tendency to over reserve. It was noted also that C&S handled cases manually and worked with paper files. From an audit perspective this was considered to be an advantage, as it made it relatively straightforward to follow the development of the file and the rationale for reserve changes.

The January 2013 audit

[30]A second audit took place in two stages in January 2013. The first stage was an examination of 49 files. Some cases were identified where Enterprise took the view that inactive files on which reserves were still being carried could have been closed and, as a result, it decided to examine a larger sample. The second stage was a review of a further 441 files which Enterprise considered to be sufficiently representative to give it a good overall picture. Enterprise identified 97 claims which it regarded as inactive and suitable for closure, but only 11 live claims where it considered the C&S reserve too high. The auditors concluded that “on the whole C&S general approach to reserving on the live claims appears reasonable” and that “in the majority of cases the file handling by C&S was of a good standard”, but that there was a need to advise C&S of “the closure strategy we wish to apply moving forward”. Dormancy instructions[31]This led to an email dated 19 February 2013 by which for the first time Enterprise introduced specific dormancy closure guidelines for C&S to follow:
“… we have discussed at strategic level [our] reserving policy and specifically our closure criteria going forwards on TP claims. We have agreed as a Board the following: • On a TPPI where there has been [no] communications for a period of 9 months then clear the reserve and close the file • On a TPPD where there has been no communications for a period of 6 months then clear the reserve and close the file • Where there is a combination of TPPI and TPPD and there has been no communication on either aspect for 6 months then remove the TDDP reserve but leave the TPPI reserve on and keep file open until such time as the 9 month period has elapsed.” • On a TPPI where there has been [no] communications for a period of 9 months then clear the reserve and close the file • On a TPPD where there has been no communications for a period of 6 months then clear the reserve and close the file • Where there is a combination of TPPI and TPPD and there has been no communication on either aspect for 6 months then remove the TDDP reserve but leave the TPPI reserve on and keep file open until such time as the 9 month period has elapsed.”

Negotiation of increased fees

[32]By April 2013 Enterprise had decided, as part of a review of its growing UK motor business, that its ultimate objective was to bring claims handling in-house. It advised C&S of this decision but, in the meanwhile, indicated that it would transfer to C&S the fault and disputed third party claims currently being handled by another claims handler, Motor Support, although in the event this did not happen until June. As with the IVA and GAB Robins files, the Motor Support files were in some disarray.[33]At about the same time, in June 2013, C&S raised the prospect of increasing the fees payable by Enterprise under the contract. Enterprise agreed to discuss this and a negotiation ensued. C&S emphasised the valuable service which it claimed to be providing, while Enterprise for its part referred to “the good work you are doing on our behalf”, expressed the wish “to hone and build our relationship with C&S” notwithstanding the ultimate aim of establishing its own claims handling service, and commented in an internal email that it agreed with C&S’s assessment that C&S was providing value for money to Enterprise. The result was an exchange of emails in October 2013 which C&S says resulted in a binding variation of the contract including not only increased fees but the introduction of a two year minimum term.

The TransRe audit

[34]Meanwhile in July 2013 an audit of C&S by one of Enterprise’s reinsurers, TransRe, was carried out, the result of which was provided to Enterprise. The conclusion from the audit was that some improvements could be made, but there was “nothing of any significance to be concerned about” and “no major issues identified”, with claims “handled to a good standard” and reserving appearing “adequate overall”. Revised

Dormancy instructions

[35]On 17 October 2013 Enterprise gave revised dormancy instructions. The periods after which files should be closed were reduced to seven months for personal injury claims and five months for property damage.

The Ozon file review

[36]On 30 October 2013 Mr Flowers of Enterprise requested what was described as an “Urgent File Review” in an email to Mr Lee Roberts at C&S. He asked for all of the open files held by C&S to be couriered to Enterprise’s solicitors for review and return, starting with files from 2010, 2011 and the first half of 2012. Follow-up emails from Mr Flowers’ assistant described this exercise as “business critical to us” and emphasised that Enterprise could not stress its urgency enough. Mr Flowers wrote:
“We have not had the opportunity to meet, but I am the CEO and major Shareholder of Enterprise Insurance Company. I understand that you are principally responsible for the team that manages all of the Enterprise open claims. I tried to call you a little earlier today but understand you are in a meeting. I wished to alert you to the contents of this email and to talk you through it to allay any concerns that may arise, and which would be unfounded. We are going through an exercise with external advisors, which is placing some scrutiny on the value of our UK motor reserves, and in turn the number of outstanding cases we have currently both with you and other claims handlers. Whilst I am unable to go into the confidential nature of this exercise, we have decided that the best way of providing the comfort and certainty required is to undertake an entire file review of every single UK motor claim we currently have open. It so happens that you are the largest provider of services to us in this respect however, you will be aware that we have other providers also, and we will be writing to them in the same regard. We are utilising a firm of solicitors with whom you maybe familiar, Ozon Law in Manchester, and we need to commence the exercise on Monday of next week. We have discussed internally how to best deal with the logistics and have decided we would like to courier all the file that you are currently holding on our behalf to Manchester for review and return. As one of our trusted partners, we don’t wish you to be inconvenienced however we do need your active participation in order that we can complete the exercise within the timescales that are essential to the business, and we are wanting to complete the review by 31st December 2013. I have attached a spreadsheet, which hopefully is a comprehensive list of files that you hold for each underwriting year; we would like to request that you release to us the files listed for 2010, 2011 and the first half of the files for 2012 by Friday afternoon this week in order that they may be couriered to Manchester for review and return. We will in due course request the outstanding files of 2012 and 2013 to date once the review well underway. I appreciate the timescale is fairly short however I understand that the nature of your filing system should facilitate this. …”
[37]This is an important message as it initiated the file review which eventually led to the termination of the agreement. I draw attention to the following points: 1. The tone of the email was reassuring. Mr Flowers referred to C&S as “one of our trusted partners” and expressly assured C&S that any concerns which might arise “would be unfounded”. In contrast Mr Flowers’ witness statement asserted that the reason for this request was that the monthly management information reports provided by C&S demonstrated an irregular upwards fluctuation in the cost of claims which Mr Flowers attributed to major faults by C&S, namely inefficient claims handling, failures to update reserves promptly and erroneous reserving. If that is true, the email was somewhat misleading. C&S would have had every reason to be concerned if it had known that this was Enterprise’s view. 2. The email also reassured C&S that it had not been singled out, and that other claims handlers were being written to in similar terms. That was not true. Although Enterprise intended to conduct a similar review with other handlers, that was for the future and Enterprise did not contact them as part of the current exercise. Mr Flowers’ concerns were entirely directed at C&S. 3. It is not apparent why this review should have been “business critical” to Enterprise or (as Mr Flowers later described it to his colleagues) “possibly the most important exercise I have sanctioned since I set up the business”, unless (as may have been the case) it was necessary to find a way of reducing reserves because there was an issue as to Enterprise’s solvency. At all events the importance of the exercise to Enterprise was made clear to C&S. 4. As C&S had only begun to handle new claims from July 2012 onwards, the files requested at this stage were files which had been transferred to C&S from the previous claims handlers, namely all the IVA and GAB Robins files and those Motor Support files which dated from before July 2012. 5. The request was limited to open files. There was no request at this stage to review files which had been closed, although Ozon did later extend the request to include settled files. 6. A request to review every open file, even in stages, was unusual. An audit would usually be, and had in the past been, conducted by reference to a representative sample of claims files. 7. The request was for physical paper files to be sent to Ozon in Manchester. As Enterprise knew, that was how C&S maintained its open claims files. There was no suggestion that C&S maintained electronic files or that it ought to have done so. 8. The e-mail recognised, correctly, that for C&S to be without these files would cause inconvenience. 9. The email promised twice that the files would be returned to C&S once the review was completed. They were to be sent “for review and return”.[38]C&S was concerned about the disruption to its business that couriering such a large number of files to Manchester would involve, as Mr Smith explained in an email dated 30 October 2013. Nevertheless he agreed to assist. He wrote:
“… We will of course endeavour to support your requirements. There’s no doubt the undertaking is challenging and will be hugely disruptive to the day to day operational activity but that aside, we will do everything we can to support your objectives. Perhaps we can speak first thing in the morning to talk thru’ logistics etc. [For] example, might it be possible for ozon staff to come to the files rather than shift circa 5-6000 files to them. I only say this given the enormous volumes of post/email and telephone traffic that occurs day to day. Either way, we’ll accommodate …”
[39]At this stage the parties were not giving any thought to the question whether C&S was obliged to send the files to Ozon as distinct from permitting a review to take place at C&S’s premises. Mr Smith was simply focusing on the practicalities of the exercise and the avoidance of disruption. As there were over 2,660 open files where the accident date fell on or before 30 June 2012, the review which Enterprise was proposing to conduct was a major exercise. Some of those at C&S were concerned that Ozon did not have the resources or personnel available to conduct such an exercise in any reasonable timescale.[40]In a telephone conversation between Mr Smith and Mr Flowers during the morning of 31 October 2013, it was agreed that C&S would courier a batch of files to Ozon, to be audited and returned before a further batch of files would be sent. On the same day Ozon assured Mr Roberts that it would aim to turn files around (i.e. to review them and return them to C&S) as quickly as possible and that the intention was to keep the disruption caused by the audit to a minimum. On 1 November 2013, therefore, C&S couriered a batch of about 700 files to Ozon. An additional 300 files were sent on 5 November 2013 and, although the original batch had not been returned, further files were requested by Ozon and were sent by C&S on 13 and 27 November 2013. In total, C&S sent more than 2,000 claims files to Ozon in November 2013.[41]The assurance that audited files would be returned was repeated in Ozon’s email dated 3 November 2013:
“… I reiterate the intention is to prioritise the 2011/10 files and urgent matters save that it is necessary for C&S to identify such urgent matters. The urgent files will be audited and returned by DX.”
[42]Despite the initially reassuring tone of Mr Flowers’ email, C&S was concerned to understand why this exercise was thought to be necessary. Its concerns were heightened by the somewhat peremptory and uncooperative approach which Ozon chose to adopt and it clearly found Mr Michael Ozon, the firm’s principal, difficult to deal with. An email dated 4 November 2013 from Mr David Hiley of Enterprise (from whom a witness statement was served but who in the event was not called to give evidence) described the Enterprise management team as “mystified” by the exercise and reported that Mr Myles Ellis, the head of Enterprise’s UK claims department was “gutted and livid” about it. Although Mr Ellis denied in cross examination that this was so, C&S had no reason to doubt what Mr Hiley told it.[43]On 6 November 2013 Mr Arif Qadri, one of those working on the file review at Ozon, provided a spreadsheet to Mr Flowers identifying what were described as “savings” on files dating from 2011 and, in a few cases, late 2010. As I understand it, those savings represented cases where Mr Qadri took the view that the reserve was too high or that the file was dormant and could be closed, thus eliminating the reserve altogether. It is unnecessary (and I do not have the material) to decide whether Mr Qadri’s view was correct, although it does appear on the face of his spreadsheet that some of the reserve figures consisted of the standard initial reserve amount and had not been adjusted since the file was first opened.[44]It is not apparent what instructions had been given to Ozon, but it appears that by 8 November 2013 it had been reported to Mr Flowers that some 290 files had so far been reviewed and that “savings” of about £500,000 had been identified. As a result Mr Flowers decided that the files should henceforth be handled by Ozon rather than C&S, and that an urgent effort should be made by Ozon to settle as many outstanding claims as possible; that no new files should be sent to C&S; and that Enterprise’s relationship with C&S should be terminated. In the event, following further internal discussion, no steps were taken to terminate the relationship with C&S at this stage, although Ozon was instructed to take over the handling of the open claims files which had been sent to it. Once again it is unnecessary (and not possible) to decide whether Mr Flowers’ loss of confidence in C&S was justified, but it does appear that this was indeed his view based upon what was reported to him. For example, in an internal e-mail dated 8 November 2013, he described C&S’s management of the claims as “disastrous” and the “savings we have found so far” as “mind blowing”. It is at first sight strange that Ozon should reach such an adverse view of C&S’s performance of its claims handling duties when previous audits had registered no such concerns and had been broadly favourable. However, this is a paradox which I do not need to resolve for the purpose of deciding the preliminary issues.[45]The decision that files should not be returned to C&S was made by 8 November 2013, but C&S was not informed by Enterprise of this decision at that stage. It continued to ask, in Mr Roberts’ email dated 11 November 2013, when files would be returned so that it could deal with ongoing correspondence. Mr Ozon responded that he would obtain an update and confirm the number of files to be returned by DX. By this stage C&S was expressing reluctance to send a further batch of files to Ozon without a commitment that at least an equal number of files would be returned.[46]In an email to Ozon dated 12 November 2013 Mr Smith referred to his agreement with Mr Flowers that files would only be sent once Ozon was in a position to look at them immediately in order to avoid significant numbers of live files awaiting audit at Ozon’s offices, possibly for some time. He asked again for clarification as to when files would be returned so that C&S could continue to work on them as necessary. Mr Ozon’s response, rather surprisingly in the circumstances, was that “there is no reason why files should not be returned once audited”. In fact Enterprise had decided by this time that open files would not be returned to C&S.[47]On 13 November 2013 Enterprise’s dormancy instructions were revised again, this time to six months for personal injury claims and four months for property damage. It may be that Ozon had already been applying these instructions in its review. If so, it would not have been fair to criticise C&S for failing to apply instructions which had not yet been given to it, though it would have been a valid criticism if C&S was failing to apply the instructions which it had been given. C&S’s own explanation when the criticism was put to it that dormant files had not been closed was that it had been following the 17 October 2013 instructions but that it was taking time to get on top of the Motor Support claims which it had inherited, which had been in a bad state.[48]In the event C&S sent a further batch of files to Ozon on 13 November 2013 without any files having been returned. It did so pointing out that the absence of files was starting to have a significant impact on its operations and pressing again for the return of those which had been audited. On 14 November 2013 it offered to scan the paper files at its office so that files need not be sent away to Ozon for review, but this offer was not taken up. Hitherto C&S’s practice had been to scan only files which had been settled and not open files.[49]In the next few days some 80 files were returned to C&S with instructions that the file be closed and the reserves released. These proved to be the only files which were ever returned. C&S took the view that this rate of return was far too slow and was impeding its ability to manage the files and thereby to protect Enterprise’s interests. Mr Chamberlain of C&S expressed this concern in an email to Mr Flowers dated 21 November 2013.[50]Mr Flowers replied on the same day, explaining why the review had been necessary and what it had shown thus far:
“The draconian action that I was forced to take several weeks ago in demanding a full file review was as a result of spiralling reserves on the case load handled by C&S. As matters presently stand, I simply fail to understand the reasons for which case reserves remain outstanding at significant levels particularly on claims arising in 2010/11 and 12. As you are aware, Ozon is now in possession of around 2,000 files and have a team of 10 people consisting in part of qualified solicitors undertaking audits. The results thus far have left me with major concerns as to the historical claims handling by C&S and have proved beyond doubt my rational for undertaking this exercise. I do not propose to go into detail vis á vis the findings of the audit thus far, I will, however, say at this stage that substantial savings have been made in respect of the files audited. You will gather from the tone of this note that I have some very real initial concerns. I will in due course be proposing a meeting with you.”
[51]Whether or not these concerns were well founded, this message confirms the disingenuous nature of the reassurances given by Mr Flowers in his email initiating the review dated 30 October 2013. He went on to advise that Ozon was now instructed to progress live files and that “when the files are returned to you (once they are scanned), there will be no steps for C&S to take as Ozon will conduct the matters to conclusion” unless for some reason Ozon was unable to do so. Meanwhile, files remaining in C&S’s possession and not yet delivered to Ozon “must be properly progressed where there is action to be taken”. He concluded:
“It is too early to currently form a view as to how we will be dealing with claims going forward. I have no desire to enter into a conflict situation with C&S and in that respect we will continue to liaise with you, returning some files and requesting further files for audit over the next few weeks. We are discussing internally the ongoing findings and once a sensible conclusion has been reached, we will arrange a meeting with you. In this respect, we will of course continue to expect you to work the files you have in your possession and in turn we will clearly be paying for those services as agreed. … In summary, given that C&S should have less files in its possession, I would hope the result in handling those files should improve. EIC does not expect C&S to provide service for no consideration and will continue to meet C&S’s fees in accordance with the agreement between the parties. I must, however, reserve EIC’s position as to any loss or spillage caused as a result of inadequate handling of claims. I hope this short note brings you up to speed. I reiterate I will arrange a visit with Andrew Stone in due course. I suspect this will occur in the New Year. It goes without saying that EIC too has its reputation on the line hence the drastic action I took. I have no doubt C&S will take all necessary steps to assist EIC and comply with its instructions.”
[52]On reviewing the files which had been returned with instructions to close them, C&S took the view that some of the claims in question were unsuitable for closure because they were subject to ongoing enquiries from the third party claimant and, if closed, would inevitably have to be re-opened, while in other cases closure would be premature. When this was pointed out to him, Mr Ellis of Enterprise accepted that such files should not after all be closed. It appears to follow that at least some of the Ozon conclusions were acknowledged to be questionable. (For the avoidance of doubt, I make no finding whether Ozon’s conclusions were in fact wrong, but I do find that in at least some cases Enterprise appeared to accept that they were).[53]C&S’s study of the files which had been returned caused it to lose what little confidence it had in the way the review was being conducted. An internal email from Mr Roberts summarised his frustration in pithy terms:
“Frankly the ‘quality’ of Ozon review team is crap, they’re missing stuff which is on file, recommending closures ahead of even the dormancy protocols of 4 and 6 months, suggesting we close files where payments need to be made or where there’s clear evidence of ongoing TP claims. No doubt Enterprise are paying for the privilege of this rubbish.”
No doubt Enterprise are paying for the privilege of this rubbish.”[54]One claims handler at C&S, Mr Gerald Findon, made the suggestion that C&S should endeavour to “undermine” the Ozon audit. It is clear from the context, however, that what he meant by this was not “sabotage” but “denigrate” – that is to say, seek to persuade Enterprise that the review was being badly conducted and that it should be conducted by C&S itself, with the additional benefit that C&S could earn fees for doing so. In the event this suggestion was not pursued.[55]On 3 December 2013, Mr Smith wrote to Mr Andrew Stone, Enterprise’s Chief Operating Officer, expressing concern that, rather than auditing the claims and returning the files to C&S for continued handling as initially agreed, Ozon was now dealing with the files sent to it. He asked for clarity as to whether this was merely happening as a temporary measure while the audit was continuing or whether Ozon was to retain the files permanently. Mr Stone’s response was that the future handling of the matters to conclusion would be discussed at a meeting between the parties in the New Year.[56]On 6 January 2014 Mr Smith wrote again to Mr Stone. He observed that the time previously indicated for the completion of the audit (i.e.the end of 2013) had elapsed and that it had been some weeks since any meaningful volume of files had been called for. He therefore requested a date for the proposed meeting. This appears to have prompted a request the following day that “the next batch” of files should be sent to Ozon for audit. The request was for a further 1,500 files be couriered to Ozon, starting with the oldest. The request seems rather odd as it appears from Enterprise’s pleaded case that Ozon had audited only 449 of the 2,000 or so claims files that it had already received.[57]In circumstances where the claims files previously couriered to Ozon were not being returned and a meeting to discuss the audit was in the course of being arranged, C&S was reluctant to send more files offsite until that meeting had taken place. However, by an email sent on 7 January 2014 Mr Ozon insisted that neither the return of files nor any meeting with Enterprise had any bearing on C&S’s instructions, which were to send further files to Ozon. On the same day Mr Flowers confirmed these instructions and stated that he would be in touch shortly to arrange a meeting.[58]Mr Chamberlain responded on 10 January 2014, making it clear that although the files were available for audit at C&S’s premises, the proposed meeting needed to take place before C&S could contemplate sending a further 1,500 files to Ozon:
“As you know we are keen to meet to discuss recent events, the relationship between our firms and the implications of the Ozon file review. We feel that we need to have that meeting before we can contemplate delivering a further 1500 files to Ozon and would be very grateful if we could meet as soon as possible. Last year we sent over 2000 files off-site to Ozon Law for review. Despite repeated requests, only a small proportion of these files have been returned to C&S, which has resulted in major operational difficulties and loss of revenue. We have in addition concerns regarding the management of those files and the impact [on] our firm’s reputation in the market. We recognise the importance of the audit and are happy to support it. If Ozon want to review the files here in our office they remain available. We are conscious that you indicated in your email of [7] January, addressed to Lee Roberts, that the delivery of the next batch of documents should not wait until we have met but we feel it is important that we talk these issues through with you as soon as possible. We are available to meet at short notice and look forward to hearing from you.”
[59]In response, Mr Flowers proposed that he meet with C&S on the Friday of the following week, but said that it was “vital” that the requested files were delivered to Ozon and asked C&S to have them ready for collection by the following Tuesday at the latest. Mr Chamberlain replied that “the promise of a meeting next Friday doesn’t really alter our reluctance to release further files which nonetheless are available to audit here”. Mr Flowers responded that Mr Ozon would now be writing to C&S formally on Enterprise’s behalf.[60]Mr Ozon did so in a letter which was dated 13 January but was sent on 14 January 2014. After setting out some of the contract clauses and making a point, not now pursued, that C&S had made a false representation that it handled claims electronically, the letter continued:
“3. The findings thus far give rise to serious concerns as to the manner in which you have been handling and pursuing claims on behalf of Enterprise. Your failure to progress matters has caused to Enterprise considerable loss and disadvantage particularly when dealing with the impact over the reserve levels maintained by Enterprise. It is necessary for Enterprise to conclude its audit before setting out its position as to the discharge of obligations under the Agreement. We confirm Enterprise hereby fully reserves its position accordingly. 4. On 7 January 2014 by email timed at 09:39, Ozon requested that a further 1,500 files are delivered for the purpose of its review. The request was met by a holding response which was communicated by your Mr Roberts under cover of an email timed 11:07 on 7 January 2014 stating that you have entered into “dialog” with Enterprise regarding the request. The “dialog” culminated in the exchange between Mr Flowers of Enterprise and Mr Chamberlain on your behalf. 5. By his email dated 10 January 2014 timed at 19:00, Mr Chamberlain on your behalf reaffirmed your steadfast refusal to release to Ozon the files requested. We consider that this amounts to a repudiatory breach which repudiation Enterprise hereby accepts. Further or in the alternative, insofar as no repudiation has occurred (which is denied), we hereby give notice to terminate on behalf of Enterprise pursuant to Clause 15.1 of the Agreement.”
[61]Thus the only ground of repudiation relied upon as justifying the termination of the contract was the “steadfast refusal”, as Mr Chamberlain’s email was characterised, to release the requested files to Ozon. Although Enterprise reserved its position as to C&S’s “discharge of obligations under the Agreement”, it did not at this stage rely upon C&S’s defective performance of those obligations as repudiatory, although it has since done so.[62]After some further correspondence in which C&S protested that it had “an enforceable two year contract from 1 October 2013” which Enterprise was not entitled to terminate and which C&S wished to continue, while Ozon on behalf of Enterprise maintained that the contract had been validly terminated, on 16 January 2014 C&S’s then solicitors accepted that the contract was at an end and that C&S would have to pursue its remedy in damages.[63]It is common ground that the contract thereby came to an end – either because C&S’s conduct was repudiatory so that Enterprise was entitled to terminate the contract by Ozon’s letter dated 13 January or, if Enterprise’s termination was wrongful, because that was itself a repudiation which C&S was entitled to and did accept as bringing the contract to an end. Issue 1: Did C&S commit a repudiatory breach by refusing to deliver a further batch of 1,500 claims files off-site to Enterprise’s solicitors?[64]The issue whether C&S committed a repudiatory breach by refusing to deliver the requested batch of 1,500 claims files off-site to Ozon involves two sub-issues. The first is whether C&S’s refusal was a breach at all. The second is whether, if so, it was repudiatory.

Breach

[65]Whether C&S was obliged to deliver the files off site depends on the following provisions of the contract.[66]Clause 12, headed “Data and Information Technology” (although the contract also provided that headings were not to affect its interpretation), provided:
“12.1 All data held within C&S’s computer systems or on paper on Enterprise claims shall at all time remain the property of Enterprise unless the Parties agree otherwise, and shall be held in trust by C&S. C&S undertakes that it shall not use the data otherwise than for a purpose contemplated by this Agreement. 12.2 C&S hereby agrees to provide unrestricted access by any or all of the following methods: • through its internet site with the ability of Enterprise to download all data fields • by the transfer electronically and/or digitally of a copy of the C&S database of Enterprise claims in a form which can be used by Enterprise to download or replicate the data.” • through its internet site with the ability of Enterprise to download all data fields • by the transfer electronically and/or digitally of a copy of the C&S database of Enterprise claims in a form which can be used by Enterprise to download or replicate the data.”
[67]Clause 13, headed “Audit”, provided:
“13.1 Enterprise and its appointed professional advisers shall have the right to examine C&S’s books and records relating to its handling and servicing of Enterprise claims which are the subject of this Agreement. Such audits may take place at C&S’s premises during business hours, Enterprise having given reasonable prior notice of its intention to conduct an audit either at C&S’s premises or via remote access of C&S’s systems. 13.2 Enterprise and its appointed professional advisers may carry out such audits of C&S’s premises and systems as frequently as they wish on the giving of reasonable notice during normal business hours (being not less than three working days). Enterprise and its professional advisers shall at their own cost have the right to take copies of any data and records relating to Enterprise claims they reasonably require and C&S shall provide all necessary facilities to do so.”
[68]Clauses 5 of Schedule 1, headed “Reporting and Inspection”, provided:
“C&S shall maintain proper files of all information and documents related to each claim. Enterprise may inspect all such information and documents and make whatever further enquiries in connection with the handling of any claim as it may think fit. C&S shall provide all reasonable co-operation and assistance in connection with any such investigation.”
[69]Clauses 6 of Schedule 1, headed “Retention of Files”, provided:
“All claim papers and files shall be made available to Enterprise and/or its appointed agent at any time during normal business hours upon reasonable request. Upon termination of this Agreement C&S shall, at Enterprise’s discretion, deliver to Enterprise all such claim papers and files (except those that C&S is required by law to retain or requires to fulfil any other legal obligations), or retain such claim papers and files for a period of 3 years after the date of termination and then destroy, or if required return the same to Enterprise.”
[70]On behalf of C&S Mr Jawdat Khurshid submits, in summary, that: 1. The claims files constituted C&S’s “books and records” referred to in clause 13 of the contract and/or “files” referred to in clauses 5 and 6 of Schedule 1. 2. For so long as the contract continued Enterprise had the right to “examine” or “inspect” these files, but only at C&S’s premises or (but only to the extent that C&S maintained electronic files) by remote access. 3. In contrast, upon termination Enterprise was entitled to have the files delivered to it.[71]On behalf of Enterprise Mr Timothy Dutton QC submits, again in summary, that: 1. Clause 13, providing for an audit at C&S’s premises, is concerned only with C&S’s “books and records”, that is to say with C&S’s own records which do not include the claims files. 2. The relevant provision is clause 12, which applies to “all data held within C&S’s computer system or on paper on Enterprise claims”. 3. The claims files comprise such “data” and, therefore, “remain the property of Enterprise” which is entitled to “unrestricted access” to such data.[72]It was understood by both parties that C&S maintained paper rather than electronic files, although it would also create a database of claims to which Enterprise would have remote access, as in fact it did. Reading the contract as a whole it is clear that C&S was both obliged to handle claims notified to it, and to do so with the skill and care of a specialist claims handler, and also that it was entitled to do so in order to earn its fee. It could only do this efficiently if it had possession of the files. If these were removed from its premises for any length of time, disruption to the efficiency of its claims handling would inevitably follow, which would damage both parties’ interests. The concerns which C&S expressed about this, and about the delay in returning files which had been sent to Ozon for review, were justified. It follows that a construction which permitted Enterprise to demand that files be sent to it away from C&S’s premises would be surprising. That does not mean that such a construction is impossible, but it is a legitimate consideration.[73]Against that background the natural meaning of the contractual provisions set out above is that it is clause 13 rather than clause 12 which deals with access to the paper claims files themselves, that clause12.1 is concerned with the ownership of the information (or data) contained in those files, and that clause12.2 is concerned with access to the electronic database which C&S was to and did maintain. Thus Enterprise was to retain ownership of the information and was to have unrestricted electronic access to the database, but was only entitled to examine the paper files themselves at C&S’s premises during business hours after giving reasonable notice of its wish to do so. That reading of clauses 12 and 13 is confirmed by clauses 5 and 6 of Schedule 1 which make clear the obligations on C&S to maintain proper files relating to each claim, to permit Enterprise to inspect those files during normal business hours and upon reasonable request during the currency of the contract, and to deliver the files to Enterprise if requested to do so upon termination.[74]Even if clause12.1 is concerned with the ownership of the files themselves as distinct from the information or data which they contain, that does not mean that Enterprise is entitled to have the files sent to it away from C&S’s premises. While the right to possession of property may be a normal incident of ownership, that is subject to contrary agreement. In the present case Enterprise has given C&S the right as well as the duty to handle claims on its behalf and for that purpose C&S is entitled to possession of the files during the currency of the contract. Moreover, even if (contrary to my view) clause12.2 entitles Enterprise to “unrestricted access” to the paper claims files, that would not mean that it was entitled to insist that the files be sent to it away from C&S’s premises. The clause would be consistent with an obligation on C&S to permit unrestricted access at C&S’s premises, which makes better sense of the contract as a whole. C&S was at all times willing to provide such access. Enterprise’s witnesses said that C&S did not have space at its office for a large team of auditors, but previous audits had been carried out there without difficulty or complaint. C&S’s obligation under clause 5 of Schedule 1 was “to provide all reasonable co-operation and assistance” and that clause gives colour to what is meant by “unrestricted access”.[75]Enterprise submits that in order to make its right of access meaningful, the parties must be taken to have made an assumption that the claims files would be available in digital form. However, the parties made no such assumption in fact and I see no reason why they should be deemed to have done so. The contract only requires C&S to maintain “proper” files, and assumes that these will be, or at least will include, paper files. In any event the request made by Ozon was for the delivery of a further batch of paper files. As noted above, C&S’s offer to scan the files was not taken up.[76]Accordingly I conclude that C&S was not obliged to send files to Ozon. Enterprise’s case that its refusal to do so was repudiatory falls at the first hurdle.

Repudiation

[77]On the assumption that C&S was under such an obligation, the question arises whether its refusal to do so was repudiatory.[78]There was no real dispute between the parties as to the principles to be applied, which can conveniently be taken from Chitty on Contracts, 32nd edition (2015), Volume 1, para 24-041, citing among other cases Telford Homes (Creekside) Ltd v Ampurios Nu Homes Holdings Ltd [2013] EWCA Civ 577, [2013] 4 All ER 377 and Valilas v Januzaj [2014] EWCA Civ 436, [2015] 1 All ER (Comm) 1047:
“….regard must be had to the nature and consequences of the breach in order to determine whether this right has arisen. The question whether a breach of an intermediate term is sufficiently serious to entitle the innocent party to treat himself as discharged is to be determined ‘by evaluating all the relevant circumstances’. In conducting this inquiry, the court is not exercising a discretion, but is engaged in a fact-sensitive inquiry which involves ‘a multi-factorial assessment’ and the use of various ‘open-textured expressions”
. The bar which must be cleared before there is an entitlement in the innocent party to treat himself as discharged is therefore a ‘high’ one. A number of expressions have been used to describe the circumstances that warrant discharge, the most common being that the breach must ‘go to the root of the contract’.”[79]It was common ground also that in determining whether a breach is repudiatory the questions identified by Lewison LJ at [51] and [52] of his judgment in the Telford Homes case would be relevant:
“Whatever test one adopts, it seems to me that the starting point must be to consider what benefit the injured party was intended to obtain from performance of the contract. … The next thing to consider is the effect of the breach on the injured party. What financial loss has it caused? How much of the intended benefit under the contract has the injured party already received? Can the injured party be adequately compensated by an award of damages? Is the breach likely to be repeated? Will the guilty party resume compliance with his obligations? Has the breach fundamentally changed the value of future performance of the guilty party's outstanding obligations?”
[80]Applying these tests C&S submits that its refusal to send files to Ozon was not repudiatory, while Enterprise submits that it was or, alternatively, that the cumulative effect of this refusal together with C&S’s poor performance in handling the claims was at least capable of amounting to a repudiation and that the issue of repudiation ought not to be determined until all the facts relating to Enterprise’s allegations of poor performance had been established.[81]I have no doubt that, considered on its own, C&S’s refusal to send the files to Ozon was not repudiatory. The benefit which Enterprise was intended to obtain from performance of the contract was the efficient handling of claims on its behalf, applying the skill and care appropriate to a specialist in the field. The ability to carry out audits was one aspect of ensuring that this was being achieved. It was recognised to be important. A refusal to permit such audits at all would therefore have been a serious matter. It is necessary, however, to examine what C&S was actually refusing to do. Contrary to Ozon’s characterisation of C&S’s refusal in its letter dated 13 January, this was not an outright or “steadfast” refusal to send the files under any circumstances. Rather it was a refusal to do so before a meeting had taken place which was due to happen in only a few days in order to provide much needed clarity as to the situation. This refusal was combined with the offer of unrestricted access to the files at C&S’s own premises in the meanwhile. What Enterprise lost was a delay of a few days, in circumstances where Ozon already had some 2,000 files in its possession of which it had so far reviewed less than a quarter. It had plenty, therefore, to be getting on with. If the short delay was critical, although there is no reason to suppose that it was, it would have been straightforward to send people to begin inspecting the files at C&S’s premises. Any costs incurred in doing so would have been relatively trivial and could easily have been compensated in damages.[82]Moreover the context for C&S’s refusal was a series of broken promises by Enterprise that files would be returned once reviewed, the disruption to efficient claims handling which would inevitably occur if a further 1,500 files were sent away, and the fact that at least some of the Ozon findings on the few files which had been returned with instructions to close them appeared to be questionable. These were all matters that urgently needed to be discussed. Even if (contrary to my view) the stance adopted by C&S was a breach of the contract, it was not unreasonable.[83]Enterprise relies on its regulatory obligation under guidance published by the Gibraltar FSC to ensure that “Appropriate and effective, systems and controls and procedures … to ensure adequate and accurate information is appropriately and promptly recorded to enable a proper assessment to be made of the ultimate cost of all claims or potential claims”, submitting that review of the 1,500 files was essential to ensure compliance. There is no reason to think that this formed any part of Enterprise’s thinking at the time and, to the extent that Mr Flowers suggested that it did, I do not accept his evidence. In any event, a delay of a few days would have made no difference at all, while if this had been a concern the review could have been begun at C&S’s premises.[84]As for the further possibility raised by Enterprise that the cumulative effect of this refusal together with the defective performance of C&S’s obligations may amount to a repudiation when all the facts are found, it is in theory possible that the cumulative effect of breaches which individually are not repudiatory may satisfy the test for a repudiation. However, that possibility cannot arise here in view of my conclusion that the refusal was not a breach at all. The first preliminary issue, which asks whether C&S committed a repudiatory breach by refusing to deliver this further batch of 1,500 claims files off-site, must therefore be answered in the negative. Issue 2: Are the pleaded allegations of breach of C&S’s duties sufficiently substantial (whether taken individually or in combination) to be capable of amounting to a repudiatory breach of the contract?[85]Enterprise’s pleaded allegations of breach of duty and/or negligence by C&S are wide ranging. They include: failing to provide accurate information to Enterprise; failing to comply with prescribed dormancy procedures; maintaining reserves after claims had been settled; setting excessive reserves; failing to abide by time limits prescribed under the Pre-Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents or the Pre-Action Protocol for Personal Injury Claims; incompetence in obtaining instructions from policyholders and contacting witnesses; and instructing third party contractors including its own associated company where there was no justification for doing so.[86]The preliminary issue is one of principle, whether such breaches if established are capable taken together of amounting to a repudiation. It has been no part of the trial of the preliminary issues to attempt to determine whether Enterprise will be able to establish any of the breaches on which it relies. For present purposes I must assume without deciding that it will be able to do so, and that the breaches which can be proved are serious and extensive. It seems to me that, if proved on a sufficient scale, the breaches alleged are undoubtedly capable of satisfying the criteria for a repudiatory breach identified above. Enterprise’s case, put bluntly, is that far from receiving the services of a specialist claims handler exercising an appropriate level of skill and care, it turns out to have entrusted the handling of its third party motor claims to a company whose systems and procedures were fundamentally flawed and which repeatedly acted incompetently. If that proves to be so, it should not be difficult to conclude that the breaches had the effect of depriving Enterprise of substantially the whole benefit which it was intended to obtain from the contract and thus that they were sufficiently serious to entitle Enterprise to terminate the contract. Indeed one of Enterprise’s allegations, that C&S tendered invoices on behalf of its associated company where there was no evidence of that company having carried out any work, is close to an allegation of fraud. A decision whether such breaches (if any) as are proved do in fact satisfy the criteria for repudiation must await establishment of the facts.[87]C&S resists this conclusion on three grounds, each of which is said to lead to the conclusion that the breaches alleged cannot justify Enterprise’s termination of the contract even if they are eventually established.

The Heisler qualification

[88]The first such ground arises out of the fact that Enterprise did not rely on C&S’s defective performance of the contract as a ground for termination in Ozon’s letter dated 13 January 2014 (in fact it reserved its position), but only on C&S’s refusal to send the next batch of files. As a general rule, a party who refuses to perform a contract, but who gives a wrong or inadequate reason or no reason at all, may later justify his refusal if there were at the time facts in existence which would have provided a good reason for the refusal. This general rule, however, has been held not to apply “if the point taken is one which if taken could have been put right”: Heisler v Anglo-Dal Ltd [1954] 1 WLR 1273 at page 1278. I refer to this as “the Heisler qualification”. C&S submits that the Heisler qualification applies in this case because if Enterprise had notified C&S of the matters of which it now complains, any defects in the performance of its claims handling operations could have been put right.[89]The claimant seller in Heisler v Anglo-Dal Ltd had promised to provide the defendant buyer with a guarantee. The claimant provided a personal guarantee. The defendant demanded a bank or third-party guarantee and treated the claimant’s refusal to provide one as an anticipatory breach which it accepted as bringing the contract to an end. The Court of Appeal held that the contract only required a personal guarantee, so that the ground of repudiation relied on at the time of termination was bad. The defendant then said that the guarantee was valueless in the absence of exchange control permission to pay the sum guaranteed, invoking the principle that a party who gives a wrong reason for termination does not thereby deprive himself of a justification which in fact existed whether or not he was aware of it. This argument failed. Somervell LJ said:
“This rule is, however, subject to a proviso. If the point not taken is one which if taken could have been put right, the principle will not apply. This has, I think, clear application here. The plaintiff was producing his document before he was under any obligation to do so. If the defendants had accepted it subject to the provision of a Treasury permission it might have been obtained; further, the plaintiff could have said that he was not bound to produce any guarantee until the defendants obtained from the bankers confirmation of the letter of credit. It is doubtful if they could ever have done so, but if they had this might itself have assisted the plaintiff in getting Treasury permission. I think, therefore, assuming the point was a good one, that it fails on the ground that it was not taken and is not one which can now be relied on.”
[90]It is apparent that this reasoning depends upon the fact that the contract was terminated for anticipatory breach by the claimant, that the contract was therefore terminated before the time for performance of the claimant’s obligation to provide a guarantee had accrued, and that if the point about exchange control permission had been taken the necessary permission might have been obtained so that (assuming such permission to have been required) the claimant might never have been in breach at all.[91]Two further cases were cited in which the Heisler qualification was considered. In André & Cie v Cook Industries Inc [1987] 2 Lloyd’s Rep 463, the claimant seller was obliged to give notice of appropriation of a shipment of soya bean meal. The notice was six days late on its face, but the buyer took no point on this at the time. It later sought to rely on the lateness of the notice to justify rejection of the shipment, but was not permitted to do so. This was because, if objection to the appropriation had been taken at the time, the seller might have been able to validate the notice by a somewhat esoteric procedure known as “proof of string” or alternatively to appropriate different goods to the contract which would have been in time. In either event the seller would not have been in breach at all. The Heisler qualification therefore applied.[92]In contrast Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 4 All ER 514 was a case of an actual breach of contract, namely a buyer’s failure to open a conforming letter of credit by the stipulated deadline. The seller refused to load the vessel on the ground that it had arrived late. This was held to be a bad point not justifying the refusal to load, but the seller was entitled to rely on the failure to open a letter of credit even though the point had not been taken at the time. The Heisler qualification did not apply. Once the deadline for opening the letter of credit had passed, it was too late to put it right.[93]C&S submits that the applicable principle is that parties should be afforded an opportunity to rescue a commercial relationship and that a contract should continue in force if such an opportunity exists. This, however, states the matter far too broadly. In my judgment it is clear that the Heisler qualification applies only to anticipatory breaches or, to the extent that this is different, to situations where if the point had been taken steps could have been taken to avoid the party being in breach altogether, either by giving it an opportunity to perform its obligation in time or by enabling it to perform in some other valid way. This is not such a case.[94]If Enterprise is able to make good its case, the breaches on which it relies had already occurred. Nothing could change that. For this purpose the allegations pleaded by Enterprise fall into two categories,(1) claims which as a result of C&S’s breach were settled too high, or which fell out of the MOJ Portal, or where the quantum was increased by unnecessary delay leading to litigation costs or increased credit hire claims and(2) claims where reserves were set too high or were maintained after the claims should have been closed. In the former cases the damage was done and Enterprise had suffered loss. In the latter case a correction could be made by reducing or eliminating the reserve at a later date and it might be that Enterprise had suffered no loss, for example if there was no business which it had been unable to write, or if any such business would have been loss-making. Nevertheless, while the later correction would mitigate the effect of the breach, it would not mean that it had not occurred. If Enterprise is able to prove that these were failings as a result of negligence or incompetence so that C&S was in breach of its duties, and if those breaches satisfy the criteria for repudiation, the Heisler qualification will not prevent it from relying on them as justifying its termination of the contract.[95]In any event C&S’s case as to what would be involved in remedying the breach (by which in fact it meant improving its standard of performance so that similar breaches were not committed in the future) was extremely vague. Ms Clara Benn, who dealt with the expert evidence on behalf of C&S, cross examined Enterprise’s expert Mr Wylde on the basis that future performance might be improved by appropriate training or instructions given to C&S staff. No details were suggested of what might be involved and the whole concept seems rather far fetched. In any event C&S was supposed to be a specialist claims handler with skilled and experienced staff. Enterprise did not contract for the services of a bad claims handler with negligent staff who, with extensive further training after their failings had been pointed out, might possibly be brought up to scratch. Mr Flowers used the metaphor of a fire burning and said (in effect) that he had to take action to put out the fire before it burnt down the building. That may be an exaggeration, but if it proves to be an apt metaphor – that is to say, if C&S’s negligence was indeed causing serious damage to Enterprise’s business – it is hard to think that the law could require Enterprise to wait and see whether, with appropriate training of its staff whatever that might consist of – its performance could be improved.[96]In any event, even if the Heisler qualification applies where actual breaches have already been committed, whether in fact C&S was capable of improving its performance for the future would itself be a question of fact to be determined in the light of whatever findings are eventually made as to whether or to what extent it was failing in its duties. C&S submits that in applying the Heisler qualification it is enough that the matter in question “might” have been put right. Although the cases do use such language, and on the assumption that the qualification applies, in my judgment there must be at least a real prospect as distinct from a merely theoretical or fanciful possibility of the necessary correction being made. Wholesale systemic failure by C&S, if proved, might well be incapable of being improved within any reasonable timescale. Accordingly, even if the Heisler qualification were in principle available, it would not be possible to conclude at this stage that the breaches alleged are not capable of justifying Enterprise’s termination of the contract. Any such conclusion would have to depend on the facts found at trial.

The termination regime

[97]The second ground on which C&S submits that Enterprise was not entitled to hold it in repudiation for defective performance of the kind alleged is that(a) Enterprise agreed not to treat remediable breaches (however serious) as giving rise to a right of termination unless at least 30 days’ written notice had been provided giving C&S an opportunity to remedy the breach within that period and(b) the breaches in question were in fact capable of being remedied. This is said to be the effect of clause 15.2 of the contract and to be supported by the decision of Ramsay J in BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC).[98]Clause 15 provided:
“15.1 This Agreement may be terminated at any time by either of the Parties giving at least three calendar months’ notice in writing to the other. 15.2 Either party (‘the Aggrieved Party’) may at any time terminate the Agreement forthwith by written notice to the other Party if any of the events referred to below occur in relation to the other Party, namely: * the other Party commits a material breach of any provision of this Agreement and (if such default is capable of remedy) it is not remedied within 30 days (or such longer notice as the Aggrieved Party may specify) after written notice shall have been given by the Aggrieved Party to the other Party requiring such remedy giving full particulars of the breach and the reasonable steps necessary to remedy it …”
The other termination events listed are all concerned with insolvency or related matters.[99]Clause 16 then deals with the consequences of termination:
“Upon termination of this agreement: 16.1 Enterprise shall forthwith pay to C&S all sums due to C&S (including all sums which would have been payable at some future time, the due date for which shall become the date of termination); 16.2 C&S shall forthwith pay to Enterprise all sums due to Enterprise (including all sums which would have been payable at some future time, the due date for which shall become the date of termination) and all unused amounts in the Claims Fund; 16.3 C&S shall, unless Enterprise expressly does not require it, continue to handle all existing claims until they are concluded, and all of C&S’s obligations and Enterprise’s obligations under this Agreement shall continue insofar as they can apply to such claims. Should C&S handle existing claims, the fee will continue to be paid on settlement of individual cases, on production of the monthly bordereaux and fee invoices. 16.4 If requested by Enterprise, C&S shall deliver all data and material belonging to Enterprise forthwith and C&S’s authorised representative shall certify full compliance with this clause. 16.5 All provisions of this Agreement which are intended to have effect following any expiry or termination of this Agreement shall survive expiry or termination of this Agreement to the extent permissible by law. 16.6 C&S shall not handle any new claims after the termination date unless agreed otherwise by the Parties.”
[100]There is, therefore, an express contractual right to terminate in the case of a “material” breach which is subject, in the case of a breach which is “capable of remedy”, to the giving of notice and the breach remaining unremedied after 30 days. A “material breach” here must include an actual breach of at least some degree of seriousness, but it need not be repudiatory. Conversely, any actual breach which satisfies the criteria for repudiation at common law is very likely to be a material breach within the meaning of this clause.[101]I do not accept that, in the case of those breaches which do satisfy those criteria, Enterprise has agreed not to exercise its common law right to treat the contract as discharged. Clause 15.2 provides an express contractual right to terminate, with the consequences set out in clause 16, which is additional to the right to terminate for repudiation at common law. Clear words would be required in order to conclude that termination for repudiation was excluded: cf. Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2010] QB 27 at [23]. There are no such words here.[102]C&S accepts this, but submits that clause 15.2 amounts to an agreement that any material breach which was capable of being remedied would not amount to a repudiation. I do not accept that the clause should be read in this way. Termination for material breach and for repudiation are separate matters even if there is some overlap between them. The criteria for repudiation are demanding but, if they are satisfied so that the effect of a breach is to deprive Enterprise of substantially the whole benefit of the contract, there is no reason why it should not treat the contract as discharged. That is so even in the case of a breach which is capable of remedy in the sense that it is possible that C&S may be able to improve its performance in the future if given an opportunity to do so. Once again, Mr Flowers’ fire metaphor may be apt: in the event of major systemic negligence causing serious damage to Enterprise’s business so that it was receiving nothing like the service for which it had bargained, Enterprise would not be obliged to wait and hope that C&S’s performance would improve.[103]Moreover the consequences of contractual termination and acceptance of repudiation are different. In the former case, the consequences are those set out in clause 16 which include an accelerated right to payment of sums which would have become due in the future and an obligation on C&S to continue to handle all existing claims if Enterprise requires it to do so. That would not be the position on acceptance of a repudiation, the result of which would be to discharge each party from any further performance of outstanding obligations and entitle the innocent party to damages.[104]In any event, C&S’s reliance on clause 15.2 as a reason why the breaches alleged are not capable of giving rise to a right to terminate for repudiation depends upon the breaches in question being capable of being remedied. As already noted above, whether this was so is itself a question of fact to be determined in the light of whatever findings are eventually made as to whether or to what extent C&S was failing in its duties.[105]C&S relies on [1366] of Ramsay J’s judgment in the BSkyB case as providing support for its argument. It is necessary, however, to read the relevant section of the judgment as a whole. The contract in that case contained a clause headed “Termination for Material Breach” which was very similar to clause 15.2 in the present case. It also contained a provision (which has no equivalent in the present case) that a failure to reach a contractual milestone “would not be deemed to be” (sc. would be deemed not to be) a material breach until a further period of three months had passed. Although the relevant passage from Ramsay J’s judgment is lengthy, it is necessary to set it out: “1362. The test for repudiation is commonly expressed in terms of whether the breach goes to the root of the contract or whether a party evinces an intention no longer to be bound by the terms of the contract. As Lord Simon said in Heyman v Darwins [1942] AC 356 at 361 it is where ‘one party so acts or so expresses himself, as to show that he does not mean to accept and discharge the obligations of a contract any further.’ Evidently, poor performance does not, of itself, amount to repudiatory conduct. Whilst the conduct must be viewed objectively, it is instructive to see how the parties treated the conduct at the time. 1363. Equally, I accept that the contractual provisions may give guidance on whether a particular breach is to be treated as repudiatory. In Lockland Builders v. Rickwood (1995) 46 Con LR 92 (CA) there was a clause of a building contract which gave the owner a right to terminate for delay or poor materials if he served a notice of breach and complied with the procedure set out in the contract. The owner did not follow this procedure but sought to terminate for repudiatory breach. The Court held that there was no repudiation. Russell LJ said at 98: ‘My own view -- returning to the facts of the instant case -- is that cl 2 and the common law right to accept a repudiatory breach can exist side by side, but only in circumstances where the contractor displays a clear intention not to be bound by his contract, for example, by walking off the site long before completion (as suggested during the course of argument by Hirst LJ) or, by way of further illustration, failing to comply with plans in a very fundamental way, for example, by not building a third storey when contractually bound to do so. But such cases are far removed from the instant one. On the facts of this case, I, for my part, would be prepared to hold that cl 2 created the only effective way in which Mr Rickwood could determine this agreement. It is difficult to understand why the clause should be there at all if that were not the true position.’ 1364. Hirst LJ said at 102: ‘In my judgment, this cl 2 did impliedly preclude Mr Rickwood from terminating the contract on the facts of the present case otherwise than by the exercise of his rights under cl 2 since the complaints made fell squarely within the scope of cl 2, ie complaints as to the quality of materials and workmanship. However, cl 2 would not have done so in relation to breaches outside the ambit of cl 2, eg. by Mr Ryan walking off the site when the works were still substantially incomplete.’ 1365. In Amoco v BAOL (Unreported, 16 November 2001), Langley J held: ‘The Contract itself contained its own scheme for compensating Amoco for reduced efficiency or performance by reduction in the operating rate for the period of the reduction in efficiency or performance (Appendix 10) and by a breakdown rate reduced to a nil rate after 48 hours. It also contained in Clause 28.1 its own provisions for termination which were effective after a breakdown of sufficient gravity to cause BAO to be unable to perform its obligations under the contract lasting 30 days or a major fault causing a suspension of operations for more than 30 days. Those provisions themselves must in my judgment form part of an appreciation of the benefit the parties were intended to derive from the contract. Thus circumstances otherwise within the scope of the termination provisions but falling short of the precise terms would in my judgment not give rise to the right to terminate at common law for the very reason that the parties agreed when and how such circumstances should have that consequence: see Lockland Builders Ltd v. Rickwood (1995) 46 Con LR 92 (CA). The provisions are ones for the benefit of both parties not just for the benefit of Amoco involving as they do time and notice constraints. For present purposes loosely expressed what I think that comes to is that to justify termination at common law something "worse" or not addressed by those provisions would be required.’ 1366. I do not read those decisions as laying down any hard and fast rules. Rather, in deciding whether by its conduct a party evinces an intention not to be bound by the terms of the contract, the way in which parties agreed to treat breaches within the terms of their contract must be a factor to take into account. In particular, if a breach of a term had to reach a degree of seriousness before a contractual termination clause could be applied, it is unlikely that a breach which was less serious would, by itself, amount to a repudiatory breach. Equally, the fact that for a particular breach the contract provided that there should be a period of notice to remedy the breach would indicate that the breach without the notice would not, in itself, amount to a repudiatory breach. 1367. In this case, the fact that there was a failure to meet a Major Milestone must be viewed in the light of Clause 16.2 which provides: ‘Notwithstanding Clause 16.1, if a Milestone (with the exception of the first and last Milestones) is not Accepted under Clause 8.2 on the relevant date. the parties have agreed that the Contractor shall not be deemed to be in material breach of the Agreement until three months after the relevant date and the provisions of Clause 11 or Clause 22.2 shall not apply to such delay prior to that date.’ 1368. The effect of this is that until three months after the relevant milestone date there is not a material breach of the Prime Contract. In the light of that provision, I consider that there could be no question of a repudiatory breach in relation to acceptance of a Milestone until that period of three months had elapsed. In terms of material breach, then clause 22.2 of the Prime Contract provides: ‘Termination for Material Breach In the event of any material breach of this Agreement by either party, the other party may give to the party in breach notice specifying the same, requiring its remedy and stating that this Agreement may be terminated if the material breach in question is not remedied in accordance with this Clause 22.2. If the party in receipt of such notice fails to remedy the breach within 30 days of receipt of the notice the party who served the notice may by further notice, forthwith terminate this Agreement, whereupon the provisions of Clauses 22.3 and 22.4 shall apply.’ 1369. That merely deals with a case where there has been a material breach and would cover breaches which could have a whole range of seriousness. I do not consider that this means that before any breach can be treated as being repudiatory it must be the subject of a notice requiring the breach to be remedied and cannot lead to termination unless there has been a failure to remedy the breach within 30 days. Take, for instance, a case where a party says that it will no longer perform the contract or acts in such a way. I do not consider that in such a case the innocent party must give notice and wait 30 days before it can terminate the contract at common law based on a repudiatory breach. In the case of less serious breaches, the failure to give any notice may well mean that the breach in itself cannot be treated as repudiatory but a failure to comply with a notice to remedy the breach may be.” ‘My own view -- returning to the facts of the instant case -- is that cl 2 and the common law right to accept a repudiatory breach can exist side by side, but only in circumstances where the contractor displays a clear intention not to be bound by his contract, for example, by walking off the site long before completion (as suggested during the course of argument by Hirst LJ) or, by way of further illustration, failing to comply with plans in a very fundamental way, for example, by not building a third storey when contractually bound to do so. But such cases are far removed from the instant one. On the facts of this case, I, for my part, would be prepared to hold that cl 2 created the only effective way in which Mr Rickwood could determine this agreement. It is difficult to understand why the clause should be there at all if that were not the true position.’ ‘In my judgment, this cl 2 did impliedly preclude Mr Rickwood from terminating the contract on the facts of the present case otherwise than by the exercise of his rights under cl 2 since the complaints made fell squarely within the scope of cl 2, ie complaints as to the quality of materials and workmanship. However, cl 2 would not have done so in relation to breaches outside the ambit of cl 2, eg. by Mr Ryan walking off the site when the works were still substantially incomplete.’ ‘The Contract itself contained its own scheme for compensating Amoco for reduced efficiency or performance by reduction in the operating rate for the period of the reduction in efficiency or performance (Appendix 10) and by a breakdown rate reduced to a nil rate after 48 hours. It also contained in Clause 28.1 its own provisions for termination which were effective after a breakdown of sufficient gravity to cause BAO to be unable to perform its obligations under the contract lasting 30 days or a major fault causing a suspension of operations for more than 30 days. Those provisions themselves must in my judgment form part of an appreciation of the benefit the parties were intended to derive from the contract. Thus circumstances otherwise within the scope of the termination provisions but falling short of the precise terms would in my judgment not give rise to the right to terminate at common law for the very reason that the parties agreed when and how such circumstances should have that consequence: see Lockland Builders Ltd v. Rickwood (1995) 46 Con LR 92 (CA). The provisions are ones for the benefit of both parties not just for the benefit of Amoco involving as they do time and notice constraints. For present purposes loosely expressed what I think that comes to is that to justify termination at common law something "worse" or not addressed by those provisions would be required.’ ‘Notwithstanding Clause 16.1, if a Milestone (with the exception of the first and last Milestones) is not Accepted under Clause 8.2 on the relevant date. the parties have agreed that the Contractor shall not be deemed to be in material breach of the Agreement until three months after the relevant date and the provisions of Clause 11 or Clause 22.2 shall not apply to such delay prior to that date.’ ‘Termination for Material Breach In the event of any material breach of this Agreement by either party, the other party may give to the party in breach notice specifying the same, requiring its remedy and stating that this Agreement may be terminated if the material breach in question is not remedied in accordance with this Clause 22.2. If the party in receipt of such notice fails to remedy the breach within 30 days of receipt of the notice the party who served the notice may by further notice, forthwith terminate this Agreement, whereupon the provisions of Clauses 22.3 and 22.4 shall apply.’[106]In the event, Ramsay J held that the breaches relied on were not repudiatory and that, even if they had been, they were not accepted as bringing the contract to an end.[107]Much of Ramsay J’s analysis is concerned with whether a termination for material breach clause operates to preclude termination for a repudiation consisting of an express or implied renunciation, a question which does not arise here. Subject to that, and so far as relevant for present purposes, I draw the following conclusions from this citation: 1. It is open to parties to agree that certain breaches or kinds of breach are not to be treated as repudiatory. Such clauses will be effective. 2. Although every case will depend on the particular contract in issue, examples where clauses have been held to have this effect include(a) clauses which provide that specified conduct gives rise to a right of termination but only after service of a notice or a period of time, and(b) clauses which provide compensation for certain kinds of poor performance. 3. Where a contract does provide that certain breaches or kinds of breach are not to be treated as repudiatory, that may provide guidance as to whether other kinds of breach qualify or are capable of qualifying as repudiatory. For example, breaches which are less serious are unlikely to do so. 4. However, a clause such as clause 15.2 in the present case, providing for termination in the event of a material breach but only after the giving of a notice and a failure to remedy, will not by itself prevent a sufficiently serious breach from amounting to a repudiation of the contract justifying an immediate termination. Such a clause will generally provide for a right to terminate which is in addition to a party’s common law rights.

Conduct not capable of being repudiatory

[108]Finally C&S submits that in any event Enterprise’s allegations of breach cannot possibly amount to a repudiation depriving Enterprise of substantially the whole benefit of the Agreement. There are, as I understand it, two strands to this argument. The first is that the individual breaches alleged by Enterprise are not serious enough to amount to a repudiation. In principle I would accept this. The bad handling of any single individual claim is unlikely to have had sufficiently serious consequences to qualify as repudiatory and I did not understand Mr Dutton to point to the bad handling of any such individual claim as repudiatory in itself. However, that does not mean that the cumulative effect of all the breaches relied on is not such as to deprive Enterprise of substantially the whole benefit of the contract, particularly if they reveal extensive systemic failings on the part of C&S.[109]The second strand, focusing on the cumulative effect of Enterprise’s allegations, is that however extensive C&S’s failings may turn out to be, it was still providing claims handling services and, even if it is proved that some (or even many) claims were badly handled, others were not; therefore Enterprise was at worst deprived of part and not all of the benefit for which it had bargained, while if C&S had cured the alleged breaches and improved its performance for the future, its services from that point onwards would have been as valuable to Enterprise as they had ever been, and any loss suffered in the meanwhile could easily be compensated in damages.[110]I reject this argument for the reasons already given, in particular at [86] and [95] to [96] above. Whether, if proved, the breaches alleged by Enterprise do in fact amount to a repudiation is a matter for the trial.[111]Accordingly the answer to the second preliminary issue is that the breaches of C&S’s duties alleged by Enterprise are capable, if proved, of amounting to a repudiatory breach. Issue 3: Was Enterprise’s purported termination of the contract by Ozon’s letter dated 13 January 2014 itself repudiatory?[112]It is common ground that(1) if (as I have held) C&S did not commit a repudiatory breach by refusing to deliver a further batch of 1,500 claims files off-site and(2) if Enterprise’s case on repudiation fails at trial, Enterprise’s purported termination of the contract by Ozon’s letter dated 13 January 2014 was itself repudiatory.

Issue 4: Was such repudiation accepted by C&S?

[113]It is also common ground that the letter dated 16 January 2014 from C&S’s then solicitors accepted Ozon’s letter as a repudiation bringing the contract to an end.[114]Accordingly, if Enterprise’s case on repudiation fails at trial, C&S will be entitled to damages for repudiation. The remaining preliminary issues concern the value of the contract to C&S and thus the potential quantum of any such damages. Issue 5: was the contract varied by an exchange of emails in October 2013 so as to(a) increase the fees payable to C&S and(b) provide that the contract should continue for a minimum term of two years from 1 October 2013?[115]As noted above, in June 2013 C&S sought to increase the fees payable by Enterprise under the contract. Enterprise agreed to discuss this and a negotiation ensued in which C&S raised the prospect of introducing a two year minimum term for the contract which, hitherto, had been terminable by either party on three months notice at any time.[116]Following various negotiations which need not be set out, on 23 September 2013 Mr Ellis of Enterprise emailed the revisions to the fees which Enterprise was prepared to accept:
“Hi Mike Yes I was in Gibraltar last week and have had the opportunity to discuss fees in detail with Andrew. • Property Damage agreed at £95 however as you are aware we are looking at utilising Nationwide’s Engineering facilities in relation to TPPD later in the year which will reduce the number of TPPD claims handled by you. • Credit Hire Claims, we would like to agree a fee of £170 • MOJ <£10k agreed at £200 • MOJ >£10k agreed at £295 • Fraud - Agreed at £500 with 50% success fee however no additional fraud fee to be paid for cases simply passed onto Keoghs for handling as I do not want to be paying double fees. • Fees for higher value claims charged on an hourly basis etc. to remain as per current fee structure. I have discussed providing a minimum 2 year agreement, this is something that Andrew would be agreeable to in consideration for a discount on the above fees of say 10%. Andrew has also spoken to our Finance Director who will be working towards putting in place a single claims fund account to ease the administrative burden that you currently undertake. I look forward to your comments. Kind regards Myles Ellis LLB (Hons), FCILEx. Head of Claims UK” • Property Damage agreed at £95 however as you are aware we are looking at utilising Nationwide’s Engineering facilities in relation to TPPD later in the year which will reduce the number of TPPD claims handled by you. • Credit Hire Claims, we would like to agree a fee of £170 • MOJ <£10k agreed at £200 • MOJ >£10k agreed at £295 • Fraud - Agreed at £500 with 50% success fee however no additional fraud fee to be paid for cases simply passed onto Keoghs for handling as I do not want to be paying double fees. • Fees for higher value claims charged on an hourly basis etc. to remain as per current fee structure. Kind regards Head of Claims UK”

Kind regards

[117]This gave C&S a choice. It could either accept the fees proposed with no minimum term or it could have a two year minimum term but with a 10% discount on the fees proposed. The discount was not attractive to C&S which indicated, in Mr Smith’s email dated 24 September, that if the proposed fees could be accepted with a two year minimum contract and no discount, C&S would accept this. Mr Ellis responded on 4 October 2013:
“I am pleased to confirm that following further discussion with Keith [Newing, Enterprise’s Finance Director] and Andrew [Stone, its Chief Operating Officer] we are happy to agree the fees outlined in my e-mail of the 23rd September with a 2 year agreement to take effect from 1st October 2013 with no discount. We will in due course submit to you a revised Claims Administration Service Agreement to include the agreed terms. Kind regards, Myles Ellis LLB (Hons), FCILex Head of Claims UK Enterprise Insurance Company Plc”
Myles Ellis LLB (Hons), FCILex Head of Claims UK Enterprise Insurance Company Plc”

Head of Claims UK

[118]Mr Smith accepted these terms, as he had said he would, by an email sent on 5 October 2013:
“Many thanks Myles, much appreciated. Mike”
[119]No revised document was prepared by Enterprise and the possibility of such an agreement was never referred to between the parties again. However, C&S did invoice Enterprise at the new higher rates for its fees for claims settled after this date and Enterprise paid those fees without question or protest.[120]The parties are in dispute as to whether the exchange of emails set out above resulted in a binding variation of the contract. C&S says that it did, and that the variation included not only agreement on increased fees but also the introduction of a minimum term. Enterprise says that it did not and in particular that there was no agreement on a minimum term, though it accepts that its subsequent payment at the higher rates invoiced by C&S amounted to an agreement to pay these fees. It makes five points: 1. The email exchange did not satisfy the contractual requirement that any variation be in writing and signed on behalf of each party. 2. Mr Ellis’s email dated 4 October 2013 was no more than an offer of agreement in principle, which was subject to a revised form of contract to be submitted “to include” the agreed terms. 3. Even if the exchange was capable of amounting to a binding agreement when considered objectively, in fact each party understood subjectively that it would not be binding until a formal agreement was signed. 4. The proposed revisions of the fee structure set out in Mr Ellis’s mail dated 23 September 2013 were too unclear or uncertain to constitute a binding contract and, in any event, the lack of clarity and certainty demonstrated that the parties did not intend to be bound. 5. There was even greater uncertainty as to what was envisaged to be involved with a “2 year agreement”.[121]I deal with each of these arguments in turn. In practice, however, at least as matters have turned out, the only real significance of this issue is whether an agreement on a minimum term would have the effect of committing Enterprise to continuing to provide new business to C&S and, if so, on what basis. That question is addressed under issues 6 and 7 below.

Clause 24.1

[122]Clause 24.1 of the contract provided:
“Any variation of this Agreement shall not be effective unless made in writing and signed by or on behalf of each of the Parties to this Agreement.”
[123]This introduces a degree of formality into any variation of the contract and ensures that the parties will not be bound by oral agreements or even by informal unsigned written documents. However, it does not go so far as to insist on manuscript signatures, paper documents, or that both parties’ signatures must be on the same document. I see no reason as a matter of construction of clause 24.1 why documents in electronic form, in particular an exchange of emails, signed on behalf of both parties should not satisfy the requirements of the clause, provided of course that the other requirements of contract formation and variation such as an intention to be bound are also present. In Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd [2012] EWCA Civ 265 the Court of Appeal held that a sequence of negotiating emails in which terms are agreed is capable of satisfying the requirements of the Statute of Frauds that a contract of guarantee (or some memorandum or note thereof) must be in writing and signed by or on behalf of the party to be charged. It held too that an electronic signature was likewise sufficient to satisfy the statute. In my judgment that reasoning applies equally here.[124]Each of the relevant emails in this case was signed, by Mr Smith on behalf of C&S and by Mr Ellis on behalf of Enterprise. Mr Ellis suggested in evidence that he did not have authority to agree a variation of the contract, but he undoubtedly had the actual authority of Enterprise’s senior management to send the email of 4 October 2013 in the terms which he sent it, which included his signature as Enterprise’s Head of Claims UK.

Agreement in principle subject to a revised form of contract

[125]As I explained more fully in Air Studios Lyndhurst Ltd v Lombard North Central Plc [2012] EWHC 3162 (QB), [2013] 1 Lloyd’s Rep 63 at [3] to [10], citing the decision of the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH [2010] UKSC 14, [2010] 1 WLR 753 and other cases, it is perfectly possible for parties to conclude a binding contract, even though it is understood between them that a formal document recording or even adding to the terms agreed will need to be executed subsequently. Whether they do intend to be bound in such circumstances, or only as and when the formal document is executed, is a question of construction which depends on an objective appraisal of their words and conduct.[126]Applying these principles it is clear in my judgment that the parties did objectively intend to be bound by their exchange of emails even though they also contemplated that their agreement would be recorded in a formal contract. They used the language of offer and acceptance; there was no expression such as “subject to contract” to negative an intention to be bound; on the contrary Mr Ellis’s email used the language of contract confirmation (“We are pleased to confirm”), while Mr Smith’s response “Many thanks Myles, much appreciated” suggests strongly that agreement had been concluded. The “revised Claims Administration Service Agreement” was a formality which was consistent with an immediately binding agreement and, while no doubt useful, was not particularly urgent (“in due course”).

Parties’ subjective understanding

[127]It is Enterprise’s case that whatever may be the result of an objective appraisal of the parties’ email exchanges, both parties in fact understood that no binding agreement had been concluded and that a new formal contract was required. So far as C&S is concerned, this subjective understanding is said to be demonstrated by internal emails sent by Mr Gerald Findon which referred to having “successfully agreed an amended fee structure with Enterprise and also to [having] secured agreement in principle to put in place a contractual relationship … for a minimum of two years”. This summary appears to draw a distinction so far as the binding nature of the email exchange is concerned between the amended fee structure and the minimum term, implying that the former was firmly agreed but the latter was only an agreement in principle. I accept the evidence of Mr Smith, however, that whatever Mr Findon’s view may have been, Mr Smith’s understanding as a director of C&S and the individual directly involved in negotiating the amendment was that the email exchange was a binding agreement and not merely an agreement in principle. I accept also that this was the understanding of his fellow director Mr Chamberlain, as is confirmed by Mr Chamberlain’s internal report of the agreement to Mr Findon and others which referred to “a 2 year agreement also to take effect from 1st October” with no suggestion that it was merely an agreement in principle or otherwise subject to further discussion. It is the understanding of Mr Smith and Mr Chamberlain, not Mr Findon, which represents the understanding of C&S.[128]So far as Enterprise was concerned, the relevant individuals were Mr Andrew Stone and Mr Keith Newing, the Chief Operating Officer and Finance Director respectively, who authorised Mr Ellis to send his email of 4 October 2013. Neither of them gave evidence. I am not prepared to find that it was Enterprise’s subjective understanding that the email exchange was not intended to result in a binding contract until a new formal contract had been signed.[129]In the light of these findings the question whether a binding contract is concluded in circumstances where an objective appraisal would lead to that conclusion but both parties subjectively understand (without communicating their understanding to the other and without knowledge of the other party’s understanding) that this result is not intended does not arise. In written submissions filed after the hearing both parties acknowledged that subjective intentions may be relevant, citing Chitty on Contracts, 32nd edition (2015), para 2-170 for the proposition that:
“The objective test is, however, here (as elsewhere) subject to the limitation that it does not apply in favour of a party who knows the truth. … Nor could a party who did not in fact intend to be bound invoke the objective test so as to bind the other party to the contract.”
[130]On the other hand, Lewis J in Newbury v Sun Microsystems [2013] EWHC 2180 (QB) at [28] held that the parties’ subjective understanding is irrelevant:
“The existence of a binding agreement needs to be determined objectively and does not depend on the subjective intent of one, or even both, parties. What the parties thought, or what it can be inferred they thought from their conduct, is, therefore, unlikely to have much, if any, significance to the question of whether, objectively, the documents demonstrate that the parties had reached a binding agreement.”
[131]If it had been necessary to decide this point, I would have wished to hear further submissions. As it is, the point does not arise and I express no view.

Proposed revisions of the fee structure too unclear or uncertain

[132]Enterprise submits that the revised fee structure in the email exchange was too unclear or uncertain to give rise to a binding contract in a number of respects, although it accepts that its subsequent payment of C&S’s invoices was sufficient to establish the required certainty so far as fees were concerned. The respects in which the email was said to be lacking clarity were that: 1. it was not clear on what basis fees were to be charged for claims which exited the Portal; 2. there was no level agreed for “higher value claims”. Schedule 2 of the Agreement provided for separate fees to apply for claims falling out of the Portal and claims exceeding £10,000. It was not clear whether the £10,000 level was to be kept or increased to £25,000 in line with the higher Portal limit; 3. the dividing line for fraud cases “simply passed on to Keoghs” was unclear; and 4. it was not clear whether two fees were payable if two of the criteria applied to a single claim.[133]None of these points was developed orally. In circumstances where the parties intended their exchange to give rise to a binding contract I would be reluctant to conclude that the language in which they expressed their agreement was incapable of being given effect. While it may be that some of the points listed above could have raised nice questions of construction, I do not accept that they are so incapable of being answered as to negative contractual intent.

Uncertainty as to what was meant by a “2 year agreement”

[134]Nor do I accept that agreement on a two year agreement was so lacking in clarity as to negative contractual intent. It is clear from the context that what the parties meant by this was that two years was a minimum rather than a fixed term. The original agreement was terminable by either party on giving three months notice at any time in accordance with clause 15.1. The effect of the amendment was that this right to terminate no longer applied and the contract would continue for (at least) two years from 1 October 2013, subject of course to termination for material breach or (broadly speaking) insolvency under clause 15.2 or acceptance of repudiation at common law in the meanwhile.[135]A separate question is whether, as C&S says, the effect of this amendment was also to impose an obligation on Enterprise as to the claims which C&S was to handle during that two year period. For the reasons given below I consider that this question is capable of being answered as a matter of construction of the amended contract and by deciding whether an appropriate term should be implied. It would be surprising if an agreement on a two year minimum term which the parties intended to bind them was struck down as being too uncertain to be given legal effect. There is no need to reach such a conclusion. The amended contract will either satisfy the demanding tests for the implication of a term as to claims being passed to it in the ordinary course of business, as contended for by C&S, including the requirements of necessity and clarity, or it will not. If it does, any argument as to the absence of contractual intention based on lack of clarity falls away. If it does not, the agreement on a two year term has merely the limited effect of varying clause 15.1 described above. That may be less than C&S had hoped to achieve, but such an agreement is not too uncertain to be given effect and had some benefit for both parties.[136]Accordingly my answer to issue 5 is that the contract was varied by an exchange of emails in October 2013 so as to increase the fees payable to C&S and to provide that the contract should continue for a minimum term of two years from 1 October 2013. Issue 6: Did the contract as varied include an implied term that Enterprise would continue to pass claims to C&S in the ordinary course of business up to 1 October 2015?[137]The order for preliminary issues included as part of issue 6 not only whether a term should be implied but whether by agreeing to the variation of the contract Enterprise impliedly represented that it would continue to pass claims to C&S in the ordinary course of business up to 1 October 2015. However, that variant of issue 6 need not be considered as Mr Khurshid accepted that a case based on such a representation added nothing.[138]Despite the formulation of the issue as being concerned with the implication of a term, C&S puts its case in two ways. Its primary case is that, on a true construction of the contract as varied, Enterprise was obliged to pass claims to it in the ordinary course of business. This is said to be a corollary of the minimum term provision. Alternatively, C&S contends that it is necessary to imply a term into the contract as varied to the effect that Enterprise would continue to pass claims to it in the ordinary course of business.[139]The relationship between the principles of contract construction and the implication of terms was considered in the recent Supreme Court case of Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72. In a judgment with which Lord Sumption, Lord Hodge and Lord Clarke agreed, Lord Neuberger pointed out at [26] to [28] that both exercises,(i) construing the words which the parties have used in their contract and(ii) implying terms into the contract, involve determining the scope and meaning of the contract, and that both exercises involve similar factors (the words used, the surrounding circumstances known to both parties at the time of the contract, commercial common sense, and the reasonable reader or reasonable parties), but that they are nevertheless different. It is only after the process of construing the express words is complete (so that what the parties have expressly agreed is determined) that the issue whether a term should be implied falls to be considered.[140]The Supreme Court reaffirmed the traditional tests for the implication of a term, including that the term must be necessary for business efficacy or so obvious that it went without saying, and that it must be clear what term the parties would have agreed if they had applied their minds to the question. It approved what had been said by Lord Simon in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings [1977] UKPC 13, (1977) 52 ALJR 20 and by Sir Thomas Bingham MR in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472, 482. Lord Simon had said:
"[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."
[141]After quoting this statement, Sir Thomas Bingham MR had added:
"The question of whether a term should be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong. … [I]t is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred ..."
[142]In the present case the starting point must be the contract as initially concluded. The construction or alternatively the implied term for which C&S contends is said to apply only to the contract as varied with its minimum term provision. It is common ground that the contract as initially concluded contained no obligation on Enterprise to pass claims to C&S, either in the ordinary course of business or at all, either as a matter of construction or by way of an implied term. It was free to choose which if any claims to pass to C&S for handling, but was entitled to send its business elsewhere, to establish its own in-house claims handling department, or for that matter to withdraw from the motor insurance business altogether. The parties expected that Enterprise would not only transfer to C&S the claims being handled by two of its existing claims handlers, IVA and GAB Robins, but would also ask it to handle at least some new claims. Those expectations were fulfilled but there was never any commitment to that effect by Enterprise. Any such commitment would have been difficult to reconcile with clause 1 of Schedule 3, providing that “C&S will handle all claims as required by Enterprise” and therefore that C&S would not be handling claims which Enterprise did not require it to handle. Essentially, therefore, the contract was a framework agreement which governed the parties’ rights and duties to the extent that Enterprise did pass claims to C&S for handling. Even so, the parties included a termination clause which either party could invoke. Such a contract was evidently regarded by the parties as commercially worthwhile despite the uncertainty for C&S as to the volume of business which it would be handling.[143]The contract as varied, even with its minimum term provision, continued to include clause 1 of Schedule 3. It contained no express obligation on Enterprise to pass any claims at all to C&S. There is in my judgment no basis for saying that as a matter of construction of the amended contract, agreement on a two-year minimum term would reasonably have been understood by the parties as meaning that Enterprise was undertaking any such obligation. The language used by the parties simply meant that it was no longer open to either party to terminate the contract by giving three months notice at any time. The amendment established the framework under which the parties would operate for the next two years, including the fee rates which would apply.[144]Nor in my judgment can the term which C&S seeks to imply into the amended contract satisfy the demanding criteria for the implication of a term. Such a term is neither necessary nor obvious and the amended contract works perfectly well without it. Moreover, even if it is accepted that agreement on a minimum term but with no express obligation on Enterprise as to the volume of business to be provided to C&S represents a problem which the parties needed to address, it is not at all apparent that they would have alighted on an obligation to pass claims to C&S “in the ordinary course of business” if they had applied their minds to that problem. On the contrary such a term is uncertain and pregnant with potential disputes. What would happen, for example, if a competitor of C&S offered to undercut C&S’s prices, or if Enterprise decided that it could handle claims more cheaply itself in-house? The proposed term is, in addition, in difficult to reconcile with the continued presence in the amended contract of clause 1 of Schedule 3.[145]Accordingly the contract as varied did not include an implied term that Enterprise would continue to pass claims to C&S in the ordinary course of business either up to 1 October 2015 or at all. Issue 7: Was Enterprise entitled to(i) restrict the number of claims to be handled by C&S on its behalf to whatever level it saw fit;(ii) refuse to allow C&S to handle any new claims on its behalf; and/or(iii) withdraw from C&S claims which C&S had hitherto been handling on Enterprise’s behalf?[146]It follows from my answer to issue 6 above that the answer to issues 7(i) and (ii) is Yes.[147]It is common ground that unless Enterprise was entitled to terminate the contract for repudiation by C&S, the answer to issue 7(iii) is No.

Conclusions

[148]For the reasons which I have given, I answer the preliminary issues as follows: 1. C&S was not obliged to send files to Ozon. Even if it was under such an obligation, its refusal to do so was not repudiatory. 2. The breaches of C&S’s duties alleged by Enterprise are capable, if proved, of amounting to a repudiatory breach of the contract. Whether, if proved, they do so amount is a matter to be determined at trial. 3. If Enterprise’s case on repudiation fails at trial, its purported termination of the contract by Ozon’s letter dated 13 January 2014 was itself repudiatory. 4. C&S’s solicitors accepted Ozon’s letter as a repudiation bringing the contract to an end by their letter dated 16 January 2014. 5. The contract was varied by an exchange of e-mails in October 2013 so as to(a) increase the fees payable to C&S and(b) provide that the contract should continue for a minimum term of two years from 1 October 2013. 6. The contract as varied did not include an implied term that Enterprise would continue to pass claims to C&S in the ordinary course of business either up to 1 October 2015 or at all. 7. Enterprise was entitled to restrict the number of claims to be handled by C&S on its behalf to whatever level it saw fit and to refuse to allow C&S to handle any new claims on its behalf; but unless C&S had repudiated the contract, Enterprise was not entitled to withdraw from C&S claims which C&S had hitherto been handling on Enterprise’s behalf.[149]Bearing in mind the wide ranging nature of the allegations made by Enterprise and the number of claims being handled by C&S, the parties will need to give careful thought to the further conduct of this action in the light of this judgment. A cost effective and proportionate way of resolving the remaining issues will need to be found.

Cited in 2 later judgments