England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		04/02/2011

MR JUSTICE CHRISTOPHER CLARKE:

1. This is an appeal from a decision of Master Kay, QC, of 7^th September 2010, whereby he declined to set aside a judgment in default entered against Mr William Henry Manuel ("Mr Manuel"), the defendant, under a guarantee. Permission to appeal was granted by Mr Justice David Steel.

The Whiteley Agreement and Guarantee

2. The claimants provide facilities for invoice discounting. On about 31^st July 2000 Royal Bank of Scotland Invoice Discounting Ltd ("RBSID"), the first claimant, which was then called Lombard Natwest Discounting Limited, entered into an Invoice Discounting Agreement ("IDA"), in the form of a deed ("the Whiteley Agreement") with Whiteley Electronics Limited ("Whiteley"). By a Limited Scope Guarantee and Indemnity of 8^th August 2000, executed as a deed, Mr Manuel guaranteed the due performance of all the obligations of Whiteley under the "Warranties and Trust Provisions" of the Whiteley Agreement, being, as defined, the warranties by Whiteley set out in clause 14, the undertakings by it set out in clause 13 and the declarations of trust set out in clause 12. He also undertook immediately upon demand to pay RBSID all amounts then payable or which might at any time thereafter become payable to RBSID by Whiteley following any breach of the Warranties or Trust Provisions (clause 1.2) and to indemnify it against all Losses that it might suffer or incur by reason of any failure of Whiteley to comply with the Warranties and Trust Provisions (clause 2).
3. On 26^th May 2005 Whiteley executed a fixed and floating charge over all its property and assets in favour of RBSID.

The Gemma Agreement and Guarantee

4. On 7^th June 2006 RBS Invoice Finance Ltd ("RBSIF"), the second claimant, entered into an IDA ("the Gemma Agreement") with a company then called Whiteley Electronics (South) Limited, but subsequently renamed Gemma Electronics Limited ("Gemma"), in the same terms, so far as presently relevant, as the Whiteley Agreement. Mr Manuel agreed to guarantee Gemma's obligations under the Gemma Agreement by a Limited Scope Guarantee and Indemnity dated 7^th June 2006 in the same form, so far as material as the guarantee of 8^th August 2000.
5. Mr Manuel was until July 2009 the managing director and majority owner of Gemma Group Ltd, which included Whiteley and Gemma.
6. The function of the IDAs was to allow Whiteley and Gemma (together "the companies") to raise money by selling debts owed to them at a discount representing the interest payable (1.5% above Base Rate) for what were in commercial substance loans. Under the Whiteley and Gemma Agreements the companies transferred ownership of all debts of the companies' customers created after the date of the relevant Agreement until its ending (clauses 1.2 and 3.2). The amount of the debts was to be shown in a Client Advice (as defined).
7. Under clause 11.1 of the Agreements RBSID/RBSIF was to have sole and absolute discretion as to how to conduct and enforce payment of Debts and could do so in whatever way it saw fit. Until RBSID/RBSIF exercised their rights under clause 11.5 the companies were obliged to collect the Debts at their expense as undisclosed agents for RBSID/RBSIF. Clauses 11.6. and 11.6.6 provided that after the cancellation of the agency of the companies RBSID/RBSIF could in their absolute discretion compromise claims with Customers or accept payment from a Customer which was less than the Notified Value of the Debt without discharging the companies from their obligations to RBSID/RBSIF.
8. Under clause 13.1.7 the companies undertook not to include in any Client Advice any Debt which should be due by a Customer who had not purchased the Goods for his business. Under Clause 13.1.8 they undertook immediately to cease and desist from any contra accounting arrangements with Customers; and under clause 13.1.9 they agreed not to include in a Client Advice any Debt until the Goods had been delivered.
9. The Whiteley and Gemma Agreements also provided that by including a Debt in an Offer or a Client Advice the companies were to be treated as having warranted that:

i) each Debt related to an actual and bona fide sale and Delivery in accordance with the Sale Contract: clause 14.1.2;

ii) the Debt was payable in the UK without any retention, set-off or counterclaim by a Customer: clause 14.1.3;

iii) all sums due or obligations by Whiteley/Gemma to the Customer had been paid or performed and Whiteley/Gemma would have no other obligations towards the Customer which could reduce the amount payable to RBSID for the Debt: clause 14.1.7;

iv) no right or claim of rescission, defence, adjustment or other right or claim existed or would arise to reduce or extinguish the Notified Value of the Debt or affect RBSID's ability to collect the Debt: clause 14.8.

The Bombardier Debt

10. The most substantial element of the claim by RBSID arises in relation to debts owed by Bombardier Transportation (Rolling Stock) UK Limited and Bombardier Transportation UK Limited totalling (purportedly) £ 834,824.12. I refer to these companies as "Bombardier" without distinction. These debts were notified to RBSID in accordance with the procedure laid down in the Whiteley Agreement. RBSID contends that some of these debts were in respect of advances, as opposed to being debts for goods or services actually delivered, and that that constituted a breach of warranties and undertakings contained in the Whiteley Agreement (namely clauses 13.1.7; 13.1.8; and 14.1.2). They also contend that Debts apparently due from Bombardier in the sum of £ 834,824.12 were in fact subject to set offs and counterclaims and that that was in breach of clauses 14.1.3, 14.1.7, 14.1.8 and 14.2.; and that such breaches have caused them loss.

The contract with Bombardier

11. In 2008 Transport for London ("TfL") was sponsoring a project to extend the East London Line ("EEL") of the London Underground and had been given the responsibility for procuring passenger services on the North London Railway ("NLR"). Bombardier had entered into a master contract with London Underground and a subsidiary of TfL for the supply of electric multiple unit trains for operation on the EEL and NLR routes and to carry out maintenance of the Rolling Stock.
12. In April 2008 Whiteley offered to supply Bombardier with Passenger Information System (PIS) equipment for the East London Line. This was a project which had been placed by Bombardier with a Danish company, which had not started it, so that Bombardier was facing large penalties for late delivery. In Mr Manuel's email of 23^rd April 2008 to Bombardier he referred to Non Recurring Costs of £ 205,000 for the project. He asked for an advance payment of £ 300,879, being 50% of the Non Recurring Engineering ("NRE") costs plus 10% of the on train equipment costs, and quoted a total cost of £ 1.9 million.
13. On 19^th May 2008 Bombardier issued a purchase order, which was described as having been raised to allow Whiteley to raise an invoice:

"to cover 50% of the Non recurring engineering cost and 10% of the recurring material cost to allow Whiteley Electronics to obtain material security within their Supply chain and also employ additional engineering personnel"

which was to be payable within 60 days from the end of the month of the invoice.

14. Whiteley raised an invoice the same day which claimed £ 350,000 + VAT for "Nonstock Sales NLR/ELL 50% Non recurring costs and 10% of material costs". According to Mr Manuel, when the invoice was put on the RBS system and Whiteley sought to draw down 85% of it, a Mr Gurdeep of RBS contacted Whiteley and said that because the sum was so much larger than normal invoicing he would need to obtain authorisation from a senior manager and asked for a copy of the contract. A copy of the purchase order was faxed to him. 85% of the amount was made available a couple of days later.
15. On 17^th September 2008 Whiteley entered into a Supply Agreement with Bombardier for the supply of goods for the London Line Trains.

Reduction of the price of goods delivered in order to pay for advances

16. On 21^st July 2008 Bombardier emailed Whiteley to say that Whiteley should amortise the £ 350,000 by applying a 12.5% discount to purchase order value "stated clearly on the invoice". Whiteley e-mailed back a spread sheet of part number prices with a 12.5% discount applied to the contract price.
17. In September 2008 BT agreed to make another advance payment of £ 150,000 and asked Whiteley to review the total contract value and confirm a revised selling value to BT for each line item based on discounting the £ 500,000 advance. There is in the papers (Tab 8 of Bundle B) a set of documents relating to this discounting, which are not entirely easy to follow. What appears to have happened is that in September 2008 a further discounting of 10% on top of 12.5% took place following the £ 150,000 payment.

The January 2009 Stock Transfer Agreement

18. On Wednesday 7^th January 2009 a meeting took place between (so it would seem) Mr Manuel of Whiteley and Mr Mowbray of Bombardier. An agreement was reached, whose precise terms are unclear, which appears to have been an agreement whereby Whiteley would transfer to Bombardier title to at least £ 1 million worth of stock and Bombardier would make a cash advance payment of £ 200,000. In his statement of June 2010 (page 28 of his bundle) Mr Manuel says:

"…there was the agreement made in January 2009 for Bombardier to take ownership of £ 1 million of Whiteley stock in exchange for an initial £ 200,000 payment and a further £ 150,000 payment, these therefore were not advance payments or loans, they were payments for goods supplied".

It is not entirely clear to me whether the further £ 150,000 was agreed in January or only in June: see paras 25 & 26 below. Further the version of this statement in the Core Bundle reads as follows:

"… there was the agreement made in January 2009 for Bombardier to take ownership of £ 1 million of Whiteley stock (not to be confused with a subsequent stock agreement for £ 350,000 which I will explain later)."

As I understood from Mr Manuel at the hearing, the January agreement related to over £ 1,000,000 of stock and the subsequent written stock purchase agreement (see paras 26 below) was intended to formalise the agreement made in January and continuing in effect.

19. Thereafter Bombardier placed notices at the Whiteley stores to the effect that it owned the stock and Whiteley started reporting the value of the stock on a weekly basis.
20. On 8^th January 2009 Colin Clarke of Bombardier e-mailed to Whiteley a revised wording for a Whiteley invoice which was to read:

"Cash advance payment in recognition for the transfer in title to Bombardier Transportation UK Limited (BTUK) with immediate effect from January 2009 of all stock held in the stores area at Whiteleys".

This wording duly appeared on the invoice of 14^thJanuary 2009. In his e-mail Mr Clarke said that Bombardier would formalise the agreement in due course.

21. On 9^th January Whiteley e-mailed to Bombardier a stock report showing that £ 1,057,461 of stock owned by Bombardier, consisting in the main of raw material and sub-assemblies required for Bombardier products and warranty spares, was held at Whiteley.

The Set Off Agreement

22. By a letter dated 26^th March 2009 Whiteley ("us") agreed with Bombardier ("you") in the following terms:

"Right of Set Off

In consideration of you agreeing at our request to provide some advance payments to us of £ 350,000 paid 18^th June 2008 and £ 150,000 paid 3^rd December 2008..We agree that in addition to any right of set-off or other general lien or similar right which you may be entitled to in law, you may at any time and without notice to us set-off any liability owed by us to you, against any liability of you to us.

Any exercise by you of your rights under this letter shall be without prejudice to any other rights or remedies available to you".

The Audit

23. In early 2009 an audit of the accounting position was carried out on behalf of the claimants.
24. On 3^rd April 2009 RBSIF wrote to Mr Manuel to tell him that the audit had established that the following four invoices to Bombardier should not have been discounted to RBSIF as they related to cash advance payments and were not in respect of a bona fide sale and delivery and thus represented a breach of clause 14.1.2:

Date	Invoice No	Amount	Amount net of VAT
19.5.08	32985	£ 411,250	£ 350,000
03.9.08	33655	£ 176,250	£ 150,000
09.9.08	33670	£ 117,500	£ 100,000
14.1.09	34564	£ 230,000	£ 200,000
		£ 935,000

These invoices called for payment at "28 days of 2^nd month following". Hence Whiteley's wish to discount them.

The letter included the following:

"This letter is a formal reminder that invoices may only be notified for goods or services delivered and where a suitable proof of delivery has been obtained. I am disappointed to have to confirm to you that the discounting of such invoices represents a breach of the Agreement under clause 14.1.2. Whilst a breach of this clause of the Agreement does give RBSIF the right to immediately terminate the Agreement we have chosen not to exercise this right at the present time."

Mr Manuel says that he never saw that letter.

25. On 3^rd June Bombardier was invoiced under Invoice 35605 for another advance of £ 150,000.

The 4^th June Stock Purchase Agreement

26. On 4^th June 2009 Bombardier and Whiteley entered into an agreement, described as an agreement for the purchase of stock, which provided as follows:

"

WHEREAS:

A The Supplier (i.e. Whiteley) has entered into a purchase contract with BT (i.e. Bombardier Transportation UK Limited) in respect of the supply of goods ("the Goods") dated 17^th September 2008 for the London Line trains (the "project").

B BT has agreed to purchase some stock on the attached listing (the "Stock") from the Supplier for £ 350,000 (ex VAT). The Stock will be retained at the Supplier's premises until such time it is incorporated into goods and delivered to customers including BT.

C It is acknowledged that the Stock is in excess of the amount paid by BT in recognition that the Stock will be sold on a progressive basis to Suppliers customers and therefore the Stock value will progressively diminish.

1 In consideration of the payment already made by BT on 27^thMarch 2009 of £ 200,000 …receipt of which is hereby acknowledged the Supplier (i.e. Whiteley) transfers with immediate effect and with full title guarantee the Stock to BT.

2. BT shall pay the balance of a further £ 150,000...to the Supplier by the 8^th June 2009.

3. The Supplier shall keep the Stock identified as BT's property and in a secure identified area. The Supplier shall insure the Stock for its full replacement value and shall replace any of the Stock that is lost or cannot be accounted for at its own cost.

4. The Supplier shall continue to use the Stock and incorporate it progressively into goods for sale to its customers provided that such customers shall not be members or affiliated to the Suppliers group (Gemma Group Limited…).

5. The title of the Stock shall transfer from BT on delivery of goods to the Supplier's customer.

5 (sic) The Supplier shall keep BT indemnified against any third party claims that they own or have any claim in any respect relating to the Stock.

6. In consideration for the purchase of the Stock the Supplier has agreed to reduce the price of the Goods by 17.5% for all Project Invoices raised by the Suppliers from the date of this agreement and shall execute such documentation and variation orders to make this enforceable under the project."

Attached to the Agreement was a listing of Stock^[1]. That list is not before the Court; nor is it clear (a) what date it was drawn up or (b) how much the Stock amounted to in volume and value.

27. On 14^th July 2009 Whiteley went into administration after its bank withdrew the overdraft facility from the Gemma Group. It had not by then completed the East London Line contract. It appears that Whiteley continued to make deliveries against the Bombardier contract (with a discount being allowed off the invoices) until in September 2009 Whiteley's business was sold by the Administrators to Bombardier.

Whiteley's internal document

28. An internal Whiteley document, drawn up by the Accounts Department, and updated on 16^th July 2009 ("the internal document"), set out what were described as either "Advances" or "Loans" from Bombardier. The Advances consisted of the first three amounts (net of VAT) set out in para 24 above, which were listed by reference to the invoice numbers i.e. 32985 (19/5/2008), 33655 (5/9/2008), and 33670 (9/9/2008). The Loans consisted of the last amount in para 24 and a further Loan of £ 150,000, listed against invoices 34564 (14/1/2009) and 35605 (3/6/2009). The last two amounts (£ 200,000 and £ 150,000, net of VAT) are the amounts referred to in the agreement of 4^th June 2009. The total thus tabulated as lent or advanced was £ 950,000. The document recognised a number of contra entries, either under the heading "Offset" and "Charged to Accounts" or simply the latter, the effect of which was to reduce the amount outstanding to Bombardier to £ 620,354.44^[2].
29. By a letter of 27^th July 2009 from Bombardier to Begbies Traynor, for the Administrators, Bombardier enclosed a copy of the agreement of 4^th June with a CD containing the Stock List, and asserted ownership of and title to such part of the Stock as remained unsold. They also referred to the Right of Set Off agreement dated 26^th March 2009 (see para 22) and asserted rights to set off advance payments and payment for components supplied by them. Because suppliers were becoming reluctant to supply to Whiteley Bombardier had taken to buying certain components and themselves supplying them to Whiteley.
30. By a letter of 28^th July 2009 from Bombardier to Mr Moyle of Hilton Baird Collection Services, collection agents acting on behalf of RBSID and RBSIF, Bombardier again referred to the Right of Set Off Agreement of 26^th March 2009:

"under which we have made advanced payments and been supplying components to the Company prior to its going into administration. We will therefore be setting such amounts against the invoices received from the Company".

31. On 2^nd September 2009 Whiteley (now in administration), its Administrators, RBSID, and the two Bombardier companies, entered into a Deed of Settlement. This recited that as at the date of the Deed BTUK i.e. Bombardier Transportation UK Limited was indebted to Whiteley in the sum of £ 834,824.12 "being monies payable in respect of services carried out" by Whiteley. Under the deed RBSID agreed to accept from BT i.e. Bombardier Transportation (Rolling Stock) UK Limited £ 230,000 in full and final settlement of the BTUK debt. The calculation which led to the £ 604,824 reduction is not apparent. It is, of course, close to the figure of £ 620,354.44 referred to in para 28 above.

The proceedings

32. The Claim Form and Particulars of Claim were issued on 8^thJanuary 2010. The claim covers debts or purported debts bought from Whiteley which are said to have been worth £ 847.442.23 less than they would have been if the warranties in the Whiteley Agreement had been correct (including but not limited to £ 604,824.12 in respect of Bombardier) and debts or purported debts bought from Gemma which were worth £ 12,095.32 less than they would have been if the warranties in the Gemma Agreement had been correct. The claim was for £ 606,861.79 in respect of the Whiteley Agreement (RBSID limiting its claim to the outstanding balance due from Whiteley to it) and £ 12,095.32 in respect of the Gemma Agreement, together in each case with interest.
33. On 26^th February 2010 judgment was entered in default in the sum of £ 627,597.11. It is not suggested that the judgment was irregularly obtained.

The contentions of the parties

RBS

34. The claimants contend, through Mr Jonathan Miller, that Mr Manuel has no real prospect of establishing (a) that Whiteley was not in breach of warranty and undertaking in entering into the Right of Set Off Agreement with Bombardier dated 26^th March 2009; (b) that Whiteley was not in breach of warranty in notifying invoices for advance payments to RBSID – the purchase order of 16^th May 2008 which RBSID saw does not show, he submits, that the sum in question was an advance payment; (c) that RBSID did not act reasonably in compromising a claim against Bombardier for £ 604, 354.44. Accordingly Mr Manuel has no real prospect of defending that part of the claim which relates to the Bombardier debt.

Mr Manuel

35. Mr Manuel contends that Bombardier has in fact been paid back for the advances to Whiteley. In his written statements he described Bombardier as being paid three times over (i) through delivery of equipment to Bombardier/non-payment of invoices to RBS^[3]; (ii) through Bombardier's ownership of the Whiteley stock which it purchased; and (iii) by reductions by way of discount in the invoices for debts. He complains that the compromise of the Bombardier claim for £ 604,824 less than the Notified Value of the Bombardier debts was unreasonable and made without obtaining a copy of the relevant documentation showing the arrangements between Bombardier and Whitely and without asking him for help. He expresses himself as having difficulty in dealing with the claim without access to the records of Whiteley and Gemma.

Payback Calculations

36. In a document headed "Payback Calculations" Mr Manuel explains how he says that Bombardier have been paid back.
37. As to Invoice 33670 in the sum of £ 100,000 (net of VAT) he says that that invoice relates to a contract known as "465" and not the East London line. That amount has been paid back to Bombardier by a reduction of the value of the invoices for equipment delivered to Bombardier subsequently. Deliveries are said to have been completed before Whiteley went into administration and therefore the whole of the £ 100,000 had been repaid. The internal document to which I refer in para28 above records that £ 91,562 had been repaid and not the whole £ 100,000.
38. Invoices 32985 for £ 350,000 and 33655 for £ 150,000 were advance payments against the EEL contract to which the agreement of 4^th June 2009 referred to in para 26 above relates. As to those he contends that the advance payments were to be repaid by completion of the engineering together with a reduction of the price of the equipment to be delivered to Bombardier. All the engineering activities had been completed by around May 2009 when Bombardier sent their engineers to Whiteley to conduct Factory Acceptance Testing (FAT) on the systems to be delivered. This testing was satisfactorily completed. The value of the engineering is said to have been £ 205,000, which was to be set off against the advance payments. In fact the internal document shows £ 210,000 as set off between May 2008 and March 2009^[4].
39. Mr Manuel says that the price of the equipment to be delivered to Bombardier was reduced by 22.5% to recover the balance of the advance payment. It is not clear to me how this figure is reached but I take it to be an approximation of the figure produced by sequential application to the contract price of discounts of 12.5%, 10% and 7.5%^[5] together with some correction to the original figures produced after applying a 12.5% discount: see the fifth column of the document headed "Class 378 Contract Price Breakdown of changes in line with upfront payments" at page 23 of the Appellant's bundle. He exhibits an email from Bombardier's Site Accountant which shows the value of the outstanding shipments to be made on ELL orders as at the time of Bombardier's purchase of the Whiteley's business from the Administrators as £ 958,000. The total value of the contract is said to be £ 2,927,305. If you deduct £ 205,000 which Mr Manuel puts as the engineering cost and the £ 958,000 figure the value of the equipment delivered is £ 1,764,305 of which 22.5% is £ 396,968. Accordingly, so he claims, Bombardier has effectively been paid £ 396,968 plus £ 205,000, making £ 601,968 against an advance of £ 500,000. As a result no money was due on the outstanding equipment invoices.
40. No such deduction appears on the internal document. Mr Manuel told me that this document showed what was taken from Advances into Sales by the Accounts Department and that the Department had failed to recognise offsets that were made against advances as a result of discounted invoicing because the discount was not always specified on the relevant invoice and an offset had only been recognised by the compiler of this document when it was.
41. It is unclear to me whether there was any retrospective application of discounts. The 10% and 7.5% additional discounts were agreed after the initial 12.5%. If, as seems likely, there was no retrospection, calculation based on an application of 22.5% to all invoices is inapposite.
42. The Master, not surprisingly, did not find it easy to ascertain from Mr Manuel's witness statement of June 2010 the basis upon which he sought to establish that he had a defence. He discerned Mr Manuel's points to be (i) that all the invoices would have been honoured if he had continued to manage the group; (ii) that after the group went into administration the collection of the debts was given to a collecting agency and that neither the agency nor RBS asked for his help; (iii) that if there was to be recourse to him to recover outstanding debts he should have been given the opportunity to solve the problems; and (iv) that RBS was aware of the invoice of £ 350,000 + VAT, which was put into the RBS system for a drawdown of 85%.
43. The Master could not see how the last point assisted the defendant because the mere fact that RBS had knowledge of the transaction would not relieve Whiteley of its obligations to RBS. In this respect he may not have discerned that the point being made was that RBS had had the purchase order which led to the invoice of £ 350,000 from which it was said to be apparent that what RBS was being asked to purchase was an invoice in respect of an advance payment.
44. The Master accepted the submission made by Miss Coombes of Hammonds in her evidence on behalf of the claimants that Mr Manuel's suggestion that the advance payments were recovered by a reduction in the invoice value of the goods, such that when the contract was completed all of the advance would have been repaid, was naive because, although that might be correct if everything went well the reality was that everything did not go well; and the provisions of the agreements were there to protect the claimants if matters went awry.
45. The Master referred to and in part summarised the three witness statements of Miss Coombes and, in particular her reference to a sum of at least £ 620,354.44 being outstanding as a result of the breaches relied on but that the sums might well have been higher, and to the compromise of the debts due to RBSID by Bombardier at £ 200,000. He also referred to her evidence that RBSID was under no obligation to invite Mr Manuel's help, and that he was in fact very unhelpful and uncooperative; and to her pointing out that RBSID was unaware of the pre-payment arrangements between Whiteley and Bombardier but that Mr Manuel must have been.
46. The Master concluded that Mr Manuel had little or no real prospect of successfully defending the claim against him because (a) it was not seriously disputed that Whiteley's actions in entering into the prepayment arrangements was a breach of their obligation under the IDAs entered into with RBSID; (b) there was no duty on RBSID to mitigate its loss by involving Mr Manuel in the debt collection; and their attempts to do so were rebuffed. Accordingly Mr Manuel had failed to show that he had any real case that the first claimant (wrongly referred to as the first defendant) had acted unreasonably.

Discussion

47. Clauses 14.1 and 14.1.2 of the Whiteley Agreement provide that each Debt must be related to an actual bona fide sale and delivery in accordance with the Sale Contract. Delivery in relation to Goods (which include Services) means, in the case of goods their physical delivery to the Customer in the United Kingdom, and in relation to services the full performance thereof.
48. The Debts the subject of invoices 32985, 33655, and 33670 were all, as it seems to me, Debts which breached clauses 14.1 and 14.1.2. Whether the Debts the subject of Invoices 34564 and 35605 did so depends on whether the sale and purchase agreement(s) of January and June 2009 are properly characterised as such. The Debt the subject of invoice 35605 was not in fact notified to RBSID.
49. There seems to me a realistic prospect of showing that RBSID knew that Whiteley was in breach of warranty in notifying the Debt of £ 350,000 due under the Purchase Order of 19^th May 2008, which was the subject of Invoice 32985. The reference in the Order, which was shown to RBSID^[6], to the purpose of its release being to allow Whiteley to "obtain material security within their Supply chain and also employ additional engineering personnel" strongly suggests that the £ 350,000 was in respect of services that had not been fully performed and goods that had not been delivered to the Customer. Further Mr Manuel told me that a lady in Whiteley's accounts department told Mr Gurdeep of RBSID that this was an advance payment. In the light of the fact that that invoice was approved for factoring, after reference to higher authority, there is an argument that RBSID waived the breach constituted by the notification of that debt and, although this is more tenuous, others like it. Mr Manuel said that, in the light of the approval of this Invoice, he assumed that other such debts would be acceptable.
50. But that does not carry the matter far enough as far as Mr Manuel is concerned. Even if payment of 85% of the value of invoice 32985 for £ 350,000 amounted to a waiver of any breach of clauses 14.1 and 14.2, there is nothing to indicate that RBS waived any right to rely on the obligations under sub-clauses 14.1.3 (Debts to be payable without any retention or set off); 14.1.7 (Whiteley to have no obligations towards the Customer which could reduce the amount payable to RBSID) and 14.1.8 (no claim existed or would exist which would reduce or extinguish the Notified Value of the Debt). Further, if and insofar as Bombardier would not be entitled to any set off at common law but only under the Right of Set Off Agreement, it was a breach by Whiteley of sub-clause 13.1.8 to enter into that agreement.
51. It is the obligation to ensure that the Debts were not subject to rights of set off that is of significance in the present case. As the Points of Claim make plain it is the fact that the Bombardier Debts were subject to counter claims that gives rise to the claim for damages. If there were no valid counterclaims against the Bombardier Debts the claims would founder.
52. There is, in my view, a prospect, which I decline to regard as unrealistic, of Mr Manuel establishing that Bombardier was not entitled to set anything off against the claims against them on the basis of the contentions and on the lines of the calculations set out in paras 36ff above. Mr Miller submitted that it was implausible that the advances could have been paid off only part way through the contract when they were to be amortised over its duration. But that ignores the engineering costs of £ 205,000 or £ 210,000, as to the deductibility of which there is a dispute. Mr Manuel's figures are no doubt disputable but I do not accept that they are wholly implausible; and they have some support from the documents.
53. Under clause 11.1 of the Whiteley Agreement RBSID had the sole and absolute discretion as to how to collect and enforce payment of Debts, and under clauses 11.6 and 11.6.6 they were entitled to compromise claims for less than their full amount. The Agreement does not, however, contain a provision that, if RBSID compromises a claim then, for the purposes of any claim to damages under clauses 14.1.3. or 14.1.7 or 14.8 (each of which provides in essence that there shall be no valid set-off against Debts), there shall be deemed to have been a valid set off to the extent recognised, assumed or implied by the compromise.
54. There is, therefore, a realistic basis for contending that, in determining the damages attributable to a breach of any of those clauses, any claim of RBSID/RBSIF was subject to the usual duty to mitigate and that they were obliged to act reasonably (and not merely without caprice). Insofar as they failed to do so and would or should have recovered more if they had acted reasonably they cannot claim.
55. There also seems to me to be a prospect which, again, I decline to regard as unrealistic of establishing that RBSID did not act reasonably. The material available to make a judgment on this issue is not extensive. But, if what Mr Manuel says is correct, nothing was in fact due to Bombardier and the extent to which RBSID could refute Bombardier's contentions must, at least arguably, have been discoverable by reasonable endeavours. I accept that there was no absolute duty to involve Mr Manuel in attempts at recovery from Bombardier: but, depending on the information available from other Whiteley personnel or the administrators it might have been unreasonable not to approach him. He says that no attempt was made to ask him how the advance payments were to be, or had been, paid back; that he would have told them if asked; and that RBS ended up negotiating with Bombardier without knowing what the contractual arrangements between Whitely and Bombardier really were. There is a dispute as to whether attempts to communicate with him made by Hilton Baird were rebuffed.
56. I recognise that, in reaching this conclusion, I am relying in part on evidence in the form of Mr Manuel's payback calculations. As I understand it the document containing those calculations was not before the Master, but Mr Manuel told me that the information contained in it was, although I have considerable doubt about that. Insofar as those calculations constitute new evidence I am persuaded that I should entertain it on the ground that it would be unjust not to do so, particularly in the case of a litigant in person who, whilst having every opportunity to put evidence before the Court has not, I believe, been fully alive to what it was incumbent upon him to produce and how he should do so.

The value of the stock the subject of the stock purchase agreement

57. Mr Manuel asserted that the value of the stock the subject of the January 2009 agreement was and, after replenishment, remained at £ 1,000,000 and had approximately that value when Whiteley went into administration. There is no more specific evidence as to the value of the stock from January 2009 onwards. The claimants submit that the existence of stock of anything like this value is inconsistent with Mr Manuel's assertion that Bombardier was having to buy stock on Whiteley's behalf before Whiteley entered into administration. Mr Manuel disputes this. The value of the components purchased by Bombardier for Whiteley was said to be £ 54,289.07 on 23^rd July 2009 – see the list at Bundle B/21/p203. This was, he says, only a small part of the stock purchased by Whiteley and was in respect of those suppliers who would not give credit.
58. In those circumstances it seems to me realistic to suppose that there may be a credit which ought to have been given by Bombardier in respect of such of the stock as they owned at the date of the administration. That, however, begs the question as to the status of the stock purchase agreement (whether of January or June 2009). If that agreement is to be regarded as a sale of goods worth more than £ 350,000 for that amount, it could be said that the value of the goods in excess of that sum redounds to Bombardier's benefit such that no credit has to be given for it. But, having regard to the financing purpose of the arrangement, it seems to me arguable that Bombardier is obliged to give credit for any amount in respect of which they have incontrovertibly benefited by reason of their acquisition of goods in excess of the £ 350,000 figure.
59. Mr Miller submitted that if, as appears to be the position, Bombardier obtained title to a fluctuating stock that was used and replenished but remained at around £1 million in value, then the stock purchase agreement, as agreed in January and/or June 2009, was not a true sale and purchase agreement but, in effect, a floating charge to secure advances made. That analysis assumes that the stock the subject of the agreement was continuously replenished and that the agreement is not, in truth, what it is said to be, namely an out and out purchase of a specific set of goods, which reduced as, with Bombardier's consent, the goods were used either for the benefit of Bombardier or other customers. The Stock Purchase Agreement of June 2009 suggests that it was an out and out purchase. Mr Miller may be right but I do not accept that that is unarguably so. Even if it is, it seems to me necessary to know what has happened to the stock and how it was treated after the administration, since, if it has, or should have been, used for Whiteley's benefit, that may serve to reduce any claim of Bombardier in respect of advances. If, as Mr Manuel contends, Bombardier was the owner of about £ 1 million of assets at the time of the administration, or anything like it, that would potentially extinguish any claim for damages.

The terms of the guarantee

60. The guarantees provided:

"4 My liability under this guarantee and indemnity shall not be affected by:

4.1 any indulgence granted or made by you to or with the Client, any Customer or any Co-surety

5 I shall be liable to you in every respect as a principal debtor."

61. Mr Miller accepted that there might be an implied term that RBSID/RBSIF should not act capriciously but submitted that there was no reasonable prospect of Mr Manuel showing that they had acted capriciously in the light of the internal document. I am not so sure. It may depend on what considerations were taken into account in reaching the settlement figure. In any event the provisions of clause 4 of the guarantee would appear to be directed to ensuring that the guarantor is not discharged on any of the grounds, such as granting time to the principal debtor, which would, at common law, effect a discharge. They do not mean that the guarantor is under any liability if the principal debtor – Whiteley - is not.

XC Trains Ltd

62. Although the Bombardier debt forms the principal part of the claim it is not the only claim. Whiteley notified debts purportedly due from XC Trains Ltd in the sum of £ 219,345.28. It was met by a contra claim that some of the equipment had not been delivered or was incomplete or non functional.
63. As to that Mr Manuel's evidence is that Whiteley had a contract with XC Trains to supply a seat reservation system which was in early 2009 behind schedule. The system was to be fitted into 5 trains which were being refurbished. Part of the refurbishments consisted of replacing the passenger luggage racks into which seat reservation displays were fitted. XC Trains, being desperate to get the trains back into revenue earning service, asked Whiteley to fit out the luggage racks with all the wiring and displays and supply them to XC Trains so that the luggage racks could be fitted on the trains and the trains put back into service, on the basis that the control box would be fitted at a later date. Whiteley did this and when the racks were delivered they were invoiced at the contract price which Whiteley expected to be paid.
64. XC Trains contends – see their letter of 9^th September 2009 – that they have paid invoices totalling £ 58,435.22 when they did not have to do so and that no debt of £ 219,345.28 was due because condition 8 of the contract between them and Whiteley set out a timescale for payment which only entitled the Seller to raise an invoice beyond a first invoice for £ 50,000 already raised "upon each delivery of Goods comprising a complete set of equipment for a rake of Rolling Stock".
65. Mr Miller contends (a) that the oral agreement on which Mr Manuel relies was not raised before the Master; (b) that, in any event, it is not open to Whiteley to rely upon it in the light of clause 17.11.a of the contract which provides that "A variation to the Contract shall only be valid if agreed in writing and signed on behalf of the Buyer and Seller"; and (c) that any agreement is not supported by any or any sufficient consideration.
66. These are all powerful points; but not such as to persuade me that there is no realistic prospect of a defence in respect of XC Trains. Payments were made outside the contractual framework and there appears to me scope for a valid contention that there was an agreement collateral to the principal contract, which is not caught by clause 17.11.a, or that there has been a waiver of that provision; and that consideration was provided by the supply of material without the control box rather than waiting until the control box could be provided as well. Even the performance of an existing contractual duty can amount to consideration if it confers a real benefit on the promisee: see Chitty, Vol 1 3-068 and 0-69. Such a conclusion does not fit easily with the documentation contained in Exhibit RCC 14 but I am not satisfied that it is unarguable.

Miscellaneous

67. There are other elements of the claimants' claim; but they are comparatively modest in amount (about £ 36,000 in all). They did not feature in the argument before me and I do not intend to add to this judgment by addressing them.

Result

68. I propose therefore to set aside the judgment and to make further directions for the service of pleadings and disclosure.
69. I have considered whether I should do so only on condition that the whole or part of the judgment sum should be brought into court. I do not propose to do so because I am not satisfied that the defence is sufficiently speculative to justify doing so and because the effect of making such an order is, on the information given to me at the hearing as to Mr Manuel's asset position, likely to stifle any defence.

The future

70. I wish to consider with the parties when judgment is handed down:

a) whether and to what extent mediation may be appropriate;

b) whether the case should be transferred to the Mercantile or County Court;

c) how the case may most expeditiously be tried;

d) the prospects of Mr Manuel obtaining representation, perhaps on a pro bono basis.

71. Whilst it is for the parties to decide what contentions they seek to make and what evidence they seek to adduce it may be helpful to observe that the following matters appear to me particularly relevant:

i) the precise nature of the stock purchase agreement(s); and, in particular the terms of the oral agreement in January 2009, the relationship between that agreement and the written agreement of June 2009, the amount of the advance to which the agreement(s) related in January and June, the quantity and value of stock involved and whether the agreement was supposed to cover later acquired stock (as well as any lost).

ii) what stock the subject of the stock purchase agreement(s) was in existence at the date of administration and subsequently, what was its value and what became of it or its value;

iii) what exactly was agreed so far as the discounting of invoices was concerned i.e. what rates were to be applied to what invoices from what date; and what discounting in fact took place;

iv) what steps were reasonably open to RBSID/RBSIF to discover the true accounting position between Whiteley and Gemma and their debtors.

72. The resolution of the above issues may depend on information from (a) Whiteley/Gemma; (b) Bombardier; (c) the Administrators; (d) the claimants; (e) Mr Manuel and other former Gemma Group personnel. I should like to consider how such information which is not readily available to both sides can efficiently be accessed.
73. Bundles. Because of the way in which this case has developed the documentation is not in user friendly form; much of it not being in chronological sequence with relevant documents scattered over a number of exhibits, some of which are very hard to read. It seems to me that early consideration should be given, as part of the disclosure process, to assembling chronological bundles of (a) relevant contracts; (b) relevant invoices; (c) e-mail and letter correspondence and general documentation.

Note 1   Which is not the listing which immediately follows the agreement in Bundle B at page 305.     [Back]

Note 2   An e-mail from Mr Clarke of Bombardier of 20th May suggested that the figure should be £ 586,500.    [Back]

Note 3   He expresses himself differently in his statements of March and June 2010.    [Back]

Note 4   I was told that it was not suggested before the Master that the engineering cost fell to be set off against advances; but as is apparent, there is some support for that in the contemporaneous documentation.     [Back]

Note 5   (100 x 87.5% = 87.5. 87.5 x 90% = 78.75. 78.75 x 92.5% = 72.85. 100 x 77.5% = 77.5 i.e. 100 less 22.5% discount)    [Back]

Note 6   Until the audit they do not appear, however, to have seen the invoices for the Debts, the notifications being of bulk figures through a “FacFlo” facility.    [Back]