On a proper construction of an agreement, which required a supplier of warehouse services to give credit to the user for additional business secured by the supplier in order to utilise spare capacity, the additional business did not include business conducted from an extension to the warehouse.
The appellants, a company (S) and a third party, appealed against a decision ((2008) EWCA Civ 1286)) that on a proper construction of an agreement, which required the respondent supplier of warehouse services (W) to give credit to S for additional business secured by W in order to utilise spare capacity, the additional business did not include business conducted from an extension to the warehouse. At one time all three parties had been subsidiaries in the same group. W had constructed a national distribution centre and had entered into an agreement with S to provide warehousing services at the centre to S. Later, W was demerged from the group and the centre became a multi-user site. Under a revised agreement between S and W, S agreed to put a minimum amount of goods through the centre annually, failing which S would be liable to make a volume shortfall payment to W. That payment was to be reduced to the extent that W secured additional third party business. Parts of S's business were then sold and the revised agreement was replaced by new agreements. A side letter provided that W should use reasonable endeavours to develop and secure additional business with a view to utilising spare capacity and throughput in the warehouse. By that time there was an extension to the warehouse at the centre. Unlike the original warehouse, which was a chilled facility and contained automated handling machinery, the extension was only partly chilled and had no automated handling machinery. A dispute arose when the threshold volume of goods under the agreement was not met and W claimed shortfall payments. The issue was whether the reference to the warehouse in the side letter was to the warehouse as originally constructed and not as extended. S contended that to have to distinguish between third party custom in two different parts of an integrated warehouse was uncommercial and unrealistic. S submitted that W had itself regarded all new business wherever it was sited within the extended warehouse as within the concept of additional business.
For the purposes of the instant appeal, it was sufficient to consider the third new agreement, the essential structure of which was the same as that of the revised agreement and, as was common ground, it was permissible to construe the new agreement and the side-letter against the background of that revised agreement, HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co (2001) EWCA Civ 735, (2001) 2 All ER (Comm) 39 and Electrosteel Castings Ltd v Scan Trans Shipping & Chartering Sdn Bhd (2002) EWHC 1993 (Comm), (2002) 2 All ER (Comm) 1064 considered. Not only did neither the revised agreement nor the new agreement state that the warehouse services were to be provided in the extension to the warehouse as well as in the original warehouse, whether expressly or impliedly, but both agreements consisted of terms that only made sense on the basis that the services were to be provided only in the original warehouse. In particular, the original warehouse was both chilled and automated, which were requirements of the services to be provided and governed the parameters of those services; the provisions in the agreements repeatedly reflected the size and capacity of the original warehouse; a growth in S's requirements which would put a strain on that capacity would require fresh agreement, and for that purpose the extension and alternative sites were spoken of as pertaining to the same subject matter but that was entirely opposite to the proposition that warehouse included the extension; there were detailed provisions in both agreements for material change in either services or charges without any reference to the extension; and it was further significant that the revised and new agreements addressed the new situation created by the demerger of W and its pursuit of new third party business without reference to the extension. Also, the warehouse was not as integrated as suggested by S. The extension was only partly chilled and not at all automated. Different services suggested different customers. Further, as the judge had suggested, it was uncommercial that S should be entitled to participate, where a volume shortfall occurred, in the profits generated by the extension without any contribution to the cost of the extension, which would be borne entirely by W. Those considerations made a powerful case that the reference to the warehouse in the side letter was to the warehouse as originally constructed and not as extended.