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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Electronic Data Systems Ltd v National Air Traffic Services & Anor [2002] EWCA Civ 13 (15 January 2002) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/13.html Cite as: [2002] EWCA Civ 13

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
TECHNOLOGY AND CONSTRUCTION COURT
(HHJ TOULMIN CMG QC)

		Royal Courts of Justice Strand London WC2 Tuesday, 15th January 2002

1. LORD JUSTICE PETER GIBSON: Dyson LJ will give the first judgment.
2. LORD JUSTICE DYSON: This is an appeal by the claimant (EDS) from the decision of His Honour Judge Toulmin QC made on 30 November 2000, whereby he refused permission to amend the reply and defence to counterclaim by adding a paragraph 17. The trial is due to start with a case management conference tomorrow. The action concerns an agreement dated 25 June 1997 by which EDS agreed to design, construct, install and maintain the software systems for an air traffic control system for the North Atlantic known as "FDPS2". This system was intended to replace the existing flight data control system. The agreement was a Private Finance Initiative (or PFI) contract by which EDS had to finance the project itself and would not start to receive payments until FDPS2 became operational in 2002. The contract was to run until 2011.
3. On 14 July 2000 the defendants (NATS) gave notice to EDS purporting to terminate the agreement on the grounds that EDS had failed to meet a contract milestone in May 2000, and had failed to satisfy NATS that it had a means of recovery such that this would not affect the operational date for FDPS2. EDS started proceedings claiming damages for wrongful termination of the contract.
4. NATS served a defence and counterclaim asserting that it was entitled to terminate the contract, and claiming that it had suffered loss and damage by reason of EDS' breach of contract. The damages were quantified in the sum of £8,092,000, being the expenditure said to have been incurred in seeking to develop the FDPS2 system which it was alleged had been entirely wasted by reason of EDS' breach of contract.
5. EDS duly served a reply and defence to counterclaim. Paragraph 16 was in these terms:

"It is denied that the Claimant was in breach of the Agreement as alleged in paragraph 26. It is further denied that the Defendant has suffered wasted expenditure as alleged. Further, the Defendant is put to strict proof that such expenditure would have been recouped if the Agreement had not been terminated prematurely."

6. At that stage, therefore, EDS was denying that it had been in breach of contract, denying the wasted expenditure, and putting NATS to proof that the expenditure would have been recouped if the contract had not been terminated, that is to say if the contract had run its full course. It was not saying that, but for the termination of 14 July 2000, the contract would still not have run its full course because NATS would have terminated at some other later date. Subsequently, NATS disclosed various internal documents which EDS considered indicate that by February 2000 at the latest, NATS had decided to be rid of EDS and not to complete the FDPS2 under a PFI contract. As a result of this disclosure, EDS questioned not only the genuineness of NATS' termination, but also sought, in respect of NATS' counterclaim for wasted expenditure, to make a positive case that, even if NATS would have recouped its expenditure if the contract had run its course to completion of the FDPS2 project, it was not prevented from recouping the expenditure by EDS' alleged breach, since it had already formed the intention not to complete the project under the agreement. Thus, EDS sought permission to add a new paragraph 17 to the defence to counterclaim in these terms:

"Further or alternatively the Defendant's claim in respect of wasted expenditure proceeds on the premise that but for the Claimant's alleged breach and the Defendant's consequent termination, the FDPS2 project would have been completed under the Agreement and the costs reimbursed and recouped. In fact, such expenditure would have been wasted in any event as the Defendant had no intention by at the latest February 2000 of completing the FDPS2 project under the Agreement and so on a balance of probabilities would have terminated the agreement in any event. The Defendant's intention to terminate in any event breaks the chain of causation. It is irrelevant whether such termination would have been lawful or unlawful. In particular the Claimant relies on the following matters in support of its contention as to the Defendant's said intention:

17.1 In a recommendation of 26 August 1999, Brian Hayes of the Defendant suggested that if the Claimant's behaviour at project level did not change so as to meet the Defendant's needs, then the Defendant should build a case to terminate the Agreement;

17.2 The exchange of e-mails between Peter Finch and Nigel Fotherby of the Defendant dated 19 and 22 November 1999 concerning 'the likely costs of re-negotiating the contract and of buying out or terminating it';

17.3 Prior to a board meeting of the Defendant on 3 February 2000, Brian Hayes prepared a brief for that board meeting which flagged what Mr Hayes considered to be a very important benefit of the 'current situation' with EDS which was the opportunity to terminate a 14 year PFI agreement. Mr Hayes' view was that NATS was being presented with a 'termination opportunity that [NATS] ought to exploit resolutely'.

17.4 At that board meeting on 3 February 2000 Mr Finch gave a presentation to the meeting which included slides which presented a request for support from the board in that it should agree that 'termination at CDR2 is the primary strategy';

17.5 Following the said board meeting on 3 February 2000, Mr Finch wrote an internal memo to Sir Roy McNulty, William Semple and Nigel Fotherby, copied to Mark Webb and Mr Hayes, all of the Defendant and stated: 'After the spirited debate at the Board meeting we were left in no doubt regarding the Board's intentions. NATS wishes to be rid of both the PFI and EDS'. The 'PFI' was a reference to the Agreement;

17.6 It is apparent from an e-mail of 18 February 2000 written by Mr Webb, that there might be 'arrangements' concerning FDPS2 that would suit the interests of the Defendant, which implicitly excluded the Claimant, but that these were 'difficult to pursue' while the Agreement with EDS remained in force;

17.7 An internal memo of 21 February 2000, concerning the FDPS2 project from Mr Finch to Mr Fotherby (and copied to Messrs Semple, Hayes and Webb) makes the implicit assumption that the Defendant will not be continuing with the existing PFI structure;

17.8 In a letter to Mr Peter Schofield of the Treasury identified as item 1004 in the Defendant's disclosure and written in about February 2000, Mr Finch stated: 'In addition, the relationship with EDS on the current contractual basis is felt to be beyond repair';

17.9 In an e-mail dated 22 February 2000, addressed to Kate Gregory of the Defendant, Mr Finch stated: 'Essentially we were playing a game of brinkmanship with EDS to see whether they will offer us a deal we can't refuse before we terminate the contract';

17.10 On 5 March 2000 Mr Hayes made a presentation about FDPS2. It is apparent from the Defendant's disclosure document item number 1010 page 05-108 that the existence of the Agreement represented a risk to the intended privatisation or part privatisation of the Defendant;

17.11 In an internal memo to Sir Roy McNulty of 12 April 2000, Mr Finch referred to his view that if the Defendant still wanted a replacement FDPS system then a negotiated non-PFI settlement with EDS was desirable and achievable, but if the Defendant's objectives had changed then it would be better to pursue the Defendant's current strategy of termination;

17.12 The business case for FDPS2 had changed between before the Agreement was entered into and after the Agreement was entered into so that it was no longer imperative for the Defendant to replace its existing system by or soon after O-date. In this regard the Claimant refers to an internal memo from Mr Finch dated 19 July 2000 which stated: 'The current FDPS1 system is not under strain and is capable of continuing to deliver service for a substantial period. Political outcries about 'a much needed system' are rubbish - you are well aware that the imperatives for FDPS2 were slipped 5 years to the right by the airlines after the FDPS2 contract was started."

7. The judge refused permission to amend. He summarised his reasons orally and reduced them to writing on the form which he completed after refusing permission to appeal to this court. Those reasons were the following:

"I have to consider the application to amend Paragraph 17 of the Reply and Defence to Counterclaim as it has been drafted. It presupposes that the Defendant would have terminated the contract after 14 July 2000. The pleading does not set out the date or the grounds alleged for such termination or how such a subsequent termination would have a relevance in law in the face of the termination on 14 July 2000 which for the purposes of this plea must have been lawful. Further the particulars alleged in the draft pleading are not sufficient to give rise to the inference that the defendant would have terminated the contract in such a way that they would not have been able lawfully to recoup their wasted expenditure. The amendment in its present form does not set out with sufficient particularity a case which has a realistic chance of success at trial."

8. It is common ground that the matters raised in the proposed paragraph 17 are relevant to the issue of whether NATS was entitled to terminate the contract and its motive for doing so. It will be seen that the case advanced in paragraph 17 differs from that put forward in paragraph 16. The case that underlies paragraph 16 is that, even if the contract had run its course to completion of the project, i.e. to the O-date, NATS is put to proof that it would have recouped its expenditure. The case put forward in paragraph 17 assumes that, if the contract had run its course to completion of the project, NATS would have recouped some or all of its expenditure, but it was not prevented from completing the project by the termination of 14 July 2000 because it would not have completed the project in any event.
9. Mr Rosen QC submits that if at trial the court were to be satisfied that NATS would not have proceeded with the contracts to completion of the project, then EDS' alleged breach of contract did not cause NATS' expenditure to be wasted because the expenditure would not in any event have been recouped from the agreement. If NATS intended from February 2000 one way or another to terminate the contract before completion of the project, so that FDPS2 would not have been completed by EDS under the contract, regardless of whether NATS was entitled to terminate on 14 July 2000, then it matters not when subsequently the contract would have been terminated. This is the case that underlies paragraph 17, and Mr Rosen submits that the judge was wrong to refuse permission to EDS to raise it.
10. In his skeleton argument, Mr Moger QC, on behalf of NATS, raised points about the measure of damages and the question of where the burden of proof lies. In his oral argument he refined and simplified his submissions considerably. What he says in summary is this. Paragraph 17 is a defective pleading because it is insufficiently particularised. He submits that it is incumbent on EDS to explain how the fact that, as it alleges, NATS would have terminated the contract in any event prevented recoupment by NATS of its £8 million odd expenditure. In the particular circumstances of this case, he argues, it is necessary for EDS to plead when and how the contract would have been terminated by NATS. This is because NATS had two further contractual rights to terminate and the financial consequences of each of them was different. Thus, NATS could have terminated for convenience under clause 20.3 at any time prior to the O-date by giving three months' notice in writing and at any time on or after the O-date by giving 12 months' notice. The financial consequences are set out in clause 20.5.5 and involve NATS paying EDS a sum calculated in accordance with a formula, together with finance charges, up to a maximum of a million pounds. Alternatively, NATS could have bought out EDS' rights under clause 21.2. Here, too, the consequences would vary according to whether the buyout notice was given before or after the O-date. Mr Moger submits, therefore, that it would be impossible to ascertain what effect, if any, a termination would have on NATS' recoupment of its expenditure without knowing which termination route was followed, and whether the termination would have been before or after the O-date.
11. Mr Rosen's response is that the case advanced in paragraph 17 is that the contract would have been terminated before the O-date since NATS had decided not to proceed with the FDPS2 project at all, and, therefore, that the expenditure would not have been recouped whether the agreement was terminated under clause 20.3 or 21.2 or in any other manner.
12. It seems to me that it is perhaps not as clear as it might be that paragraph 17 is saying that NATS would not have brought FDPS2 on stream even if it had not terminated the contract on the grounds of EDS' alleged breach of contract, but I understand that the paragraph is to be read as limited in that way, and I approach the matter on that basis.
13. As I have said, the question is whether the particulars pleaded by EDS are sufficient. The judge thought that they were not. His reasons were that EDS did not plead (a) the date or the grounds on which NATS would have terminated; (b) the way in which such a subsequent termination would be relevant in law; or (c) particulars that were sufficient to give rise to the inference that NATS would have terminated in such a way that it would not have been able to recoup its expenditure.
14. As to (a), in view of the case sought to be advanced in paragraph 17, and to be understood in the way that I have described, I do not consider that EDS was obliged to plead the date or grounds on which NATS would have terminated the contract but for EDS' breach. It was sufficient to plead that the contract would have been terminated at some time before the FDPS2 project was completed, and so as to deny to NATS the possibility of recoupment of its expenditure. As to (b), it seems to me that the relevance of this plea is obvious and has been sufficiently pleaded. It goes to the causation of the loss of the money expended. As to (c), it seems to me that the particulars pleaded are sufficient to raise an arguable inference that NATS would have terminated, to use the judge's words, "in such a way that it would not have been able to recoup its expenditure". That case may or may not succeed at trial, but in my judgment it is sufficiently particularised to justify the giving of permission. It is not suggested that the case is so poorly particularised that it is embarrassing to NATS. The relevant facts are all within the knowledge of the NATS witnesses, and they will know the case that they have to meet on the basis of paragraph 17.
15. It is not argued on behalf of NATS that the amendment would cause it any prejudice due to its lateness. Nor is it suggested that it would add materially to the length or costs of the trial. EDS may or may not succeed on the issue raised by the amendment. I am quite satisfied that the point is not doomed to failure. I would accordingly allow this appeal.
16. LORD JUSTICE PETER GIBSON: Although we are differing from the judge in giving a case management decision and despite the admirably lucid, but economic, argument of Mr Moger QC for NATS, for the reasons given by my Lord, I too would allow this appeal. Whether at the end of the day we do EDS a favour by allowing the amendment remains to be seen.