England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY

		Manchester Civil Justice Centre 1 Bridge Street West Manchester M60 9DJ
		25th June 2008

His Honour Judge Hodge QC:

1. This claim raises an important point of law arising out of the operation of the system that exists for processing credit and debit card payments: where a merchant acquirer (which supplies the facilities that enable a merchant to accept card payments) has received payments from a card issuer, to what extent can it lawfully withhold those payments from a merchant which has been engaged in unauthorised third party card processing, particularly where the goods sold include prescription drugs which may have been sold without any prescription. In the instant case, the resolution of this point of law is overlaid by the need also to resolve contested issues of fact as to whether the third party card processing was indeed unauthorised by the merchant acquirer and whether prescription drugs were indeed sold without prescription.

The operation of the credit and debit card system

2. It is fundamental to the resolution of the present litigation to understand how the credit and debit card system operates. This appears from the unchallenged evidence of Mr Tony Mooney, formerly Head of Corporate Risk for Barclaycard Business. I begin by identifying the various parties involved in a typical card transaction. First, there is the cardholder, who uses his card to purchase the goods and services. He enters into a contract with the supplier (or merchant); and the use of his card is governed by a separate contract between the cardholder and the card issuer. Secondly, there is the merchant, which supplies the goods and services. The merchant's ability to accept card payments is governed by the terms of its agreement – a merchant services agreement ("MSA") – with its merchant acquirer. In the present case, the Claimant, Lancore Services Ltd ("Lancore"), was the merchant. Thirdly, there is the merchant acquirer, which supplies the facilities which enable the merchant to accept card payments. The merchant acquirer is a party to the MSA with the merchant. The merchant acquirer is also bound by the Visa and MasterCard Scheme Rules which, amongst other things, govern the rights and obligations between the merchant acquirer and the card issuer. Within the UK, there are only 6 merchant acquirers; and, under the Scheme Rules, a merchant acquirer must also be a card issuer. In the present case, Barclaycard Business, a trading name of the Defendant, Barclays Bank Plc ("Barclays"), was the merchant acquirer. Barclays's card-issuing arm, Barclaycard, is a separate part of the Bank. Fourthly, there is either Visa or MasterCard, which operate their card schemes and process the payment data and the payments in respect of any particular transaction. Fifthly, there is the card issuer, which supplies the card facility to the cardholder. Like the merchant acquirer, the card issuer is bound by the relevant Scheme Rules; and it also has a contract with the cardholder. Where the relevant card has been issued by Barclaycard, and where the merchant acquirer is Barclaycard Business, the card issuer and the merchant acquirer happen to be parts of the same legal entity; but whether this is the case in relation to any particular transaction is a matter of chance. Finally, there may also be the involvement of a Payment Service Provider ("PSP"). With the development of internet trading, some merchants found that they lacked the necessary technology or know-how to trade over the internet and communicate with the merchant acquirer's own computer systems. That led to the development of PSPs, which sit between the merchant and the merchant acquirer in relation to the flow of data, and facilitate the processing of card transactions, enabling the merchant to "talk" to the merchant acquirer's systems. However, PSPs are not restricted to processing data for internet transactions: they also process data for mail and telephone order ("MO/TO") transactions. The role of a PSP is limited to data exchange. The merchant acquirer has no contract with the PSP, which is retained and paid for by the merchant. The merchant acquirer's contract remains with the merchant; and payment is made to the merchant, and not to the PSP. Each merchant acquirer has a list of accredited PSPs from which it is prepared to accept data; and if a merchant wishes to use a PSP, it may select one of those accredited PSPs. In the case of Lancore, it chose to use an accredited PSP called Cybersource, whose facilities had apparently been resold to Lancore by another entity, incorporated in Germany, called Enterpayment AG ("Enterpayment"). PSPs should be distinguished from Internet Payment Service Providers ("IPSPs"), in the case of Visa, and Merchant Service Providers ("MSPs"), in the case of MasterCard. These are labels applied by the Scheme Rules to companies that sit in between the merchant and the merchant acquirer for the purpose of processing card data; but they differ from PSPs, not least because the merchant acquirer contracts directly with them. An IPSP or MSP has to be registered with, and approved by, Visa or MasterCard respectively, and thus the recruitment process is entirely different to that of a normal merchant. Indeed, under the MasterCard Scheme Rules, an MSP is expressly prohibited from processing, owning or controlling settlement funds for MasterCard merchants, settlement of transactions being made direct to the actual merchant.
3. I next consider the various stages in a typical card transaction. Whether the card transaction takes place face-to-face, over the telephone, by mail order, or over the internet, the fundamental principles are essentially the same. When a cardholder purchases goods from the merchant, using his or her card, the merchant captures the card number and the amount of the transaction. The data captured does not include either a description of the goods being purchased or the name and address of the cardholder. The merchant electronically submits the details captured to the merchant acquirer, which passes that information on to either Visa or MasterCard, which in turn passes the information on to the card issuer. This transmission of this data takes a matter of a few seconds. The card issuer verifies that the card has not been reported lost or stolen and that there is sufficient credit on the card in respect of the specific transaction and, subject thereto, it authorises the transaction. That authorisation is communicated back electronically by the card issuer to Visa or MasterCard, then by Visa or MasterCard to the merchant acquirer, and then by the merchant acquirer to the merchant. The electronic terminal at the merchant will print out a receipt, and the cardholder will receive the goods sold or the services provided. The merchant acquirer will then be obliged to pay the merchant for a valid card transaction. The MSA will specify how the amount payable is to be calculated; generally, it will be the amount of the underlying transaction, less transaction costs. Subject to the applicability of any deferred payment terms that may have been expressly agreed with the merchant concerned (e.g. where the merchant is a new customer), Barclaycard Business normally originates a BACS payment to the designated bank account of the merchant on either the day of the transaction or the day afterwards. It is at the point of originating the payment that the money is physically debited from Barclaycard Business's account. This debit is irrevocable; but there is a time interval - in the case of Lancore, it was two working days - before the money is credited to the merchant's account. Once the transaction has been processed, the card issuer incurs a debit liability under the Visa or MasterCard Scheme Rules, which results in a sum equal to the value of the transaction being paid via Visa or MasterCard to the merchant acquirer. Because of the volume of transactions which are processed on any given day, there is a significant and complex reconciliation conducted by Visa and MasterCard each evening. This reconciles payments made to the merchant acquirer by the various card issuers (in respect of new transactions) and payments made by the merchant acquirer to the various card issuers (as a result of chargebacks). The net effect of the reconciliation process is that the merchant acquirer receives payment in relation to the transaction. Typically, this payment is received a few days after the date of the transaction. Normally, therefore, the money is received two or three days after Barclaycard Business has originated the BACS payment to the merchant. If Barclaycard Business does not receive a payment in respect of a valid card transaction, that does not affect its obligation under the MSA to pay the merchant. This is one of the risks which the merchant acquirer bears under the system. Finally, the card issuer issues a card statement to the cardholder; and the cardholder discharges his contractual liabilities to the card issuer when he pays the balance due on his card account.
4. Sometimes - perhaps because the cardholder has not received the goods or services, and therefore wants a refund on the transaction - it is necessary for a refund to be processed to the card. If that refund can be passed back to the merchant acquirer under the Visa and MasterCard Scheme Rules, then that refund is referred to as a "chargeback". The cardholder's entitlement to such a refund, and the rights and obligations arising as between the card issuer and the merchant acquirer, are governed by complex provisions in the Scheme Rules. In very broad terms, where a chargeback occurs, Barclaycard Business, as merchant acquirer, has a contractual obligation to refund the card issuer, effectively through the reconciliation process to which I have already referred. In 2005/06, the window for chargebacks could vary between 30 and 180 days from the date of transaction or non-performance of the underlying contract. Under the terms of the MSA, Barclaycard Business is also entitled to claim a refund from the merchant in relation to the disputed transaction. However, the two payments (that of Barclaycard Business to the card issuer, and that of the merchant to Barclaycard Business) are separate. If the merchant does not make the payment to Barclaycard Business - e.g., because it has become insolvent or otherwise ceased to trade between the date of the transaction and the date of the chargeback - Barclaycard Business still has a contractual obligation under the Scheme Rules to pay the refund to the card issuer. This is another of the risks which a merchant acquirer bears under the system.
5. The Visa and Mastercard Scheme Rules set out the framework under which Barclaycard Business must conduct itself when acting as a merchant acquirer. These systems operate globally, and it is of the utmost importance that the members of the Card Schemes adhere to the Scheme Rules if they are to work. Failure to comply with the Scheme Rules, either by itself or by any of its merchants, can lead to Barclaycard Business being fined by Visa or MasterCard or to other serious disciplinary action, including, ultimately, suspension or termination of membership. The Scheme Rules are subject to constant review and updating; and Barclaycard Business employs a team of staff who have the responsibility of monitoring and communicating the Scheme Rules within Barclaycard Business. The Scheme Rules lay down onerous obligations in respect of the taking-on of new merchants and the on-going monitoring of its merchants. Subject to a limited exception in the case of IPSPs and MSPs (as identified above), the Scheme Rules prohibit, and prohibited, "aggregation" (sometimes referred to as "laundering"). This occurs when a merchant who has entered into an MSA processes card transactions for the supply of goods or the provision of services by a third party who has not entered into an MSA. If a merchant aggregates, there is nothing in the data submitted to the merchant acquirer or the card issuer to alert them to that fact. In such a situation, goods and services are being supplied by an entity which has not been scrutinised by the merchant acquirer. Often it occurs precisely because the supplier does not want to be the subject of such scrutiny. In such circumstances, aggregation can be a cloak for transactions which are illegal, or of a sort which a merchant acquirer would not wish to be associated with, and in respect of which it would not have entered into an MSA with the true supplier had it been approached to do so. Aggregation therefore presents particular risks for both merchant acquirers and for card issuers. Because the merchant acquirer does not know the true nature of the transactions being entered into, it is not in a position to assess the extent of, or to mitigate, the chargeback risk, the risk of sanction under the Scheme Rules, reputational risk, or regulatory risk. Because a UK card issuer has a potential liability to card holders arising out of section 75 of the Consumer Credit Act 1974 in relation to each transaction, aggregation means that the card issuer may be potentially exposed to claims in respect of transactions with suppliers who choose not to be the subject of scrutiny or due diligence by a merchant acquirer, and with whom the merchant acquirer might not have been prepared, or allowed, to deal at all. Because aggregation is regarded as a risk to the integrity of the system as a whole, it was, and is, a fundamental obligation on a merchant acquirer that, for each merchant, there should be a separate and distinct merchant number, and that the transactions processed by that merchant should be settled by the merchant acquirer into a bank account in that merchant's name. The Scheme Rules also prohibit, and prohibited, the processing of payment data in respect of illegal transactions.
6. Apart from its need to comply with the Scheme Rules, Barclaycard Business also has, and had, its own policies and procedures designed to protect its reputation and goodwill, and to secure compliance with its own obligations as regards due diligence under the "Know Your Customer" regime. Thus, its recruitment policy prohibited the recruitment of merchants engaged in the sale, supply or export of prescription drugs, of which Viagra was specifically referred to by way of example. Further, Barclaycard Business's own Merchant Terms and Conditions reflected both its own interest in prohibiting aggregation and illegal transactions, and the prohibitions on such in the Scheme Rules. Under the Terms and Conditions in force from June 2004: (1) Barclaycard Business was only obliged to process transactions where the goods or services supplied had been supplied by the merchant; (2) the merchant was prohibited from sending payment details in respect of any transactions where it had not itself supplied the goods; and (3) Barclaycard Business was entitled to withhold or claw back payments which resulted from transactions where the supplier had not supplied the goods or services or where the transaction was illegal. The precise meaning and effect of these provisions is one of the issues in this litigation.

The history of dealings between Lancore and Barclays

7. Lancore was incorporated on 29^th March 2005. The directors are, and were at all material times, Mr Julien Lankry (a French national who has been living in the United Kingdom for about 25 years, and who regards himself as fluent in English, although he speaks it with a pronounced French accent), his wife, Mrs Yvonne Lankry (a British national, who also acts as the Company Secretary), and Mrs Hilary Ellis (who had gone to school with Mrs Lankry and had known her since the age of 12). All three are 55 years of age. Mr and Mrs Lankry deal, and dealt, mainly with sales and marketing activities, whilst Mrs Ellis deals, and dealt, mainly with the administration of the company. Initially, the shares in Lancore were held by Mrs Lankry and by Mrs Ellis, although the latter was merely a nominee for Mr Lankry. The shares are now held by Mr Lankry (as to 70%) and by Mrs Lankry (as to the remaining 30%).
8. According to paragraph 3 of a witness statement made by Mr Lankry on 4^th June 2007 in opposition to an application by Barclays for summary judgment in these proceedings ("Mr Lankry's June 2007 statement"), Lancore was formed principally as a cheque payment processing business. For a few months during the spring and early summer of 2005, and using its banking facilities with Barclays, Lancore carried on the business of providing payment processing facilities in respect of low-value cheques drawn (in a number of different currencies) in favour of mail order companies which principally provided horoscopes and lottery services; but, for various reasons, this business proved unsatisfactory, so Lancore resolved to move into the business of selling kitchenware through mail order and advertisement. To this end, at the end of August 2005, Mr Lankry approached Mr Christopher Firth, a New Business Manager for Barclaycard Business, to obtain a merchant service facility to enable it to process credit and debit card payments from mail order sales in five different currencies. According to paragraph 5 of Mr Lankry's June 2007 statement, Mrs Lankry spoke to Mr Firth on 8^th September 2005; and her handwritten note records that Mr Firth needed a letter "confirming that we own the goods" (4A/189). On 12^th September 2005, Mr Firth sent an e-mail (4A/194) detailing Barclaycard Business's offer of merchant service facilities. His quotation was based on a foreign currency card turnover for Lancore of about £1.258 million per annum; and to facilitate the processing of these transactions, Mr Firth offered Barclaycard Business's EPDQ Lite system as an in-house PSP at a cost of 1% of all turnover. The e-mail confirmed that, due to the nature of Lancore's business (MO/TO), its application would be subject to a risk assessment; and that Lancore would need to provide security to Barclaycard Business, either by way of a cash lump sum deposit or deferred settlement.
9. It would seem that Lancore agreed to proceed on this basis; and, in accordance with his usual practice, Mr Firth filled in as much of the necessary documentation as he could from the information already supplied to him by Lancore. Mrs Ellis and Mrs Lankry then completed Barclaycard Business's standard-form application pack on 14^th September 2005 (4A/207-227). The business was described as the sale of kitchenware by mail order/telephone order; no website address was provided; and total annual turnover was forecast of £10.5 million, with an annual card turnover of £1.7 million. The application pack included a document headed "Your Agreement" (4A/222 and 222A), and signed by Mrs Ellis (on behalf of Lancore) and by Mr Firth (on behalf of Barclays), by which Lancore confirmed that the details shown in the whole Application Pack were correct, that Lancore had read and agreed to the agreement, and that it had read, understood and agreed to be bound by Barclays Merchant Terms and Condition, "in particular Condition 3.4 (Authorisation), Condition 3.12 (Illegal and third party transactions), Condition 4 (Chargebacks) and Condition 24 (Using information)". It was Mrs Ellis's evidence that she probably did not read this particular provision when signing the agreement. It was the evidence of both Mr Lankry and Mrs Ellis that no copy of Barclays Merchant Terms and Conditions was supplied to Lancore until a meeting between Lancore and Barclays on 23^rd February 2006. Mr Firth accepted that Lancore had not been provided with a copy of Barclays Merchant Terms and Condition; and he attributed this to an oversight on his part: He had intended to hand a copy over when he met with Lancore's directors on 16^th September, but Mrs Lankry had cancelled that meeting, and Mr Firth did not visit Lancore's premises until 24^th January 2006. However, on behalf of Lancore, it is accepted that, by executing this Agreement, Lancore became contractually bound by Barclays Merchant Terms and Conditions. On 14^th September 2005, Mrs Lankry also wrote a letter addressed to Mr Firth, on Lancore's headed notepaper, confirming that "we own the goods" (4A/228). According to paragraph 8 of Mr Lankry's June 2007 statement, the completed application form was returned to Barclaycard Business together with that letter. By e-mail dated 16^th September, Mrs Lankry chased Mr Firth for confirmation of safe receipt of the documents; and Mr Firth confirmed by e-mail on the same day both that he had received them and that he had forwarded them on to Barclaycard Business's Northampton office (4A/205). On 4^th October 2005, Mrs Lankry sent an e-mail to Mr Firth stating that she had received a letter from Mr Andy Stone (who was a team manager in Barclaycard Business's risk operations department) confirming that Lancore's application had been accepted, subject to it providing security in the form of deferred settlement for 30 days. She recorded that she had left a message for Mr Stone asking whether, rather than deferred settlement, it might be possible to deposit a security (4A/235).
10. According to paragraph 10 of Mr Lankry's June 2007 statement, in the meantime he had decided, following a meeting with Marcus Tarara of Enterpayment at a trade show in Frankfurt in April 2005, that he (Mr Lankry) would like to diversify Lancore's business into e-commerce. Mr Lankry had discussed the possibility of Lancore becoming a PSP with Mr Tarara, and they had agreed that this was a good idea. (Barclays points out that, strictly, Lancore wished to act as a third party processor, or aggregator, rather than as a PSP, the role of the latter being confined to the exchange of data, whereas Lancore wished to offer an online multi-currency payment processing service. Lancore responds that it is irrelevant how Lancore's proposal falls to be characterised under the Scheme Rules, to which Lancore was not privy.) In paragraph 11 of his June 2007 statement, Mr Lankry states that he contacted Mr Firth again in mid-October 2005 to explain his new plans for Lancore to become a PSP to internet businesses, using its own merchant facility with Barclays. This is not reflected in Barclays's own contemporaneous documentation (where the first reference to it appears to be in an e-mail of 29^th November 2005 at 4A/337, following an inquiry from Mr Lankry, directed to Barclays's sales centre, "about offering a service for payments for his customers via his merchant account"); nor is it consistent with the further information supplied by Lancore (and verified by a statement of truth signed by Mr Lankry on 2^nd November 2007) at 1/50 according to which Mr Firth was first informed of Lancore's intention to become an e-commerce PSP on behalf of third parties at the meeting on 30^th November. This further information accords with Mr Lankry's own oral evidence (confirmed by Mr Firth), which was that this subject was first discussed at any length with Mr Firth at a luncheon meeting at the Teppanyaki Japanese restaurant in Manchester on 30^th November 2005. As a result, it would appear that Lancore no longer relies upon any earlier discussions between Mr Lankry and Mr Firth. In paragraph 7 of his witness statement prepared for the purpose of this trial, and dated 28^th February 2008, Mr Lankry states that he was referred to Mr Firth by Mr Keith Robertson, who was standing in for Mrs Trisha Conroy as Lancore's business relationship manager during her temporary absence from Barclays on maternity leave; and he asserts that, as his ideas for becoming a PSP were new to Lancore, he "relied on them to provide guidance and considered Barclays and Mr Firth as experts in the business of payment processing". I reject this assertion, which is not consistent with the chronology, or the nature, of Mr Lankry's dealings with Enterpayment and Barclays respectively; nor is it consistent with the documents that Lancore itself generated and supplied to Barclays after 30^th November 2005.
11. It is clear from documents generated between 10^th and 13^th November 2005 that Mrs Ellis approached Mr Firth to see whether Lancore could use Enterpayment, rather than Barclays's EPDQ Lite system, as its PSP; and that Mr Firth confirmed (1) that, although Enterpayment was not itself an approved PSP, it was a reseller of a Cybersource facility; and (2) that, as Cybersource were already accredited with Barclaycard Business, it would be able to work with Enterpayment (4A/268-279). This led to the completion, by Mrs Ellis, on behalf of Lancore, on 16^th November 2005, of a revised Section E of the application form, identifying Cybersource as Lancore's PSP (4A/282-4). The (mandatory) website address was said to be "n/a". An e-mail from Mr Firth on 17^th November (4A/285) confirmed that Lancore would now be using Cybersource rather than Barclays's own EPDQ Lite system; and that Lancore had deposited £36,000 in a realisation account. (Surprisingly, I was told that no documentation exists evidencing the precise terms upon which the £36,000 security deposit was to be held; although Barclays's internal ARAMIS screen shots reveal (at 6/258) that a signed 21 days deferred settlement letter was received by Barclays on 14^th November 2005.) It is said by Lancore that this change of PSP was to enable Lancore to process third party payments via the internet; and that this was, or should have been, apparent to Barclays.
12. On 21^st November 2005 Barclaycard Business wrote to Lancore welcoming it as a customer and providing an internet merchant number for it. The letter (4A/294) stated that Lancore would be receiving its welcome pack within the next three working days. There is no documentary evidence that a welcome pack was ever sent to Lancore; and it is Lancore's evidence that it never received one. Equally, however, there is no evidence that Lancore ever queried this omission, as it had been invited to do by the penultimate paragraph of the 21^st November letter. I find it surprising that Lancore should not have chased up the welcome pack unless it had already received sufficient information about the mechanics of processing card payments from another source, such as Enterpayment; but, on this issue, and in the absence of documentation from Barclays pointing to the despatch of the welcome pack I am prepared to accept Lancore's evidence that it did not receive one.
13. Following a telephone conversation earlier that morning, on 23^rd November 2005 Mrs Ellis sent an e-mail to Mr Firth (4A/314) confirming the name (LANCORE-M2S) that Lancore wished to appear in the "descriptor" field (on cardholders' statements), and asking Mr Firth to confirm the fees for chargebacks, refunds, etc since she could not find the details of these. It was not clarified in evidence where Mrs Ellis had been looking for these details. On 25^th November 2005, Mr Firth was involved in an exchange of e-mails with Barclaycard Business's risk operations section (4A/315) during the course of which he stated that Lancore would "not be using a website. It will all be MOTO, so no web details required. The reason for the PSP is the fact that it is Multicurrency." Barclays points out that it was Mr Firth's unchallenged evidence that multi-currency transactions could only be processed by means of a PSP; although this could also be done by using the EPDQ Lite system. I acknowledge the point made by Mr Cogley, during his cross-examination of Mr Firth, that (contrary to the impression created by paragraph 40 of Mr Firth's witness statement), he had already secured a reduction (from 1% to 0.8% of card turnover) in the cost to Lancore of Barclays's EPDQ Lite facility on 13^th September 2005 (4A/201), some weeks before Lancore first approached Mr Firth about using an alternative PSP. Nevertheless, I accept Mr Firth's evidence that Lancore led him to understand that it was solely for costs reasons that it wanted to use an alternative PSP. Mr Firth recalled that, at around that time, other PSPs were offering a service at a reduced rate for facilities that supported both mail/telephone orders, as well as internet transactions, so that he had not been particularly surprised to receive Lancore's request to use an alternative PSP. Mr Firth said that he never found out the rate that Lancore was to be charged by the rival PSP. I entirely reject the suggestion that Mr Firth was told that the reason for the change from EPDQ Lite to Enterpayment was that Lancore intended to engage in processing payments for third party merchants trading via the internet. This suggestion is inconsistent with (1) Mrs Ellis's omission of any website address from the revised section of the application form that she completed on 16^th November; (2) the terms of Mr Firth's email to Barclays's Risk Operations section of 25^th November 2005; and (3) the chronology, from which it is clear that the change pre-dated Mr Lankry's first approach to Barclays about offering a payment processing service on 29^th November, and his meeting with Mr Firth on 30^th November, by almost 3 weeks.
14. During this period, three written agreements were entered into. The first was a "Cooperation Agreement", dated 27^th October 2005, between Lancore Services (Belize) Limited ("Lancore Belize") and Physician Drugs Ltd, a company with an address in St Kitts and Nevis in the East Caribbean (4A/241-7). The second was a PSP Agreement between Enterpayment and Lancore dated 3^rd November 2005 (4A/249-65). The third was a Processing Agreement signed by Lancore on 18^th November and by Lancore Belize on 23^rd November 2005 (4A/320-323). In paragraph 25 of his June 2007 statement, Mr Lankry states that Lancore Belize had been incorporated on 5^th April 2005 as a wholly-owned subsidiary of Lancore; and that it was "one of a number of companies which I had formed in different jurisdictions so as to take advantage of tax and other benefits. Accordingly, when I decided that Lancore should expand its business to become a PSP, it was decided to use Lancore Belize to enable the sale of pharmaceuticals outside the UK." In paragraph 6 of his witness statement prepared for this trial, and dated 28^th February 2008, Mr Lankry gives a slightly different account, according to which Lancore Belize had actually been incorporated to act as a fulfilment house. He says that he had decided to establish Lancore Belize "as a fulfilment house in order to generate money by providing fulfilment services to merchants. A fulfilment house receives the order from the merchant usually by e-mail and then selects the products that have been ordered from pre-delivered stock and then packs and dispatches the order…I am the Director and decided to set up the company in Belize as there were no particular restrictions there and it is possible to fulfil many products without infringing any laws." David Jenkins, apparently acted as Lancore Belize's registered agent: see 4A/88, 90-2 and 107. It is Barclays's case, as put to Mrs Ellis at the end of her cross-examination on the afternoon of Day 4, that Lancore Belize was a sham and that no transactions went through it.
15. On 29^th November 2005, Mr Lankry called Barclaycard Business's sales centre inquiring about offering a service for taking payments for his customers via his merchant account: see 4A/335. I accept that he did so because he had had difficulty in contacting Mr Firth. This led to a half-hour telephone conversation between Mr Lankry and Ms Julia Constantinos of Barclaycard Business's Retail Technology Department, the terms of which were summarised in her e-mail to Mr Firth of 29^th November 2005 (4A/339-40). The contents of this e-mail were accepted as an accurate summary by Mr Lankry. He wished "to offer, besides his current set up, a type of service whereby other companies who wish to offer their goods or services over the internet use his services for payment. He gave me two examples of the types of businesses such as Pharmaceutical items and casinos. He said it was a type of fulfilment service, but I'm not 100% sure what is meant by that. First I thought he wanted to offer a PSP type set up but we have now established that this is not what he wants to do. We also went through the scenario of him being a master merchant and I informed him that he could not do that (or so I believe). He gave me a couple of examples of two companies who do a similar set up to what he wants to do and these were Paknet and Payment Solutions." Ms Constantinos concluded her e-mail by suggesting that Mr Firth might need to speak to Mr Lankry to discuss his new venture. It is worth noting that, in this conversation, it was Mr Lankry who used the expression "fulfilment service"; and that it was Ms Constantinos who was not entirely sure what he meant by it.
16. Following this e-mail, a meeting took place between Mr Lankry and Mr Firth over lunch at the Teppanyaki Japanese restaurant in Manchester on 30^th November 2005. Mr Firth's manuscript notes of this meeting, taken on a page torn from his notebook, are at 4A/342; and a typed transcript is at 4A/343. Following the production, during the course of Mr Firth's cross-examination at the beginning of the 6^th day of the trial, of the actual notebook, which it was originally thought had been destroyed, but which was found overnight by Mr Firth in his attic, Mr Cogley formally abandoned his earlier position that Mr Firth had fabricated this note, with a view to covering his tracks, at some time in February 2006; but he did maintain his suggestion that the note was not prepared during the course of the meeting itself, but at some time later; and that it did not set out, even in summary form, all the things that had been discussed at the meeting. In due course, I shall have to determine precisely what transpired at the 30^th November meeting. Mr Lankry's witness statement produced for the trial, and dated 28^th February 2008, refers (at paragraph 8) to this important meeting only in passing, when he states that he "can specifically remember discussing with Mr Firth the advantages of having a company in Belize and in particular mentioned fulfilment in Belize to him at our meeting on 30 November 2005. However, he did not seem very interested in the point and I formed the impression that he did not feel there were any concerns about it." The meeting is dealt with more fully in Mr Lankry's June 2007 statement, where, according to paragraph 13, he told Mr Firth "that Lancore intended to provide payment solutions to internet businesses in the field of betting, casinos, pharmaceuticals and adult sites. [Mr Firth] said that he was interested in the proposal and told [Mr Lankry] that the Bank dealt with a number of customers who provided payment solutions to internet businesses for those type of services. He also commented on the huge potential of those markets." As Barclays point out, the furthest that Mr Lankry's evidence goes in this regard is to state that Mr Firth was "interested in the proposal". In his oral evidence, Mr Lankry said that, at the meeting, he had produced to Mr Firth a draft brochure (which he identified as the document at 10/5/5-6) outlining Lancore's "Simple & Affordable Multi Currency Payment Processing Solutions for the Direct Mail Industry". This brochure, produced on the morning of the 3^rd day of the trial, was very different from the document (4A/ 345-50) that Mr Lankry had previously identified (at paragraph 13 of his June 2007 statement) as the document that he had produced to Mr Firth at the 30^th November meeting. The copy of the newspaper advertisement for Ladbrokes online betting to which Mr Lankry referred in his June 2007 witness statement was never produced in evidence. (Mr Firth said that he was never shown it.) Mr Lankry also mentions the 30^th November meeting at paragraph 27 of his June 2007 statement (when commenting upon a witness statement from Barclays's solicitor, Mr Brako); but merely in order to refute the assertion that Mr Firth had referred at the 30^th November meeting to Lancore "holding title to and providing the goods and services" as a requirement "in respect of Lancore's fulfilment services". During his cross-examination, and in answer to a question from the Bench (Day 2/46-7), Mr Lankry made it clear that it was solely as a result of what Mr Firth had said to him at this meeting on 30^th November 2005 that Mr Lankry had thought that Lancore could go ahead with the processing of transactions for third parties over the internet.
17. Mr Firth deals with this important meeting at paragraphs 50 through to 57 of his witness statement dated 20^th March 2008. He states that Mr Lankry suggested a "new venture" by which Lancore might offer a fulfilment service similar to the type of services offered by Pacnet and Payment Solutions. However, Mr Firth states that Mr Lankry was very vague about the type of trades that he would be providing the fulfilment services for; and Mr Firth is certain that Mr Lankry did not mention the sale of pharmaceuticals or adult web sites, although, right at the end of the meeting (and thus, according to Mr Firth, not recorded in his notes), Mr Lankry did mention gambling as a further area in which Lancore could provide the sort of fulfilment service which he had been discussing. Mr Firth's evidence was that he made it clear to Mr Lankry that Lancore would have to own the goods or provide the services before Barclaycard Business could act as Lancore's merchant acquirer: As far as he was concerned, the Risk Department would not sanction a merchant facility to someone who was acting as a payment processor or fulfilment house for others. According to Mr Firth, at no point did he confirm that Lancore could use its current merchant facility to provide any type of fulfilment service; and, as far as he was concerned, Lancore continued to trade in mail/telephone order kitchenware. According to Mr Firth, the later discussions with Lancore on its proposed "new venture" proceeded on the basis that this was something quite separate from the existing Lancore business, and would be subject to its own separate approval processes. In cross-examination, Mr Firth said that Mr Lankry's main priority at the meeting had been to see whether he could offer some form of third party fulfilment services.
18. Following his meeting with Mr Lankry, Mr Firth received two e-mails from Lancore. The first (4A/344), timed at 5:36 pm, was from Mr Lankry, and was copied to Mr Robertson. It enclosed a copy (4A/345-50) of the contents of Lancore's new brochure entitled "Business without Borders, Online Multi-Currency Payment Processing". The e-mail also stated that, from the following week, Lancore would have its own web site "Lancore.biz". The second e-mail (4A/364), timed at 6.07pm, was from Mrs Lankry and gave the website addresses of Pacnet Services and Payment Solutions. Late on the afternoon of 4^th December, Mr Firth forwarded a copy of Mrs Lankry's e-mail, together with the brochure, to Andy Stone in Barclays Business's Risk Department. Mr Firth's e-mail (4A/365) stated that it looked as though Lancore was looking to offer a fulfilment service along similar lines to the two companies whose website addresses had been listed in Mrs Ellis's e-mail, but that, having checked the Recruitment Policy, it looked as though Barclays Business could only enter into an agreement direct with the owner of the goods rather than the third party, Lancore. Mr Firth's e-mail recorded that "At this moment in time I don't have a description of the goods to be sold. Clearly all will be MOTO and security would be required". Mr Firth asked Mr Stone to have a look at the gist of the request to see if an exception could be made in relation to Lancore's application. Mr Stone's evidence was that he could not recall receiving Mr Firth's e-mail; and that, so far as he was aware (and as confirmed by the documents), he did not respond to it. In cross-examination, he accepted that something had gone wrong. Mr Firth then responded to Mrs Lankry's e-mail (4A/364), stating that he had looked at the information she had provided and he had requested guidance from Barclays's Risk Team. He said that his concern was over whether Lancore would be judged as a fulfilment house. He said that he would come back to her as soon as he had received an update. In fact, Mr Firth did not come back to Lancore.
19. Shortly thereafter, by e-mail dated 5^th December 2005 (4A/373), and copied to Mr Robertson, Mr Lankry sent Mr Firth four documents, comprising Lancore's "new brochure, other marketing material and background information". The attached documents comprised (1) an updated, and printed, version of the "Business Without Borders" brochure (4A/374-5), (2) a PowerPoint document entitled "Lancore Gateway Tool" (4A/376-9K and 397-412), (3) a PowerPoint document entitled "Lancore Merchant Services PowerPoint" (4A/379L-Z and 381-395) and (4) a Cybersource document entitled "Cybersource Advanced Fraud Screen" (4A/379AA-AB). The third of these documents included statements (under the heading "Framework") that "Each new merchant's application will be submitted to the bank. Merchant will receive its own merchant account and descriptor" (4A/379X and 393); and (under the heading "Risk Management") that "Lancore provide Partner Bank with a Risk Management Compendium about each new merchant…Lancore will vet each applicant merchant with its own its own [sic] risk management process" (4A/379Y). Mr Firth also recalls being sent the documents in hardcopy form. He states that he sent the paperwork on to Ms Kelly Brewin in the Bank's Risk Department; but beyond looking at the documents, and thinking that Lancore was proposing a fulfilment service, he considered the ball to be in the Risk Department's court. On 6^th December 2005, Mr Firth was notified that the setup for Lancore's merchant service facility was complete (4A/421-2); and Lancore began submitting payment data on or about 8^th December 2005.
20. Merchant transactions are monitored on Barclays's Eagle Case System; and it is clear from entries thereon (4A/430-33) that, from at least 13^th December 2005, Lancore was regarded by monitoring staff within Barclaycard Business as operating as an internet merchant. By the time Barclaycard Business ceased payments to Lancore's bank account (in accordance with instructions given on 15^th February 2006: see 4B/598) it had processed almost 67,000 payments, totalling (by reference to 6/312) some $4.9m and 1.156m Euros (on which Barclays had earned substantial sums by way of commission). Lancore relies upon Barclays's conduct in processing payment data submitted by Lancore, and (subject to the 21 days' deferred settlement terms) in transferring multi-currency payments received from Visa and MasterCard to Lancore's bank account (which, of course, was held with Barclays), in support of its case that, at the meeting on 30^th November 2005, Mr Firth had represented to, and had assured, Mr Lankry that Barclaycard Business would permit Lancore to act as an e-commerce PSP, submitting payment data on behalf of third party merchants selling, amongst other things, men's healthcare products, including prescription drugs such as Viagra. By "going live" and proceeding to process payment data in respect of internet sales by third party merchants, Mr Lankry asserts that he assumed that Barclays had authorised Lancore to facilitate such transactions. It is Lancore's case that Barclays's standard Merchant Terms and Conditions had been varied accordingly, either by contractual agreement or by some form of estoppel.
21. On 21^st December 2005, Mr Firth received an e-mail from Mrs Ellis (54A/458-9) which read: "Further to our telephone conversation, we would like to formally request Barclaycard to provide facilities for Lancore Services Limited. Details are as follows: Turnover is realistically estimated at US $1 million to US $2 million a month based on the attached summary of websites and anticipated volumes. The products are sold through our affiliates websites. We have a fulfilment centre from where goods are dispatched, in our name, within 5 to 10 days. I have attached a letterhead as requested to confirm that Lancore own the goods at the point of sale. Our head office is based in the UK as you know but we have registered companies in Canada, Singapore, India and Ghana, with sales representatives working in those countries. As previously mentioned we work in partnership with Enterpayment AG in Germany. Our website, which is currently being upgraded, can be found at www.Lancore.biz. As requested, we have also attached our Management Accounts for the 6 months period ended 30 September 2005. If you require any further information please do not hesitate to contact us." There is a dispute, which I shall have to resolve, as to the contents of the attached summary of websites: Mr Firth recalls that two of the businesses were VW and Mercedes-Benz, but that the other 8 businesses were described as "men's healthcare". The attached letter, dated 21 December 2005, on Lancore's headed notepaper and signed by Mrs Ellis, confirmed "that we are the owner of the goods at the point of sale" (4A/460). It is common ground that Mr Firth must have asked for this confirmation in the telephone conversation which had preceded this e-mail.
22. Mr Firth recalls calling Mrs Ellis and asking her for clarification of what was meant by men's healthcare products, and that she informed him that these were a "Viagra" type of drug. Mr Firth states that he immediately advised her that Barclays would not agree to allow Lancore to provide facilities to businesses dealing in those types of drugs, or for any similar purpose, because the Bank had to consider its reputation and the risks of chargebacks. He recalls that Mrs Ellis would not take no for an answer, and she pushed him to agree to check the position with the Bank's Risk Department. Accordingly, Mr Firth got in touch with Mr Ray Copeman, a senior risk manager at Barclaycard Business. He confirmed Mr Firth's understanding of the position; and he also supplied further confirmation from another risk colleague, Mr Simon Everett, that it was against the Bank's policy to recruit such trade. Mr Firth states that he recorded Mr Copeman's comments on his handwritten notes at 4A/441, transcribed at 4A/442. Mr Firth recalls that the information from Simon Everett was supplied by Mr Copeman under cover of an e-mail. Although the e-mail itself has not been recovered, Mr Firth claims that the attachment is the document at 4A/461, which Mr Firth says that he saved to his computer at 4.12pm on 22^nd December 2005 under the file name "Info re Viagra.rtf". (This document is recorded on the printout from the H drive of Mr Firth's computer that was produced to the Court on the morning of Day 8 of the trial, and which appears at 8/5/24-5, where it is shown as having been "modified" at 5.12pm on 22^nd December 2005.) Mr Copeman has no recollection of any conversation or e-mail exchange with Mr Firth along the lines to which he refers, although he is sure that, if Mr Firth had asked him what Barclays's policy would have been, he would have told him that the Bank's policy was clearly against recruiting merchants dealing in prescription drugs, including Viagra. In cross-examination, Mr Copeman stated that he would not have made any note of such a conversation. Mr Firth states that he immediately informed Mrs Ellis of Mr Copeman's response, and that he clearly explained to her that under no circumstances would Barclays process transactions that related to prescription drugs or anything remotely similar. He recalls that Mrs Ellis laughed about that and said words to the effect of: "Oh well, never mind". Mr Firth states that, after clarifying to Mrs Ellis the Bank's position in relation to pharmaceutical products, he heard nothing further from Lancore on that subject; although he states that Mrs Ellis was insistent that Barclays should consider Lancore's proposal for merchant facilities in relation to car accessories. Mrs Ellis disputes that her e-mail of 21^st December related to the sale of prescription drugs or men's healthcare products or that she ever had any conversation with Mr Firth on this subject. She asserts (in agreement with Mr Lankry's oral evidence to the court) that she had been made aware by Mr Lankry that Lancore was already processing payments in connection with the sale of men's healthcare products, including Viagra; and she asserts that Mr Firth is lying in his evidence about these conversations. In due course I shall have to determine this conflict of evidence.
23. At about 10.20pm on 22^nd December Mr Firth sent an e-mail to Mr Copeman (10/5/17) asking him to review a pre-approval request. Having omitted to include the actual pre-approval form, Mr Firth submitted a further e-mail to Mr Copeman at about 10.20am on 23^rd December (10/5/19) enclosing the missing document (10/5/8-9 and 20-21). The pre-approval request related to the sale by Lancore of motor vehicle accessories via the internet. Mr Firth's comments read: "Ray, This is the business we spoke about earlier regarding the sale of Viagra. Their initial application was to enable the sale of health goods via approx 10 web sites. Given the policy decline we spoke about I have been asked to look at the remaining two other business sectors they are looking to get involved with. They have arrangements with Mercedes & Volkswagen to sell associated merchandise. Apparently the process will be as follows. The customer will log on via the manufacturers site, choose their goods they wish to buy and then be diverted to the Lancore site. Lancore will own the goods at the time of the sale (electronic copy of letter attached) and take the payment in Euros from the transaction. T/O predicted to be £1.3 m, all in Euros with an average value of £60. They also advise that they have another agreement in principle (Daimler Benz). Details will follow when available. The customers appreciate that security will be required. Their existing agreement (M/N 4514774) has just gone live. That arrangement is for the sale of household goods and works as MOTO. For this facility they are on 21 days D/F plus a credit sum of £36K which is held by Barclays in Manchester. The website www.lancore.biz currently does not have the link with the car manufacturers, however the customer is aware that we will need to see this and their T & Cs before we could give a go ahead. Very basic draft accounts for Lancore are also attached (for 6 months). Ray, you will no doubt need to talk with me regarding this one." In cross-examination, Mr Copeman told me that he could not recall looking at the lancore.biz web site, nor was it probable that he would have done so. At about this time, Mr Firth sent an e-mail to Mrs Ellis (4A/458) stating: "As agreed, I have submitted a pre-approval request for you for the motor vehicle accessory facilities… My initial thoughts are that we may require more detailed information given the level of turnover envisaged…"
24. At 12.14 p.m. on Friday 23^rd December 2005, Mr Firth sent an e-mail (10/5/22-3) to Mr Lankry, who was in France, and to Mrs Ellis. It stated as follows: "Further to my lengthy conversations with Hilary I am able to summarise where we are with your application. The crux of the issue is the question of ownership of the goods at the time of the sale. If I understand matters correctly when a customer purchases goods they will make their choice whilst on the web site (eg Volkswagen) and then be directed to the Lancore site to make payment. If this doesn't happen the customer will not be deemed to know that they are purchasing from Lancore. If in this circumstance the order is placed via Lancore I cannot understand how Lancore would be able to anticipate this request and have the stock to deal with this purchase instruction. To clarify this situation I would need to see the contracts between yourselves and the various car manufacturers you would choose to deal with. Ultimately if you do own the goods at the time of the sale we can then move this application forward. If however you do not we would then be left with one other option. We at Barclaycard have one other customer who appears to be offering a similar system whereby they do not own the goods of the time of the application. To register this company for this service was an extensive process. Not only would Barclaycard need in depth financial information, copies of contracts etc but the governing bodies of the card industry (Visa & MasterCard) would also have to approve the application. Such an application would also incur financial costs. Unfortunately I am unable to advise likely figures other than to say that MasterCard charge the existing customer an annual renewal fee of £2,000. I do not know what fees Barclaycard or Visa would charge. The card scheme governing bodies do monitor such trade and reserve a right to apply fines should it come to light that customers are not trading in line with card scheme rules. As such I appreciate that this may not sound like good news, but I am sure given the complexity of your proposal you will understand the need for the information." Barclays relies upon this e-mail, and Mr Firth's emphasis therein upon Lancore being the owner of the goods to which the proposed new facility was to relate at the point of sale, as supporting its case that Mr Firth would never have agreed on 30^th November to Lancore engaging in third party processing in the manner alleged by Mr Lankry.
25. At 12.54pm on 23^rd December 2005 Mrs Ellis sent an e-mail to Mr Firth in the following terms: "Thanks Chris. Did yu [sic] receive the voice mail message I left? Julien asked if I could make inquiries about Barclay's view of "Adult" websites. He would like to know if they would accept this type of business or not. Best wishes for Christmas and New Year!" Mr Firth's response, timed at 1.08pm was: "Hilary, I did receive your voicemail, but have not had a chance to look into this yet. It looks to me that the priority is to resolve the issue detailed below. That being said I do know that we have retailers on our books who sell some adult material. Clearly we have to ensure that we are happy that we are not at any form of reputation risk when dealing with such matters. I suppose at some time in future we will need to look more closely at the specifics of the goods to be sold." Copies of the latter two e-mails (10/5/22) were only produced on Day 6 of the trial, and were not addressed in Lancore's evidence or in Mr Firth's witness statement. Barclays points out that this exchange of emails is entirely inconsistent with Mr Lankry having raised the issue of adult websites at his meeting with Mr Firth on 30^th November: its terms suggest that this matter is being raised with Mr Firth for the first time, and it reveals his concern to alert Lancore at once to an area of business where Barclays may have concerns as to its reputation.
26. On 29^th December Mr Copeman sent an e-mail to Mr Firth (4A/472) referring to a conversation between them and stating that, in order to decide whether the vehicle accessories' application would be against Barclaycard Business's policy, he would need to see a copy of the agreement between Lancore and its sub-merchants. In a subsequent e-mail to Mr Copeman, Mr Firth confirmed that he had just taken a call from Mrs Ellis, who had advised that Lancore was in the process of obtaining a copy of the contracts for Barclaycard Business. The e-mail continued: "With regard to their future expansion, Hilary has asked that we start talking with them so that they might be able to provide a fulfilment service." Mr Firth then pasted in the text of his email to Mr Lankry and Mrs Ellis of 23^rd December (summarising where Barclays was with Lancore's application); and he asked Mr Copeman to ring Mrs Ellis at Lancore "to discuss how they would go about setting up such a facility". In fact, Mr Copeman never spoke to Mrs Ellis; but Barclays submit that this email from Mr Firth to Mr Copeman is significant for three reasons: (1) The fact that Mrs Ellis had asked Mr Firth if Barclaycard Business could start talking to Lancore with a view to Lancore providing a "fulfilment service" is the clearest possible indication that Lancore knew that Mr Firth had not agreed to third-party processing prior to that date. (2) Had Mr Firth agreed with Mr Lankry on 30^th November 2005 to Lancore undertaking third party processing, and had Mr Firth subsequently sought to conceal that fact from others within Barclaycard Business, it would have been madness for Mr Firth to have suggested that Mr Copeman should speak to Mrs Ellis directly as she (presumably) would have told Mr Copeman what Mr Firth was supposed to have already agreed. (3) It provides further evidence that Mr Firth would never have committed Barclaycard Business to Lancore's proposal to undertake third-party processing without clearing the same with the Risk Department first.
27. On 10^th January 2006, Mrs Ellis wrote to Mr Firth (4B/484) confirming that a merchant facility was required prior to Lancore being able to complete its negotiations with VW and Mercedes-Benz. If a merchant facility was approved, Lancore would within 2 months establish the link from their websites to Lancore, and Barclays's requirements regarding ownership of the goods "at the point of sale" would be met. Trisha Conroy returned from maternity leave in or about the first full week of January 2006. According to Mr Firth, in or around the middle of January he received a multi-currency transaction report for Lancore which showed that its card turnover for December 2005 had been significantly higher than anticipated. Mr Firth and Mrs Conroy decided that they should visit Lancore's premises. On 17^th January 2006 Mrs Ellis sent an e-mail to Mr Firth (4B/489) attaching a translated copy of a contract between Lancore and an unidentified contractor, and recording that Mrs Conroy had contacted her that morning and had made an appointment for Mrs Conroy and Mr Firth to visit Lancore the following Tuesday. The e-mail noted that "hopefully Julien will be here to meet Trish for the first time". The meeting took place on 24th January at Lancore's offices. The evidence of both Mr Firth and Mrs Conroy - which I accept - was that they had met up prior to the meeting to discuss their agenda and that they had agreed that it should cover both Lancore's current trading and its proposed new business venture. The meeting was attended (on behalf of Barclays) by Mrs Conroy, Mr Firth, and Mr Robertson (although he contributed little to the meeting), and (on behalf of Lancore) by Mrs Lankry and Mrs Ellis. Mr Lankry was not present. Mrs Conroy's manuscript notes are at 4B/498 (with a colour copy at 10/5/26); although there is a dispute as to whether they were taken at the meeting itself (as Mrs Conroy asserts) or were prepared in advance of the meeting (as Lancore suggests). Mr Firth's notes were only produced, with his notebook, on day 6 of the trial and are at 10/5/14. There is a conflict of evidence, which I shall have to resolve, as to what took place at this meeting; and, in particular, as to the extent to which Lancore's existing business was discussed, and whether (as she asserts) Mrs Conroy asked to be supplied with full details of the products that Lancore was currently selling and a flow chart relating to its current business. It is common ground that there was a lot of talk about the ownership of goods at the point of sale.
28. On 25^th January 2006 Mr Firth e-mailed to Mr Copeman a copy of the English translation of Lancore's proposed contract. Mr Copeman responded the following day, saying that he did not like it. He questioned why, given that Lancore was a UK company, the proposed contract was subject to German law. He also doubted whether Lancore would really be the owner of the goods at the point of sale (4B/518 and paragraph 27 of Mr Copeman's witness statement). Mr Firth made notes on a hardcopy of Mr Copeman's e-mail (4B/518 and 536-7), which included statements that Lancore's bank account showed transfers to pay for the goods that they were selling via their existing merchant number; that the relationship manager was happy that they were not acting as a fulfilment house; and that they were using Enterpayment to fulfil their orders, selling kitchen utensils, etc in Europe via MOTO. Barclays rely upon these notes as evidence that Mr Firth's understanding at that time was still that Lancore's business was the sale of kitchenware by mail and telephone order. Mr Firth discussed the e-mail with Mr Copeman, who asked Mr Firth to obtain a flow diagram from Lancore explaining how the proposed purchase and sale of the goods would work. On 30^th January Mrs Ellis sent an e-mail to Mr Firth (4B/538), further to their meeting and to his telephone conversation with Mr Lankry, in which she estimated Lancore's net worth at its year end of 31^st March 2006 at approximately £123,000. She stated that she understood from Mr Lankry that Mr Firth was pursuing Lancore's application for a second account. Mr Firth responded (4B/552) by asking Mrs Ellis to confirm the realistic annual level of card turnover expected for the current merchant number to enable Barclays to calculate the true level of its exposure.
29. On 2^nd February Mrs Ellis sent an e-mail to Mr Firth (4B/552) attaching a flow diagram (4B/540) for the proposed second account. The flow diagram was headed "Prepared for C. Firth – Barclaycard 1.2.06" and clearly related to internet sales. The e-mail went on to estimate annual card turnover to be approximately £2 million (an increase from £141.6K to £166.6K per calendar month). Mrs Ellis appreciated that the Bank's exposure would increase, but she wanted Mr Firth to suggest how Lancore might reduce the anticipated increase in its security deposit, and/or the number of days for clearance. Mr Firth forwarded the flow diagram to Mr Copeman, who responded that it looked "ok, they must be on 21 days deferred with current acquirer" (4B/554). Mr Firth's e-mail response to Mrs Ellis (4B/552) was that the increased turnover of £2m seemed very low compared to the figures seen within December and January; but that if it was correct, and if Lancore wished to maintain its 21 days deferred settlement terms, it would be required to place a total of £50,000 in the security account. Mrs Ellis responded (4B/553) pointing out that, with regard to the present account, the figure of £2m was Lancore's best approximate figure at that point in time, and that it appreciated that an increase in security was inevitable. However, Lancore was having to make payments in 14 days and would appreciate Mr Firth's advice as to how much security deposit would be required for deferred settlement terms of 14 days also. Mr Firth's response was that Barclays would require a cash balance equivalent to half of Lancore's monthly turnover for 14 days deferral; but that, given the uncertainty over the level of turnover, he would expect that Barclays would be happier with the current arrangement. Having spoken to Mr Lankry, Mrs Ellis e-mailed Mr Firth on 6^th February (4B/559A) stating that Lancore had decided to leave the arrangements on the existing merchant account as they were for the time being, and inquiring whether there had been any developments on the second account.
30. Later that day (6^th February), Mr Firth informed Lancore by e-mail (also at 4B/559A) that, subject to Barclay's usual sanction process, he now had agreement that Barclays might take an application from Lancore for "the extra international facilities". Mr Firth was still awaiting confirmation of the required security, and he would keep Mrs Ellis informed, although he was sure that this would equate to 30 days deferred. In the meantime, he needed Mrs Ellis to advise him of her approximate live dates for the new contracts. He indicated that he would be on holiday the following week (beginning Monday 13^th February), and so could do with talking to her at some point during the week ending Friday 10^th. Discussions continued by e-mail between Mr Firth and Mrs Ellis, during the course of which she provided, on 7^th February (4B/563), and in response to Mr Firth's request for details of "a few facts" regarding "the new venture", the address of a web site (www.wen-shop.com) for the sale of computer accessories. This was the first reference to wen-shop in the documents. Mrs Ellis was concerned about the period of deferred payment and/or the amount of security deposit to be lodged with Barclays, and the speed with which the new facilities could be made available. By an e-mail dated 9^th February (4B/566) Mr Firth indicated that his thoughts were that Lancore would require a separate merchant number for each web site; and he pointed out that Barclays had a duty to check the website, and the terms and conditions of all web merchants, before facilities were sanctioned. On 10^th February (4B/567) Mrs Ellis sent a fax to Mr Firth attaching various documents, confirming that, in addition to wen-shop, Lancore now had a PC Game site business, and inviting a quote for the amount of security required for a monthly turnover of US $500K for these sites with 21 days deferred payment. Before leaving on holiday, Mr Firth completed application forms for Lancore in respect of 3 new merchant facilities, two for car accessories and one for computer accessories (4B/582-7); although it is clear from his contemporaneous e-mail to Barclaycard Business's recruitment department (4B/575) and his manuscript notes (4B/576-81) that he only had Mr Copeman's pre-approval for the VW and Mercedes facilities, and that Mr Firth had concerns about the "entirely new" wen-shop facility. It was Mr Firth's unchallenged evidence (at paragraph 98 of his witness statement) that such an application form had to be completed whenever an existing merchant required a new facility as a result of a new venture or a new outlet. Mr Firth's evidence was that he was so concerned about the wen-shop facility that he telephoned Mrs Ellis during the early part of his week on holiday to discuss the matter further, but that she was unable to provide him with any satisfactory answers as to what wen-shop did. Before Mr Firth could speak to Mr Copeman about the matter further, upon his return to the office, he received an e-mail from Mr Copeman dated 14^th February 2006 (4B/604), which Mr Firth accessed from his Blackberry, telling him not to take any further action with Lancore.
31. On the same day, 2^nd February, that Mrs Ellis had sent her flow diagram to Mr Firth, she had also sent an e-mail to Mrs Conroy (4B/541) attaching a separate flow diagram headed "Prepared for T. Conroy – Barclays 1.2.06" (4B/543) and a list of products (4B/542) comprising kitchen knives and various computer and electrical goods. The flow diagram clearly related to sales of goods by mail order. There is a dispute as to whether this flow diagram and this list of products related to the business in which Lancore was then engaged under its existing merchant facility (as Mrs Conroy asserts) or to the proposed further merchant facility (as Lancore asserts). In paragraph 36 of her witness statement, Mrs Conroy states that she forwarded these documents to Mr Firth, although she recognised that this may not have been straight away since her next communication with him was when he telephoned her, in or around the middle of February, to inform her that Lancore had been involved in transactions that were said to be in breach of its card facility, and that the bank had stopped its account. It is Mr Firth's evidence that he did not see the list of products that had been supplied to Mrs Conroy until the end of February or early March 2006 (by which time Barclays had stopped processing transactions for Lancore and was withholding further card payments). In cross-examination, Mrs Conroy referred to this evidence from Mr Firth, and she said that she could not be sure that she had forwarded these documents on to him. Certainly, there is no indication in the documents that she had done so.
32. On 13^th February 2006, Barclaycard Business received an e-mail (4B/591-2) from Mr Michael Liquornik, the Chief Operating Officer of Optimal Payments, a company competing with Lancore, stating that he had been advised by Visa International that one of its (non-gaming) merchants had been aggregating and miscoding. Mr Liquornik was contacted by Mr Copeman, to whom Mr Liquornik sent a further e-mail, dated 14^th February 2006 (4B/596-5), accusing Lancore of providing aggregation for payments to online merchants of INET-CASH. Lancore was said to be processing transactions from a website known as Rapidshare, which was alleged to be selling illegal MP3s and adult videos. On 15^th February, Mr Copeland issued an instruction suspending payments to Lancore's bank account whilst Barclays carried out an investigation (4B/598). At that time, Barclays was holding some US $2.035m and 314k Euros (equivalent to some £1.177m and £215.6k respectively) in Barclaycard's multi-currency unit for onward transmission to Lancore (4B/601). Allowing for the inherent delay in crediting payments that had already been debited from the multi-currency unit to Lancore's bank account, payments into that account ceased on Friday 17th February. On Monday 20th February, Barclaycard Business received a telephone call from Mrs Ellis complaining that Lancore was no longer receiving funds into its bank account (4B/620).
33. By this time, the investigation had been referred to Mr Trevor King, a fraud manager in Barclaycard Business's Special Investigations Section. An e-mail from Mr King, sent at about 3.30pm on 16^th February (4B/612-3), indicates that, by that time, he had already concluded that Lancore was engaged in "laundering", by which he meant unauthorised third party processing. As part of the investigation, Mrs Joanne Marriott, an assistant credit manager in the risk operations section, was asked to contact a random sample of 11 Barclaycard holders; and the result of her calls are set out in the table she prepared at 4B/632A. On 20^th February, Mr Copeman sent an e-mail to Mr Firth (4B/624) informing him that Barclaycard Business had stopped all payments to Lancore and that it was now carrying out a full investigation. It was said that Lancore's card payments had grown massively, and that Barclaycard Business "know from cardholder contacts that they are selling Viagra", having been recruited to sell kitchen goods by mail order. In an e-mail from Mr Stone dated 21^st February (4B/634-5), responding to the disclosure that Barclaycard Business had not checked Lancore's website, as it had been told that Lancore had been trading by mail order, he stated that this information showed "that we have taken the word of the account manager, in this case Chris Firth, saying that they are not doing internet trading even though it is a PSP application. In reality, I think he has led us up the garden path, or he's been led up the path himself. In future where it is PSP trading, I want to see the internet side checked end of story – any argument from account managers saying they are mail order won't be acceptable…". In an effective piece of cross-examination on the morning of Day 7 of the trial, Mr Cogley (for Lancore) obtained the concession from Mr Stone that, if he had had the benefit of all of the information (selectively) presented to him by Mr Cogley, including the email from Ms Constantinos to Mr Firth of 29^th November 2005 (4A/339-40), Mr Stone would not have suggested that it might have been Lancore that had led Mr Firth up the garden path rather than the other way around. On 22^nd February, Mr King received an e-mail from Ms Maria Watts in Barclays's multi-currency unit (4B/648) stating that she had just taken a call from a lady at Lancore, who had said that she had been looking through its contract and had referred to a section called "Merchant Conditions", but that they did not seem to have a copy of this in their paperwork. This supports Lancore's case that they had not previously received a copy of Barclays's Merchant Terms and Conditions.
34. On Thursday 23^rd February, Mr King and another fraud manager, Mr Darran Jennison, attended a meeting at Lancore's offices. Initially, only Mrs Lankry and Mrs Ellis were present, but they were later joined by Mr Lankry, who had flown in to Manchester from Paris. Notes of the meeting were taken by Mr Jennison and are at 4B/656-8, with a typed transcript at 4B/659-61. There is an issue as to the precise point in the meeting at which Mr King, who led for Barclays, first accused Lancore of being involved in the sale of drugs and pornography: it was common ground that this was before Mr Lankry had joined the meeting, but Mrs Ellis puts it far earlier in the meeting than Mr King and Mr Jennison. It is common ground that the focus of Mr King's earlier inquiries had been upon what Lancore had been selling (as opposed to an inquiry as to the nature of its business); and that when Mr King accused Lancore of being involved in the sale of drugs and pornography, Mrs Ellis and Mrs Lankry were both shocked and horrified. Both Mr King and Mr Jennison formed the view, immediately after the meeting, that neither of them had had any idea about the true nature of Lancore's business – a view expressly disclaimed in evidence by Mrs Ellis, when she agreed with Mr Lankry's evidence to the court (in answer to a question from the Bench on the afternoon of Day 2) that she had known that Lancore had been processing payments for pharmaceutical products from 8^th December. It is common ground that, after his arrival at the meeting, Mr Lankry admitted – according to Mr King and Mr Jennison only reluctantly, and after earlier, and repeated, denials – that Lancore had been involved in processing transactions for third parties; and that he asserted that there had been nothing wrong with this, and that Barclaycard (through Mr Firth) had been aware of what Lancore had been doing.
35. Late that evening, Mr King received an e-mail from Mr Firth with an attached summary of the Lancore application process (4B/666-9). This was incorporated within the report that Mr King prepared dealing with the recruitment of Lancore, the history of its dealings with Barclaycard Business, and his meeting of 23^rd February (4B/670-8). Mr King is accused of partiality, and of lack of professionalism, in his report for having omitted any reference to Mr Lankry's assertion that Mr Firth had been aware of what Lancore had been doing. On 24^th February Mr King sent a letter to Lancore (4B/679-80) purporting to "annotate…the main points that were discussed" at the meeting. For the sake of clarity, he attached a copy of the contract, together with a copy of the applicable Merchant Terms and Conditions. The letter continued: "The credit card turnover rose significantly past that which was anticipated and accordingly, Barclaycard Business felt it prudent to security check some of the transactions that had been processed by your facility. All the resultant replies from cardholders have indicated that transactions were for the purchase of male medicines and pornographic downloads. Our investigations are continuing in this respect. As a result of these findings, you were advised at the meeting that your merchant facility has been suspended with immediate effect, due to the malfeasant nature of the transactions processed by your company, or by agents on behalf of your company." Reference was then made to what were said to be the applicable Merchant Terms and Conditions. The letter reiterated Barclaycard Business's request to provide details of the relevant cardholders and details of their transactions. In cross-examination, Mr King was criticised for parts of this letter, in particular for the omission of any reference to the tip-off from Mr Liquornik, and for the assertion that all of the resultant replies from cardholders had indicated that transactions were for the purchase of mail medicines and pornographic downloads. Mr King accepted that, in hindsight, he had been "slightly over-egging things".
36. Lancore consulted the solicitors' firm of Wacks Caller (now part of Pannone LLP, Lancore's present solicitors). They wrote to Mr King on 1^st March 2006 (4B/691-2). The letter made the point that Lancore strenuously denied that it was in fundamental breach of the merchant agreement, and accordingly Barclays had no right to withhold payments; and Wacks Caller required the immediate release of funds to their client. Barclays's claim was said to appear to proceed on two limbs: (1) the failure by Lancore to notify Barclays of a change of business; and (2) the failure to act as "merchant" for the purposes of the card transactions. As to the former, Wacks Caller accepted that Lancore had stated in the merchant agreement that it sold kitchenware, and that in fact was said to remain the case. Reference was made to Lancore's web site, www.goodhome.tv. However, Wacks Caller also accepted that Lancore had diversified into selling pharmaceuticals. It was said that Mr Lankry had discussed this with Mr Firth over lunch at the Teppanyaki Restaurant on 30^th November 2005. As to the latter, Wacks Caller identified the central issue as being whether Lancore provided the goods and services. It was said that Lancore marketed the household goods and pharmaceuticals on five named websites. The last three were said to lead to the same online pharmacy shop. All the domain names were said to belong to Lancore. The letter continued: "Our client uses third parties to distribute the goods but our client has title to the goods at the point of sale and this is confirmed in our client's terms of business which can be found on all of the websites referred to above. In these circumstances our client clearly acts as the Merchant for the purposes of the transaction and therefore each transaction falls squarely within the definition of "Card Payment" and therefore comes within the terms of the Merchant Agreement. In these circumstances, you have no grounds for relying upon clause 4.1 of the 2004 Merchant Terms and Conditions and we must insist that our client's account is unfrozen immediately." The letter went on to refute the assertion that there was any pornography on the Rapidshare website, and attached a letter from Enterpayment (4B/693A) which stated that, due to an administrative error, it had misrouted Lancore's Euro credit card merchant account to a website that did not belong to Lancore. Enterpayment was sure that that mistake would not happen again. Wacks Caller's letter went on to state that Lancore was unable to provide the information requested by Barclays as the cardholders were Lancore's clients' customers and Lancore had to comply with its obligations under the Data Protection Act. In summary, it was said that Lancore had not acted in breach of the Merchant Agreement, and that it required its account to be unfrozen immediately. Lancore was currently assessing what damage had been caused to its business as a result of Barclay's unlawful suspension of its account; and the letter threatened an immediate application to the court for appropriate relief.
37. There was no response to this letter, apart from a formal letter from Barclaycard Business to Lancore dated 7^th March 2006 (4B/700) giving notice that Lancore's merchant account was terminated. However, Wacks Caller's letter was referred to Mr Firth by Mr King, who also sent an e-mail to Mr Firth that I am told is privileged. In response, Mr Firth wrote a letter to Mr King dated 3^rd March 2006 (4B/698). This confirmed the details of his meeting with Mr Lankry on 30^th November 2005: "At Mr Lankry's request we met over lunch at a Teppanyaki restaurant in Chinatown Manchester. Mr Lankry was keen to discuss his new business ideas with me. My recollection is that he was non-specific and we spoke about the sale of various goods. I do not recall that he mentioned the sale of pharmaceutical products. He did however mention possible links with the gambling business and certain household goods. I have meeting records which confirm that the purchaser would have to buy the goods from Lancore and that I required from Mr Lankry a description of the goods to be sold. At no time was any agreement made to take an application for the sale of any specific product. I hope this helps and that should you require any more information you will come back to me." In answer to questions from the Bench towards the end of his evidence, Mr Firth told the court that he was certain that Mr Lankry had not mentioned the sale of pharmaceutical products at the lunchtime meeting on 30^th November: Something like that would be something that he would have remembered very clearly.

The litigation and trial

38. Lancore issued its Claim Form in the Manchester District Registry on 12^th April 2006 claiming "damages against [Barclays] in respect of card payments due to [Lancore] which have been withheld by [Barclays]". The case was allocated to the Multi Track by Orders of DJ Needham dated 7^th July 2006 (1/159) and of DJ Smith dated 7^th November 2006 (1/161). Particulars of Claim were attached to the Claim Form. These had been settled by Mr Neil Berragan (of Counsel) and were verified by a statement of truth signed by Mr Lankry on 12^th April 2006. Paragraph 3 alleged that "In the course of the discussions with Mr Firth… [he] represented to and assured [Lancore] that [Barclays] would accept and process transactions originating from other ecommerce businesses, provided that the goods or services were the property of [Lancore] at the point of sale." Paragraph 6 alleged that goods or services had "been sold via the internet on behalf of [Lancore] by Lancore Services Limited of Belize (a wholly owned subsidiary of [Lancore]) which provided fulfilment services to Physician Drugs Limited who in turn operated an affiliate programme, providing links to [Lancore's] web site". Further information provided by Lancore reiterated that one of the conditions upon which Mr Firth had agreed that Lancore could undertake third party processing had been that Lancore "would have to be the legal owner of the goods sold at the point of sale" (1/19). Despite this, Lancore asserted that "the goods or services provided at the time of sale were owned in each case by Lancore Services Limited of Belize"; that "the goods provided were virtually all pharmaceutical products sold in the manner described above. A small amount of kitchenware was sold directly by [Lancore]" (1/29); that "at the time of sale and the point of payment, title to goods or services was held in each case by Lancore Services Limited of Belize (except in the small number of cases where the Claimant made sales of its kitchenware products via its own website)" (1/31); and that "the goods were supplied in each individual case by Lancore Services Limited of Belize which packaged and dispatched all pharmaceutical products sold" (1/32). As required by a Court Order dated 19^th September 2006, on 3^rd October 2006 Lancore provided further information (1/43-4) in which it accepted that "Lancore Belize Limited concluded contracts with customers on its own account, and that consequently the Claimant was not the owner of goods of the point of sale"; and further accepted that Barclays "was entitled to terminate the Agreement immediately pursuant to clause 16.1 and 3.12 (a) of [Barclay's] Merchant Terms and Conditions". It was said that Lancore intended to apply for permission to file and serve amended Particulars of Claim reflecting this, which it duly did.
39. There followed an application by Barclays for summary judgment, on the basis that Lancore's claim had no real prospect of success. That application was supported by a witness statement made by Mr Harold Brako, an associate in the firm of DLA Piper UK LLP, Barclays's solicitors, on 2^nd February 2007 (8/111-129). In paragraph 46.1 he stated that it was worthy of particular note that "Lancore plead no case that the Bank was told (let alone agreed or consented) that Lancore Belize would be providing the services to the e-commerce companies or that Lancore Belize, rather than Lancore itself, would hold title to the goods supplied. I am also informed by Mr Firth that no such agreement would have been given even if asked for. It therefore follows that even on Lancore's own pleaded case it was not a party to the card transactions and it did not have title to the goods supplied, even though Lancore concedes that it was made clear by the Bank that Lancore had to have title to the goods or services it processed transactions for. Accordingly, on its own case, Lancore has no contractual entitlement to payment on the submitted card data."
40. On 4^th June 2007, Mr Lankry made a witness statement in opposition to Barclay's application (8/10). It was upon this witness statement that Mr Lankry principally relied as his evidence in support of the claim. At paragraph 24, he addressed Barclay's alleged requirement as to the ownership of the goods at the point of sale. He said that "this was a requirement of the Bank in respect of the original Application when Lancore only required a facility to accept payment by credit and debit cards in respect of the goods supplied by them directly. It is obvious that the Bank would require that to be the case in those circumstances. However, it was never a requirement that Lancore owned the goods at the point of sale in relation to its activities as a payment service provider. It must have been apparent to both Mr Firth and the Bank from our conversations and the documents supplied to them that Lancore would not own the goods at the point of sale as it was only providing fulfilment services and not selling the goods." Mr Lankry stated that he was informed by Lancore's solicitors that, in the circumstances, Lancore intended to apply for permission to make amendments to the Statement of Case in due course to reflect this. Referring to Mr Brako's witness statement, at paragraph 27 Mr Lankry said that "Mr Firth did not make any reference to Lancore holding title to and providing the goods and services at [the 30^th November] meeting. That was an earlier requirement in relation to the original intention to supply kitchenware and not to act as a payment service provider. There was no such requirement in respect of Lancore's fulfilment services and the Bank subsequently agreed to and did process the transactions." At paragraph 29, Mr Lankry summarised Lancore's case as follows: "… the Bank were made fully aware that Lancore intended to provide fulfilment services for third party transactions involving pharmaceutical products and prescription drugs. This is accepted by Mr Firth. The Bank were also sent copies of Lancore's brochures explaining the nature of the services to be provided and it is not denied that they were received. The Bank then subsequently accepted and processed payments. There was no requirement that Lancore should own the goods at the point of sale when acting as a payment services provider and nor could they [sic] be as Lancore were merely providing fulfilment services and not selling the goods. The Bank seeks to rely on its terms and conditions, but these were not received until the meeting with Mr King on 23 February 2006, the Application Form simply being e-mailed to Lancore for completion without the terms and conditions in the previous September."
41. The reference within paragraph 29 of Mr Lankry's June 2007 statement to Mr Firth's acceptance that third-party processing was to extend to pharmaceutical products and prescription drugs was to paragraph 25 of Mr Brako's witness statement, where he related that he had been informed by Mr Firth that, at the 30^th November meeting, Lancore had indicated its desire "to provide internet fulfilment services for various European clients and thereby effectively providing merchant services to other businesses including pharmaceutical, casino and "adult" sites." In paragraph 55 of his witness statement dated 20^th March 2008, Mr Firth refers to this passage and states that he has no recollection of having said this to Mr Brako or to anyone else. In his oral evidence, Mr Firth maintained that he was certain that Mr Lancore had not mentioned the sale of pharmaceutical products at the 30^th November meeting.
42. Barclays's application for summary judgment came on for hearing before me in Liverpool on the 13^th June 2007 and was dismissed, on condition that Lancore applied to re-amend its Amended Particulars of Claim, and supported such application by evidence from each of the three directors. A copy of my order is at 1/163-4; and a transcript of my extemporary judgment is at 1/215-238. There was no appeal from my decision. The Re-Amended Particulars of Claim, verified by a Statement of Truth signed by Mrs Ellis on 8^th November 2007, are at 1/3-15. Paragraph 3 (1/7) now provides that "Mr Firth represented to and assured [Lancore] that [Barclays] would accept and process transactions originating from other ecommerce businesses, however, the stipulation that the goods were the property of [Lancore] at the point of sale remained in respect of any goods that [Lancore] sold direct." Paragraph 6 (1/10) had already been amended (by deleting the words "on behalf of the Claimant") to make it clear that goods or services were sold via the internet by Lancore Belize. Further Information from Lancore (1/45-55), verified by a Statement of Truth signed by Mr Lankry on 2^nd November 2007, made it clear that Lancore only provided payment processing services to Lancore Belize; and that Lancore Belize had only provided fulfilment and encashment services to Physician Drugs Limited: It had been intended that Lancore Belize would offer services to other affiliates but, before this could occur, Barclays had ceased processing payments and thus had prevented this from occurring.
43. Prior to trial, there were various interim applications and Orders for the provision of further information and further disclosure. Despite this, further documents – some of which were significant - were disclosed during the course of the trial, and were inserted in Volume 10; and it was necessary for Barclays to produce a further (third) witness statement from Mr Mooney, dated 11^th April 2008, dealing with (1) the accounts into which Visa and MasterCard had made payments in respect of Lancore transactions; (2) the suggestion that moneys were being held in a bank account in the name of, or referable to, Lancore, or to its transactions; (3) how Barclaycard had accounted internally in respect of Lancore transactions which had been processed, but where no payments had been made to Lancore; and (4) what had happened to the £36,000 deposit paid by Lancore as security for its merchant facility. During the course of the trial, Lancore produced a witness statement from Susan Ely, dated 16^th April 2008, exhibiting the bill from the lunch at the Teppanyaki Restaurant on 30^th November 2005.
44. The trial began in Manchester on Tuesday 8^th April 2008. Mr Stephen Cogley, leading Mr Peter Ferrer, appeared for Lancore. Mr Andrew Sutcliffe QC, leading Mr Jonathan Davies-Jones, appeared for Barclays. Both parties' counsel had prepared written openings submissions, which I had had the opportunity of pre-reading. Mr Cogley addressed me in opening for about 1 ½ hours, and he was followed by Mr Sutcliffe, who addressed me for about 30 minutes. The first witness was Mr Lankry, who went into the witness box at about 2.20pm on Day 1 and gave evidence for some 9 hours 10 minutes, concluding at about 2.40pm on Day 3. He was followed by Mrs Ellis, who went into the witness box at about 2.50pm and gave evidence for some 4 hours 50 minutes, concluding at about 3.25pm on Day 4.
45. A peculiar feature of Lancore's evidence was that the statements of Mr Lankry, dated 28^th February 2008, and of Mrs Ellis, dated 17^th March 2008, prepared for the trial itself, were both remarkably short. Mr Lankry had made two earlier witness statements (dated 4^th June and 4^th July 2007), and one affidavit (sworn on 18^th March 2008); but only his June 2007 statement was of any length. Mrs Ellis had made two witness statements (dated 4^th June and 4^th July 2007), and two affidavits (sworn on 7^th March and 12^th March 2008); but none was of any length. Barclays impugns the honesty, as well as the reliability, of the evidence of both Mr Lankry and Mrs Ellis.
46. Another peculiar feature of Lancore's evidence is that, although Mrs Lankry had made two short witness statements (dated 28^th November 2006 and 4^th July 2007), she was not called as a witness at the trial of this action. In answer to questions from the Bench at the end of his evidence, Mr Lankry indicated that there was no reason why his wife (a director of, and a substantial minority shareholder in, Lancore) could not be called to give evidence; and Mr Sutcliffe made it clear (early on the morning of Day 4 of the trial) that he had no objection to her being interposed at any time during the course of the following week, to suit Lancore's convenience. Lancore did not take him up on this offer. Mrs Lankry clearly had played an active role in relevant events: For example, she had completed the original application form for the merchant facility (with Mrs Ellis), and she had sent the contemporaneous letter dated 14^th September 2005 confirming that Lancore owned the relevant goods (having previously spoken to Mr Firth and made a written note of his need for such a letter); she had dealt with Mr Stone, asking to deposit a sum of money by way of security as an alternative to deferred settlement (as indicated in her e-mail of 4^th October 2005); she had sent the e-mail to Mr Firth on the evening of 30^th November 2005 providing details of the Pacnet Services and Payment Solutions web-sites, and thus (as Mr Lankry accepted in evidence) she had discussed with Mr Lankry his important lunchtime meeting with Mr Firth; together with Mrs Ellis, she had been one of Lancore's two representatives at the meeting with Mrs Conroy, Mr Firth and Mr Robertson on 24^th January 2006; and, again with Mrs Ellis, she had been Lancore's only other representative at the first part of the meeting with Mr King and Mr Jennison on 23^rd February 2006. I find the decision not to call her to give evidence for Lancore surprising; and I accept Mr Sutcliffe's invitation to conclude that she was either unable (or unwilling) to give evidence supportive of Lancore's case. I find that Mrs Lankry had material evidence to give on issues that arise in this litigation; and I am entitled to, and I do, conclude that Lancore's omission to call her tends to strengthen the evidence adduced by Barclays, and to weaken the evidence adduced by Lancore, on those issues: see Wisniewski v Central Manchester Health Authority [1998] PIQR P324, a decision of the Court of Appeal that was not cited to me.
47. I also find it surprising that Lancore should claim that Enterpayment was unable, or unwilling, to assist Lancore in this litigation with the provision of documentation and evidence when, on Mrs Ellis's evidence in her witness statement of 17^th March 2008 at 2/3, Enterpayment stands to receive some £920,000 if Lancore should succeed in obtaining judgment in this litigation. Enterpayment's professed disinterest in this litigation became even more surprising when it emerged in cross-examination that a company in Germany connected with Enterpayment, and apparently called Gab Security, was providing Lancore with financial assistance in this litigation.
48. The first of Barclays's witnesses was Mr Firth, who went into the witness box on the afternoon of Day 4, although his cross-examination did not begin until after the weekend, on the morning of Day 5. He was in the witness box for almost 7 hours, concluding at about 3.30pm on Day 7. Right at the beginning of his cross-examination, Mr Cogley made it clear that Mr Firth's honesty was in issue: His case was that Mr Firth had known that Lancore was engaged as a third-party PSP, processing payments for merchants selling pharmaceuticals, including Viagra, and that he had sought to cover his tracks; although (as stated above), following the production and inspection of Mr Firth's original notebook, Mr Cogley very properly abandoned his earlier suggestion that Mr Firth had written up his note of the 30^th November meeting in or about February 2006. It is therefore not surprising that, at times, Mr Firth appeared to be somewhat defensive in his attitude in the witness box.
49. Barclays's second witness was Mr Copeman. I did not understand his honesty or reliability to be challenged by Lancore; but, in any event, I found him to be a cautious and careful witness in whom the Court could place its confidence and trust. He gave evidence for about 1 ½ hours, continuing into the morning of Day 7. I then heard from Mr Stone, who gave evidence for about 50 minutes. I did not understand his evidence to be challenged by Lancore. Indeed, Lancore relies upon the conclusion drawn by Mr Stone that, because there was a PSP involved, Lancore must have been intending to trade via the internet. I then heard from Ms Kelly Brewin, who at the relevant time was a Team Leader within Barclaycard Business's managed Recruitment Team, overseeing one of the teams involved in processing merchant applications. She gave evidence for about 30 minutes. I am afraid that I was not overly impressed with Ms Brewin's apparent competence in the area of risk analysis; but I derived little benefit from her evidence beyond the fact that, once it was established that Lancore had possessed its own web-site, this should have been looked at as part of Barclaycard Business's due diligence. The morning of Day 7 concluded with the evidence of Mrs Joanne Marriott, who was the assistant credit manager who had contacted a sample of 11 Barclaycard holders who had purchased goods, the payment for which had been processed by Lancore. She gave evidence for about 20 minutes; and, again, I did not understand there to be any real challenge to her evidence.
50. On the afternoon of Day 7, I heard from Mrs Conroy, who gave evidence for about 2 hours. I formed the clear judgment that she was an entirely honest, straightforward, and impressive witness. I accept entirely her evidence that her handwritten notes were made at the meeting on 24^th January itself and not, as Mr Cogley sought to suggest, in advance of, and by way of preparation for, the meeting: As Mrs Conroy pointed out, when challenged in cross-examination, they begin by identifying "Yvonne & Hilary"; yet Mrs Conroy had expected (and had been led by Mrs Ellis's e-mail of 17^th January to expect) that Julien Lankry would also be present at the meeting; and certain of the matters recorded in the notes could only have been communicated during the course of the meeting. Mrs Conroy's evidence was supported not only by her own notes, but also by Mr Firth's notes, which were only disclosed on the morning of Day 6 of the trial. I reject all challenges to Mrs Conroy's reliability and credibility as a witness.
51. Mr King went into the witness box on the afternoon of Day 7, although his cross-examination did not begin until the morning of Day 8. He gave evidence for a little under 2 ½ hours. He was accused by Mr Cogley of partiality and of a lack of professionalism in his role as a fraud investigator. I accept that Mr King went into the meeting on 23^rd February 2006 having already formed the view that Lancore was engaged in "laundering", by which he meant the unauthorised third-party processing of transactions, which included the sale of prescription drugs. I also accept that, in his subsequent written report on Lancore, he did not record the claim that had been advanced by Mr Lankry at the meeting that Mr Firth had known that Lancore had been engaged in processing payments for goods sold over the internet by third parties. Furthermore, Mr King himself accepted that, in his letter to Lancore of 24^th February, he had omitted to mention the tip-off from Mr Liquornik, suggesting instead that the security checking of some of the transactions on Lancore's merchant account had been due to a higher than anticipated credit card turnover; and he also acknowledged that, in hindsight, he had been "slightly over-egging things" in asserting that "all the resultant replies from cardholders have indicated that transactions were for the purchase of male medicines and pornographic downloads". However, I reject any suggestion that Mr King sought to take advantage of Mr Lankry's absence from the first part of the meeting to browbeat or to intimidate Mrs Lankry and Mrs Ellis, or that Mr King had a closed mind and that he convened, and attended, the meeting solely in order to confirm his existing suspicions. In this connection, it is only fair to record that, in paragraph 34 of his witness statement, Mr King acknowledged that, by the end of the meeting, both he and Mr Jennison were of the view that neither Mrs Ellis nor Mrs Lankry had had any idea about what Lancore was really trading in, and that Mr Lankry had hidden the true nature of Lancore's trading from them. Mr King was calm and considered when giving evidence; he made appropriate concessions; and, subject to the qualifications previously stated, I find that he was an honest and reliable witness.
52. Mr Jennison entered the witness box on the morning of Day 8, although his cross-examination only began after lunch. His evidence lasted a little over an hour. I formed the clear impression that Mr Jennison was heavily dependent upon his contemporaneous notes for his evidence as to what had taken place at the meeting on 23^rd February; and that he was reluctant to proffer more than the absolute minimum in answer to questions from Mr Cogley. However, Mr Jennison's role at the meeting had been that of note-taker, and he had left it to Mr King to ask the questions. He very fairly acknowledged in cross-examination that, when he had arrived at the meeting, Mr Lankry had not been angry, but rather late and flustered; and that Mr Lankry had asserted at the meeting that, through Mr Firth, Barclaycard Business had known that Lancore had been third party processing. As with Mr King, I find Mr Jennison to be an honest and, within the limits of his recollection, a reliable witness.
53. Finally, the court heard from Mr Mooney, who had made 3 witness statements (dated 20^th March, 2^nd April and 11^th April 2008) and who gave evidence on the afternoon of Day 8 for about 40 minutes. He was an honest, reliable and thoroughly impressive witness; and I do not understand there to be any real challenge to his evidence. He told the court that after Mr King's early retirement from Barclays at the end of March 2006 (because his wife was diagnosed as having cancer), the Bank's investigation into Lancore's dealings had effectively come to an end. Mr Mooney acknowledged that it was now impossible to return the moneys in dispute (which were identifiable, and were held in an account in the name of Barclays's multi-currency unit) to the relevant card issuers; that there was no legal impediment to the moneys being paid over to Lancore; and that it was theoretically possible, but unlikely, that Visa or MasterCard could still start proceedings against Barclays arising out of its processing of the Lancore transactions. In answer to questions from the Bench, Mr Mooney indicated that, if Lancore failed in the present litigation, the moneys in dispute could remain frozen for a very long period of time.
54. Mr Mooney was Barclays's last live witness. Barclays had served a witness statement from Mr Keith Robertson, who had stood in as Lancore's relationship manager during Trisha Conroy's absence on maternity leave; but he was not called as a witness. Pursuant to paragraph 1 of an Order made by myself at the Pre-Trial Review in Liverpool on 25^th March 2008 (1/175A-B), Barclays adduced, under the Civil Evidence Act 1995, expert evidence (contained within Bundle 3) from Dr Wolfgang Rehmann and from Mr Anthony Young as to the designation, and the laws governing the sale, of prescription drugs in Germany and the United States of America respectively.
55. After the conclusion of the evidence, on Thursday 17^th April, and because of its prior commitments, the Court adjourned until Wednesday 23^rd April. By the time the trial resumed, both parties had produced written closing submissions: in the case of Barclays, these extended to no less than 112 pages; and, in the case of Lancore, to a more modest 24 pages. Each party then addressed me orally for a day. The hearing concluded at about 4.30pm on Thursday 24^th April. I subsequently received from Mr Cogley a short written response to further written closing submissions that Barclays had handed in on the last day of the trial, and which had addressed two issues that were said to have arisen in the course of Lancore's closing. Without intending any disrespect to the parties' advocates, I do not propose, in this judgment, to set out in full their respective arguments. This is a consequence of the need to keep this judgment to manageable proportions in the time available to me. It is in no way an indication that those written and oral submissions were unhelpful, or that I have failed to bear them in mind. On the contrary, the advocates' submissions, both written and oral, could not have been more comprehensive, or of greater assistance to me. Should this matter go further, the parties' arguments will appear with admirable clarity in the advocates' respective written submissions, and in the written transcripts of the hearing, which are available to the parties and to the court.

Assessment of the principal witnesses

56. In the course of my review of the trial, I have so far refrained from commenting upon the reliability and credibility of the three principal witnesses in this case: Mr Lankry, Mrs Ellis, and Mr Firth. Their honesty, and the reliability of their evidence, is crucial to the determination of the disputed issues of fact that fall to be resolved by me. It is a sad truth that either Mr Firth on the one hand, or Mr Lankry and Mrs Ellis on the other, have been dishonest in their evidence to the court: there is no room for genuine mistake in this case.
57. I have no hesitation in concluding that the evidence of Mr Firth is to be preferred to that of Mr Lankry and of Mrs Ellis on all points where there are differences between them. I am entirely satisfied that it is Mr Lankry and Mrs Ellis, and not Mr Firth, who have lied in their evidence to the court. The principal reason for arriving at this conclusion is that Mr Firth's account of events is consistent with the contemporaneous documents, whereas the version of events related by Mr Lankry and by Mrs Ellis is inconsistent with the contemporaneous documents. Barclays's case is supported not only by Mr Firth's own documents, but also by documents generated by other bank employees, and by documents only produced by Barclays during the course of the trial. By contrast, Lancore's case flies in the face of numerous documents, including many generated by Lancore itself. A second, but subsidiary reason, for my conclusion is the impression created upon the court by each of Mr Firth, Mr Lankry, and Mrs Ellis when giving their evidence.
58. First, I consider Mr Firth. Although, at times, he appeared naturally defensive in the face of Mr Cogley's signposted, and frontal, assault upon his honesty, I found Mr Firth to be a careful and straight-talking individual who, on the whole, had a good recollection of relevant events. I reject Mr Cogley's submission that Mr Firth was not a straightforward witness at all. The further documents produced during the course of the trial, including the pre-approval form (10/5/19-21) and Mr Firth's original notebook, fitted well with the evidence given from recollection in his witness statement. I do not attach any significance to the fact that, in response to Mr Lankry's evidence as to the physical layout of the Teppanyaki restaurant, Mr Firth was prepared to resile from his earlier evidence (at paragraph 50 of his witness statement) that he had made his notes of his meeting with Mr Lankry on 30^th November "at the table during the course of the lunch", to the extent that Mr Firth acknowledged in evidence that they might have been made after they had finished eating and had moved away from the "hot-plate" to some more comfortable chairs arranged around a low table. Nor do I attach any significance to the fact that the bill for the meal at the Teppanyaki restaurant showed that Mr Firth had apparently drunk a Japanese beer, rather than a diet coke, particularly when Mr Sutcliffe's assertion (on instructions, and at the beginning of Day 3) that Mr Firth thought that he would have had a diet coke was made in the context of evidence from Mr Lankry that they had been drinking wine at the meeting. I accept that Mr Firth made a genuine mistake when, in his report to Mr King of 23^rd February 2006 (4B/666-8), he identified "16^th Dec 05 (approx)" as the date when Lancore had supplied him with a schedule of approximately 10 proposed new businesses, which had led to Mr Firth's conversation with Mrs Ellis about the sale of Viagra. Not only was the date, 16^th December, qualified by the word "approx", but it was also a date that had featured in Mr Firth's manuscript notes (see 4A/441-2); and Mr Firth's report was similarly vague about the date of his 30^th November meeting with Mr Lankry: "End Nov 05".
59. Mr Cogley naturally made much of the evidence in paragraph 25 of Mr Brako's witness statement of 2^nd February 2007 (made in support of Barclays's summary judgment application), where he had stated that he had been informed by Mr Firth that, at the 30^th November 2005 meeting, Mr Lankry had indicated Lancore's desire to provide internet fulfilment services to other businesses, including pharmaceutical, casino and "adult" sites. I accept Mr Firth's evidence (at paragraph 55 of his witness statement) that he has no recollection of having said this to Mr Brako, or to anyone else. I acknowledge that there is no evidence from Mr Brako, or from anyone else at DLA, as to how paragraph 25 came to feature in Mr Brako's witness statement. Nevertheless, I accept Mr Firth's evidence - re-affirmed in answer to questions from the Bench, after he had been re-examined by Mr Sutcliffe – that, notwithstanding the more equivocal language in his e-mail to Mr King of 3^rd March 2006 at 4B/698 ("I do not recall that he mentioned the sale of pharmaceutical products."), Mr Firth was "certain" that Mr Lankry had not mentioned the sale of pharmaceutical products at the meeting on 30^th November 2005. Mr Brako's account of what he had been told by Mr Firth is inconsistent, not only with Mr Firth's present evidence, and with his e-mail of 3^rd March 2006, but also with the whole tenor of the e-mails and other documents generated between 30^th November 2005 and the termination of Lancore's merchant facility. In particular, if Mr Brako's evidence accurately reflects what he had been told by Mr Firth, then - as Mr Cogley accepted - Mr Firth must have been lying when he told Mr Stone, on 4 December 2005, that at that moment in time he did not have a description of the goods to be sold by Lancore. Furthermore, the terms of the e-mails passing between Mrs Ellis and Mr Firth on 23^rd December 2005, regarding "adult" sites, strongly suggest that this was not a type of business that had been mentioned to Mr Firth at the 30^th November meeting. In any event, Mr Lankry has to explain far more inconsistencies and changes of position in Lancore's own evidence and its pleaded case.
60. In paragraph 24 of her witness statement (and confirmed in cross-examination), Mrs Conroy stated that, prior to their meeting with Lancore on 24^th January 2006, her recollection was that Mr Firth had "suspected that Lancore had already started selling car accessories without telling Barclaycard". (There was no suggestion that he suspected that Lancore might have been selling pharmaceutical products; and, in view of his account of his telephone conversations with Mrs Ellis on or about 21^st December 2005, there was no reason why he should have done so.) Although Mrs Conroy's evidence was consistent with paragraph 88 of Mr Firth's witness statement, in cross-examination on Day 6 Mr Firth disclaimed any such suspicion. Apart from this, Mr Firth's evidence as to the events of, and surrounding, the 24^th January meeting is consistent with that of Mrs Conroy. If (as I incline to think) Mrs Conroy is correct in her recollection on this point, I would not regard the consequent misrecollection on the part of Mr Firth as detracting from the reliability, still less the truthfulness, of his evidence generally. It is perhaps surprising – and even more so if Mrs Conroy's recollection is correct - that neither Mrs Conroy nor, more particularly, Mr Firth had looked at Lancore's website before the meeting on 24^th January 2006; but the evidence (acknowledged at paragraph 7.9.4 of Lancore's outline closing submissions) is that no-one at Barclays did so until around the time of the 23rd February meeting. Moreover, as Mr Sutcliffe pointed out, apart from the rather vague evidence from Mr King (towards the end of his cross-examination) of what he had found when he looked at the website at around the time of the 24^th February 2006 meeting - that it was purporting to be a merchant processing facility (although Mr King made no mention of pharmaceutical, or men's health-care, products) - there is no evidence before the court as to what an inspection of Lancore's disclosed website (which, according to an e-mail to Mr Firth from Mrs Ellis on 21^st December (4A/ 458) was "currently being upgraded") would have revealed. (I find it surprising that Lancore, as the site owner, did not seek to put any such evidence before the Court if this would have assisted its case.)
61. In summary, I reject Mr Cogley's attack upon Mr Firth's evidence and veracity. I simply cannot accept Mr Cogley's submissions (1) that Mr Firth had known precisely what Lancore had been up to, in terms of acting as a third party payment processor for internet merchants selling pharmaceutical products, including Viagra, over the internet; and (2) that Mr Firth's evidence in these proceedings was a dishonest attempt to cover his tracks by deliberately concealing that knowledge. Despite Mr Cogley's searching cross-examination, I accept Mr Firth as an honest and reliable witness.
62. I cannot say the same for Mr Lankry. Making all due allowance for his pronounced French accent, which at times made his oral evidence difficult to follow, I found him to be a wholly unsatisfactory witness, both in the manner, and in the content, of his evidence. Mr Lankry used very many words to tell the Court very little. He rarely gave a straight answer to a straight question. His answers were rambling and imprecise. He had a tendency to trim his evidence when he realised the implications of a potential answer. I agree with Mr Sutcliffe that he was quite unable to give a straightforward, coherent, and satisfactory explanation as to precisely how Lancore Belize was supposed to have operated, and as to the reasons for this; and I agree also that Mr Lankry's evidence regarding the role and operation of Lancore Belize, which (incredibly) was entirely unsupported by any documentation, tended to be made up by Mr Lankry as he went along. I agree with Mr Sutcliffe that Mr Lankry's oral evidence that there was a system in place which involved the sending of prescriptions to Lancore Belize was bizarre and self-contradictory. Mr Lankry was unable to name any individual who had allegedly worked in Lancore Belize's prescription department. He had never seen Lancore Belize's premises, let alone the prescription department. He was quite unable to explain how the procedure of sending prescriptions to Lancore Belize actually worked: At one moment, he suggested that they were sent to the merchant, then to Lancore Belize, and then to Enterpayment. At another, he suggested they were sent either to Lancore Belize or to the merchant. But he could not explain how they could have gone to the merchant in circumstances where none of the disclosed websites contained an address for the merchant to which to send them. I accept that Mr Lankry's evidence in this regard was all being made up as he went along. Had there been anything genuine about the alleged system for sending prescriptions to Lancore Belize, Mr Lankry, as its director, would have been able to give a cogent description of it. Mr Lankry was quite unable to explain satisfactorily either the true nature of the (undocumented) arrangements that were said to exist between Lancore and Enterpayment, or the legal basis, or the commercial justification, for the 30% commission that Mrs Ellis claimed (and Mr Lankry agreed) should have been deducted from the payments made by Lancore to Enterpayment. Mr Lankry has failed to provide any satisfactory explanation for the various shifts and changes in Lancore's case (as detailed at paragraph 101 of Barclays's written closing submissions) regarding the true identity of the third party or parties for which Lancore was undertaking card payment processing: In summary, initially Lancore was said to be selling the goods, with Lancore Belize merely acting as its agent; then it was said that Lancore Belize was selling the goods; later (in paragraphs 4 and 7 of a witness statement made by Lancore's solicitor, Mr Harry Gee, on 26^th February 2008, in answer to an application by Barclays for specific disclosure) it was said that Lancore Belize did not own or sell goods, but merely acted as a fulfilment house, effectively acting as a "deliverer" or holder of goods providing services to merchants; and finally, in evidence, Mr Lankry appeared to revert to the position that Lancore Belize was the owner of the goods. Mr Cogley made the point (in relation to Mr Firth's evidence) that Mr Firth knew rather less about Lancore's business than Mr Lankry; but, at times in his evidence, Mr Lankry demonstrated remarkably little apparent knowledge of that business.
63. I am far from satisfied that Mr Lankry has told the court the full story behind his approach to Barclays for a merchant account. Mr Lankry's evidence (towards the end of Day 1) that the written agreement between Lancore and Enterpayment dated 24^th August 2005 (4A/ 186A-G) related to the proposal for Lancore to become involved in the sale of car accessories would tend to show that, even at that early date, this was something that Lancore was already actively considering; whilst the Cooperation Agreement (4A/241-7) between Lancore Belize and Physician Drugs Limited was dated 27^th October 2005; yet neither of the ventures to which those agreements were said to relate featured in Mr Lankry's discussions with Mr Firth until very much later in the chronology. Mr Lankry could also be slapdash in his evidence and his approach: in his witness statement in opposition to Barclays's summary judgment application, he identified the wrong document as the brochure that was shown to Mr Firth at the 30^th November meeting; and he never sought to provide (nor, as I find, did he ever have any intention of providing) Barclays with any application, or any merchant risk compendium, for any third party for which Lancore undertook third party processing, in conformity with the literature provided to Mr Firth on 5^th December 2005. Indeed, even though Mr Firth had made it clear (in his e-mail to Mrs Ellis of 4^th December 2005) that he had requested guidance from Barclays's risk team, Mr Lankry told the Court (at page 9 of the Transcript of Day 3) that he had merely presumed that "everything was fine" because after four days he had had "the okay from Barclays to go live". (In fact, everything was already in place, and all that happened was that Cybersource started submitting payment data.) Initially in his evidence, Mr Lankry said that he was unable to explain why the list of products supplied to Mrs Conroy on 3^rd February 2006 omitted any reference to car accessories if (as he and Mrs Ellis claimed) the document referred to Lancore's proposed new merchant facility. Later, Mr Lankry suggested that the explanation was that Lancore did not know that they could obtain this particular business. I find that this lame explanation was an example of Mr Lankry concocting evidence on the hoof and under the pressure of cross-examination.
64. There are a number of further features of Mr Lankry's conduct which adversely affect his credibility: (1) He provided instructions to Wacks Caller to put forward a version of events in their letter of 1^st March 2006 which Lancore now accepts was untrue. (2) He was prepared to sign a statement of truth on the original Particulars of Claim when he must have known that certain of its contents were untrue. (3) He created (as I find) the domain names for goodhome.tv (on 21^st February 2006) and pharmaworld.cc (on 24^th February 2006) in a deliberate attempt to put forward a false version of events in relation to Lancore's trading position; and he then lied about doing so. In summary, I found Mr Lankry, in his evidence, to be rambling, shifty, evasive, and, at times, self-contradictory or incoherent. He was not a witness in whom I can place any trust.
65. Nor can I place any trust in Mrs Ellis's evidence. Had Mrs Ellis asserted in evidence that she had been unaware that, from the time it "went live" on 8^th December 2005, Lancore had been engaged in third party processing, it is possible that I might have been persuaded to the view (entertained by Mr King and Mr Jennison after their meeting with her on 24^th February 2006) that Mrs Ellis had had no idea about what Lancore was really doing, and that Mr Lankry had hidden the true nature of Lancore's business from her. In his oral evidence (in response to a question from the Bench), however, Mr Lankry made it clear that Mrs Ellis had known the true position. Thereupon, Mrs Ellis found herself, as Mr Sutcliffe put it, caught between a rock and a hard place; and, in her oral evidence, Mrs Ellis accepted that she had been told by Mr Lankry that Lancore was involved in third party processing in connection with the sale of men's health care products, including Viagra. I have wondered whether Mrs Ellis's evidence to this effect may have been false, motivated by a desire to support the husband of the friend she had known since they had been children together; but even on this interpretation, Mrs Ellis would have been guilty of lying to the court. I therefore approach Mrs Ellis on the footing that she did know what Lancore was up to; but, on this basis, I find the contemporaneous documentation entirely inconsistent with honesty on the part of Mrs Ellis in her dealings with Barclays from the time when Lancore's account "went live" on 8th December 2005. I also reject her evidence that the reason why she did not tell anyone at Barclays about Lancore's activities was because she believed that Barclays had already approved them: I have no doubt that Mrs Ellis deliberately concealed the true nature of Lancore's business from Barclays, because she knew that that business had not been, and would not be, authorised by Barclays.
66. I reject, as inconsistent with the contemporaneous documents (and, in particular, the lately-disclosed pre-approval form), and the inferences properly to be drawn from them, the evidence of Mrs Ellis as to the nature of the businesses detailed in the attachment to her e-mail to Mr Firth of 21^st December 2005. I accept Mr Firth's account of his subsequent telephone conversations with Mrs Ellis, as set out at paragraphs 68 and 69 of his witness statement; and I find that Mrs Ellis was untruthful in her evidence to the court when she said that Mr Firth had lied about these conversations. Mrs Ellis was unable to provide any satisfactory explanation as to why Mr Firth should have "submitted a pre-approval request for [Lancore] for the motor vehicle accessory facilities", and not also for electrical and electronic goods, if these had been the other items detailed in the attachment to Mrs Ellis's e-mail; nor could she offer any explanation as to why she had not queried this omission when Mr Firth had reported the limited nature of his request for approval to her. Mrs Ellis could provide no satisfactory explanation for her failure to query Mr Firth's insistence, in relation to the proposed second merchant account, on Lancore owning the goods at the point of sale if she had really thought that Barclays had already agreed to Lancore undertaking third party processing. Her response, when this point was put to her in the context of Mr Firth's e-mail of 23^rd December 2005 (which she accepted that she had discussed with Mr Lankry), was entirely unconvincing: She said that it had not occurred to her. Neither Mrs Ellis (nor Mr Lankry) ever made the obvious point, in their discussions with Mr Firth, that there should be no need for Lancore to be the owner of the goods at the time of sale because (on their evidence and case) Mr Firth had already agreed to Lancore processing payments on behalf of third parties.
67. In the context of the 24^th January meeting, Mrs Ellis offered no satisfactory explanation for her failure to mention the extent of Lancore's third party processing activities as the reason for the unpredicted increase in its credit card turnover when she and Mrs Lankry were questioned about this. I am satisfied that the explanation actually provided, which was recorded in Mr Firth's lately-produced note of the meeting, that this was attributable to "seasonal fluctuations" – slightly odd in the context of the sale of men's healthcare products – was deliberate obfuscation. I reject Mrs Ellis's explanation that she thought that Mrs Conroy and Mr Firth were only interested in details of the (on Lancore's own case, very few) goods that Lancore itself was selling: I have no doubt that both Mrs Ellis and Mrs Lankry chose deliberately to conceal the true nature of Lancore's business from Mr Firth and Mrs Conroy because they knew that it had not been authorised by Barclays. I have no hesitation in rejecting Mrs Ellis's evidence that the list of products that she supplied to Mrs Conroy on 3^rd February 2006 related to the proposed new merchant facility: It made no mention of car accessories, which at that time were the only products which had been identified for the new facility. When I asked Mrs Ellis about this on Day 4 of the trial (p 47 of the transcript) her answer (which should be contrasted with her response to the queries raised in Mr Firth's e-mail of 7^th February at 4B/563) was both lame and unsatisfactory: She said that it was because they had already discussed in depth the two Mercedes and VW web sites and, as she believed, Mrs Conroy and Mr Firth had already looked at those web sites and had seen the products that were for sale; and the products listed were the ones that Mr Firth and Mrs Conroy had not been able to see.

Principal findings of fact

68. At no stage in the course of cross-examination was it put to either Mr Lankry or to Mrs Ellis that Lancore's entry into the MSA was part of some "scam", calculated to facilitate some underlying unlawful business venture, or that Lancore had induced Barclays to enter into the MSA by means of some form of fraudulent misrepresentation as to Lancore's true business intentions. During the course of Mr Cogley's oral closing submissions on the morning of Day 10, Mr Sutcliffe expressly confirmed that he had advanced no such submission to the Court. I therefore approach this case on the footing that, in relation to the obtaining of Lancore's merchant facility, no case of fraud or of fraudulent activity has been advanced against Lancore, still less has such a case been made out against it.
69. I accept Mr Firth's account of the 30^th November 2005 meeting at the Teppanyaki restaurant in preference to Mr Lankry's version of events. I make the following findings of fact: (1) Mr Firth's handwritten notes were made during the lunch, and not at some later time. (2) Mr Lankry only mentioned gambling right at the end of the meeting, after Mr Firth had stopped taking notes. If, at the same time, Mr Lankry produced an advertisement for Ladbrokes online betting, this did not register with Mr Firth, who was not provided with a copy. (3) Mr Lankry did not provide Mr Firth with a copy of the leaflet that was produced during the course of the trial for him to take away with him from the meeting. Rather, Mr Lankry e-mailed to Mr Firth a copy of the contents of a new, more detailed, brochure later that same afternoon. (4) Mr Lankry made no mention of pharmaceutical products or "adult" sites during the lunch meeting. This conclusion is consistent with: (a) Mr Firth's handwritten notes; (b) Mr Firth's e-mail to Mr Stone of 4^th December 2005; (c) Mr Firth's reaction when Mrs Ellis first referred to a "Viagra" type of drug on 21^st December 2005; (d) the pre-approval form that Mr Firth submitted to Mr Copeman on 23^rd December 2005; (e) the e-mails passing between Mrs Ellis and Mr Firth on 23^rd December 2005 regarding adult sites; (f) the omission of any reference to the processing of transactions concerned with the sale of healthcare products at the meeting on 24^th January 2006; and (g) Mr Firth's handwritten notes on the e-mail he received from Mr Copeman of 26^th January 2006, which referred to the sale of kitchen utensils etc by mail and telephone order. (5) Mr Firth did not represent to or assure Mr Lankry that Barclays would accept and process transactions originating from other e-commerce businesses. Nor did he agree to Lancore acting as a payment processor or fulfilment house, let alone one involving the sale of pharmaceutical or "adult" products. What Mr Firth did do was to make it clear to Mr Lankry: (a) that an extensive risk assessment would be required before Barclays could look at such a proposition; and (b) that Lancore would have to own the goods or provide the services before Barclays could act as Lancore's acquirer. (This was accepted by Mr Lankry). As far as Mr Firth was concerned, Barclay's risk department would not sanction a merchant service facility for someone who was acting as a payment processor or fulfilment house for others.
70. I entirely reject, as inconsistent with the evidence, Lancore's case that, by 30^th November 2005 at the latest, Barclays was, or ought to have been, aware that Lancore's application for a merchant account was to enable it to act as a third party processor for merchants selling pharmaceuticals and providing gambling and "adult" sites. I also reject Mr Cogley's alternative suggestion that this is a case of "crossed wires", involving a genuine misunderstanding between the parties as to the basis upon which Lancore was entitled to operate its existing merchant facility.
71. I find that from 8^th December 2005, when Lancore began to submit payment data to Barclaycard business via its PSP, all three of Lancore's directors knew that virtually all the payment data related to the sale of prescription medicines by third parties to cardholders. Mr Firth, by contrast, was unaware of this. All three of Lancore's directors knew that Mr Firth had never reverted to Lancore, as he had indicated that he would do in his email of 4^th December; but they did not take this as consent to Lancore's proposal to act as an online multi-currency payment processor. Mr Lankry, and probably Mrs Ellis and Mrs Lankry also, knew that Lancore had not taken any steps to supply Barclays with an application or risk management compendium in respect of each third-party merchant, as indicated in the PowerPoint document that Mr Lankry had sent to Mr Firth on 5^th December 2005. I find that all three directors of Lancore knew that Barclays had not given its approval to the processing of card payments otherwise than pursuant to its existing merchant facility, which they all appreciated was for the sale of kitchenware by mail and telephone order only; and they also appreciated Barclay's requirement that Lancore should own such goods at the point of sale. All three of Lancore's directors also appreciated that the 21 days deferral period, and the amount of the security deposit, had been ascertained accordingly. Mrs Ellis herself accepted that she probably appreciated that Mr Firth was not the man who had the final approval to Lancore's proposed new merchant facility; and she (and Mr Lankry and, I infer, his wife) knew that such approval had not been given.
72. I find that although, from at least 13^th December 2005, the staff within Barclaycard Business who were engaged in monitoring Lancore's account appreciated that it was acting as an internet merchant, they did not appreciate that Lancore's merchant facility had been authorised on the footing that it was for the sale of goods by mail and telephone order only. I find that, until the tip-off on 13^th February 2006, no-one at Barclaycard Business appreciated that Lancore was processing payments for third parties; nor did anyone appreciate that the goods being sold included prescription medicines, such as Viagra, and other men's health-care products. I reject Lancore's case that Barclays had sufficient "corporate" knowledge to have permitted third party processing of transactions, and that it did not impose any inhibition in that regard until the point of suspension (or termination) of Lancore's processing facility. I reject entirely Lancore's case that there was ever any agreed variation to Barclaycard Business's Merchant Terms and Conditions. I also reject Lancore's case that Barclays is estopped from relying upon the Merchant Terms and Conditions according to their tenor.
73. I find that the attachment to Mrs Ellis's e-mail of 21^st December 2005 was in the form recalled by Mr Firth. This is consistent with both the pre-approval form completed by Mr Firth the following day and the report prepared by Mr Firth for Mr King on 23^rd February 2006. (I consider the discrepancy between "approx 10 web sites" in the former document and 8 in the latter to be of no importance.) I reject Lancore's case that there was no mention of men's healthcare products in the attachment as completely at odds with the terms of the pre-approval form. I also accept Mr Firth's account of his subsequent telephone conversations with Mrs Ellis and Mr Copeman, as set out at paragraphs 68 and 69 of his witness statement. Again, this is consistent with the terms of the pre-approval form. It is also consistent with the other contemporaneous documentation and (save as to the date: "16^th Dec 05 (approx)") with the terms of Mr Firth's later report to Mr King. It follows that I find, from the terms of her conversations with Mr Firth, that, immediately after she had first raised the matter with him, Mrs Ellis knew that Barclays would not agree to allow Lancore to provide payment processing facilities for businesses dealing in men's health-care products, such as Viagra, or other prescription drugs. I also find that this was made known by Mrs Ellis to Mr Lankry (to whom Mrs Ellis spoke by telephone several times a day when he was not in Manchester), and probably also to Mrs Lankry.
74. I accept the evidence of Mr Firth and Mrs Conroy, supported by their contemporaneous handwritten notes, as to what transpired at the meeting on 24^th January 2006. I find that: (1) Mr Firth and Mrs Conroy asked Mrs Ellis and Mrs Lankry to explain the nature of Lancore's current business, and they were informed that it involved the sale of kitchen knives and related goods by mail and telephone order, sourced from the Far East, with Enterpayment/Cyber-source acting as a fulfilment house. (2) Mrs Ellis and Mrs Lankry deliberately failed to disclose the fact that, as they knew, Lancore was in fact, processing transactions involving the sale of Viagra and other prescription drugs on behalf of third parties. (3) Mrs Ellis and Mrs Lankry deliberately failed to disclose the fact that any sales of kitchenware that there may have been were of little value, amounting to (at most) a couple of thousand pounds. (4) There was no room for misunderstanding questions being put to them which might have caused Mrs Ellis or Mrs Lankry to believe that they were not required to disclose the fact that Lancore was involved in third-party processing. (5) Mrs Ellis and Mrs Lankry gave a deliberately false explanation - seasonal fluctuations - for the vastly greater than predicted card turnover. (6) Mr Firth pointed out that Lancore's security deposit would have to be increased to £100,000 due to the significantly increased monthly card turnover. (7) Mr Firth repeated to Mrs Ellis and Mrs Lankry Barclays's requirement that Lancore should own the goods that were being sold. (8) Mrs Conroy asked Mrs Ellis and Mrs Lankry to provide, and they agreed to provide her with, a definitive list of the products that Lancore was currently selling; a flow chart detailing the flow of goods against the flow of cash in the business; and a copy of Lancore's contract with its PSP. (9) Mr Firth asked Mrs Ellis and Mrs Lankry for a flow chart showing how it was anticipated that Lancore would own the goods to be supplied by Mercedes and VW, in order to comply with Barclays's requirement that Lancore should own the goods at the point of sale. (10) The meeting was friendly; and, although they both required further information and documentation, Mr Firth and Mrs Conroy left it with no real concerns that Lancore was operating outwith the terms of its existing merchant facility.
75. I find that the list of products supplied to Mrs Conroy by Mrs Ellis on 3^rd February 2006 was intended by Lancore, and was understood by Barclays, to refer to Lancore's existing merchant facility, and not to the proposed new facility. In contrast to the flow diagram supplied to Mr Firth, which clearly related to internet trading, the accompanying flow diagram sent to Mrs Conroy clearly related to a form of mail order selling. The list of products clearly did not relate to the proposed new facility, because it included kitchen knives, and it made no mention of the Mercedes and VW accessories.
76. I accept the account of the meeting of 23^rd February 2006 given by Mr King and Mr Jennison and the accuracy of the latter's contemporaneous handwritten notes. I find that: (1) Mr King asked Mrs Ellis and Mrs Lankry about Lancore's existing turnover, and they were told that it all related to the sale of knives etc in USA/Europe. (2) When asked about the significant increase in turnover from their original estimate, Mrs Ellis and Mrs Lankry falsely put this down to successful Christmas trading (as they had done at their earlier meeting with Mrs Conroy and Mr Firth). (3) Mrs Ellis and Mrs Lankry stated that they had changed from mail order to internet selling through the goodhome.tv website in the middle of January 2006. (4) Mr King repeatedly asked Mrs Ellis and Mrs Lankry whether Lancore had been trading in pharmaceutical drugs, including Viagra; and, despite their knowledge of Lancore's role in the processing of such transactions, they both denied all knowledge of this. However, I reject the evidence of Mrs Ellis that it was at an early stage of the meeting that Lancore was first accused of selling drugs and pornography. (5) When Mr King informed Mrs Ellis and Mrs Lankry that some cardholders had confirmed that they had purchased Viagra and pornographic downloads from Lancore, they feigned ignorance and would only concede that Mr Lankry might know a bit more about the transactions. (6) After Mr Lankry had joined the meeting, Mr King asked him whether Lancore sold pharmaceutical drugs such as Viagra and, despite being fully aware of Lancore's role in the processing of transactions involving prescription drugs, Mr Lankry stated that Lancore only sold kitchenware; and he sought to suggest that Lancore's German distributor, Enterpayment had made some mistakes on the Lancore account. (7) Following further questioning from Mr King, regarding details of Lancore's stock, suppliers, and customers, Mr Lankry lost his temper, and he admitted that Lancore was processing transactions for the third parties; but he asserted that there was nothing wrong with doing this, falsely asserting that Barclays was aware of what Lancore was doing. Mr Lankry then inquired when Barclays would release the funds it was withholding from Lancore. (8) Whilst, before Mr Lankry's arrival, Mr King and Mr Jennison had been taken from the meeting room to Lancore's office in order to view the goodhome.tv website, contrary to Mrs Ellis's evidence they were not given printouts of the website to take away with them.
77. I find that Wacks Caller's letter of 1^st March, approved by Mr Lankry, was incorrect in the following respects: (1) Lancore had never sold, and was not still selling, kitchenware or household goods through the goodhome.tv website. The domain name for that website had only been created on 21^st February 2006, two days before the meeting with Mr King and Mr Jennison. Whilst the website may have existed previously, it did not exist in 2005 (because the domain name subscription had not been continued); and it was recreated on the instructions of Lancore. (2) Mr Lankry had not discussed the sale of pharmaceuticals by Lancore with Mr Firth over lunch on 30^th November 2005. (3) Lancore did not market pharmaceuticals on the remaining four websites, nor (save in respect of the Pharmaworld website, which was not created, apparently by Lancore Belize, until 24^th February 2006) did it own the domain names for those websites. The websites which marketed prescription drugs that resulted in transactions processed by Lancore were owned and operated by third parties. (4) Lancore never had title to the goods at the point of sale. The terms of business found on the Pharmaworld website referred to Lancore as owning the goods at the point of sale; but since this website was only created on 24^th February 2006, this was plainly a concoction, designed to mislead Barclays. (5) None of the transactions "falls squarely" within the principal definition of "Card Payment" in the Merchant Terms and Conditions since, as Lancore now accepts, each transaction was processed on behalf of a third party.
78. I find that, between August 2005 and February 2006, Lancore repeatedly represented to Barclays (in Mr Lankry's initial approach to Mr Firth, in Lancore's application form, at the meeting on 24^th January 2006 and, until Mr Lankry finally conceded the true position, at the meeting on 23^rd February 2006) that its business was the sale of kitchenware by mail and telephone order. In reality, what it was actually doing was third-party processing in respect of sales of prescription drugs. It was because of this that, whereas Lancore's predicted level of card turnover had been reported to be in the order of £142,000 per month, the actual volume of Lancore's card business in the months of January and February 2006 was in the order of some £1.47m and £1.75m respectively.
79. In the light of the documents, or lack thereof, and of the evidence of Mr Lankry and Mrs Ellis under cross-examination, I find that Lancore Belize did not own any of the goods which were sold and, in fact, never did any of the things which Lancore has suggested that it did. In particular, I find that: (1) Despite the fact that Lancore Belize was said still to be a subsidiary of Lancore, Mr Lankry was unable to name any of its directors (see the transcript of Day 2, page 14); nor could he name anyone who had ever worked for it, apart from Mr Jenkins. (In paragraph 6 of his witness statement prepared for the trial, Mr Lankry had said that he was the director and had decided to set up the company.) (2) There appears to have been no direct contact between Lancore and Lancore Belize. Mrs Ellis said in cross-examination, on Day 3 at page 46 of the transcript, that she had had no contact with anyone at Lancore Belize. If there was a query at any time, she would direct it through Enterpayment in Germany, although she could not think of any query that Lancore had in fact received. (3) Mr Lankry did not recognise the signatures of those who had signed agreements purportedly on behalf of Lancore Belize. Indeed, he thought that they might have been negotiated or arranged on its behalf by Enterpayment. (4) The key provisions of the processing agreement between Lancore and Lancore Belize appear to have been completely ignored: no statements were issued by Lancore in respect of transactions processed, and no payments were ever made by Lancore to Lancore Belize. All payments from Lancore went to Enterpayment, whose involvement was explained by Mr Lankry on the basis of a gentlemen's agreement which he claimed to have made with it. (5) Although Mr Lankry spoke about Lancore Belize's warehouse, he had never been to Belize and he had never seen any such warehouse. The evidence of Mrs Ellis on Day 3 was that Mr Lankry had explained the role of Lancore Belize as doing some fulfilment for Lancore, in the sense of storing the products and then dispatching them to the customer; but, on the following day, she explained that fulfilment of orders for kitchenware had been effected by a company in Hong Kong. As regards pharmaceutical products, it was Mr Lankry's evidence that products had been supplied to Lancore Belize by various merchants from around the world, and they had then been shipped by Lancore Belize to customers from all around the world. All of this was achieved without, apparently, a shred of documentation surviving to show for it. (6) There is, in fact, no credible evidence that Lancore Belize ever sold or did anything. In order for Lancore Belize to have been the seller of any goods, it would have had to have acquired them in the first place; but Mr Lankry was quite unable to explain how it did so when, on his own evidence, it paid no-one for the goods concerned. (7) The truth was expressed by Mr Gee in the witness statement he made on behalf of Lancore on 26^th February 2008: "Lancore Belize did not own or sell goods"; although I reject his further observation that it acted as a fulfilment house. (8) The suggestion from Mr Lankry that Lancore Belize was receiving and reviewing prescriptions in respect of each sale of prescription goods is wholly unrealistic, and was a flight of fancy on his part.
80. On the evidence, I find that, both at the time when Barclays suspended payments to Lancore's bank account on 15^th February 2006, and at the time when it terminated Lancore's merchant agreement (or MSA) by its letter of 7^th March 2006, Barclays "reasonably suspected" (within Condition 3.12 (c) of Barclays Merchant Terms and Conditions) that the payment details that Lancore had been submitting to Barclays were both for "illegal transactions", and for card payments by Cardholders to third parties, in the sense that they represented payments by cardholders to third party merchants who were engaged in selling prescription drugs over the internet without prescription.
81. Based on the evidence of Mr Mooney, supported by the documentation that is before the Court, I find that any chargeback periods have now long since expired, and that any contingencies, such as chargebacks and fines, can now be safely ignored. On the balance of probabilities, there is no real prospect that Visa or MasterCard will now seek to pursue Barclays for chargebacks, or for fines (or assessments). The only legitimate chargebacks have already worked their way through the system; and they had done so before the amount of Lancore's £36,000 security deposit (with accrued interest) was credited to the account in the name of Barclays's multi-currency unit, in which the moneys in dispute in this litigation are presently held. I therefore find that Barclays's continued retention of this fund neither reflects, nor bears any relation to, any actual loss that Barclays has sustained, or will sustain in the future: it represents a pure windfall gain to the Bank. I also find that there is no practical means of returning the sums in dispute to the card issuers (still less the cardholders) who were the original source of these moneys. Although I do not understand this to be challenged by Lancore, for the avoidance of doubt I record that I find that the sums in dispute were never credited to Lancore's bank account, but were at all relevant times retained by Barclays in bank accounts in its name.
82. On the evidence before the Court, I find that virtually all of the transactions which Lancore was processing on behalf of others were illegal transactions in prescription drugs. In its further information, Lancore admitted that "virtually all" the products being sold were "pharmaceutical products", with only a small amount of kitchenware (valued in evidence at only a couple of thousand pounds). In opening on the morning of Day 1, Mr Cogley accepted that Lancore had been concerned in the sale of prescription drugs. However, he disputed that Lancore had done anything illegal, or that there was any taint of illegality about Lancore's activities. He pointed out that Lancore was not itself the seller of any drugs, and he submitted that there was no evidence that prescription drugs had been sold without prescription. In paragraph 8.3 of his written closing submissions, Mr Cogley pointed to the complete absence of any evidence of transactions in relation to cardholders in any jurisdiction other than the United Kingdom (which accounted for only some 6% of transactions by value); and to the poor quality of the evidence afforded by the sample of 11 cardholders approached by Mrs Marriott. He submitted that there was insufficient evidence for the court to conclude, on a balance of probabilities, that the 67,000 card transactions submitted by Lancore related to illegal transactions.
83. I reject Mr Cogley's approach, which focuses upon only one part of the evidence which is before the court. I prefer, and largely adopt, the analysis which is to be found at Section 5.2 of Barclays's written closing submissions. On the evidence of the chargeback documentation, the screen prints from the bestgenericpharmacy website, and the admissions of Mr Lankry and of Mrs Ellis in cross-examination, and in the absence of any countervailing evidence from Lancore (which ought to have been in a position to supply evidence from the merchants on whose behalf it was processing card payments), I find, on the balance of probabilities, that virtually all of the transactions for which Lancore submitted payment details to Barclays involved the sale of the 14 drugs identified in Appendix 1 to Barclays's written closing submissions (Viagra, Valium, Cialis, Prozac, Xenical, Soma, Meridia, Ambien, Lunesta, Levitra, Propecia, Lipitor, Zocor, and Ultram). By reference to an analysis of the payment data submitted by Lancore, I find that 85% by value of all transactions Lancore processed were with cardholders based in the USA (67%), Germany (12%), and the UK (6%). On the basis of the unchallenged expert evidence of Mr Young (as to the USA) and Dr Rehmann (as to Germany), and the statutory and other material placed before me in relation to the UK (which reflects the position which applies generally in the European Community), and in agreement with the submissions of Mr Sutcliffe, I find (1) that, with the exception of Lunesta in Germany (where it was not authorised for distribution at all), all of the 14 drugs were prescription drugs in the USA, Germany and the UK; and (2) that it was illegal to sell prescription-only drugs without a prescription in, and under the law applicable to contracts concluded by cardholders within, those three jurisdictions. For the reasons advanced by Barclays at paragraphs 118 to 122 of its closing written submissions, I find that virtually all, if not all, of the drugs were sold without prescriptions being provided to the relevant merchant; and that the sales were therefore illegal.

Barclaycard Business's Merchant Terms and Conditions

84. Having found that Barclays is entitled to rely upon its Merchant Terms and Conditions according to their tenor, I turn to consider their true meaning and effect. Condition 1.1 of Barclaycard Business's Merchant Terms and Conditions (June 2004) sets out certain definitions, which are stated to apply "unless stated otherwise". The expression "Card Payment" is defined as "a payment for goods or services provided by you or supplied by you which the Cardholder has authorised you to charge to his or her Card account". (In my citations, the emboldened words "you", "we" and "us" appear in bold type on the original Merchant Terms and Conditions themselves.) Condition 2, headed "Our responsibilities", provides, by Condition 2.1, that "We will pay you the amount of all Card Payments (less any Refunds) included in Payment Details which you send to us as set out in this Agreement. We will do this each Banking Day as set out in the Payment Schedule...". No Payment Schedule was ever produced in evidence; but it is common ground that the parties had expressly agreed that payments into Lancore's bank account should be deferred by 21 days. By Condition 3.5 (b) it was provided that payment was to reach the merchant's bank account two to four Banking Days after Barclays sent payment, the actual number of days depending upon how Lancore sent its Payment Details for processing, and whether or not its bank account was held with Barclays. It would appear from the evidence that, in fact, payments reached Lancore's bank account with Barclays two Banking Days after Barclays sent payment. Condition 3.5 (a) provided that Lancore was to send Barclays Payment Details and Refund Details according to the Operating Instructions and Procedure Guides. The sub-clause continued: "When you send us Payment Details, this is your confirmation that you have provided goods and services to the Cardholder...".
85. It is necessary for me to set out the provisions of Condition 3.12, headed "Illegal and third party transactions", largely in full:

"(a) You must only send us Payment Details for payments by Cardholders to you for goods or services provided by you or the supply of cash by you to Cardholders.

...

(c) If we become aware, or reasonably suspect, that:

(i) the Card Payment was not genuine; or

(ii) the Card Payment was for an illegal transaction; or

(iii) the Card Payment was for a payment by a Cardholder to another person or for cash given to a Cardholder by another person; or

(iv) the payment does not in some other way constitute a Card Payment then we may withhold or debit from your bank account the amount of that Card Payment."

86. Condition 4 is headed "Chargebacks – Our right to refuse payment and to charge payments back to you". So far as material, Condition 4.1 reads as follows:

"(i) In some circumstances we will have the right not to pay you for a Card Payment. If we have already paid you for it, you may have to pay that amount back to us. This is called "charging back". (ii) We may charge a Card Payment back to you or refuse to pay it even if it has been authorised. (iii) We may also do this if you send us information about a transaction which is not a Card Payment but which has been processed by us as a Card Payment. (iv) If we have the right to charge a Card Payment back that amount will be a debt from you to us which you will owe immediately. (v) We will have the right not to pay you or to chargeback in the following circumstances:

(a) if the Card Payment or the way in which it was carried out has broken this Agreement or if the Payment Details or the way in which they have been sent to us have broken this Agreement;

...

(g) in any other circumstances where the Operating Instructions and Procedure Guides say we can charge the Card Payment back to you;

..."

For ease of exposition, I have inserted roman numerals (in italics) into the preamble to Condition 4.1. I accept Mr Sutcliffe's submission that the sentence in the preamble which I have identified as (iii) is free-standing; and that it confers upon the merchant acquirer a right, where a merchant has sent information about a transaction which is not a Card Payment but which has been processed as one, to charge the Card Payment back to the merchant, or to refuse to pay it, which is unqualified by the sub-paragraphs (a) to (h) of Condition 4.1 which follow. The Procedure Guide, which expressly forms part of the MSA, explains (at page 7.2 at 4A/64) that one of the most common reasons for chargebacks is that "a transaction was processed on behalf of a third party who could not process the transaction themselves. This is called laundering and is in breach of your Merchant Agreement."

87. Condition 16 is headed "Ending this Agreement". Condition 16.1 provides as follows:

"Normally we will give you at least 30 days' notice in writing if we want to end this Agreement. However, in certain circumstances such as those set out in Condition 4 (1) (h) (i) to (viii), or where we reasonably suspect fraud, or where you are in breach of Conditions 3.12 (a) or 4.2, we may end this Agreement by giving you immediate notice."

Lancore accepts that it was engaged in third party processing, that is to say that it was sending Barclays Payment Details otherwise than for payments by Cardholders for goods or services provided by Lancore itself. Lancore was therefore in breach of Condition 3.12 (a). Having rejected Lancore's case that Condition 3.12 (a) was varied by agreement, or that Barclays is estopped from relying upon that Condition according to its terms, it follows that Barclays was entitled to terminate the MSA by giving Lancore immediate notice (which Barclays did by its letter of 7^th March 2006). Lancore's claim for damages for premature termination of the MSA therefore fails.

88. Condition 16.6 provides that:

"If this Agreement ends, you will continue to be liable to us for all obligations which arose before the date the Agreement ends. Conditions 4, 7, 8, 9, 10, 12, 13, 14, 17, 24 and 25 will continue after this Agreement ends."

Mr Cogley points out that Condition 3.12 is not one of those that is expressed to survive the termination of the MSA. That is correct; but it does not seem to me to assist Lancore, because Barclays had already exercised its right to withhold payments to Lancore before Barclays exercised its right to terminate the MSA by its letter of 7^th March 2006. Condition 3.12 (c) refers to a right to "withhold" (that is to say, to hold back, to keep back, to refuse to give, or to refrain from making) payment, and not to a right merely to "suspend" (in the sense of stopping for a time, or deferring) payment. That meaning of the verb "withhold" is reinforced by the right that is also conferred by Condition 3.12 (c), in the circumstances identified therein, to debit the amount of a Card Payment from the merchant's bank account. Moreover, as Mr Sutcliffe observed in his closing oral submissions, acceptance of Mr Cogley's submission, that the right to withhold payment under Condition 3.12 (c) cannot survive termination of the MSA, would produce the absurd result that, if the right to withhold payment for an illegal transaction were to be exercised prior to termination, Barclays would be obliged to make the payment as soon as it had exercised its right to terminate the MSA. I agree with Mr Sutcliffe that neither party to the MSA could have intended such an absurd result. Having exercised its right to withhold payment during the subsistence of the MSA, in my judgment Barclays is entitled to rely upon Condition 3.12 (c) to continue to withhold payment, notwithstanding the MSA's termination.

89. On behalf of Lancore, Mr Cogley submits that the payment details submitted by Lancore to Barclays were not Card Payments for the purposes of the Merchant Terms and Conditions because they were not payments for goods or services provided by Lancore; and it therefore follows that the provisions of the MSA are irrelevant to Lancore's claim, which falls outside the Merchant Terms and Conditions. As Mr Cogley expressed it at the beginning of his oral closing submissions on the morning of Day 10, if these are not "Card Payments", then the parameters of this dispute take place outside the MSA. This is a cheeky submission, because it involves the proposition that Lancore is in a better position than it would have been in had it been doing that which it had been authorised to do under the MSA: having submitted payment details on behalf of unauthorised third party merchants, contrary to the terms of the Merchant Terms and Conditions, Lancore then seeks to contend that the Merchant Terms and Conditions confer no entitlement upon Barclays to withhold payments to Lancore. I reject this submission.
90. I accept that the payment details submitted by Lancore to Barclays were not Card Payments within the primary meaning of that expression for the purposes of the Merchant Terms and Conditions because they were not payments for goods or services provided by Lancore. I accept that that primary meaning of the expression "Card Payments" applies for the purposes of Condition 2 of the Merchant Terms and Conditions; so that Barclays was under no obligation to pay the amount of those Card Payments to Lancore, and there was no breach of Barclays's express obligation to pay under Condition 2.1. However, the context of both Condition 3.12 (c) and of Condition 4.1 requires an extended meaning to be given to the term "Card Payment": in each of these Conditions, the term must extend to "a transaction which is not a Card Payment but which has been processed by Barclays as a Card Payment". In the case of Condition 3.12 (c), that conclusion follows from the terms of Conditions 3.12 (c) (iii) and (iv), which give the right to withhold the amount of a Card Payment if it was "for a payment by a Cardholder to another person" or "the payment does not in some other way constitute a Card Payment". In the case of Condition 4.1, it follows from the sentence in the preamble which I have identified as (iii): "We may also do this if you send us information about a transaction which is not a Card Payment but which has been processed by us as a Card Payment." I do not find any tension, still less any inconsistency, in holding that Barclays's obligation to pay its merchant (under Condition 2.1) only extends to card payments for goods or services supplied by the merchant itself, whilst Barclays's express right to withhold payment to the merchant (under Conditions 3.12 (c) and 4.1) extends to transactions which are not card payments for goods or services supplied by the merchant itself, but which have been processed by Barclays as though they were card payments. Indeed, such an express right to withhold makes sound commercial sense given that (as Mr Mooney explains in his first witness statement) the data captured by the merchant does not include a description of the goods being purchased (paragraph 10); and if a merchant "aggregates" (ie processes transactions for the supply of goods or services by a person who has not entered into an MSA), there is nothing in the data submitted to the merchant acquirer, or to the card issuer, to alert them to that fact (paragraph 33). In my judgment, both Condition 3.12 (c) and Condition 4.1 gave Barclays the express right to withhold payment to Lancore; and that right to withhold payment survived Barclays's lawful termination of the MSA. Lancore now accepts (contrary to the terms of Wacks Caller's letter of 1^st March 2006, and the terms of its original Particulars of Claim) that it had been engaged in third party processing; and it is clear on the evidence that, after 13^th February 2006, Barclays had become aware, or reasonably suspected, that that was what Lancore was doing. I also find that Barclays reasonably suspected that the payment details submitted by Lancore were for illegal transactions, namely the unlawful sale of prescription drugs without a valid prescription.
91. Mr Cogley submits that there should be implied into the Merchant Terms and Conditions a term whereby, should Barclays exercise a right to withhold payment of an amount received from a customer of Lancore, Barclays would account to Lancore for such payment (less any refunds) after a reasonable time. I accept Mr Sutcliffe's submission that such a term cannot be implied because it would be inconsistent with the express terms of Barclays Merchant Terms and Conditions. By Condition 2.1, Barclays's payment obligation is limited to making payment for goods or services provided by Lancore, and not by third parties. By Condition 3.12 (a) Lancore must only submit payment details for payments by cardholders for goods or services provided by Lancore, and not by third parties. By Condition 3.5 (a), by sending payment details to Barclays, Lancore confirmed that it had provided goods or services to the cardholder. In view of the contractual framework of Barclays Merchant Terms and Conditions, there can be no grounds for implying any obligation on the part of Barclays to make any payment to Lancore for goods or services provided by third parties. I also note that in the case of Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] 1 WLR 689 (cited by Mr Cogley in support of his submissions on the applicability of the law of penalties), the House of Lords declined to embark upon a process of redrafting a withholding provision in a building sub-contract by reading in words which it did not contain so as to restrict the moneys withheld to the value of the main contractor's claim: see per Lord Reid at p 698 E-F, per Lord Morris of Borth-y-Gest at p 703G-H, and per Lord Salmon at pp 723H-724A. In my judgment, the implication of a temporal limitation upon the right to withhold payment to a merchant for goods or services provided by a third party is equally impermissible, going far beyond any acceptable process of implication or construction. The only limitation upon the right to withhold which I consider to be implicit in the applicable Conditions is that the right to withhold on the grounds of "reasonable suspicion" under Condition 3.12 (c) ceases if and when Barclays ceases to entertain such reasonable suspicion.

A penalty?

92. Mr Cogley's next submission is that the withholding provisions infringe the law against penalties, because the amount withheld is wholly disproportionate to any loss which Barclays may have suffered (which, on the basis of Mr Mooney's evidence, is nil). Mr Cogley prays in support the Gilbert-Ash case (cited in the preceding paragraph). In particular, he relies upon passages in the speeches of Lord Reid at p 698C-F and of Lord Salmon at p 723G-H. So far as material, the passage from Lord Reid's speech reads as follows:

"This provision purports to entitle the contractor to "suspend or withhold payment of any moneys due". There is no reference to the amount of the contractor's claim in respect of breaches of contract and no requirement that before withholding payment he need even estimate the amount of his claim. Read literally this provision would entitle the contractor to withhold sums far in excess of any fair estimate of the value of his claims. That would simply be to impose a penalty for refusing to admit his claims. Not only would the withholding of the excess permanently deprive the sub-contractor of the interest on that excess which would accrue while the dispute lasted, but it might have most damaging effects on the sub-contractor's business. So as it stands, this provision is unenforceable."

93. Mr Sutcliffe emphasises that Lancore does not, and could not, seek to challenge Condition 2.1 of Barclays Merchant Terms and Conditions as a penalty; yet it is that Condition which is said to be "the bedrock" of Barclays's defence. He submits that the law relating to penalty clauses (and the law relating to relief from forfeiture clauses) is concerned with clauses which are expressed to operate in the event of a breach of an agreement, and which specify consequences flowing from that breach. It has nothing to do with clauses which are concerned, not with specifying the consequences of a breach, but with defining a party's primary rights and obligations; nor with clauses which provide for the payment of a sum of money (or a forfeiture) on the happening of an event which is not a breach of contract. I accept that submission, which (in the context of the law relating to penalties) seems to me to be supported by the decision of the House of Lords in Export Credit Guarantees Department v Universal Oil Products Co [1983] 1 WLR 399, an authority applied by Andrew Smith J in Office of Fair Trading v Abbey National Plc & 7 Ors [2008] EWHC 875 (Comm), judgment in which was handed down on the last day of the hearing of this case, at paragraph 295 and following.
94. Mr Sutcliffe submits, first, that the law of penalties has no application to the right to withhold payment that is conferred upon Barclays by Conditions 3.12 (c) and preamble (iii) to Condition 4.1 of its Merchant Terms and Conditions. There are two reasons for this: First, because these conditions are directed to underlining, and reinforcing, Barclays's primary obligation, which is to pay the amount of all "Card Payments" (as defined) included within Payment Details which Lancore sends to Barclays, and they merely emphasise that the merchant has no entitlement to payment if it submits information about a transaction which is not a Card Payment but which Barclays (mistakenly) processes as if it had been a Card Payment. Secondly, because (except in a case falling within paragraph (a) of Condition 4.1) the right to withhold payment is not expressed to arise on any breach of the MSA. Mr Sutcliffe points out that there is no provision of the Merchant Terms and Conditions which makes the submission of payment details for illegal transactions a breach of the MSA. Barclays was entitled to withhold payment from Lancore because (as I have found) it reasonably suspected that the card payments were for illegal transactions. Mr Sutcliffe accepts that Condition 3.12 (a), as well as giving rise to a condition precedent to liability on the part of Barclays to make payment to the merchant, also impliedly prohibits the merchant from submitting payment details for payments by Cardholders for goods or services provided by third parties. That is reflected in page 7.2 of the Procedure Guide (4A/64), which refers to third party processing as a breach of the MSA; and in sub-paragraph 61.2 of Mr Mooney's first witness statement. However, this prohibition merely reflects the extent of the primary obligation assumed by Barclays under Condition 2.1, which does not extend to the processing of payments for goods or services supplied to a Cardholder by a third party.
95. Secondly, Mr Sutcliffe submits that, even if the law of penalties applies to the conditions which entitle Barclays to withhold payment to Lancore, they are "commercially justifiable" provisions, which were not included within the MSA with the predominant purpose of deterring Lancore from breaking it. He submits that those are the relevant tests because the applicable conditions of the Merchant Terms and Conditions do not readily fit within the traditional dichotomy between a genuine pre-estimate of damages and a penalty. That dichotomy does not necessarily cover all of the possibilities. Thirdly, Mr Sutcliffe submits that, even if the relevant test to apply is whether the withholding conditions represent a genuine pre-estimate of Barclays's loss, the answer is that they do. Mr Sutcliffe's submissions are set out at length at section 6.4 of Barclays's written Closing Submissions.
96. I was referred to a number of authorities on the law of penalties. These included Philips Hong Kong Ltd v AG of Hong Kong (1993) 61 BLR 49, PC; Lordsvale Finance Plc v Bank of Zambia [1996] 1 WLR 752, (Colman J); Cine Bes Filmcilik v United International Pictures [2003] EWCA Civ 1669, CA; Euro London Appointments Ltd v Claessens International Ltd [2006] EWCA Civ 385, [2006] 2 Lloyd's Reports 436, CA; and M & J Polymers Ltd v Imerys Minerals Ltd [2008] EWHC 344 (Comm), (Burton J). Since the hearing concluded, I have also considered the recent decision of Andrew Smith J in the OFT case (cited above); although I have not found it necessary to call for further submissions in the light of that decision since (1) it does not involve the statement of any new principle of law and (2) it merely reinforces the conclusion at which I had arrived independently of that decision. None of these decisions is directly in point because none of them relates to a withholding provision of the kind presently under consideration; but I have derived assistance from them in identifying the true purpose, and the proper scope, of the penalty jurisdiction; and, in particular, in deciding (1) whether the rule against penalties has any application to the withholding provisions contained in Conditions 3.12 (c) and preamble (iii) to Condition 4.1 of Barclays Merchant Terms and Conditions; and, if so, (2) whether those Conditions infringe that rule and are unenforceable accordingly.
97. In this connection, it is worth bearing in mind that the penalty jurisdiction apparently originated in the Courts of Equity in cases where a sum of money was agreed to be paid as a penalty for non-performance of a collateral contract, where the actual damage which could be sustained could be estimated. In such circumstances, the Courts would limit the sum recoverable to the actual loss suffered. The principle was always recognised as being subject to fairly narrow constraints, and the courts always avoided claiming that they had any general jurisdiction to re-write the contracts that the parties had made: see per Lord Woolf in Philips Hong Kong at p 55. In the same opinion (at p 58), Lord Woolf approved the following words of Dickson J. in the Supreme Court of Canada in Elsey v JG Collins Insurance Agencies Ltd. (1978) 83 DLR at p 15 (themselves approved by the Australian High Court in Esanda Finance Corporation Ltd v Plessnig [1989] ALJ 238), namely:

"It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression."

Lord Woolf pointed out that those views were in accord with those expressed by Diplock LJ in Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 at p 1447 that the "court should not be astute to descry a penalty clause". Those statements were said to "assist by making it clear that the court should not adopt an approach to provisions as to liquidated damages which could, as indicated earlier, defeat their purpose". Lord Woolf continued:

"Except possibly in the case of situations where one of the parties to the contract is able to dominate the other as to the choice of the terms of a contract, it will normally be insufficient to establish that a provision is objectionably penal to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss. Even in such situations so long as the sum payable in the event of non-compliance with the contract is not extravagant, having regard to the range of losses that it could reasonably be anticipated it would have to cover at the time the contract was made, it can still be a genuine pre-estimate of the loss that would be suffered and so a perfectly valid liquidated damage provision… A difficulty can arise where the range of possible loss is broad. Where it should be obvious that in relation to part of the range, the liquidated damages are totally out of proportion to certain of the losses which may be incurred, the failure to make special provision for those losses may result in the "liquidated damages" not being recoverable… However, the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. Any other approach will lead to an undesirable uncertainty especially in commercial contracts."

This passage was cited with approval by Mance LJ in Cine Bes Filmcilik at paragraph 14.

98. In Lordsvale Finance, Colman J. formulated a test of "commercial justification", which has since been endorsed and applied by Mance LJ in Cine Bes Filmcilik, by Chadwick LJ in Euro London Appointments, and by Burton J in M & J Polymers. At pp 762G – 764B, Colman J said this:

"The speeches in Dunlop… show that whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach… The question that has always had to be addressed is therefore whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss… However, the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach."

In Lordsvale Finance, Colman J. accepted that a clause which sought to provide that, on the happening of a default, the rate of interest payable on a loan would be increased with retrospective effect would "have all the indicia of a penalty". But he held that the position was different where, on default, the increase in the rate was prospective. That was not because, in the latter case, there was "in any real sense a genuine pre-estimate of loss", but because there was "a good commercial reason for deducing that deterrence of breach is not the dominant contractual purpose of the term". In M & J Polymers, Burton J was satisfied that, as a matter of principle, the rule against penalties might apply to a "take or pay" clause; but on the facts of the case, he was entirely satisfied that the take or pay clause was "commercially justifiable", did not amount to "oppression", was negotiated and freely entered into between "parties of comparable bargaining power", and did not have the "predominant purpose of deterring a breach of contract" nor amount to a provision "in terrorem". It was therefore upheld.

99. I accept Mr Sutcliffe's submissions that the withholding provisions do not infringe the law against penalties. I have found that Barclays was entitled to withhold payment to Lancore upon each of two grounds: (1) that Barclays reasonably suspected that the card payments submitted by Lancore were for illegal transactions (Condition 3.12 (c) (ii)); and (2) that card payments submitted by Lancore were for payments by cardholders to persons other than Lancore and thus were not "Card Payments" as defined for the purposes of the Merchant Terms and Conditions (Condition 3.12 (c) (iii) and preamble (iii) to Condition 4.1). It is convenient to consider each of these grounds in turn.
100. So far as Condition 3.12 (c) (ii) (illegal transactions) is concerned, in my judgment the law of penalties has no application to the right to withhold payment conferred by this Condition since it does not arise on any breach of the MSA. In my judgment, the right to withhold falls squarely within the principle in the Export Credit Guarantees Department case. Even if the law of penalties were to apply to this condition, however, I am entirely satisfied that it does not offend against the rule against penalties, and that Barclays is entitled to exercise the right to withhold payment in respect of transactions which it reasonably suspects to be illegal. I accept Mr Sutcliffe's submission that the condition falls outside the traditional dichotomy between a genuine pre-estimate of damages and a penalty, and that the applicable test is that of commercial justifiability. I am also satisfied that the condition satisfies that test. The reasons why the condition is commercially justifiable are obvious: There is a paramount public interest in regulated, financial institutions, such as Barclays, avoiding any involvement in illegal transactions; and Barclays has an entirely legitimate commercial interest in structuring its agreements with merchants so as to avoid any involvement in transactions which it knows, or reasonably suspects, to be illegal because of the potential risks of criminal liability, of engaging, or falling foul of, the provisions of the Proceeds of Crime Act 2002 (in particular Part 7), and of sanctions (including fines, suspension, or termination of membership) under the Scheme Rules; because of the risks to Barclays's reputation; and because of the increased risk of loss to Barclays which its involvement in illegal transactions may carry. Although this condition was part of Barclays's standard Merchant Terms and Conditions, and was not negotiated and freely entered into between parties of comparable bargaining power, I am satisfied, nevertheless, that it is not oppressive, and that it does not have the predominant purpose of deterring a breach of contract, nor does it amount to a provision "in terrorem".
101. So far as Condition 3.12 (c) (iii) and the preamble (iii) to Condition 4.1 (third party processing) are concerned, I am by no means satisfied that the law of penalties has any application to the right to withhold payment conferred upon Barclays in a case (such as the present) where a merchant has been engaged in third party processing or "aggregation". As Mr Sutcliffe points out, Lancore had no entitlement to receive payment for anything which was not a Card Payment; and these Conditions merely make it clear, for the avoidance of doubt, that the merchant's contractual entitlement to receive payment under Condition 2.1 cannot be enlarged merely because Lancore has submitted information about a transaction which is not a Card Payment, but which Barclays has mistakenly processed as though it were a Card Payment. That is simply underlining the limits of the obligation assumed by Barclays under Condition 2.1, and has nothing to do with penalising the merchant for a breach of the MSA. I can also see considerable force in Mr Sutcliffe's further submission that the prohibition imposed upon Lancore by Condition 3.12 (a) against sending payment details for payments by cardholders to third parties merely reflects the extent of the primary obligation assumed by Barclays under Condition 2.1, which does not extend to the processing of payments for goods or services supplied to a cardholder by a third-party. The right to withhold payment in respect of data submitted about a transaction which is not a Card Payment (as defined in the Merchant Terms and Conditions), but which has been processed by Barclays as such, arises, not because of any breach of the Condition 3.12 (a) prohibition, but because it falls outwith the primary obligation assumed by Barclays under Condition 2.1. That view seems to me to be reinforced by the approach taken by Andrew Smith J in the OFT case (cited above) at paragraph 299, where he observed:

"Undoubtedly the law about penalties does not apply if the obligation is to pay for a service or upon an event other than a breach, even if the service supplied or the event takes place against the background of or accompanied by a contractual breach, and even if the service would not have been provided or the event would not have occurred but for the breach. A customer could not necessarily invoke the law about penalties to challenge charges payable for his bank lending him money simply because his account would not be overdrawn but for his own breach. If an obligation to pay is penal, it must require payment upon the breach itself."

Mr Sutcliffe seeks to test the matter in this way: If Condition 3.12 (c) (iii) and preamble (iii) to Condition 4.1 were to be struck down, that would still not achieve the result that Lancore seeks to achieve, because that can only be secured to Lancore by re-defining Barclays's primary payment obligation under Condition 2.1; and that has nothing to do with the law of penalties.

102. Assuming, however, that the law of penalties were applicable to these Conditions, I am entirely satisfied that they do not offend against that rule, and that Barclays is entitled to withhold payment to Lancore in reliance thereon. As with Condition 3.12 (c) (ii), it seems to me that the appropriate test is that of commercial justifiability. I am also entirely satisfied that the Conditions satisfy that test. The predominant purpose of the Conditions is to underline, and to reinforce, the primary obligation assumed by Barclays under Condition 2.1. Barclays has an entirely legitimate commercial interest in structuring its MSA so as to eliminate the risk of third-party processing, which, for the reasons set out at paragraphs 32 – 40 of Mr Mooney's first witness statement, is a vice which presents particular risks for merchant acquirers such as Barclays. Where it occurs, the merchant acquirer is not in a position to assess the extent of, or to mitigate, the risks of chargebacks, the risks of sanctions by the Card Schemes (including fines, and ultimately suspension or the loss of its membership under the Schemes), the risks to the merchant acquirer's reputation, or the risks of regulatory or criminal liabilities. Third-party processing is often a cloak for illegality. The Mastercard Scheme Rules regard third-party processing as a risk to the integrity of the card system as a whole. In these circumstances, there is both a public interest, and Barclays has an entirely legitimate commercial interest, in structuring its agreements with merchants so that it avoids any involvement in third-party processing, and any obligation to pay in respect of third-party processed transactions. The Conditions do not have the predominant purpose of deterring a breach of contract. Nor do they amount to a provision in terrorem. In any event, it is impossible to see how the right to refuse to pay Lancore could possibly be described as "penal" in circumstances where Lancore has no contractual or other right to be paid in any event. In so far as the law of penalties applies to clauses providing for the withholding of money, it must be a pre-requisite that the money being withheld would otherwise be payable. That is not the position here; and there can be no "oppression" to Lancore. The Gilbert-Ash case, relied upon by Lancore, is clearly distinguishable because it concerned the right of a contractor to withhold payment of moneys "due" to its subcontractor. Here, no monies are due to Lancore, pursuant to Condition 2.1.
103. Finally, and if it is relevant to ask whether the Conditions represented a genuine pre-estimate of loss, judged as at the time that the parties entered into the MSA, I am satisfied that they did. As Lord Woolf observed in Philips Hong Kong (cited above), so long as the sum payable in the event of non-compliance with the contract is not extravagant, having regard to the range of losses that it could reasonably be anticipated that the innocent party would have to cover at the time the contract was made, it can still be a genuine pre-estimate of the loss that would be suffered, and thus a perfectly valid liquidated damages provision. Moreover, the court has to be careful not to set too stringent a standard, and should bear in mind that what the parties have agreed should normally be upheld. Under the Scheme Rules, Barclays is not entitled to submit for payment by the card issuers information about transactions which have been processed on behalf of third-party merchants, who could not have processed the transactions themselves. As the Procedure Guide explains, this is called "laundering", and is one of the most common reasons for chargebacks. It may also give rise to a risk of fines or other sanctions under the Scheme Rules. As Mr Sutcliffe points out, a card issuer which pays the merchant acquirer in respect of such a transaction will almost certainly be paying under a mistake of fact; and it may seek to recover back the sum paid from the merchant acquirer as money paid under a mistake. In these circumstances, Barclay's potential loss in respect of any given third-party processed transaction, assessed as at the date of entry into the MSA, may fairly be represented in the amount of the payment itself; and there is therefore nothing disproportionate in providing for this to be withheld. Mr Cogley understandably points to the fact that Barclays is presently holding a fund in the order of £1.9 million, against which the only adverse claim is that of Lancore in these proceedings. He submits that, for the Court to uphold the withholding provisions, will result in a substantial windfall to Barclays. However, the question whether a sum stipulated is a penalty or liquidated damages is a question of construction, to be decided upon the terms and inherent circumstances of this MSA, judged as at the time it was entered into, and not as at the time that Lancore broke the terms of the MSA, still less with the hindsight knowledge available as at the date of trial.

Relief against forfeiture

104. Mr Cogley's next submission is that the court should grant relief against forfeiture in respect of the moneys in dispute. In this connection, I was referred principally to the cases of Shiloh Spinners Ltd v Harding [1973] AC 691, HL; Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana ("The Scaptrade") [1983] 2 AC 694, HL; BICC Plc v Burndy Corporation [1985] Ch 232, CA; and Jobson v Johnson [1989] 1 WLR 1026, CA. From them, I derive the following propositions: (1) The burden of showing that relief is appropriate lies on the party seeking it. (2) Relief is only available where what is in question is the forfeiture of proprietary or possessory, as opposed to merely contractual, rights. (3) Relief against forfeiture for breach of covenant or condition is available in appropriate, and limited, cases, where the primary object of the bargain is to secure a stated result, which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result. (4) The word "appropriate" involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful; of the gravity of the breaches; and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach. (5) Unlike the law of penalties, the court considers the position at the time of the application for relief, and not at the time the contract was entered into. (6) If the court is minded to grant relief, it will normally do so only upon terms calculated to secure the primary object of the bargain – classically, in the form of an extension of time for securing the stated result; and, if those terms are not complied with, the forfeiture provision will be enforced.
105. Mr Cogley submits that, in the present case, the outcome of this litigation will determine which of the two parties is entitled to the moneys in dispute. He submits that Lancore satisfies the requirements of relief from forfeiture in that: (1) it has a sufficient proprietary interest in those moneys, either by virtue of its chose in action, or because they were only retained by Barclays by way of security, and they form an identifiable fund in Barclays's hands; and (2) it would clearly be appropriate to order relief from forfeiture in circumstances where the sums retained by Barclays bear no relation at all to any loss which it has conceivably suffered. Mr Sutcliffe submits that the conditions upon which Barclays relies are not forfeiture provisions; and even if they were, this is not an appropriate case for the grant of relief.
106. I accept Mr Sutcliffe's submissions. In my judgment, the court has no jurisdiction to grant relief against forfeiture in the present case; and, even if it did, this would not be an appropriate case for the court, in the exercise its discretion, to grant such relief. My reasons are as follows: (1) This is not a case of the forfeiture of proprietary or possessory rights. Under the terms of Barclays Merchant Terms and Conditions, Lancore has no entitlement to receive payment for illegal transactions, or for transactions which are not "Card Payments" (as defined) but which have been processed by Barclays as card payments. (2) The relevant moneys cannot be regarded as security for the performance of Lancore's obligations under the MSA; and, even if they could, it is no longer possible to attain the performance of those obligations. Lancore has submitted payment data for illegal, and for third-party processed, transactions, and that cannot now be undone. (3) Alternatively, if the relevant moneys can be regarded as security for the performance of Lancore's obligations under the MSA, the grant of relief from forfeiture would defeat, rather than help to attain, the primary object of the bargain, namely the processing of Card Payments (as defined), and not of card payments submitted on behalf of third party merchants engaged in unlawful transactions. (4) In any event, if relief from forfeiture were available, this would not be an appropriate case for the exercise of the Court's equitable discretion to grant such relief having regard to: (a) the commercial justifications for the provisions (outlined above); (b) the fact that Lancore acted wilfully in engaging in third-party processing when, at all times, it knew the Barclays required it to own the goods concerned at the point of sale; and (c) the fact that Lancore knew that Barclays would not countenance it processing payments for the sale of prescription drugs, including Viagra.
107. In summary, I find that Barclays is entitled to rely upon the provisions of Conditions 3.12 (c) (ii) and (iii) and preamble (iii) to Condition 4.1 by way of contractual defence to Lancore's claim for the recovery of the disputed moneys. In the light of that conclusion, I can deal with Lancore's other arguments quite shortly.

Agency and fiduciary duty

108. The next cause of action asserted by Lancore is that Barclays acted as its agent for the purpose of receiving and processing card payments, and it therefore owed Lancore a fiduciary duty to account. I reject this submission. I fear that, in the course of his enthusiastic submissions, Mr Cogley has displayed a tendency to over-intellectualise, and certainly to over-complicate, the legal relationship between the parties to this litigation. The only capacity in which Barclays dealt with the transactions at issue in these proceedings was as merchant acquirer under, and in accordance with the terms of, the MSA, which incorporated Barclays Merchant Terms and Conditions. As I have already held, these entitled Barclays to withhold payment of the moneys in dispute to Lancore. The MSA gave rise to no agency, or fiduciary, relationship; and, even if it had, Barclays's payment obligations would have extended no further than the obligation imposed upon it by Condition 2.1. I entirely reject any contention that the sums referable to the transactions processed by Barclays, and forming the subject-matter of the present claim, were impressed with any trust in favour of Lancore. I share the general disinclination expressed by Bingham J in Neste Oy v Lloyds Bank Plc ("The Tiiskeri") [1983] 2 Lloyd's Rep 658 at 665 (col 1) "to see the intricacies and doctrines connected with trusts introduced into everyday commercial transactions"; and, for reasons corresponding to those identified by Bingham J in that case, I conclude that there is nothing in the operation of the card payment system, properly understood, which could possibly operate to impress a trust by the card issuer (or the cardholder) upon moneys paid by the card issuer to the merchant acquirer. Nor can Lancore derive any assistance from the fact that it banked with Barclays. Any suggestion that any moneys referable to the transactions in issue were credited to any bank account in the name of Lancore is contradicted by paragraphs 13 and 14 of Mr Mooney's third witness statement. The pre-existing relationship of banker and customer is entirely irrelevant to this dispute between Barclays and Lancore, which falls to be determined by reference to the MSA and Barclays Merchant Terms and Conditions.

Restitutionary claim for unjust enrichment

109. The final cause of action asserted by Lancore is that Barclays has been unjustly enriched and should make restitution to Lancore. It is said that it is clearly unconscionable for Barclays to retain the moneys in dispute: Barclays (which has derived commission from processing these transactions) has neither title, nor any valid claim, to these moneys, which were destined for, and intended to be paid to, Lancore. If this claim falls to be dismissed, then Barclays will receive a windfall gain, in excess of £1.8m, at Lancore's expense. Further or alternatively, Lancore has a valid claim for moneys had and received to its use.
110. In my judgment, there is a short, and simple, answer to Lancore's restitutionary claim: that it is precluded by the express terms of the MSA, and the Merchant Terms and Conditions incorporated therein. In a case, such as the present, where the relationship between the parties to the litigation is governed by contract, the proper role of the law of restitution is interstitial: it exists to supplement the law of contract, and not to supplant it. In his concurring speech in the case of Pan Ocean Shipping Limited v Creditcorp Ltd [1994] 1 WLR 161,HL at 166F, Lord Goff of Chieveley warned against the serious difficulties that may arise "if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract". Here, as Mr Sutcliffe points out, Lancore only needs its restitutionary claim if it fails in its contractual claim; but the restitutionary claim cuts across the entire contractual structure. The effect of that structure is (1) that any claim against Barclays has to be made by Lancore in respect of goods or services which Lancore has itself supplied in the capacity of merchant; and (2) that Barclays has no obligation to pay sums received by it in respect of transactions where the goods or services were supplied by someone other than Lancore in the capacity of merchant. I accept the submission that the court should not, in these circumstances, grant Lancore a restitutionary remedy where there is a contract governing the parties' obligations. It is not the function of the law of restitution to redistribute risks which the parties have, by contract, already allocated. For this reason alone, I would reject the restitutionary claim.
111. Mr Sutcliffe also supplies a longer answer to the restitutionary claim. He refers to the three subordinate, and closely inter-related, principles that underlie the concept of unjust enrichment, as identified at paragraph 1-016 of Goff & Jones: The Law of Restitution, 7^th ed (2007): (1) The defendant must have been enriched by the receipt of a benefit. (2) The benefit must have been gained at the claimant's expense. (3) It must be unjust to allow the defendant to retain that benefit. Mr Sutcliffe concedes that the first of these conditions is satisfied in the present case: Barclays has received a benefit by the receipt of funds in respect of the transactions it processed, and for which no payment has been made to Lancore under the MSA. However, he disputes that either of the second and third conditions are satisfied.
112. Mr Sutcliffe denies that Barclays's benefit was gained at Lancore's expense. There are two, entirely discrete, reasons for this: First, the result of the transaction between the cardholder and the third-party merchant was that Lancore came into possession of payment data. However, that payment data was worthless to both the third-party merchant and to Lancore because Lancore was not entitled to submit that data to Barclays for processing under the terms of the MSA. As a result, Lancore has suffered no loss: the benefit received by Barclays cannot be a benefit gained at the expense of Lancore because Lancore was never entitled to it. Secondly, Lancore was not the owner of the goods that were sold, and any benefit gained by Barclays cannot therefore have been received at Lancore's expense. Lancore seeks to overcome this difficulty by alleging an entitlement to claim the benefit received by Barclays on the footing that it was gained at the expense of Lancore Belize. However, I have already rejected Lancore's case that Lancore Belize ever sold anything; and, even if it had done so, it is impermissible, as a matter of law, for a claimant to seek restitution in respect of a benefit gained at the expense of a third-party. Lancore is not suing as attorney for or on behalf of Lancore Belize. Further, by clause 2.2 of the Processing Agreement between Lancore as processor and Lancore Belize as merchant (4A/321), any claim by Lancore Belize against Lancore to pay out any transaction amount only exists if and to the extent to which Lancore is able to collect the money from the clearing partner. I should also make it clear that, in my judgment, Lancore has been economical in the evidence which it has chosen to place before the court as to the true nature, and terms, of the arrangements between itself and the third-party merchants; and there is simply insufficient evidential material upon which I can make any findings of fact as to the extent to which Barclays's gain reflects, and represents, a loss to Lancore. I am entirely sceptical as to the account by Mrs Ellis, in paragraph 2 of her witness statement for the purposes of this trial, of Lancore's alleged (but entirely undocumented) entitlement to a 30% commission on its payments to Enterpayment, which seems not to have been operated in practice, and which is inconsistent with the document at 4B/767B (prepared, according to Mr Lankry's oral evidence on the morning of Day 3, by Lancore's accounts department) according to which commission was receivable at the rate of 6% on transactions.
113. Secondly, Mr Sutcliffe disputes that it would be unjust to allow Barclays to retain any benefit for the following reasons: (1) Lancore cannot bring itself within any recognised, substantive category of restitutionary claim. (2) There would be no injustice, as between Barclays and the third-party merchants, if Barclays were to be allowed to retain the benefit because those merchants have sought to abuse the card payment system by deliberately not entering into merchant agreements themselves and by obtaining the services of an unauthorised third-party processor. In any event, injustice as between Barclays and the true merchants is irrelevant to the merits of Lancore's claim because it cannot claim in its own name for enrichment at the expense of someone else. (3) There would be no injustice, as between Barclays and Lancore, if Barclays were to be allowed to retain the benefit because (a) Lancore's restitutionary claim cuts across the entire contractual structure of the MSA; (b) the MSA expressly provides for Barclays to retain the money; (c) Lancore accepted the risk that Barclays would not pay in circumstances where a transaction was third-party processed or illegal; (d) there is nothing arbitrary, capricious or unreasonable in the terms of the MSA which, in prohibiting third-party processing and payments in respect of illegal transactions, merely reflects Barclays's need to comply with its obligations under the Scheme Rules, and its own legitimate commercial interests; and (e) there would in fact be no injustice in depriving Lancore of whatever (unproven) commission it was entitled to under the (unproven) arrangements it had created in circumstances where third-party processing is an abuse of the credit card system.
114. Had it been necessary for me to do so, I would have accepted these submissions in their entirety.

Illegality and ex turpi causa

115. Mr Sutcliffe submits that illegality in the underlying transactions - the unlawful sale of prescription drugs without prescriptions - operates as a defence to all of Lancore's claims. He relies upon authorities which, he submits, establish that illegality is available as a defence to a claim on a cheque issued in performance of an illegal contract; and that illegality in the underlying transaction is available as a defence to a claim by a beneficiary under a letter of credit; and this notwithstanding that both cheques and letters of credit are regarded as autonomous contracts, insulated from the performance of the underlying contract. In this connection, I was referred by Mr Sutcliffe to dicta of Staughton LJ in Group Josi v Walbrook Insurance Co Ltd [1996] 1 Lloyd's Rep 345, CA at 362 and of Coleman J at the interim hearing in Mahonia Ltd v JP Morgan Chase Bank [2003] EWHC 1927 (Comm), [2003] 2 Lloyd's Rep 911 at paragraphs 66 and following, which were effectively endorsed at the trial of the same case by Cooke J: see [2004] EWHC 1938 (Comm) at paragraph 431. Mr Sutcliffe submits that, although there appears to be no decision on the point, illegality in the underlying transaction must also found a defence to a claim in respect of card payments.
116. Mr Cogley submits that a claimant may sue to enforce rights arising out of an illegal transaction provided he does not have to rely upon, or set up, his own wrongdoing,or the underlying illegality. He also submits that, in order for an "ex turpi causa" plea to succeed, the claim has to be "founded on" or "arise from" an illegal act of the claimant. He referred me to Webb v Chief Constable of Merseyside [2000] QB 427 CA, to Costello v Chief Constable of Derbyshire [2001] EWCA Civ 381 [2001] 1 WLR 1437 CA, and to the judgment of Langley J in Stone & Rolls Ltd v Moore Stephens [2007] EWHC 1826 (Comm) at paragraph 22 onwards, and particularly to his conclusion at paragraph 43.
117. It is unnecessary for me to decide between these competing submissions; and it is undesirable that I should do so, first, because anything that I say would not form part of the ratio of this decision and, secondly, because, on the evidence, the true nature, and terms, of the arrangements between Lancore and the third-party merchants is obscure. It is even more undesirable that, sitting as a Judge of the Chancery Division, I should rule upon a further submission of Mr Sutcliffe that the decision of the Criminal Division of the Court of Appeal in R v V [2002] EWCA Crim 108, an appeal against sentence following conviction on a plea of guilty, "demonstrates that the very act of third party processing [of] credit card transactions for somebody else who is selling prescription-only drugs without a prescription is itself an offence under s58 Medicines Act 1968". I merely observe that Mr Sutcliffe's suggested analogy with the cheque and letter of credit cases would seem to me to ignore the potential relevance of the fact that, in those cases, the claimant was seeking to recover moneys belonging to the defendant, whereas here it is accepted by Barclays that the moneys in dispute represent a windfall to the Bank.
118. The reason why it is unnecessary for me to decide whether, under the general law, the illegality of the underlying transactions operates as a defence to all of Lancore's claims is that Condition 3.12 (c) (ii) of Barclays's Merchant Terms and Conditions, incorporated into the MSA, confers an express right for Barclays to withhold payment to Lancore if it becomes aware, or reasonably suspects, that a card payment is for "an illegal transaction"; and, on the evidence, that is what Barclays has done. In my judgment, there is no need for Barclays to invoke the "ex turpi causa" principle, or the general effects of illegality upon contractual relationships and dealings, in circumstances where the contract in question provides expressly for such matters.

The £36,000 deposit

119. Although, surprisingly, the relevant documentation is not available, it is common ground that Barclays received a deposit of £36,000 by way of security for the performance of Lancore's obligations under the MSA. The MSA has now been lawfully terminated; and, subject to any legitimate calls upon that deposit by Barclays, it should be refunded to Lancore. Barclays submits, in reliance on the evidence contained in Mr Mooney's third witness statement, that the £36,000 has been offset against chargeback liabilities, and has been exhausted as a result. Mr Mooney's evidence (at paragraphs 19 to 22 of his third witness statement) demonstrates that Barclays's purpose in taking the security deposit was to secure Lancore's obligations under the MSA and, in particular, the payment of chargebacks and fees chargeable to Lancore; and that, as at 2^nd July 2007 (when it was transferred to Barclays's general multi-currency unit sterling bank account at 1 Churchill Place, London), the credit balance on the account in which the security deposit was held had increased to £37,569.69 as a result of interest paid. (A further small sum of interest, amounting to £100.87, in respect of interest from 4^th June to 2^nd July 2007 has still to be credited to the account.) By 2^nd July 2007, all chargeback liabilities had already been accounted for, without recourse to the security deposit. This had apparently been achieved by debiting chargebacks against the moneys in the pipeline that had been frozen on 15^th February 2006. It therefore seems to me that Lancore is entitled to the return of the sum of £37,670.56, with interest from 2^nd July 2007. On the evidence, Barclays has not demonstrated that any of the security deposit has been offset against chargeback liabilities; and, in my judgment, Lancore is entitled to its return.
120. In answer to questions from the Bench at the end of his evidence, Mr Mooney sought to justify the retention of the security deposit on the footing that, without it, Barclays's deferred settlement terms would have been one month, rather than 21 days, with the result that, at the time payments to Lancore's bank account were first suspended on 15^th February 2006, the sum frozen would have been considerably, and correspondingly, greater. I accept that that consequence would have followed; but in my judgment it affords no defence to the return of the security deposit under the arrangements which the parties had, in fact, implemented.

Conclusion

121. For the reasons set out above, Lancore is entitled to the return of its security deposit of £36,000 with interest; but its claim is otherwise dismissed. If the parties cannot agree on the amount of interest, I shall direct an assessment before one of the Specialist Chancery District Judges.
122. I conclude by expressing my thanks to all counsel for their assistance in this case, which has been considerable.