England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CARDIFF JUSTICE CENTRE
(HIS HONOUR JUDGE CHAMBERS QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		10 May 2011

Lady Justice Arden:

1. This is an appeal against the order of HHJ Chambers QC dated 20 September 2010; the judge was sitting in the Mercantile Court of the Cardiff District Registry of the High Court of Justice. The principal provision in the order with which this appeal is concerned was the entry of judgment against Mr Havard, the appellant, for £120,740 plus interest. This sum constituted the value of motor cars which the judge found that a company called Halfway Car Sales Limited, Halfway had sold to Mr Havard without authority and in circumstances where Mr Havard was not entitled to rely on section 2 of the Factors Act 1889. Section 2 of the Factors Act is headed "Powers of Mercantile Agent with Respect to the Disposition of Goods". Subsection (1) reads:

"Where a mercantile agent is, with the consent of the owner, in possession of goods or of the documents of title to goods, any sale, pledge, or other disposition of the goods, made by him when acting in the ordinary course of business of a mercantile agent, shall, subject to the provisions of this Act, be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the person taking under the disposition acts in good faith, and has not at the time of the disposition notice that the person making the disposition has not authority to make the same.

I need not read further in section 2 of the 1889 Act.

2. Mr Havard and the respondent, Mr Summers, are dealers in used cars. They each consigned cars for sale to Halfway in Llanelli on terms which so far as material provided for the seller (that is, as the case may be, Mr Havard or Mr Summers) to receive back the price which they had paid for the vehicle and that any profit would then be shared between whichever of them was the seller and Halfway. During the relevant period Halfway was in serious financial difficulty. The judge found that both Mr Havard and Mr Summers were aware of Halfway's financial difficulty and that they each in the course of 2007 provided loans to Halfway by what he termed "kite flying". The judge defined this in paragraph 10 of his judgment as involving the passing of cheques between accounts which permit drawings against uncleared effects and thus facilitate by careful timing the operation of a de facto overdraft. I need not go further into that matter for the purposes of the point with which this judgment is concerned.
3. In December 2007 Halfway's bank ceased to provide banking service to it and Halfway stopped trading. On the advice of his accountant Mr Havard removed all of his cars and a number of cars which he believed belonged to other dealers, including Mr Summers, and he took them to his own premises. He then invited Mr Summers to attend his premises to identify his cars. Mr Summers identified some 36 other vehicles belonging to him which Mr Havard contended he had legitimately and in good faith purchased from Halfway in a number of sales. The judge found that all but three of these sales took place after September 2007, so in the three month period September to December 2007. The judge found that the sales were trade sales to Mr Havard and thus at lower prices than would have been achieved in ordinary retail sales and in so doing that Halfway had exceeded its authority as the agent of Mr Summers by making quick trade sales in an effort to keep itself solvent. There is no appeal on the authority point. The judge also found that Mr Havard had acted in bad faith in making the purchases, and I will come back to that matter. In his evaluation of the witnesses the judge did not find Mr Summers to be a particularly frank witness. In addition, he did not consider that Mr Havard was a good witness. Again, he considered that he should not readily accept the evidence of Mr Bonner-Evans, who ran Halfway who was called to give evidence, except where Mr Bonner-Evans' evidence was persuasive. There was one matter in which the judge appears to have accepted Mr Bonner Evans' evidence. Mr Bonner-Evans gave evidence that he did not inform Mr Summers of the trade sales made to Mr Havard because he, Mr Bonner-Evans, did not think that Mr Summers would authorise them and admitted that when he made the trade sales he did so because he needed the money to keep Halfway trading, stating that he was robbing Peter to pay Paul, a phrase that was used in other contexts in the course of the trial. The judge found that it was no part of Halfway's apparent authority to make sales in these circumstances. With respect to the questions with which we are concerned, the central question was whether Mr Havard either knew or was to be treated as not having known in terms of paragraph 38 of the judge's judgment. The judge there said that the central question in this case is what the defendant (that is Mr Havard) either knew or is to be treated as having known). The judge set out the key parts of Mr Havard's evidence. He held at paragraph 51 of his judgment:

"…I have no hesitation in rejecting the assertion that Mr Havard had no reason to believe that Halfway did not own the cars that are in question in this case."

4. On the basis of the evidence of Mr Havard the judge found that Mr Havard was unquestionably on notice that the sales were not made in the ordinary course of Halfway's business and that Mr Havard had deliberately refrained from making further inquiries, and for those reasons he had not acted in good faith.

"51. Given the Defendant's own evidence, I have no hesitation in rejecting the assertion that Mr Havard had no reason to believe that Halfway did not own the cars that are in question in this case.

52. I think it obvious both that a significant number of the cars in question were not sold in the ordinary course of Halfway's business and that the Defendant was on clear notice that this was so and deliberately refrained from making inquiry. He did not inquire because his evidence shows that he as good as knew the situation and did not care. I further find that, having such notice, the Defendant was not acting in good faith."

5. Of the 36 cars alleged to have been properly sold to Mr Havard by Halfway the judge found that 33 had been improperly sold and made an order for the payment of damages in conversion in favour of the respondent, Mr Summers.
6. The matter was then the subject of an application for permission to appeal to this court and limited permission was given by Patten LJ on paper, limited to two points. The two points are in substance whether the judge was wrong in law to treat as determinative the fact that the sales were not in the ordinary course of Halfway's business and in that connection attention is drawn to section 2 of the Factors Act 1889; and secondly whether or not the judge was wrong to conclude that Mr Havard had not acted in good faith. When this matter was called on for hearing, the court made it clear to Mr Edwin Glasgow QC, who appears for the appellant with Mr Gwydion Hughes, that it wished to hear argument first on the question of good faith and accordingly it is that matter with which this judgment is concerned, the court having indicated that it did not wish to hear Mr Mark Anderson QC, who appears with his junior, Mr Stephen Reed, on behalf of the respondent.
7. I am going to read the ground of appeal dealing with good faith: "The learned judge erred in finding that when the appellant bought cars from Halfway he did not do so in good faith (see paragraph 52 of the judgment) within the meaning of that expression used in section 2(1) of the Factors Act 1889, given the weight of the evidence before him". Mr Glasgow has made it clear that he is not seeking to disturb findings of primary fact but has made submissions that the conclusion which the judge reached on good faith was wrong in law.
8. I am now going to turn to the appellant's submissions and I will take firstly the submissions from the skeleton argument and then the submissions that were developed in front of us. The appellant's case is based both upon the question of ordinary course of business and on the question of good faith, but I am dealing with the second question in this judgment. The appellant submits that what the judge was looking for was the extraordinary features of the sales by Halfway which might have placed Mr Havard on notice that there was something wrong about those sales. It is submitted that on the evidence before the judge there was nothing unusual about the sales which would take them out of the ordinary business of a mercantile agent. Then there were submissions made in that regard with which I am not at this stage concerned, but it is said that the sales were in ordinary business hours and at the place of business and were consistent with the course of business that had developed between Mr Havard and Halfway over several years and that they were entirely conventional sales acts. As to good faith it is submitted on behalf of Mr Havard that the expression is not defined in the 1889 Act and would appear to mean honestly, whether negligently or carelessly or not. The evidence, it is submitted for Mr Havard, was that at all stages he did act in good faith. The loans were made in an attempt to assist with Halfway's cash flow and Mr Havard did everything that he could to satisfy himself that there was nothing improper about the sale of the 36 cars. His evidence was that he had obtained hire purchase and outstanding finance checks on each car that he bought and that was all in reality he could have done. So it is said that the judge should not have found that he should have made further enquiries about the cars and that there was no more Mr Havard could have done. There was nothing about the facts and circumstances of the sale of the 36 cars, it is said, which could justify the inference that Mr Havard had a suspicion that something was wrong, and on that particular point we were reminded by Mr Glasgow of the authorities to the effect that mere suspicion that something is wrong is not enough to give rise to a finding of bad faith. In particular we were taken to Navulshaw v Brownrigg [1852] 2 De G, M & G 441 (under an earlier Factors Act) where it is said that:

"To deprive the pledgee of the protection of the Act, he must be fixed with knowledge that the agent is so acting as above stated, and no mere suspicion will amount to notice; nor will the knowledge that the agent has power to sell the goods constitute notice that he has not power to pledge them."

So it said on behalf of Mr Havard that the finding by the judge that he was on notice of a defect in Halfway's authority was not supported by the evidence.

9. I will deal first with the submissions of the respondent in writing before I come back to Mr Glasgow's argument orally to us today. In written submissions it is said on behalf of Mr Summers that attention should be drawn to the scale of purchases of cars and loans that were made in the material period September to December 2007 and Mr Gwydion Hughes, who also addressed us following Mr Glasgow, accepted that there had been a volume of business of about £1m in the material period and that there had been many hundreds of cars sold. Also, by the end of 2007 the business which Mr Havard had with Halfway was his main business. In addition he had had previous forecourt businesses, as it was put. In written argument it is said on behalf of Mr Summers that the sale of cars was determined by the cash flow needs of Halfway and that the amount of sales was determined by whatever Halfway needed to stay afloat. Therefore the sales could not have been in the ordinary course of business of a mercantile agent. It is also said that some of the sales were actually shown in the records as loans or, in one case of a paying-in slip, was re-categorised as a loan and that cheques were also made out to Mr Havard, showing that he did in fact receive monies from Halfway. It is also said that the evidence in the trial showed that he sometimes bought cars without checking whether they were physically present. Indeed he accepted in his own evidence that at the late stages some were actually purchased without the hire purchase checks to which he had previously referred. The question of whether the trading was in the ordinary course of business it is submitted on behalf of Mr Summers to be determined in the course of all the circumstances of the case and on Mr Summers' case that there was sufficient to make the transaction unusual.
10. I now turn to the oral submissions that we have had today. Mr Glasgow, who did not appear at the trial, accepts that when considering the question of good faith, the court is entitled to look at all the circumstances of the case and the court is not, therefore, restricted to circumstances which directly pertain to the ordinary course of business of a conventional mercantile agent. The gravamen of Mr Glasgow's oral submissions on the question of good faith have rather been directed to the way the judge dealt with the evidence of the defendant. The position is that the material paragraphs of the judgment dealing with good faith start at paragraph 31 and go through to paragraphs 51 and 52, which I have already set out in this judgment. The first few paragraphs deal with the evaluation of witnesses and I do not think I need set those out because I have already summarised them. However, I would set out paragraphs 35 to 50:

"35. Halfway was the Claimant's agent. It was an implied term of that agency that Halfway should do what it reasonably could to obtain a proper market price for the vehicles entrusted to it for sale. In his evidence the Defendant said, 'it would make no sense for a dealer to sell to another dealer the day after' the vendor had acquired the vehicle. He then looked at Schedule C1 and said, in respect of the vehicles that had come in from the Claimant the day before 'I certainly wouldn't have sold my cars for that profit'.

36. In his evidence Mr Bonner-Evans said, 'I sold trade to get the money in so I was 'robbing Peter to pay Paul''. He also said that he did not think that the Claimant would have approved had he known that a sale was a trade sale. A little later, he continued, 'I never told [the Claimant] that I had done it because I either knew that he didn't approve or didn't know if he would approve'.

37. It was no part of Halfway's agency to be able to rob the Claimant by quick under value sales to pay other creditors nor could Halfway have had any apparent authority to do so.

38. The central question in this is what the Defendant either knew or is to be treated as having known.

39. It seems to me that the answer is to be found in the evidence of the Defendant taken both alone and in conjunction with some of that of Mr Bonner-Evans.

40. I start with that which the Defendant asks me to believe as constituting his defence.

41. First I think it to be clear that, while not opining on the numbers in question, the Defendant was well aware that Halfway acted for other principals than himself in the way that I have set out.

42. The Defendant told me that he had no idea how many cars the Claimant had on Halfway's forecourt. When shown his 'purchases' from Halfway as listed for September to November 2007 (TBA/44-46) including the purchases from the Claimant he said, 'I thought that all these purchases were part exchange and/or purchases that Halfway owned themselves…I was always led to believe that these part exchanges in respect of my vehicles or that they were Halfway's own stock'.

43. Against these assertions, one looks to the background as stated by the Defendant.

44. The Defendant said, 'I think we all knew from the minute Mr Bonner-Evans started that he was in trouble. The man who turned up first would get a cheque. He had to keep his stock up to create a flow. I was worried that he would go into liquidation'.

45. The Defendant described how, on advice from his accountant, from August 2007 onwards he caused stickers to be put into tax discs on his vehicles on Halfway's forecourt stating that they belonged to him in order that they could not be treated as Halfway's property.

46. The Defendant's evidence continued, 'I knew he was up to skulduggery and bouncing. Never instances let down. From the minute we met I thought he was robbing Peter to pay Paul'.

47. The next answer he gave was, 'it never occurred to me that I might be buying cars that belonged to others'.

48. Asked as to the position on 2 November 2007 he said, 'I didn't ask him, 'are these all yours?' No. Why should I have? If he sold me them vehicles in part exchange or vehicles which he can no longer afford to stock, I'm skint. I rejected 10 to 15. How could I know there was a risk? I suspected that he was robbing Peter to pay Paul. I didn't know that he was selling to produce cash. He told me 'Here's a part exchange – one of yours – I've got a trade vehicle'.

49. Later the Defendant said, 'Bonner was always in trouble from the day he was born. I always knew that. Of course I knew there was a risk there. Until mayhem – bounced cheques'.

50. The asserted background to these statements was that from early September 2007 onwards the Defendant made frequent loans to Halfway which, regardless of whether or not they were kite flying, were self-evidently a material source of a cash flow which it was to be assumed the bank was unwilling to provide."

11. Mr Glasgow is particularly concerned with the quotations from the defendant's evidence (that is, the evidence of Mr Havard) set out at paragraphs 44, 46, 47, 48 and 49. Since the judge has handed down his judgment transcripts of the evidence have been prepared and it is quite clear that in the case of each of those quotations which constitute the totality of the quotations from the evidence of Mr Havard at the trial, what the judge has done is précis a number of answers and put them into quotation marks without any sign that they are in fact not necessarily sequential and without their context. In my judgment this is not a way in which a quotation from a defendant's evidence should be set out. If it says, "The defendant said …", and then there is text in quotation marks, one would read that as meaning that that which appears between the quotation marks is a direct quotation from the defendant. However, we have had the benefit of being taken through the transcript by Mr Glasgow and we have seen the full context in which these statements appeared. It was clearly helpful that we should have been taken to those paragraphs, although at the end of the day Mr Glasgow very properly accepted that the judge's summary, although it was a précis, was not in fact unfair and that the judge's very short extracts from the evidence did reflect what Mr Havard had said.
12. Therefore there was evidence at the trial of three particular matters to which I will draw attention. In relation to paragraph 46 the defendant is quoted as having used the expression "skulduggery" and we can see at the bottom of page 107 to 108 of the transcript that Mr Havard had in fact said in the course of quite a long answer:

"We knew that he was up to skulduggery, we knew that he'd bounced cheques on us, we knew he'd be in the situation where he'd bluff and store things for a couple of weeks, but generally, and Dick will tell you this, he's dealt with him for longer than I have in the last 20 years, he's never ever sort of let anybody down, but there could be instances where we knew exactly what was happening."

That is part of his answer at page 107 to 108. Although he is using what might be said to be a royal "we", Mr Havard did say that he knew that there was skulduggery. He then goes on in his answer:

"So, Halfway could continue to trade in this period. Yes, and I suppose from the minute that I've met this man, I've always been in the situation where I believed he was robbing Peter to pay Paul. I still believe that up to his demise he was robbing Peter to pay Paul."

The reference to "demise" is, as I understand it, a reference to the demise of Halfway, not of Mr Bonner-Evans. So in the course of that there is an expression of "robbing Peter to pay Paul". It is unfortunate that the judge does not go on to say that there are of course circumstances in which a business can properly use monies which it receives, for which it is going to have to account to a client whose property has been sold, in the course of its own business and then account to the client for the amount due to him. In other words, when it receives money, let us say, belonging to Peter a company does not necessarily – or even usually – have to keep that money in a separate drawer to use it to pay Peter and may in some circumstances use it to pay Paul. That was a point of which the judge was well aware because he himself raises it at page 109 and asks counsel to deal with that point.

13. We were also taken to the transcript which dealt with the other quotations given by the judge in his judgment but in each case, as I have explained, Mr Glasgow accepted that the end result of what the judge set out, albeit that it was presented as a straight quotation, was not unfair and, as I say, it was helpful to see what Mr Havard had said in context.
14. The position is that since this court is hearing this matter on appeal it is not concerned with the question of whether the judge's finding was one which he was compelled to make or indeed a question of whether it was a finding which this court would itself have made. The question for this court on an appeal of this kind is whether or not the judge was entitled to make the findings of fact which he made. As I pointed out to Mr Glasgow in the course of his submissions, this court does not interfere with findings of primary fact by a judge on the basis of oral evidence unless it is clear that the judge is plainly wrong, then it has a duty to intervene. If it was a conclusion which the judge could properly and fairly make then that conclusion would stand, even though it is not the conclusion that this court would itself have come to.
15. I therefore turn to state my conclusions. As already indicated and as Mr Glasgow fairly agreed the court has to look at all the circumstances of the case in determining whether or not the conditions of section 2 of the 1889 Act, including the condition of good faith, was made out. In his judgment the judge had found that Mr Havard was aware that Halfway acted for other principals apart from himself and that he knew that some of the vehicles on Halfway's forecourt belonged to other people (see paragraph 42). Mr Havard said in his evidence that he carried out checks – hire purchaser and outstanding finance checks – but he accepted that these checks would only show whether or not there were hire purchase payments outstanding or whether the cars had been reported as stolen or damaged; I assume therefore it was some form of insurer's record or police record that he consulted. This is my observation and not the judge's, but (insofar as we have been taken to the transcript) he did not give evidence that he had asked Halfway who owned the cars or where they had come from, or whether there had been a discussion of that nature. Mr Havard knew that Halfway was in trouble financially. Indeed, Mr Havard had put stickers on the cars which he owned so that they would not be treated as Halfway's cars. He knew that Halfway was up to "skulduggery" and that in his words it was robbing Peter to pay Paul. He also knew that he was lending money which was, one must assume, because Halfway's bank were not prepared to lend him money in the ordinary way. He also said that he knew that there was a risk involved (see paragraph 49 of the judgment), meaning a risk that Halfway might go under. In those circumstances it is not impossible to conclude that there are circumstances in which, from the point of view of Halfway, there would be a risk of Halfway misusing property belonging to other principals.
16. In all those circumstances, in my judgment, the judge was entitled to hold that Mr Harvard knew that some of the cars in Halfway's possession did not belong to Halfway and also that Mr Havard was on notice and that he deliberately refrained from making enquiries. The judge held in strong terms that Mr Havard as good as knew about the situation but did not care. The judge went on to find that the vehicles were not sold in the ordinary course of Halfway's business. That was a contentious finding on the other ground on which permission to appeal was given. As I read the judge's judgment, the judge relied on that particular factor as part of his finding of a lack of good faith. He was using it as part of the grounds for coming to the conclusion that there was not good faith for the purposes of section 2.
17. In my judgment the judge was entitled to come to that conclusion on the evidence before him and the findings which he made that if a person deliberately refrained from making enquiries he was not acting in good faith in the sense in which that term is used in section 2 and is explained in the skeleton argument. In those circumstances in my judgment the appeal on that ground must be dismissed. Mr Glasgow fairly accepts that the appeal must wholly fail on that basis.

Lord Justice Carnwath:

18. I agree. Patten LJ gave permission on what were in effect two grounds, first that the judge applied the wrong test to determine whether the car sales were made in the ordinary course of business as a mercantile agent, and secondly that he applied the wrong test in deciding whether the appellant had acted in good faith. It is necessary for the appellant to succeed on both points if the appeal is to be upheld. I prefer to say nothing about the first ground, save that I am not surprised that Patten LJ granted permission. On the second point, as my Lady has made clear, on analysis there is nothing special about the definition of good faith under the Factors Act and there is no basis for saying that the judge did not apply the right test. What the case amounted to was a contention that in applying the right text he did not have sufficient material to support his conclusions. While I agree with my Lady that the judgment could in certain respects have been rather more fully and clearly expressed, I have no doubt that there was material to support that finding.

Lord Justice Wilson:

19. I agree with both judgments.

Order: Appeal dismissed