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

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
LEEDS DISTRICT REGISTRY
MERCANTILE LIST

		The Court House Oxford Row Leeds LS1 3BG
		6 June 2013

Judge Behrens :

1 Introduction

1. Lombard North Central PLC ("Lombard") is a well-known finance company. On 24^th December 2004 Lombard entered into a Lease Purchase Agreement with Waterfront Corporation Ltd ("Waterfront") in respect of machinery which was then situated in its factory at Unit 36 First Avenue, Deeside Industrial Park, East Flintshire CH5 2NU ("the factory"). The Defendants ("Mr Nugent, Mr Clark, and Mr Crabtree"), who at the material time were directors of Waterfront, entered into joint and several guarantees in respect of all sums due by Waterfront under the terms of the Lease Purchase Agreement.
2. On 19^th October 2006 joint administrators were appointed to Waterfront by the High Court in Manchester. It is common ground that the effect of such appointment was to terminate the Lease Purchase Agreement. It is also common ground that as at the date of termination the outstanding balance under the Lease Purchase Agreement was £143,884.08.
3. Between October 2006 and January 2011 the factory was occupied by two companies Drink Pac Ltd and Drink Pac UK Ltd. Drink Pac Ltd was the occupier from 3^rd November 2006 until 10^th October 2007 when it entered creditors' voluntary liquidation. It is not clear when Drink Pac UK Ltd entered possession; documents in the case suggest that it was before February 2008. In any event an administrator was appointed to Drink Pac UK Ltd on 25^th January 2011.
4. It is not in dispute that the machinery remained on site in the factory throughout this period. It is equally not in dispute that sums totalling £39,600 were paid on various dates by the occupiers to Lombard. £7,050 was paid by Drink Pac Ltd; the remaining £32,550 was paid by Drink Pac UK Ltd. Invoices sent by Lombard suggest that rent was agreed between Lombard and the occupier at the rate of £1,000 per month plus VAT.
5. On 24^th January 2011 Lombard sold the machinery to Iconiq Drinks Co Ltd for £42,500 plus VAT of £8,500.
6. On 5^th December 2011 Lombard's solicitors made formal demands under the guarantees. On 9^th January 2012 Lombard instituted these proceedings to enforce the liability under the guarantees. The sum now claimed is £54,346.58 made up as follows:

Balance Outstanding at 29/10/2006		143,884.08
Less
Rent from Drink Pac Ltd	7,050.00
Rent from Drink Pac UK Ltd	32,550.00
Sale proceeds	42,500.00
VAT adjustment	7,437.50
	89,537.50	89,537.50
Balance Due at 24/1/2011		54,346.58

7. This is in fact some £180 less than the sum claimed in the Claim form and the formal demands. There was a sum of £180 in respect of costs which is not now pursued.
8. None of the Defendants dispute the validity of the guarantees. They do however raise a number of defences:

1. There is a dispute as to the precise nature of the machinery which was the subject of the Lease Purchase Agreement. Both sides agree that it included a Tetrapak Tetra Prisma Asceptic 250 ml Filling Machine including PT19, serial number 21005/83751 ("the Prisma 250 ml Filling Machine"). Lombard contend that the Prisma 250 ml Filling Machine was the only piece of machinery included in the Lease Purchase Agreement. The Defendants, on the other hand, contend that it included the line of 7 or so pieces of machinery of which the Prisma 250 ml Filling Machine forms the main part. The significance of the dispute relates to the value of the machinery included within the Lease Purchase Agreement. If the Defendants are correct it was much more valuable to Lombard than if Lombard is correct.

2. There is a dispute as to the rent received and the sale proceeds. It is the Defendants case that the machinery was worth more than the £143,884.08 outstanding as at the date of the administration.

1) They contend that Lombard should have taken steps to sell the machinery in early 2007. They rely on an offer made by Mr Clark in January 2007 to buy back the machinery at the settlement figure.

2) They contend that rental received by Lombard was too low. A rent of £1,000 per month was too low. In any event there were long periods over which no rent was paid. There were 51 months between October 2006 and January 2011. Rent has only been received for 33 or 34 of those months.

3) They contend that the price received by Lombard in January 2011was too low.

3. At one time Mr Browne raised a minor dispute as to the moneys owing as at 24^th January 2011. This dispute relates solely to VAT. Lombard has credited Waterfront with £7,437.50 which is 17.5% of the sale price of £42,500. This was the VAT rate as at the date of the Lease Purchase Agreement. However the VAT rate at the date of the sale by Lombard was 20% and Lombard received £8,500 VAT. The issue was whether Waterfront should have been credited with the sum of £8,500 rather than the £7,437.50 – a difference of some £1,062.50. As I pointed out the resolution of this dispute depended on the relevant VAT regulations and I left it to the parties to determine whether it should be pursued and if so to refer me to the relevant provisions. In the event neither Counsel has pursued this dispute. Accordingly I take it to have been abandoned.

9. It is the Defendants' case that if a proper price had been received for the machinery it would have been sufficient to discharge any liability they had under the guarantee.
10. Five witnesses gave evidence in the trial. The principal witness for the Claimant was James Webb who was involved (at least partially) on behalf of Lombard from November 2006. In addition Lombard called Michael Street, a litigation clerk employed by Lombard. Mr Street's evidence related to the figures which, as appears above have been resolved. The principal witness for the Defendants was Mr Nugent. In addition the Defendants called Christopher Carberry, a former employee of Lombard who had inspected the machinery before Lombard entered into the contract and Stephen Gibbons the Commercial Director of Tetra Pak UK Ltd who had supplied the machinery. Both Mr Carberry and Mr Gibbons gave evidence pursuant to a witness summons. Mr Gibbons had no direct knowledge of the machinery as he was not involved in the sale of the machinery to Waterfront or with the arrangements surrounding the Lease Purchase Agreement in 2004.
11. In addition to the witnesses of fact I was provided with a report from a single joint expert - Mr Tallon – dated 1^st March 2013. Mr Tallon is a Chartered Surveyor based in Manchester with extensive experience in the valuation and agency of Plant and Machinery, Chattel assets and stock. No questions were asked of Mr Tallon in relation to his report and he did not attend the trial for the purpose of cross-examination.

2 The facts

2.1 The acquisition of the line.

12. According to Mr Nugent most of the line including the Prisma 250 ml Filling Machine was acquired from Tetra Pak in 2001. Mr Nugent did not join Waterfront until after that date and thus could not give direct evidence of the acquisition.
13. Mr Nugent however produced a document dated 15^th February 2001 which he said formed the basis of the arrangement. That document purports to be a quotation from Tetra Pak to Clark Foods. Mr Nugent thought that there was a revised agreement in that the actual agreement was with Waterfront and there was an arithmetic error that needed correction.
14. Under that document Tetra Pak was to supply filling equipment (the Prisma 250 ml Filling Machine) valued at £377,000, four pieces of distribution equipment valued in total at £252,300 for a price of £509,501. That sum was payable over a 5 year term with monthly payments of £10,149.25 and a balloon payment of £110,149.26. The document refers to a Machine Lease Agreement but no details are provided.
15. In addition Tetra Pak were to supply hardware valued at £99,500 and Installation and Commissioning to the value of £98,500 for a total sum of £168,500. This sum was payable in full by the time the performance had been accepted.
16. It is clear from Mr Tallon's report that each of the pieces of equipment had their own individual serial numbers.
17. Although the position is by no means clear Tetra Pak appears to have retained title to the filling and distribution equipment but not to the hardware.
18. According to Mr Nugent one further piece of equipment – a multi-packer (to enable shrink wrapping) was acquired at a later date at a cost of £150,000. In his witness statement Mr Nugent suggested this was acquired in 2003; in cross-examination he suggested that it might have been acquired somewhat earlier. In any event the price was paid at the time. Mr Nugent did not suggest that Tetra Pak had retained title to the multi-packer.
19. Both in his witness statement and in cross-examination Mr Nugent stressed that the line is a series of pieces of equipment. No single piece is independent. Each is dedicated to the line. Whilst he accepted that the Prisma 250 ml Filling Machine was the most important piece in the line he suggested that all parts were necessary. He gave as an analogy a BMW car and its engine.
20. The single joint expert - Mr Tallon – makes the following comments in paragraph 3.1.2 – 3.1.3 of his report:

Such lines are supplied to suit the requirements of each individual customer. In addition to the standalone filling machine that is the principal component of a line there are many end of line/downstream options available including …

I would suggest that is most common for a customer to purchase a complete line however the same could be configured with any number of the options detailed … above. It is however possible that a Company may already be in possession of packing equipment or wish to purchase packing equipment from an alternative supplier and therefore only purchase the filling machine from Tetra Pak.

2.2 Negotiations leading to the Lease Purchase Agreement.

21. According to Mr Nugent there were problems with the line which gave rise to a number of warranty claims against Tetra Pak. As a result in the autumn of 2004 Tetra Pak offered to sell its interest in the line to Waterfront for £245,000 plus VAT. Waterfront sought finance for this purchase from Lombard.
22. On 1^st September 2004 Mr Nugent wrote to Lombard. The purpose of the letter was to invite Lombard to permit Waterfront to make the payment to Tetra Pak direct and then to sell the Goods to Lombard to enable Lombard to enter into the Lease Purchase Agreement. Significantly for the purpose of this case the letter describes the goods as follows:

Goods Description Tetrapak Tetra Prisma Asceptic Filling Machine including PT19 (the "Goods").

23. On 2^nd November 2004 Tetra Pak sent an invoice to Waterfront for £245,000 plus VAT. The invoice described the transaction as:

Sale of Tetra Prisma Asceptic Filling Machine including PT19 Machine No 21005/83751 – 250 ml.

24. In a letter dated 11^th April 2005 Rebecca Thomas on behalf of Tetra Pak confirmed to Mr Clark on behalf of Waterfront that ownership of the TPA line has transferred fully from Tetra Pak to Waterfront. The letter identified 3 pieces of equipment with serial numbers - the Prisma 250 ml Filling Machine, a straw applicator (1549) and a cardboard packer (1123).
25. On 6^th December 2004 Mr Carberry, an account executive employed by Lombard visited the factory. He was shown round by Mr Nugent who said that the visit would have taken about 2 hours. He would have shown Mr Carberry the factory including the whole of the line for about an hour. A further hour would have been spent in the office.
26. Mr Carberry completed an asset inspection form report which described the asset as Tetrapak Prisma Ascetic Filling Machine with identification marks 21005/83751. It did not refer to any other piece of equipment or any other serial number. In re-examination he said that if he had thought there were 4 pieces of equipment with serial numbers he would have written down those serial numbers.
27. Mr Nugent on the other hand, in re-examination, said that he made it clear to Mr Carberry that it was the whole line rather than just the Prisma 250 ml Filling Machine which was to be the subject of the transaction with Lombard.
28. On 16^th December 2004 Waterfront sent an invoice to Lombard for the moneys then due to Tetra Pak (£245,000 plus VAT less a deposit of £24,500 – a total of £283,375). The invoice followed the wording of the invoice from Tetra Pak:

Sale of Tetra Prisma Asceptic Filling Machine including PT19 Machine No 21005/83751 – 250 ml.

29. It requested Lombard to pay Tetra Pak directly on its behalf. It is not in dispute that Lombard duly paid Tetra Pak.
30. On 24^th December 2004 Lombard and Waterfront entered into the Lease Purchase Agreement and the Defendants entered into the joint and several guarantees.

2.3 The Lease Purchase Agreement

31. As might be expected the Lease Purchase Agreement is contained in a written document signed on behalf of Waterfront and Lombard.
32. The Schedule to the Lease Purchase Agreement describes the goods as:

Tetrapak Tetra Prisma Asceptic Filling Machine including PT19. It gave the serial number as 21005/83751.

33. The credit was the sum of £283,375. In addition there was facility fee of £2,205 and an option to purchase of £50 plus VAT.
34. The credit was repayable by 48 instalments of £5,329.04. However Waterfront was in addition required to pay the whole of the VAT with the third instalment. The option to purchase fee was payable with the final instalment.
35. It is not necessary to refer to the terms in detail. As already noted the agreement contained a clause providing for automatic termination on the appointment of an administrator. It also provided a clause dealing with Payments on termination ("the termination payment clause"):

You will pay to us all of the Rentals and other amounts that have become due to us but remain unpaid and all Rentals and other amounts that would, save for the termination, have become due less such rebate we calculate at our absolute discretion.

36. As already noted the parties are agreed that, as at the date of termination the sum due under that clause was £143,884.08.
37. It also contained a clause entitled "Disposal of the Goods following termination"("the disposal clause"):

If you have not exercised your right to become the owner of the goods and this Agreement has terminated we will try and sell the goods if they are in our possession. If you have paid to us all amounts that are due to us on termination we will pay to you the Net Proceeds of Sale we receive as soon as practicable after we receive them. The Net Proceeds of Sale will be the proceeds from selling the goods after deducting VAT payable on the sale, any costs of repossession …or … that we or any party who has acted for us may have incurred. If we have not sold the goods within 28 days of our repossessing them and if you have paid to us all amounts due on termination we may but shall not be obliged to have the goods valued at a forced sale valuation if sold to the trade by a dealer of goods of a similar kind to the goods. … We will deduct from the amount we are to pay to you the costs relating to the valuation, any costs of repossession …. We will then treat this amount as the net proceeds of sale under the provisions of this clause.

38. The clause is by no means comprehensive because it does not deal with many common situations. Most of the clause deals with the situation where the agreement has been terminated and all sums due under the agreement (including the option to purchase) have been paid. That is likely to be a highly unusual situation. Save that there is an obligation to "try to sell the Goods" the clause would appear to have limited application to the common situation where the Agreement is terminated as a result of non payment of the instalments or, as here, on the insolvency of the hirer.

2.4 The Guarantee

39. It is not necessary to refer to the terms of the Guarantee in any detail. It is common ground that it was duly executed by each of the Guarantors. Each gave their then address. [As will appear Mr Nugent moved from his address without informing Lombard and says he did not receive letters sent to him at his old address.]
40. The Guarantee identified the Lease Purchase Agreement and described the Goods in the same terms as in it. There are two relevant obligations on the Guarantors:

(1) Hereby guarantee the payment to you on demand of all sums that become payable by the Customer under the Agreement and the due performance and observance by the Customer of all the terms and conditions of the Agreement.

(2) Hereby indemnify you against any failure by the Customer to observe the Customer's obligations set out in the Agreement and agree to pay you on demand any sums which the Customer has agreed to pay you under the Agreement and any sums which may become payable to you as a consequence of the Customer's said failure.

2.5 Termination

41. The schedule of payments indicates that there were some problems with the payments in 2005. However it is accepted that the agreement was not terminated in 2005 and that there were no arrears at any time after 13^th July 2005. It is however common ground that the agreement was automatically terminated on 19^th October 2006 when joint administrators were appointed to Waterfront.
42. It is also common ground that, after taking into account the rejected direct debit payment of £5,329.04 payable on 16^th October 2006 the sum of £143,884.08 became due on termination^[1] under the terms of the clause set out above.

2.6 Events following the administration

43. Lombard maintained a document known as the Alfa Report which records, in summary form, events that occurred in relation to the agreement. The Alfa Report shows that following the administration the matter was dealt with by Simon Rodgers. There is a note dated 2^nd November 2006 stating that

Asset valued at £27,222     →     33% devalue per year.

44. Mr Webb appears to have taken over the administration of the account on behalf of Lombard at the beginning of November 2006.
45. On 2^nd November 2006 Mr Webb wrote to each of the guarantors at the address on the guarantees informing them of the termination and of their potential liability in the event of a shortfall. The letter gave the outstanding balances. Mr Nugent had moved and says he received none of the correspondence sent by Lombard. Both Mr Clark and Mr Crabtree received the letter.
46. On 3^rd November 2006 the administrators sold the business and assets of Waterfront to Drink Pac Ltd. Under the agreement such right, title and interest as Lombard had in the plant and machinery passed to Drink Pac Ltd.
47. On the same day Mr Crabtree wrote to Mr Webb. He asked if the new company continued to use the equipment, whether it would take on the commitment under the agreement, and, if so, whether there would be any recourse to him.
48. On 7^th November 2006 Mr Clark phoned Mr Webb. The note of the phone call in the Alfa Report reads:

He says that he has had the equipment valued by Tetra Pak at £275K and that the line would be worth about £800k to replace with new kit. He says it is likely that the newco will approach us with a poor offer. I have agreed that I will get the valuation double checked and will try to push the Admin into settling the agreement if it appears there is equity. [Mr Clark] says that he would be happy if the administrator settles the balance in full, however if it appears that this is not going to happen then he intends to settle. I have not commented on whether this would be acceptable.

49. The note goes on to comment that as the original cost was £245k Mr Webb would find it hard to believe that it was worth £275K.
50. On 8^th November 2006 Mr Webb replied to Mr Crabtree. He reported that Lombard had received an offer from a co-guarantor to settle the outstanding balance in full if the Administrator or purchaser of the business did not do so.
51. On the same day Mr Webb sent a request for a valuation to two people employed by Lombard at different offices. One of those was Mr Andrew Elliott at Redhill. Mr Elliott is an equipment manager but there is no evidence as to what qualifications or expertise he had in valuations. He did not give evidence or provide a report.
52. On 6^th December 2006 Mr Elliott sent Mr Webb an e-mail which, according to the Alfa Report reads:

Re offer for the Tetra Pak Machine, further to conversations with the supplier it seems that this machine was supplied by them and invoiced in 2001. The cost of an equivalent machine today is circa £275,000 and Tetra Pak have a similar machine manuf in 2000 for sale at £50,000. It is my opinion that we will be lucky to achieve in XS of £40,000 after costs for this machine. Therefore the offer of settlement seems reasonable.

53. Meanwhile, on 1^st December 2006 Mr Crabtree sent a chasing letter to Mr Webb inviting him to confirm that he (Mr Crabtree) was released from his guarantee.
54. In fact there was a dispute as to Lombard's title to the equipment as Drink Pac Ltd did not accept that Lombard had retained title. Thus on 10^th January 2007 Mr Webb wrote to both Mr Clark and Mr Crabtree. The letter to Mr Crabtree informed him of the dispute and that Lombard was working with the administrators to resolve it. The letter to Mr Clark included:

You confirmed that you would be prepared to settle the above outstanding balance in full in the event that [Drink Pac Ltd] were not able to do the same.

At the moment title to the asset is disputed and we are working with the Administrators [to] ensure the co-operation of [Drink Pac Ltd]. We have not yet received offers from [Drink Pac Ltd] but they have indicated that they would not be prepared to pay the outstanding amount in full.

Please can you provide confirmation of your offer in writing so that we may refer to it if negotiations with [Drink Pac Ltd] should fail?

55. At one stage in his evidence Mr Nugent suggested that Mr Clark had not received this letter. However as Mr Clark appears to have replied to it on 15^th January 2007 Mr Nugent accepted that Mr Clark must have received it.
56. Mr Clark's reply reads:

I would like to confirm that I will buy the machine back for £143,984.08 if [Drink Pac Ltd] do not do the same I have a buy back proposal, if I do not hear from you within 14 days I consider the matter closed and I will inform the other parties accordingly.

57. A number of points can be made about this offer. First it is only open for 14 days and is made at a time when Drink Pac Ltd was disputing title. Second the offer refers to "the machine" and not the Line. Third it gives no indication of the source of Mr Clark's funds. Mr Clark did not give evidence or provide a witness statement. In cross-examination Mr Nugent said that the offer was based on discussions between Mr Clark and Tetra Pak and that Tetra Pak would be providing the funds to repurchase. He also said that the offer by Tetra Pak related to the Line and not just the Prisma 250 ml Filling Machine.
58. It appears from the Alfa Report that discussions about Lombard's title continued until mid February 2007. On 21^st and 22^nd February 2007 Mr Webb had conversations with Rick Hallberg of Drink Pac Ltd. In those conversations Mr Hallberg accepted that Lombard had established title. Mr Webb asked whether Mr Hallberg would allow access to the equipment. Mr Hallberg stated that he could source a new line but that it would take at least 6 months and he would need that much notice. Mr Webb also told Mr Hallberg that Lombard was going to give the guarantors some time to pay the settlement. If they did not do so Lombard would discuss the sale of the asset to Drink Pac Ltd.
59. On 22^nd February 2007 Mr Webb wrote to Mr Nugent, Mr Clark and Mr Crabtree.
60. The letter to Mr Clark included:

…Drink Pac Ltd have agreed to relinquish their title claim over the Tetra Pak 250 Line. They have expressed an interest in purchasing the line but they have confirmed that they are not prepared to settle the full outstanding balance.

We will allow you ten days from the date of this letter to settle the agreement. Please arrange for the balance of £143,984.08 to be paid …

… You will need to contact Rick Hallberg at Drink Pac Ltd to discuss arrangements to remove the equipment…

If we do not receive the settlement within this timescale then we will enter into negotiations with Drink Pac and possibly with third parties. Although we will endeavour to achieve a fair market value it is likely that there may be a shortfall for which you will be personally liable.

61. The letters to Mr Nugent and Mr Crabtree summarised the effect of the letter to Mr Clark. In addition it invited them to call Lombard as soon as possible if they had any contingency proposals.
62. According to Mr Nugent neither he nor Mr Clark received the letter sent to them. The letter to Mr Clark was sent to the same address as that contained in Mr Clark's letter of 15^th January 2007. [This was in fact slightly different from the address given by Mr Clark on the guarantee. The Street (Chapel Lane), the City (Chester) and the postcode were the same. However the house was not identified and the village (Tattenhall) was different.] The letter to Mr Nugent was sent to the address contained in the guarantee. It was, however, accepted by Mr Nugent that Mr Crabtree received the letter sent to him.
63. In any event there was no response to any of these letters. The settlement moneys were not paid by Mr Clark.
64. On 21^st March 2007 Mr Webb instructed Mr Elliott to arrange a sale of the equipment. According to the Alfa Report on 19^th April 2007 Mr Elliott informed Mr Webb that Drink Pac Ltd was still alleging that they had obtained title from the administrators.
65. There is no evidence of any attempt by Lombard to sell the equipment or any part of it between March 2007 and January 2011. Instead Lombard appear to have entered into an ad hoc letting arrangement first with Drink Pac Ltd and later with Drink Pac UK Ltd to lease the equipment at a rate of £1,000 per month plus VAT. There was no direct evidence of the arrangement. According to Mr Webb the arrangement was made by Mr Elliott on behalf of Lombard. As I have noted Mr Elliott has not been called. There is thus no evidence of the basis upon which the rent of £1,000 per month was agreed. There is no evidence that Lombard obtained any independent valuation evidence at the time.
66. The first invoice sent by Lombard is dated 23^rd April 2007. It is addressed to Drink Pac Ltd and includes:

Hire of Goods Invoice in relation to the following: Tetrapak 250 ml prisma asceptic filling machine with PT19 attachment … Hire period 3/11/06 – 3/5/07. Cost £1,000 per month plus VAT.

For the avoidance of any doubt we confirm that payment of this invoice by Drink Pac Ltd does not constitute any novation or similar such act of this agreement with yourselves and does not bestow on Drink Pac Ltd any rights under the said agreements. … Should Drink Pac Ltd agree to purchase the goods at the end of or during this period we will refund seventy percent of the hire charge to date against the agreed sale price.

67. A total of £39,600 (inclusive of VAT) was received by Lombard in hire charges in relation to the period up to the eventual sale in January 2011. The payments were made as follows:

Date	Payor	Amount
8/05/07	Drink Pac Ltd	£7,050
11/03/08	Drink Pac UK Ltd	£11,750
23/03/09	Drink Pac UK Ltd	£7,000
12/06/09	Drink Pac UK Ltd	£3,450
26/05/10	Drink Pac UK Ltd	£10,350
Total		£39,600

68. As already noted this represents approximately 34 months of rent payments over a 51 month period from the beginning of November 2006 to the end of January 2011. There is no evidence of any steps taken by Lombard to enforce payment in respect of the months that were not paid.
69. On 24^th January 2011 Lombard sold the equipment to Iconiq Drinks Co Ltd for £42,500 plus VAT. The description of the goods in the invoice was:

Used Tetrapak 250 ml prisma asceptic filling machine with PT19 attachment Serial no: 21005/83751

70. According to Mr Webb negotiations for the sale were carried out by Mr Elliott. There is no evidence of these negotiations before the Court. Equally there is no evidence of any independent valuation before the sale took place.

3 The expert evidence

71. As already noted on 1^st March 2013 Mr Tallon has provided expert valuation evidence both on the sale and rental values of the Prisma 250 ml Filling Machine, and of the Tetra Pak 250 ml Line at various times.
72. In paragraph 3.2.1 he points out that there is no direct comparable evidence and his opinions are based on conversations with specialist UK and European based traders within the sector together with evidence of sales of similar specification and capacity lines. He points out that he had the benefit of valuing some of the equipment in 2007 on the instructions of the liquidator of Drink Pac Ltd.
73. Mr Tallon's views may be summarised in the following tables.

The Tetra Pak Line	Oct-06	Jan/Aug 2011
Sale Price	160,000	87,500
Commission	16,000	8,750
Costs of Dismantling	17,500	17,500
Storage	3,500	3,500
Marketing	4,250	4,250
Net Sale Proceeds	118,750	53,500
Rental	3,500	3,500
The Filling Machine	Oct-06	Jan/Aug 2011
Sale Price	80,000	45,000
Commission	8,000	4,500
Costs of Dismantling	12,250	12,250
Storage	1,750	1,750
Marketing	4,250	4,250
Net Sale Proceeds	53,750	22,250
Rental	1,750	1,750

74. Where Mr Tallon has given a range I have taken the average of his range. A number of other points can be made about these figures. The storage figure assumes a 6 month storage period before sale. I have assumed that costs of storage, dismantling and marketing are the same in 2006 and 2011. In reality the figures for 2011 might be somewhat higher than the 2006 figures. None of the figures include VAT. Mr Tallon's figures for January and August 2011 are identical and I have not therefore included a separate column for them.
75. As already noted Mr Tallon was not questioned and did not give oral evidence. There is no other evidence of value and/or costs and there is accordingly no reason not to accept these figures.

4 The construction issue.

76. In their closing submissions both Mr Browne and Miss Jackson have drawn my attention to the relevant principles of construction. They are well-known and are set out in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912F-913G; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 at [14]-[15] and [21]-[25] and Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at [21]-[30]. They include:

(1) the ultimate aim of interpreting a contractual provision is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant;

(2) the reasonable person is one who has all the background knowledge which would reasonably be available to the parties in the situation they were at the time of the contract;

(3) where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense.

77. A number of points can be made about the background knowledge:

1. In the Investors case Lord Hoffmann defined this in wide terms as including

… absolutely anything which would have affected the way in which the language of the document would have been understood by the reasonable man.

However some doubts have been expressed about the width of this principle. In BCCI v Ali [2001] 1 AC 251 Lord Hoffmann made it clear that he meant "anything that a reasonable man would have regarded as relevant. [For a fuller discussion see Lewison – The Interpretation of Contracts 5th Ed at paragraph 1.04]

2. The law excludes from the admissible background the previous negotiations of the parties and the declarations of subjective intent. The inquiry is objective. The question is what reasonable persons would have had in mind. It is furthermore clear from the decision in Chartbrook that evidence of previous negotiations is inadmissible as an aid to construction. [See Lewison paragraph 3.08 for a detailed discussion]

78. In this case the contract between the parties is contained in the Lease Purchase Agreement. Evidence of Mr Nugent's subjective intentions is irrelevant as an aid to the construction of that document.
79. Any discussions at the inspection by Mr Carberry on 6^th December 2004 were, at best part of the negotiations and are thus inadmissible. However in case I am wrong about this I am not satisfied that Mr Nugent told Mr Carberry that the whole line was to be the subject of the Lease Purchase Agreement. If he had done so I do not think that Mr Carberry would have completed the inspection report in the way he did. Although I thought Mr Nugent was an honest witness, he was not wholly reliable over the details. For example he suggested that Mr Clark had not received the letter of 10^th January 2007 when in fact he (Mr Clark) must have done so.
80. In construing the Lease Purchase Agreement it is to my mind significant that it identifies only the Prisma 250 ml Filling Machine, giving the serial number of only that machine. The line contains a number of other pieces of machinery with their own serial number. Furthermore as Miss Jackson points out in paragraphs 11 – 15 of her closing submissions the Lease Purchase Agreement is consistent with all the other contemporaneous documentation.
81. Furthermore, although Tetra Pak appear now to accept that the machinery it sold to Waterfront in 2004 included more that just the Prisma 250 ml Filling Machine it did not include the whole line. In particular title to part of the line was acquired by Waterfront in 2001 (the hardware valued at £99,500). Furthermore the multipacker was obtained at a completely different time. Thus if the line was the subject of the Lease Purchase Agreement it would include machinery that was not the subject of Tetra Pak's invoice of 24^th November 2004.
82. In paragraphs 6 and 7 of his closing submissions Mr Browne invites me to hold that the commercial or business purpose of the transaction favours the construction of the Lease Purchase Agreement for which he contends. I do not agree. There is in my view no commercial reason why Waterfront should not have financed part of the line rather than the whole line.
83. In all the circumstances I am satisfied that a reasonable man would have understood the parties to have been referring only to the Prisma 250 ml Filling Machine in the Lease Purchase Agreement. That is the ordinary meaning of the words and serial number in the Agreement and I see no reason to depart from it. Indeed I find it difficult to see how the wording in the agreement can be construed as the Line.
84. It is true that in the letters of 22^nd February 2007 Mr Webb referred to "the Tetra Pak 250 Line". However those letters came into existence over 2 years after the contract was made. Furthermore Mr Webb was not involved in the formation of the Lease Purchase Agreement. In those circumstances I can attach no weight to that letter as an aid to construction of the Lease Purchase Agreement.

5 The obligations owed by Lombard on termination of the Lease Purchase Agreement.

85. In the Amended Defence and in paragraphs 6.12 – 6.19 of his Closing Submissions Mr Browne asserts a number of duties owed by Lombard in respect of the Prisma 250 ml Filling Machine which I shall now call "the Machine". He claims an equitable duty equivalent to that of a mortgagee who sells mortgaged property –

The mortgagee when selling mortgaged property is under a duty to a guarantor of the mortgagor's debt to take reasonable care in all the circumstances of the case to obtain the true market value of that property [See American Express v Hurley [1985] 3 ARE 564 at 571 and the discussion in Chitty on Contracts 31^st Ed Vol 2 paragraph 44-119]

86. In so far as Lombard decided to lease the Machine he contends that there was an equivalent duty to obtain the true market rental value of the machine and to ensure that rental payments are paid.
87. In the alternative he contends that Lombard failed to mitigate its loss by failing to obtain the best price on the sale of the Machine or to recover the best rent for it.
88. In her skeleton argument and her closing submissions Miss Jackson has sought to answer these submissions in a number of ways. First, she points out that this is a lease purchase case and not a mortgage case. At all material times Lombard was the owner of the Machine. Thus it is not a case of Lombard taking the Machine as security. Thus the principles applicable to security cases do not apply.
89. Second she submits that the law relating to mitigation of loss has no application to this situation. This is a case of an agreement which terminated automatically on the insolvency of Waterfront. It did not terminate as a result of any breach of contract by Waterfront. Thus there is no claim for damages by Lombard for breach of contract. Thus the principles of mitigation of loss do not arise. She supports this by reliance on a decision of Judge Langan QC [Lombard v Ridge Scaffolding [2^nd July 2010 unreported]]. In paragraph 9 of that decision Judge Langan made it clear that the claim on the guarantee was a claim in debt.
90. For my part I have no difficulty in accepting that the claim under the guarantee is a claim in debt. However the general rule is that:

On being sued by the creditor for payment of the debt guaranteed a surety may avail himself of any right of set off or counterclaim which the principal creditor possesses against the creditor. [See Chitty on Contracts Vol 2 para 44-085].

91. In those circumstances the question is not whether the claim under the guarantee is an action for breach of contract but whether Waterfront had a counterclaim or set-off against the sum due under the termination payment clause. That, in turn, depends on the obligations on Lombard in respect of the Machine on the termination of the Agreement.
92. On one view the lease of the Machine has come to an end with the result that Lombard can do what they like with it. On that view Lombard would not be under a duty at all to sell or lease the Machine and would be entitled to retain any monies they received from either leasing or selling it.
93. I cannot accept that that is the true construction of the Lease Purchase Agreement. It is, of course not what happened as Lombard have given credit for the sale proceeds and the rental it has received. More importantly that view ignores the disposal clause.
94. I have set out the disposal clause in detail in section 2.3 of this judgment. It is to be noted that it starts with an obligation on Lombard to try to sell the goods on termination. To my mind that obligation is inconsistent with a right for Lombard to do what they like with the goods. It is, to my mind implicit in such a clause that the proceeds of sale will be credited to the account of the lessee. Otherwise I can see no reason for the obligation at all. This is to my mind fortified by the later parts of the same clause. In each of the two situations provided for the net proceeds of sale or the valuation (as defined) is credited to the Hirer.
95. If there is an obligation to sell the goods I see little difficulty in the Court implying a term that Lombard would to take reasonable care in all the circumstances of the case to obtain the true market value of the goods.
96. The modern approach to implied terms is contained in the decision of the Privy Council in A-G of Belize v Belize Telecom [2009] 1 WLR 1988, paragraph 21

In every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such provision would spell out in express words what the instrument read against the relevant background would be reasonably understood to mean.

97. The tests which used to be applied to determine whether or not a term should be applied are to be regarded as guidelines to assist the court to answer the question set out above.
98. In my view the proposed term as to sale meets that test. Equally, as it seems to me, if Lombard decides to lease the goods pending sale I see no difficulty in implying a term that Lombard will take reasonable care to obtain the true market rental value of the machine and to ensure that rental payments are paid.

In the circumstances:

1. I agree with Miss Jackson that this case is not governed by the law relating to mitigation of damages. Waterfront was not in breach of contract. The Lease Purchase Agreement was not terminated as a result of breach of contract.

2. I also agree that it is unnecessary to bring in equitable obligations such as arise as between mortgagor and mortgagee. As Miss Jackson points out the Machine was not held by Lombard as a security.

3. However there were, in my view, the implied terms set out above in the disposal clause. In so far as there was a breach of the implied terms Waterfront would have been entitled to set off or counterclaim for any loss is suffered against the sums otherwise due under the termination payment clause. In those circumstances it is open to the guarantors to avail themselves of such set off or counterclaim as a defence or partial defence to the claim under the guarantee.

6 The offer made by Mr Clark

99. As noted in section 2.6 there was a telephone conversation between Mr Clark and Mr Webb on 7^th November 2006 and an exchange of correspondence between 10^th and 15^th January 2007.
100. In my view the conversation on 7^th November 2006 did not amount to an offer to settle the outstanding debt by Mr Clark. It was at most a statement of intent by him. The Alfa Report however adds support to Mr Nugent's view that Mr Clark was referring to the whole line rather than just the Prisma 250 ml Filling Machine. In the light of Mr Tallon's valuation it is unlikely that the Machine alone would have been valued at £275K. Furthermore the reference to the cost of the replacement line in the sum of £800k would not be relevant if he was thinking of just the Machine.
101. In his letter of 10^th January 2007 Mr Webb made it clear that Drink Pac Ltd was disputing Lombard's title. In those circumstances it was in my view unreasonable of Mr Clark to require a reply within 14 days. It was equally unreasonable of Mr Clark not to follow up his offer after the 14 days had expired. Lombard replied to the offer on 22^nd February 2007 when (as Mr Webb thought) title to the Machine had been resolved. Mr Clark did not reply to that letter.
102. It is not to my mind an answer for Mr Nugent to assert that Mr Clark did not receive the letter of 22^nd February 2007. If Mr Clark had followed up his original letter he would have discovered the position.
103. In any event I am satisfied on the evidence that Mr Clark did not himself have the funds to pay the £143,984. He was relying on Tetra Pak to provide the funds. I am not satisfied that Tetra Pak was willing or offered to pay £143,984 for the Machine.
104. In all the circumstances:

1. I am not satisfied that Lombard was in breach of the implied term in not accepting the offer of 10^th January 2007 within 14 days. In my view Lombard's conduct in seeking to sort out the title and responding in the way it did on 22^nd February 2007 was not unreasonable.

2. I am not in any event satisfied that Waterfront and/or the guarantors suffered any loss as a result of the alleged breach because I am not satisfied that Tetra Pak would have provided the funds to enable the purchase of the machine at £143,984.

7 The proceeds of sale and rents received.

105. Mr Elliott sold the machine for £42,500 (plus VAT) on 24^th January 2011. Although Mr Tallon valued the machine at £45,000 as at that date it is clear from his report that the net proceeds of sale would have only amounted to £22,250 plus VAT. Thus, although there is no evidence of Mr Elliott's negotiations it cannot be said that the sale in January 2006 was for a sum less than the market price. [In his closing submissions Mr Browne has used the figures from Mr Tallon's report which relate to the Line rather than the Machine. In the light of my conclusion on the construction issue I have taken the figures for the machine throughout the remaining sections of this judgment.]
106. If, however, Lombard had sold the Machine in October 2006 for the market price the net proceeds of sale would have amounted to £53,750 which is, of course more than the £42,500 which was ultimately received in 2011. However in that event Lombard would not have received any part of the £39,600 (inclusive of VAT) which was received in respect of rent for the period between 2007 and May 2010. It is thus, in my view too simplistic an approach simply to compare the market price in 2006 with the price ultimately received by Lombard.
107. As already noted the rental agreed by Lombard was £1,000 per month plus VAT. According to Mr Tallon the market rent was £1,750 per month plus VAT. Accordingly the rent agreed by Lombard was significantly less than the market rent. However in order to achieve the market rent Lombard would have had to dismantle the Machine from the line (at a cost of £12,250) and would have incurred costs of storage and marketing until a suitable tenant could be found. In those circumstances it was not, in my view, unreasonable for Lombard to accept the lower rent of £1,000 plus VAT and avoid the other costs involved in seeking a market rent. Accordingly I am not satisfied that in accepting a rent of £1,000 per month Lombard were in breach of any implied duty owned to Waterfront which can be relied on by the guarantors.
108. It will be recalled that the rent receipts of £39,600 only represents payments of rent for 34 months over the 51 month period between November 2006 and January 2011. The question arises as to whether Lombard should have taken more steps to obtain payments over the other 17 months and if they had taken more steps whether any further payments would have been received.
109. Lombard has called no evidence as to the steps it actually took to enforce payment of the rent or of any discussions it had with either Drink Pac Ltd or Drink Pac UK Ltd. The Statement of Affairs filed on behalf of Drink Pac Ltd shows assets (most of which comprised book debts) estimated to realise just under £250,000 and an estimated deficiency of just over £1 million. Drink Pac Ltd had possession of the Machine for about 11 months (November 2006 – October 2007) and paid Lombard a total of £7,050 inclusive of VAT on 8^th May 2007. This represents 6 months rent. There were 5 months arrears of rent as at the date of the liquidation. (I note that in the Statement of Affairs Lombard are shown as creditors in the sum of £4,700). In the light of Drink Pac Ltd's financial position I take the view that 4 months rent would have been recovered if Lombard had pressed.
110. There is no equivalent information about Drink Pac UK Ltd which appears to have had the use of the Machine from October 2007 until January 2011 (40 months) yet only paid 28 moths rent. Drink Pac UK Ltd was insolvent by the end of 2010 and it may well be that if steps had been taken at the end of the period they would not have been successful. However looking at the overall picture I am not satisfied that Lombard took adequate steps to collect the rent owed to it by Drink Pac UK Ltd. If adequate steps had been taken I think that a further 9 months rent would have been collected.
111. In those circumstances I think that Waterfront and the guarantors are entitled to a set off in the sum of £13,000 plus VAT or £15,275 against the sums otherwise due under the guarantee.

8 Conclusion

112. In all the circumstances I would give judgment in the sum of £39,071.58 (being the sum claimed of £54,346.58 less the £15,275 set off in respect of the rent.)

Note 1    This sum did not allow any discount for early payment but nothing turns on this.    [Back]