Case No: A3/2012/0907
Neutral Citation Number: [2012] EWCA Civ 1413
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr. Justice Hildyard
[2012] EWHC 498(Ch)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 1 November 2012
Before :

LORD JUSTICE RIX
LORD JUSTICE MOORE-BICK
and
LORD JUSTICE LEWISON
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Between :

	(1) THE PROCTER & GAMBLE COMPANY
(2) PROCTER & GAMBLE INTERNATIONAL OPERATIONS SA
(3) PROCTER & GAMBLE PRODUCT SUPPLY
(U.K.) LIMITED	

Claimants/
Respondents	
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	(1) SVENSKA CELLULOSA AKTIEBOLAGET SCA
(2) SCA HYGIENE PRODUCTS UK LIMITED	Defendants/Appellants	

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(Transcript of the Handed Down Judgment of
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Mr. Andrew Onslow Q.C. and Miss Catherine Gibaud (instructed by Reynolds Porter Chamberlain LLP) for the appellants
Mr. Christopher Nugee Q.C. and Mr. Stephen Brown (solicitor advocate) (instructed by Jones Day) for the respondents

Hearing date : 9th October 2012
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Judgment
Lord Justice Moore-Bick : 
1.	The respondents, to whom I shall refer collectively as “P & G”, are companies in the Procter & Gamble group, which manufactures a wide variety of household goods, including paper tissue towels (facial tissues, toilet paper and kitchen towels). On 12th March 2007 P & G entered into an Asset Sale and Purchase Agreement with Svenska Cellulosa Aktiebolaget SCA for the sale of, among others, plants in Manchester and Orleans manufacturing paper tissue towels. However, P & G was unwilling to sell Svenska certain elements of its proprietary manufacturing technology known as CPN belt technology and the parties therefore agreed that P & G would replace the CPN belt equipment at each of the plants with equipment known as TAD equipment. 
2.	The removal and replacement of the CPN belt equipment was expected to take several months, so in order to enable Svenska to obtain products from the Manchester and Orleans plants without delay the parties entered into a Transitional Supply and CPN Conversion Agreement dated 1st October 2007 (“the Agreement”), under which P & G agreed to sell Svenska various products manufactured at those plants in accordance with its requirements. In some cases products were to be supplied to Svenska’s subsidiaries, including the second appellant. Since for the purposes of the appeal nothing turns on the distinction between the two appellants I shall refer to them collectively as “Svenska”.
3.	The Agreement contained the following, among other, provisions:
“ARTICLE II
TRANSITIONAL SUPPLY: BASIC OBLIGATIONS
2.01	Seller’s Obligations . . . during the term of this TS and CPN Agreement, Seller will sell to Buyer Buyer’s requirements . . . of Contract Products within the applicable Contract Product Category.
. . . 
2.03	Buyer’s Obligations . . . during the term of this TS and CPN Agreement Buyer will purchase from Seller Buyer’s requirements . . . of Contract Products . . . at the prices set forth in Schedule TS9.01 . . . 
ARTICLE IX
TRANSITIONAL SUPPLY: PRICE
9.01	Pricing and Cost Assumptions. Schedule TS9.01 sets forth the calculation of the price Buyer will pay Seller for Contract Products.”
4.	Schedule TS9.01 and the documents attached to it contained detailed provisions governing the prices to be paid for a range of products supplied from the two plants. A document headed “CPN / TAD Final Transfer Prices” attached to the schedule contained a list of the prices payable in respect of the various products, each being expressed in Euros. The bulk of the Schedule itself contained provisions for the adjustment of prices by reference to the cost of pulp and the volume of products supplied. 
5.	Clause 2 of the Schedule set out the basis on which the prices of products to be supplied under the Agreement had been calculated. It provided as follows:
“TRANSLATING PLANT COSTS INTO PRICES PER SKU
2.1	Attached to this Schedule TS9.01 is a document entitled “Summit - CPN Firm plant budgets” within which are figures for 07/08 (the “Plant Costs”). In determining the Prices per SKU, Seller has broken down the figures comprised in Plant Costs and re-constituted them on a per SKU basis. Seller undertakes that:
(a)	the prices per SKU have been derived using the figures set out in the Plant Costs and applying those against its reasonable anticipated volumes and SKU mix for 07/08 (“Anticipated Quantities”); and
(b)	in respect of each CPN Facility, the total cost of the Anticipated Quantities at that CPN Facility does not exceed the total Plant Costs.
2.2	The Prices per SKU represent a fixed standard cost in relation to each Contract Product SKU, variable only by reference to and in accordance with paragraphs 3 and 5 below.”
6.	A “SKU” is a Stock Keeping Unit.
7.	The document headed “Summit – CPN Firm plant budgets” contained manufacturing budgets for Orleans and Manchester for the year 1st July 2007 to 30th June 2008, as well as estimates of the individual components of the total costs of each plant. Those budgets and estimates formed the basis of the prices contained in the document headed “CPN / TAD Final Transfer Prices” mentioned earlier. The document showed the budgeted cost of production at each plant, manufacturing and warehouse expenses and raw material costs. With the exception of the cost of pulp, which was expressed in US Dollars, the costs were all expressed in Euros. At the foot of the document was the following notation:
“£/€ exchange rate    1.49164.”
8.	Finally it is necessary to refer to article X of the Agreement, which dealt with invoicing and payment for goods supplied under the Agreement. Most of it is not relevant to the dispute between the parties, but the final sentence lies at the heart of the present appeal. It provided as follows:
“Payment will be made in pounds sterling (in relation to Contract Products shipped from the UK) and Euros (in relation to Contract Products shipped from France).”
9.	At the time the parties entered into the Agreement they were both well aware that the manufacturing and warehousing costs at the Manchester plant were incurred in sterling. They were also aware that most of the products emanating from Manchester were sold into the UK market at prices expressed and paid in sterling.   
10.	During the months following the execution of the Agreement P & G supplied Svenska with various quantities of products from both Manchester and Orleans. Invoices for the price of those goods were rendered in Euros. Over the course of those months, however, the exchange rate between the pound sterling and the Euro declined, so that, in the absence of any agreement to the contrary, settlement of  invoices expressed in Euros required a greater amount of sterling. Svenska considered that that was not what the parties had intended when entering into the Agreement and was not what the Agreement on its true construction provided for. It considered that it was obliged to pay for goods supplied from the Manchester plant in sterling at a fixed exchange rate of £1 = €1.49164 and remitted payment on that basis. P & G did not agree and in due course it began these proceedings against Svenska to recover what it claimed was the outstanding amount due on the basis that the correct rate of  exchange was that prevailing on the date of payment.
11.	At first instance Svenska put its case in three ways: that it was an express term of the Agreement that a fixed rate of exchange applied in respect of the settlement of invoices in sterling under article X; alternatively, that a term to that effect was to be implied into the Agreement; alternatively, that the Agreement should be rectified to incorporate an express term to that effect. The judge rejected all those arguments and gave judgment for P & G, but he gave permission to appeal limited to the question whether the Agreement was subject to an implied term that payment in sterling for goods supplied from Manchester should be subject to a fixed rate of exchange. 
12.	 The judge examined with care the background to the Agreement. He noted that it was a fixed price contract (subject only to adjustment in specific circumstances) and accepted that the prices for which it provided had been derived from budgets prepared by P & G which reflected costs that would be incurred in sterling, Euros and US Dollars. He also noted that the price of the products to be sold was expressed in Euros and that the document headed “CPN / TAD Final Transfer Prices” contained no exchange rate or reference to sterling. He was unable to accept that the reference to an exchange rate in the budget document could sensibly be read as an express term providing a fixed rate for conversion into sterling of prices for products supplied form Manchester which had been expressed in Euros.
13.	Having rejected the existence of an express term the judge turned to consider whether as a matter of construction or implication the Agreement, properly understood, provided for a fixed exchange rate. In this context he referred to the well-known distinction, elucidated by Lord Denning in Woodhouse A.C. Israel Cocoa Ltd. S.A. and Another v Nigerian Produce Marketing Co. Ltd. [1971] 2 Q.B. 23, between money of account and money of payment and observed, correctly in my view, that an agreement to make payment in a currency other than the currency of account does not of itself alter or otherwise affect the measure of the obligation. He was unable to accept that the exchange rate notation on the budget document was capable of supporting an implied term of the kind suggested by Svenska. The correct rate of exchange was therefore that prevailing on the date of payment.
14.	On this appeal the main thrust of the submissions made by Mr. Onslow Q.C. on behalf of Svenska was that the commercial objective of the parties to the Agreement was that Svenska should have the benefit of the agreed sale of the two plants immediately and should therefore bear no more than the cost of production in respect of goods supplied from Manchester and Orleans. Accordingly, the prices payable for products supplied from Manchester should reflect the costs incurred at (or at any rate budgeted for at) Manchester. Since it was known that those costs would be incurred mainly in sterling, in order to give effect to the intention of the parties the provision in article X for payment in sterling for goods produced in Manchester was to be construed as providing for a fixed rate of exchange. The appropriate rate was that on which the budget was based, as shown in the notation on the budget document. He accepted, however, that in the absence of the final sentence of article X Svenska would have been bound to pay the fixed prices denominated in Euros. 
15.	In A-G of Belize v Belize Telecom Ltd and another [2009] UKPC 10, [2009] 1 W.L.R. 1988 Lord Hoffmann, giving the opinion of the Board, reaffirmed that the meaning which a document bears is that which it would convey to a reasonable person having all the background knowledge that would reasonably be available to the audience to whom it is addressed. In the case of a contract that objective meaning is conventionally described as the intention of the parties. He continued:
“18.  In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.
. . .
21.  It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.”
16.	However one chooses to describe it, therefore, the question in the present case is simply what the Agreement, construed in its commercial context, would reasonably be understood to mean. The starting point must be the language used by the parties, read against the background of the particular transaction. 
17.	In support of his submissions Mr. Onslow relied on various aspects of the factual background which he contended pointed to the parties’ intention to adopt a fixed rate of exchange for the payment of goods supplied from Manchester, but which he said the judge had failed to take into account. He referred in particular to what he said was the parties’ rationale for, and calculation of, the prices provided for in the Agreement, their agreement to use budgets as a proxy for costs, their calculation of those budgeted costs using a fixed rate of exchange and Svenska’s intention to operate the Manchester plant as an independent profit centre accounting in sterling. 
18.	I accept that, broadly speaking, the parties’ objective in entering into the Agreement was to enable Svenska to have the immediate benefit of the two plants notwithstanding the delay in physical handover that would result from the need to remove the CPN belts and replace them with TAD equipment. That is why the prices that Svenska was to pay for goods supplied from the two plants were intended to represent no more than the projected cost of production. Prices could have been finally established after the event by an audit of the actual cost of production, but the parties chose instead to treat budgeted cost as representing actual cost for this purpose. That of itself does not matter, however. What matters for present purpose is that the parties chose the Euro as the currency in which to prepare the budget and, therefore, the currency in which to express the prices calculated by reference to the budget. They did so, notwithstanding the fact that they were both aware that many of the costs incurred at Manchester would be incurred in sterling.
19.	I can well understand why Svenska should have wished to fix the prices for goods supplied from Manchester in sterling, given that the majority of the costs of producing the goods would be incurred in sterling and the bulk of the revenue derived from their sale would be received in that currency. Of itself, however, that does not take the matter very far. The company in the P & G group that had been operating the Manchester plant accounted in Euros and could therefore be expected to want the price denominated in Euros, regardless of the currency in which costs were incurred. The question is what agreement did the parties reach on the question. It does not add anything to say, as Mr. Onslow did in the course of his submissions, that the parties wanted to achieve certainty of price, since one is still left with the question of the currency by reference to which that certainty was to be established. 
20.	The exchange rate between sterling and the Euro referred to in the notation in the budget document necessarily provides the foundation for Svenska’s case, since if it had not been mentioned it would be impossible to argue that the parties had any particular rate in mind as a fixed rate for all purposes of the Agreement. However, I do not think that Svenska can obtain any assistance from that notation, nor from the fact that it was a rate which P & G had adopted for internal transactions for the year in question. The obvious purpose of including the notation was to explain the rate at which sterling costs had been converted into Euros for the purpose of the budget. If it had been the parties’ intention to adopt that rate of exchange for the payment of all goods supplied from Manchester, it would have been a simple matter to express the prices of goods supplied from that plant in sterling. The effect of doing so would have been to make sterling the money of account in relation to the sale of those goods. However, the parties conspicuously failed to take that step.
21.	The importance of choosing a money of account by which financial obligations are measured cannot have been lost on two commercial parties such as these. The choice of the Euro as the currency in which to produce the budget may have reflected the fact that the dominant member of the P & G group involved in this transaction was based in Switzerland and accounted in Euros, but in truth the reason for choosing it is irrelevant. It is enough that it was the currency chosen by the parties for that purpose. The provision in article X for payment in sterling of the price due for goods supplied from Manchester does not in my view detract from the clear terms of the Agreement by which the price is expressed in Euros. As the judge pointed out, the distinction between the money of account and the money of payment is well understood. Invoices were rendered in Euros, a practice that would have had little purpose if the parties had agreed a fixed rate of exchange. 
22.	Mr. Onslow submitted on the authority of Rainy Sky S.A. and Others v Kookmin Bank [2011] UKSC 50, [2011] 1 W.L.R. 2900 that the Agreement was open to two possible constructions and that the construction for which he contended should be preferred because it made better commercial sense. I entirely agree that if a clause is reasonably capable of bearing two possible meanings (and is therefore ambiguous), the court should prefer that which better accords with the overall objective of the contract or with good commercial sense, but the starting point must be the words the parties have used to express their intention and in the case of a carefully drafted agreement of the present kind the court must take care not to fall into the trap of re-writing the contract in order to produce what it considers to be a more reasonable meaning. In my view the Agreement, considered as a whole, is not reasonably capable of being given two possible meanings. For the reasons I have given I do not think that it can reasonably be construed as providing for a fixed rate of exchange for the purposes of payment in sterling for goods supplied from Manchester.
23.	For these reasons, which are essentially the same as those relied on by the judge, I would dismiss the appeal.
Lord Justice Lewison:
24.	I agree. I have since had the benefit of reading in draft the judgment of Rix L.J., with which I also agree.
Lord Justice Rix:
25.	I also agree, but I have had some sympathy with the submissions of Svenska, which I will briefly seek to explain.
26.	There is no express choice of currency of account in this case, nor is there usually one. It is simply, and usually, that a price is stated in one currency rather than another. In this case, the place of Euros as the currency of account is achieved by a process of interpretation. Article IX (“Transitional Supply: Price”) simply states that “Schedule TS9.01 sets forth the calculation of the price Buyer will pay Seller for the Contract Products”. I would emphasise the word “calculation”. Schedule TS9.01 itself explains the calculation in detail, for the very reason that the parties were seeking to achieve cost neutrality in their pricing structure. The schedule therefore also included provisions for renegotiating prices in circumstances where costs were likely to change, as where volumes, or volume mix, altered, or where the cost of pulp (the single most important ingredient, and one which was incurred in US Dollars) varied. All this is sufficiently recognisable from the clause headings of the schedule themselves: viz “Translating plant costs into prices per SKU”, “Adjustments”, “Audit”, and “Review of Pricing”. The relevant prices, and their calculation, were not even to be found in the schedule, but in two further documents attached to the schedule, called respectively “CPN/TAD Final Transfer Prices” and “Summit – CPN Firm plant budgets”. The former sets out the prices per unit of various products, and the latter sets out how those prices have been calculated from the budgeted costs of the two plants in question. It is the latter document which contains the calculation, and also the note that “£/€ exchange rate 1.49164”, which is a necessary part of that calculation. It is common ground that that exchange rate is not a spot rate but a so-called “Firm rate” adopted by international companies to express an average forward rate anticipated to be applicable during a stated period. Ultimately, the prices are stated in Euros. 
27.	The only reference to currencies in the main part of the contract itself is found, not in the Price clause (article IX), but in the Payment clause (article X), at the end of which it is stated that “Payment will be made in pounds sterling (in relation to Contract Products shipped from the UK) and Euros (in relation to Contract Products shipped from France)”.
28.	It is plain therefore that the parties have attempted, for the reasons inherent in their contract, to price the goods to be shipped, over the limited period of the next year, on a costs basis. They have done so, not on a snapshot basis, but on a budgeted forward basis which seeks to take into account the anticipated fluctuations in costs over at any rate the following year. Certain foreseeable factors which might alter that calculation are consequently provided for. A forward exchange rate is adopted, but no provision is made for any deviation from that average rate.
29.	The practical question raised by this appeal is: Who takes the risk of any such deviation of the £/€ exchange rate from that conventional forward rate? The legal question has been, at any rate in part: What is the currency of account?
30.	It seems to me to be obvious that the currency of account is the Euro, for, as Lord Justice Moore-Bick has shown, the parties have deliberately chosen to adopt the Euro as the currency in which the goods are to be priced. It is also obvious that the currency of payment is £ sterling. But the ultimate issue is whether, for the purposes of the contract, a fixed exchange rate between the two currencies is to be regarded as agreed at the rate adopted by the parties for their price calculations. Svenska submits that that is the true interpretation of the contract, and P&G submits otherwise. This is in truth not a disagreement as to whether the € or the £ is the currency of account, but whether a fixed rate of exchange has been agreed between the two currencies.
31.	On that issue, Mr Onslow QC on behalf of Svenska submits in effect that P&G’s interpretation of the contract whereby the invoiced Euros are to be translated into £ sterling at the rate applicable at the date of payment is only an interpretation or implication of the contract, not its express language, and that, applying a purposive approach to construction, the better interpretation or implication is to adopt the “Firm” exchange rate which the parties had agreed to adopt for the year as a whole rather than a floating rate which varies from day to day. Although Mr Onslow did not quite put it this way, his submission is that it is as though in article X, where the law might otherwise imply the words “at the £/€ rate applicable at the time of payment”, the parties should be taken, as a matter of interpretation or implication, to have agreed “at the £/€ rate agreed herein as applicable to the calculation of prices”. Mr Onslow submitted that, contrary to the suggestion that, if the £ had appreciated rather than depreciated against the €, Svenska would be submitting the opposite of its present case, in either event the adoption of a fluctuating exchange rate worked a result inconsistent with the inherent purpose of the contract to match price to cost. Thus, where the € appreciates against the £, Svenska ends up paying, in £ terms, more than the cost of manufacture in Manchester; and where the £ appreciates against the €, adoption of a fluctuating rate would mean that Svenska would pay less than the cost of manufacture. It may be that P&G would in any event end up with the same amount of Euros, however it would be either over-compensated or under-compensated in terms of costs.    
32.	This is an attractive argument, but one essential weakness, in my judgment, is that the principle by which, in the normal way, a difference between currency of account and currency of payment leads to an exchange rate as at the time of payment rather than at some other time or rate is a deep-rooted principle of nominalism, and not a mere question of the interpretation or implication of one among other contracts. In this connection I refer to Dicey, Morris & Collins, 14th ed, 2006, at rule 236 and paras 36-005-008. In my judgment, therefore, if that principle is to be dislodged by contrary provision, then it must be done clearly. An analogy would be with the exclusion of a right of set-off or some other basic principle of English law: see Gilbert Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd [1974] AC 689 at 717H. As Moore-Bick LJ has remarked, an express adoption of the rate used in the costs schedule as a rate also applicable for the conversion back to £ from € could very easily have been inserted.
33.	There are other difficulties. Thus it is not as though all the costs of the Manchester plant are to be found originally in £. An underlying budget for Manchester, which provided the background for the contractual budget attached to Schedule TS9.01 (but which Mr Onslow was not able to say was a document known to both parties as part of the factual matrix of their contract) shows that costs were expressed partly in £ and partly in €. The evidence before the trial judge was that in any event only some 56% of the Manchester plant’s costs were incurred in £, 28% in US$, and 17% in €. The € component embraced both component costs, such as chemicals and colours, and also central overhead costs. There was a contractual mechanism for adjusting prices if the US$ price of pulp varied outside of a stipulated range, but even then the variation was expressed in terms of a quarterly adjustment expressed in €. 
34.	The essential position appears to be therefore: that (1) the parties, who could have chosen to express their prices in £ for the Manchester plant, opted instead for € prices; and (2) the parties made no express provision for what might have to be done if the £/€ exchange rate fluctuated materially beyond the average forward rate adopted by the parties for the purpose of their budgetary and price calculations. 
35.	Mr Onslow accepted, moreover, that if there had been no reference in article X to payment in £, and the contract had simply referred to € prices, then, even though the purpose of the contract had remained the same, namely to reach agreement on prices which reflected a cost and not profit basis of manufacture with all that that entailed in terms of a conventional £/€ forward rate, he would have lacked any reason to ask us to depart from the normal rule expressed by what I have referred to as the principle of nominalism. If so, then it is indeed very difficult to know what has been added or changed by the express provision for payment for Manchester production in £.
36.	In these circumstances, it seems to me to be ultimately too difficult to say that the reasonable understanding of the contract is that the € prices should be exchanged at a fixed conventional rate only referred to in the contract for the different purpose of calculating a € price for the goods to be supplied.
37.	I am prepared to assume that, nevertheless, the parties did not in fact intend the serendipity of exchange rate fluctuations to be capable of upsetting the essentially cost based calculation of the prices to be charged; but they failed to deal with that contingency. No one perhaps anticipated that there would be such a material change in the £/€ rate within the next year from that which the parties had adopted for the purpose of calculating their agreed prices. If so, that would reflect a lacuna in the contract: and the question for the court becomes one of interpreting what is there in the contract for its guidance on what is not there. Contract calculations are frequently capable of being disappointed by unforeseen exchange rate fluctuations. It is always possible for the party who bears a risk of such fluctuations to hedge the risk. By agreeing to pay a price designated in € but payable in £, Svenska should have realised that there was an exchange rate risk to which it was exposed; but which it could mitigate in the conventional way in which such a risk is being dealt with in international business all the time. Similarly P&G would have been able to hedge any risk which, if the parties had contracted differently, it considered remained with it.
38.	In English law we have eschewed asking what the parties have actually intended, thinking that the question of contractual intention is to be derived objectively from their agreement, and that when it comes to a dispute the question of actual intention is likely to be submerged in wishful thinking. In the civil law, matters are looked at differently, with the court free, as I understand matters, to look at everything for the purpose of deriving the actual, as distinct from the imputed, intention of the parties. Even so, for different reasons, English law is much more willing than the civil law, again as I understand matters, to accommodate disclosure of documents and cross-examination, even though they add to the cost of litigation. In matters of contractual interpretation there is an irony in this combination of approaches. Nevertheless, willingly applying as I do the current understanding of contractual interpretation in English law, which has become increasingly open to the influences of considerations of factual matrix and purposive construction, I am unable to create an agreement which the parties might, or might not, have arrived at, had they thought of and discussed the problem which has overtaken them.
39.	For these, as well as the reasons expressed by Moore-Bick LJ, I would dismiss this appeal.