Scottish Court of Session Decisions

[1] The pursuer is one of a number of wholly owned operating subsidiaries of Gaelic Invoice Factors Limited (GIFL). At all material times the board of each of GIFL and the pursuer comprised five directors, including Mr David Russell, the managing director, and Mr John Doyle, the finance director.

[2] The business of the pursuer and of the other subsidiaries of GIFL was invoice factoring, that is, the acquisition from trading companies ("the clients") of debts on credit sales (of goods or services) made to their respective customers. Such debts were acquired by assignations granted by the clients to one of the operating companies and duly intimated to the relative customer. The factoring was done on a "recourse" basis, that is, with a right in the operating company to recover from the client, and ultimately from the client's directors, any shortfall in recovery of the factored debts. The sales were ordinarily on terms of 2 - 3 months credit. The operating companies were entitled to decline to accept particular debts or classes of debt offered by their clients for factoring but, in the event of debts being accepted, the operating company would then advance to the client up to 80% of the face value of the debts, the balance being paid on payment to the operating company of the debt in full. The operating companies made a factoring charge and an administration charge for their services. The attraction of those arrangements to the clients was their assistance to their cash flows.

[3] As at August 1997 the operating companies in the Gaelic group had among them about 117 clients, the commercial activities of which extended over a wide range. The total advances made to those clients at that time marginally exceeded £15m. One of those clients was Peter Craig & Co Limited ("PCL"), which carried on business as a heating contractor. PCL was the only client at that time of the pursuer. It was also the client to which at that time the largest total advance had been made by any of the operating companies.

[4] PCL had become a client of the pursuer at about the beginning of 1994, its managing director having been introduced to one of the Gaelic directors by the branch manager of the Bank of Scotland at its Queen Street, Glasgow branch, at which both GIFL (and its subsidiaries) and PCL held their accounts. PCL also had a non-executive director who was understood to have invested in it. After a meeting at PCL's premises in Hamilton between officers of GIFL and the directors of PCL, at which PCL's accountant was also present, it was decided to accept PCL as a client. At that stage PCL's sole customer was understood to be British Gas plc, for which PCL undertook the installation and maintenance of central heating systems in industrial and in domestic premises. GIFL agreed to factor PCL's domestic but not its industrial debts. Initially, £100,000 was the maximum amount of the advance made available to PCL. On 27 January 1994 a formal Factoring Agreement was executed by the pursuer and PCL. This Agreement, which was in the Gaelic standard terms, followed an initial written agreement between PCL and GIFL which included certain operational procedures. These procedures continued to apply notwithstanding the subsequent formal Agreement. They provided, amongst other things, for original invoices to be sent by PCL to British Gas plc with copy invoices to Gaelic. They provided that British Gas plc was to make payment direct to Gaelic but that, in the event of PCL receiving any cheques from British Gas plc, those cheques were to be passed to Gaelic and not be banked by PCL.

[5] Early in 1995 the accounting arrangements within British Gas plc changed. As a result of that change the latter was no longer prepared to make payment to the pursuer as factor of PCL but insisted on making payment to PCL as contractor. To meet that situation an arrangement was made to which the pursuer, PCL and their mutual bank manager were all party. That involved the opening at the Queen Street branch of a PCL "No. 2" account into which it was agreed that PCL would pay all monies received by it in respect of debts factored by the pursuer and from which such payments would immediately be transferred to the pursuer's account at the same branch.

[6] Towards the end of 1995 PCL began to undertake work for local authorities and housing associations in respect of the installation and servicing of central heating systems in their housing stocks. From about then onwards the volume of business done by PCL with British Gas plc decreased. The volume of business (or apparent business) with the local authorities and housing associations substantially increased. The original limit of £100,000 on the facility having been increased early in 1995 to £450,000, an approach for a further increase was made towards the end of that year by PCL and its accountant. That approach was accompanied by projections of expected business. Eventually in about February 1997 an arrangement was made with Singer & Friedlander Limited under which each of it and the pursuer would advance £1m to PCL in respect of factored debts. At a further meeting in about June 1997 an application, supported by audited accounts, was made by PCL for yet a further increase. Each of the pursuer and Singer & Friedlander Limited agreed early in September 1997 to increase the respective facilities by a further £300,000 each. As at late September 1997 the total advance, equally between them, made by the pursuer and Singer & Friedlander Limited to PCL exceeded £2.2m.

[7] In the early Summer of 1997 the directors of GIFL were approached by an insurance broker interested in obtaining for GIFL an insurance policy which included cover against exposure to "fresh air invoices", that is, the risk of being defrauded by clients obtaining advances against fictitious invoices. GIFL, which had some years earlier sustained a relatively minor loss as a result of such a device, expressed interest in such a policy. Subsequently there was received through the broker a form of proposal under the heading "FRAUDULENT ACCOUNTS RECEIVABLE, FIDELITY AND ERRORS AND OMISSIONS INSURANCE" in which certain information was requested of the potential proposer. This form was on or about 15 August 1997 completed and signed by Mr Russell on behalf of GIFL.

[8] The enquiries included under paragraph (2) (headed "NATURE OF BUSINESS") the request at sub-paragraph (a) "Please briefly describe your activities", against which Mr Russell entered "FULL FACTORING SERVICE, INCLUDING SALES LEDGER MANAGEMENT". Paragraph (5) (headed "CLIENT MANAGEMENT PROCEDURES") contained the request -

against which Mr Russell entered "see Report". The relative report, which had been composed by Mr Doyle and was attached to the proposal form, gave a detailed response to each sub-paragraph. Only the responses to sub-paragraphs (b) and (c) are of possible relevance to the issues in this litigation. They were as follows:-

[9] The completed Proposal Form with relative slip was presented by the broker to underwriters at Lloyds. The proposal was there accepted and the risk spread over four syndicates in defined proportions. Mr Alec Sharp, who was the lead underwriter for one of those syndicates and who, it is now accepted, had authority to bind not only that syndicate but also the others, accepted the risk on their behalf. Cover took effect from 4 September 1997. The extent of the loss covered was £1m subject to an excess of £12,500. The "Assured" was defined as including any subsidiary company (such as the pursuer) in which GIFL had a controlling interest. There were eight applicable insuring clauses, one of which (Clause 7) related to invoice fraud. Most of the remaining applicable clauses related to other dishonest conduct, including dishonesty on the part of employees of an Assured.

[10] Towards the end of September 1997 a telephone call from PCL's accountant to GIFL suggested that all was not well with PCL's financial position. Within a few days it emerged that a very substantial number of the invoices supposedly issued by PCL to local authorities and to housing associations, on the basis of which the pursuer had advanced monies to it, were fictitious. Early in October 1997 PCL went into receivership.

[11] The pursuer claimed under the policy for its losses, which exceeded £1m. The underwriters repudiated liability. In this action, in which Mr Sharp (who despite the Instance is correctly named "Alec Sharp") has by agreement been convened as "the representative underwriter", the pursuer now seeks a declarator that under the policy the defender is under an obligation to indemnify the pursuer in the sum of £987,500. Although a number of defences were originally advanced to the action (including contentions relative to the amount claimed), the only matters now in issue relate to whether the underwriters were entitled, on the grounds relied on by them in their pleadings, to avoid the policy. These grounds are of misrepresentation and non-disclosure in a number of pleaded respects.

[12] It is convenient at this stage to deal with an objection to certain evidence sought to be adduced from Mr Sharp. In the course of his evidence-in-chief Mr Sharp identified the completed Proposal Form and its attachment both of which he had had before him at the time he accepted the risk. Mr Brailsford for the defender then proceeded to ask Mr Sharp whether there was any part of the responses contained in them which he had regarded as material. At that point Mr Glennie for the pursuer objected to the line of evidence on the ground that the defender had no record for any proposition that the underwriters had actually been induced (on the basis of any misrepresentation or non-disclosure) to accept the risk. After some discussion, including a reference to Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501, I allowed the evidence to be adduced subject to a reservation as to its competency and relevancy. Mr Sharp then gave evidence, to which I shall in due course return, as to his attitude to the responses in the completed Proposal Form and attachment. The objection was more fully discussed at the hearing on evidence.

[13] In Pan Atlantic the House of Lords in an English appeal concerned with marine insurance reviewed the test of materiality (of misrepresentation or of non-disclosure) for the purposes of policies of insurance. It rejected by a majority the "decisive influence" test of materiality but, unanimously, held that to entitle an insurer to avoid a policy for misrepresentation or for non-disclosure the misrepresentation or non-disclosure required not only to be material (in a non-decisive sense) but also actually to have induced the insurer to make the policy on the terms which he did.

[14] At the hearing on evidence the defender's detailed response to the objection taken was presented by Mrs Wolffe. Her primary submission was that the objection was ill-founded because the representations made in the Proposal Form (and in its attachment) constituted in this insurance contractual warranties which, if breached, of themselves entitled the underwriters to avoid the policy. Section One of the present policy narrated that the assured had made to the underwriters

In such circumstances it was unnecessary for the underwriters to establish separately that they had been induced by the relative representations to contract or had relied on such representations. Inducement and reliance were implicit. Reference was made to Standard Life Assurance Co v Weems (1884) 11 R (HL) 48, Dawsons Ltd v Bonnin 1922 S.C. (HL) 156 and Unipac (Scotland) Ltd v Aegon Insurance Co (UK) Ltd 1996 S.L.T. 1197. It would in many cases be artificial to draw a distinction between a representation and a non-disclosure. It was not conceded that any valid distinction could be drawn here. In any event, sufficient notice had been given by the defender of an intention to lead evidence as to the thought processes of the relative underwriter at the time of acceptance of the proposal. Reference was made to letters of 23 February and 28 April 1998 from the underwriters' solicitors to Mr Russell in which the grounds for avoiding the policy had been set out fully. These letters had been incorporated brevitatis causa into the defender's pleadings. Reference was also made to the witness summaries lodged by the defender in this process. Pan Atlantic, which was not concerned with a "basis of contract" representation but with matters at the other end of the spectrum of materiality, was distinguishable. Reference was also made to MacGillivray on Insurance Law (9^th edition) para. 17-26 and St Paul Fire & Marine v McConnell [1995] 2 Ll.L.R. 116.

[15] Mr Glennie, in renewing the objection, submitted that an insurer might avoid a policy for misrepresentation or non-disclosure only if he satisfied the court (1) that the representation or non-disclosure was of a fact which was objectively material and (2) that he was himself induced by the misrepresentation or non-disclosure to enter into the contract on the terms on which it was entered. To justify avoidance, an insurer must plead and prove both elements. Under Scots law, in all cases other than in life assurance, materiality was to be judged from the point of view of the prudent or reasonable insurer (Hooper v Royal London General Insurance Co Ltd 1993 S.C. 242). The test of materiality was now that laid down by the majority of the House of Lords in Pan Atlantic, which should be followed in Scotland. Their Lordships in that case were unanimous in holding that, whatever the test of materiality, actual inducement of the particular underwriter had to be established. These two necessary elements had subsequently been recognised and applied. Reference was made World Link International Ltd v Royal London Insurance Co Ltd, Mr Nimmo Smith Q.C., 31 October 1995, unreported, St Paul Fire & Marine Insurance v McConnell, Marc Rich & Co v Portman [1996] 1 Ll.L.R. 430, [1997] 1 Ll.L.R. 225 and Johnson v IGI Insurance Co Ltd [1997] 6 Re.L.R. 283. Inducement could not be inferred in law from proved materiality, though there might (exceptionally) be cases where the materiality was so obvious as to justify a rebuttable inference of fact that the insurer had been induced. There was here no averment of actual inducement by any non-disclosure or representation. The letters relied on, even when read as incorporated in the pleadings, were part of the narrative of (purported) avoidance. The defender's substantive defence was set out at a later passage in the defences where there was no averment of actual inducement. In any event, the letters on a fair reading advanced no contention based on actual inducement. Nor did the witness summaries assist. Had the defender sought to make on averment a case of actual inducement, the pursuer would have been in a position to recover documentary material (for example, from the broker with whom Mr Sharp had been in negotiation) to test the latter's evidence. The breach of warranty contention advanced by Mrs Wolffe was not reflected in the pleadings where the whole emphasis was on misrepresentation, non-disclosure and avoidance. The concepts were different, material misrepresentation or non-disclosure enabling the insurer to avoid, breach of warranty discharging him from liability as from the date of the breach (Nova Scotia v Hellenic Mutual Ltd [1992] 1 A.C. 233). The breach of warranty contention was also inconsistent with a Joint Minute entered into between the parties in which the sole issue identified for determination was whether the underwriters were entitled to avoid the policy. A different approach was necessary in respect of a breach of warranty case as against a case based on misrepresentation or non-disclosure. In any event, a breach of warranty case could not assist the defender in any matter turning upon non-disclosure.

[16] In order to set this issue in its practical context it is helpful, in my view, to record the evidence which, subject to the reservation, was in the event adduced from Mr Sharp. At this stage I do so without any assessment of its credibility or reliability. Moreover, as any issue of actual inducement can in the circumstances be relevant only to such grounds for avoidance as the defender seeks to rely on, I restrict my consideration of Mr Sharp's evidence to those aspects. Thus, while, for example, Mr Sharp testified that all the responses in the completed proposal form were "material to weighing up the risks" and noted in that respect information given about the assured (including the date of its establishment, the number of its employees and the number of those with responsibility for handling of monies and/or accounts), nothing in this litigation turns on those latter matters. What is potentially relevant is his testimony as to his attitude, at the time of accepting the policy, to the representations made by the proposer through the broker in response to the request for information contained in paragraph 5 and in particular sub-paragraphs (b) and (c) of that paragraph, all as read with its representation in paragraph 2 that its business activities were "full factoring service, including sales ledger management".

[17] Mr Sharp's evidence fell into two broad categories - (1) his understanding (interpretation) of what the responses meant or imported and (2) the extent to which, in accepting the proposal, he was influenced by them or any of them. He testified that he regarded the appended "report" containing the responses to paragraph 5 as "an impressive document" which gave him comfort. What emerged from the document, he said, was the degree of control represented as being exercised over what was going on. Of particular importance to the risk proposed to be insured against were the represented arrangements in respect of invoices, in respect of the credit risk not being extended and in respect of collection arrangements working satisfactorily. If full information had not been supplied on the Proposal Form, further questions would have had to have been put and satisfactorily answered before the proposal would have been accepted on the terms that it was. Particular importance had been attached (by him) to the statements in the second and third sentences of sub-paragraph (c).

[18] While there is considerable force in Mr Glennie's submission that actual reliance is not pled by the defender, I am, albeit with some hesitation, prepared to hold Mr Sharp's testimony to be competent (in the sense of being within the bounds of the defender's pleaded case). It is clear on the defender's pleadings that he relies on contentions that the insured at the time of proposing insurance misrepresented in certain material respects the management procedures practised by it and that the underwriters were accordingly entitled to avoid the policy. He avers that the risk of invoice fraud was consequently greater and materially different from the risk presented in the proposal. While that averment goes primarily to the issue of materiality, it can fairly, albeit generously, be read as implicitly offering to prove that the underwriters, when considering the presented risk, actually relied on the statements then made. If it cannot be so read, then, subject to the "basis of contract" argument, the defender's case has throughout been irrelevant as wanting an offer to prove a fundamental element in the defence. The pursuer has no plea to the relevancy of the defences or any part of them. Nor was any suggestion made at any procedural stage that the defence on the merits could be disposed of without inquiry on the ground that it was fundamentally irrelevant. In these circumstances the pursuer must be taken to have accepted that the defender was offering to prove the whole elements necessary to establish an entitlement to avoid the policy on grounds of misrepresentation (or, in so far as it may arise, of non-disclosure). Such proof necessarily included proof of actual reliance. The two elements, while distinct, should not be treated as if contained in watertight compartments (Pan Atlantic, per Lord Goff at p.517G-H). It is no sufficient answer, in my view, that the pursuer was entitled to suppose, as Mr Glennie suggested, that the defender might argue that the (clear and unanimous) ruling by the House of Lords in Pan Atlantic that actual reliance had to be established by the insurer was, for some undisclosed reason, inapplicable to the present case. If the pursuer chose, perhaps for tactical reasons, not to challenge the relevancy of the defences, it cannot now properly complain that it was deprived of the opportunity of seeking evidence to rebut testimony of actual reliance. The weight, however, to be attached to such testimony may properly be commented upon.

[19] On the other hand, it is plain, in my view, that the defender cannot succeed on his present pleadings on the "basis of contract" argument. His whole case on record proceeds, consistently with the correspondence repudiating liability, upon allegations of material misrepresentation or non-disclosure leading to an entitlement to avoid the policy, which entitlement was purportedly exercised. While the representations alleged to have been untrue are largely contained in or arise out of the Client Management Procedures report, there is no suggestion whatsoever that, by reason of a breach of any contractual warranty, the underwriters were and are discharged of any obligation to make payment under the policy. Had that been the defender's case, the averments of materiality of the alleged misrepresentations would have been unnecessary - except possibly as a secondary and distinct line of defence. Averments of non-disclosure would have had no place, except again possibly as a secondary and distinct line of defence. While I do not rely for this purpose on any nice distinction between discharge and entitlement to avoid, there is, in my view, no fair notice of any primary line of defence based on any inaccurate but non-material statement amounting to a warranty. The issues arising on a breach of warranty defence (including issues of interpretation of the relative statement and of factual non-compliance) are importantly different from those arising in a defence based on misrepresentation. No motion to amend was made. It would be inappropriate to express any view on what might have been the fate of such a motion. In these circumstances it would be quite wrong, in my view, for me to entertain a defence on the "basis of contract" argument. In the event Mr Brailsford's submission on the evidence proceeded almost entirely on the basis that the underwriters had been entitled to and had avoided the policy on the ground of material misrepresentations and non-disclosures which had induced them to enter into the contract on the terms that they had.

[20] I accordingly turn to the evidence in so far as it bears on the issue whether the underwriters were entitled to avoid the policy on the grounds of material misrepresentation actually inducing the contract of insurance. It will also be necessary to say something about the claims of non-disclosure.

[21] Within GIFL the immediate tasks of financial control over clients' accounts were performed by credit controllers. As at 1997 there were twelve such controllers, divided into three sections, each comprising a credit control supervisor and three other credit controllers. The credit control supervisors, in addition to supervising credit controllers in their sections, also undertook directly credit control functions with clients and their customers. Mrs Jean Monson, a credit control supervisor, had primary responsibility at executive level for the PCL account. As regards management level, although the state of the business with every client was frequently discussed by all the directors at meetings, many of them informal, each director had a portfolio of clients for which he was immediately responsible. The PCL account fell within Mr Russell's portfolio, though his work was to some extent shared with another director, Mr Jim Cameron. Mrs Monson, as credit controller for the PCL account, reported to Mr Russell.

[22] The pursuer under its contractual arrangements with PCL, as with other clients, was entitled in its discretion to decline to purchase a debt or debts tendered by way of assignation. Limits were also set to the total amount at any time of purchased debt, the amount of debt outstanding from any particular customer of the client and the proportion of a particular customer's debt to the total amount of indebtedness. Although with PCL, whose customers being largely public bodies were creditworthy, the discretion to decline appears rarely to have been exercised, the financial limits were adhered to. If at any time such limits were liable to be overstepped, a claw-back arrangement operated to maintain them. As at September 1997 the total authorised limit for PCL was £2.6 million, half of which was to be provided by Singer & Freidlander Limited; the individual customer limit was £500,000.

[23] The business between PCL and its local authority or housing association customers generated (or appeared to generate) a large number of invoices, many of them individually being of relatively small value. The practice was for PCL to deliver to the offices of the pursuer batches of documents. These ordinarily comprised a form of assignation, signed by an authorised signatory of PCL and referring to an attached sheet on which were listed particulars of the debts proposed for purchase. These particulars included what bore to be the values of the individual debts and the names of the debtors as well as other purportedly identifying material, such as invoice dates and numbers and, in most cases, a customer order reference. Also delivered within the batches were copies of the relative invoices. Such batches were checked and, if found to be order, approved and processed by the pursuer's staff. Monies were then, subject to the set financial limits, advanced to PCL. As well as having documentary communication, Mrs Monson spoke by telephone every day or so to the office manager or other staff at PCL.

[24] The written agreement between the pursuer and PCL provided on its face that the pursuer would be responsible for giving notice of assignation of purchased debts to the relative customer. That arrangement, which reflected GIFL's general practice with its clients, was not in the event implemented as GIFL had already agreed with PCL an operational procedure under which the original invoices would be sent by PCL to British Gas plc, with a copy to the relative Gaelic company. That procedure was continued in respect of the local authority and housing association customers which PCL subsequently acquired. A similar arrangement (under which principal invoices were not sent by the Gaelic operating company to clients' customers) applied in respect of two other of the 117 clients of GIFL, namely, Scotcare Heating Services Ltd and Western Delicatessens. In each of those three cases there was a particular reason for departing from GIFL's general practice. In the case of PCL the reason was the burden of transmitting very large volumes of invoices, each generally of small value; PCL itself agreed to undertake this burden. GIFL's general practice was in fact unusual in the factoring industry, where it was more common for principal invoices to be sent direct by clients to their customers.

[25] GIFL and the operating companies had a computer system on which most of the information held by them in respect of clients and their customers was stored. That system was upgraded in November 1996. In about May 1997 Mr Doyle issued instructions to staff encouraging the fullest use of the recording facilities on the computer system. However, some of the more mature members of staff, including Mrs Monson, for some time thereafter preferred to continue to keep some items of information, mainly related to telephone conversations with clients' customers, in manuscript form.

[26] The computer records provided information in tabulated form in respect of assigned debts as yet unpaid by individual customers. Some time after the beginning of each month a report of such outstanding debts was run off by the relative credit controller. Such a report typically listed, as at the last day of the previous month, the particular client's customers with in column form the respective amounts invoiced during that month, and those outstanding for one month, for two months, for three months and for more than three months, with the cumulative totals of those amounts. The credit controller could also access on the computer screen the individual invoice sums in respect of each customer. The timing of this exercise would vary from one client to another, since it depended on the particular client first confirming that the invoicing of customers for the previous month had been completed. The form in which collection was pursued by the factor also depended to some extent on the wishes of the particular clients, whose differing views as to the urgency with which their customers should be pressed for payment were respected.

[27] In 1997 Mrs Monson had responsibility for seven or eight clients, including PCL. She would make in all about 10-15 telephone calls per day to customers of clients. In relation to each of the individual local authority and housing association customers of PCL (of which there were about 20), she would speak by telephone to a member of the relative purchase ledger department between one and three times per month. The purpose of those calls was to enquire when payment might be expected in relation to outstanding invoices. The officials to whom Mrs Monson spoke themselves had access by computer to financial information. They were usually able to advise her what sum had been authorised for payment and when that payment was expected to be made. They were not, however, able to give her complete information as to the position on particular invoices, since these were rendered by PCL to operational entities within the organisations (such as housing department offices or individual surveyors or engineers) and did not appear on the purchase ledger department computer until they had been cleared for payment. Mrs Monson kept manuscript notes of the information thus provided to her using them to pursue the matter where payment had been indicated but had not arrived, and destroying them once their purpose had been served. I observe at this juncture that I found Mrs Monson to be a particularly straightforward witness, whose credibility and reliability I had no reason whatever to doubt. In so far as certain hearsay evidence adduced from witnesses lead at the end of the defender's proof might suggest that Mrs Monson's contact with purchase ledger departments was not as frequent as was spoken to by Mrs Monson (a matter on which she was not cross-examined), I preferred Mrs Monson's evidence.

[28] Although GIFL's computer system had a facility for calling up and printing both summary and comprehensive lists of assigned debts outstanding at any time, printed statements were not sent to the customers of PCL, either monthly or at any other regular interval. At one time monthly statements had been sent by the pursuer to such customers but that practice was discontinued as they had indicated that, as they paid on approved invoices, such statements were not of assistance. Because it was believed that delays in payment of some accounts were occurring at the customers' operational end, Mr Russell, who was regularly in touch with Mr Peter Craig and other officers of PCL, enlisted the assistance of PCL to expedite its customers' processing of them. He also wrote in the course of 1997 several letters to Mr Craig drawing his personal attention to sums outstanding from PCL's customers. This approach appeared to assist in advancing payment. In the latter part of September 1997 Mr Craig, on the encouragement of Mr Russell, wrote letters to several of PCL's customers bearing to express concern at the amounts of monies outstanding from them. Those letters were followed shortly by letters to those customers from Mr Russell, the latter being accompanied by printed statements detailing the outstanding debts. Those latter letters prompted indignant responses from the senior officials to whom they were addressed, pointing out that most of the items to which the statements related were in respect of work neither instructed nor carried out. It then emerged that large numbers of the "invoices" were fictitious.

[29] For the purpose of considering their attitude towards the pursuer's claim to be indemnified under the policy, the underwriters instructed a forensic accountancy investigation by the firm of Messrs Hacker Young, Chartered Accountants. A detailed report, with appendices, was prepared on its behalf by one of its partners, Mr Dragoslav Lazarevic, CA. On the basis of the conclusions reached in that report solicitors wrote in February 1998 to GIFL stating that they were instructed by the underwriters to advise that they were minded to avoid the policy. A formal letter of avoidance followed in April 1998.

[30] Mr Lazarevic gave evidence speaking to a revised version of his report. Certain of the conclusions spoken to by him were critical of business practices adopted by the pursuer (or GIFL) in relation to the PCL account. But it is important to recognise that such criticisms, whether well founded or not as a matter of business practice, are not of themselves the central issues in this litigation. Those issues, subject always to their being adequately pled, are (1) whether GIFL made in the completed Proposal Form (or its attachment) any material misrepresentation, (2) whether GIFL was responsible for any material non-disclosure and (3) whether in either case the underwriters relied on such misrepresentation or non-disclosure in agreeing to provide cover on the terms which they did. In all those matters the onus of proving the relevant facts rests on the defender. It is also important to bear in mind that, although the claim has arisen in relation to fraud perpetrated from within PCL (it being neither necessary nor appropriate to speculate as to the individual or individuals involved), the proposal form was completed in respect of the business of GIFL and the operating companies as a whole. PCL was, it is true, in terms of the total value of monies advanced, the largest client; of the total sum of about £15 million stated in the proposal form to be currently advanced to clients, approximately £2.2 million (or 14.74%) was there stated to be advanced to PCL (though, as a result of the sharing agreement with Singer & Freidlander Ltd, half of that sum (or 7.37%) was to the account of the latter company). But in terms of representing its procedures to the underwriters and in terms of any obligation to make disclosure to them, it was the business as a whole which was the relevant subject matter.

[31] In relation to sub-paragraph (b) of the "Client Management Procedures", it was not seriously contended that any part of it, fairly read, was inaccurate. In relation to sub-paragraph (c), GIFL undoubtedly had an in-house computer which was used to a very substantial extent in the management of clients' accounts, albeit management was to some extent further assisted (at least with some clients) by manuscript notes and by making use of the good offices of the client to facilitate more prompt payment of debts. The computer system was up to date; there was no suggestion in evidence that it was otherwise than "very good". Mr Brailsford submitted that there was no evidence that the computer system "helps with the detection and prevention of client fraud". But this is, in the first place, to invert the onus, it being for the defender to prove any inaccuracy in the representation, rather than vice versa. In any event, the proper inference (in the absence of evidence to the contrary, of which there was none) is that a modern information technology system, providing as it does ready storage of and access to accounting records, is a useful tool against client fraud, albeit it cannot guarantee that such fraud will not occur; if it could, there would be no need for or attraction in insurance against such fraud.

[32] It was not suggested that the controllers were not dealing with the clients' accounts on a daily basis (it is clear that they were) but it was submitted that what was being done could not properly be regarded as "credit control". In this connection there was, in my view, again an undue emphasis on what was done relative to PCL as against other clients. But, even as regards the former, Mrs Monson's activities can properly be regarded, in my view, as "credit control", albeit the information which she was able to obtain directly from PCL's customers about outstanding monies was limited by the procedures adopted by those customers; and, as to recovery, there was no risk that such customers, whose solvency was never in issue, would not ultimately pay debts which were due. Whatever the effectiveness or otherwise of the pursuer's system to detect an elaborate fraud, that system did constitute credit control.

[33] I do not lose sight in this connection (or otherwise relative to the report provided of Client Management Procedures) that the expressions used are to be seen in the context of GIFL having described its business activities as "full factoring service, including sales ledger management". It was not, however, suggested that "sales ledger management" added anything to "full factoring service", the former being embraced within the latter. And "full", while importing the administration of debtors' accounts and the collection of debts, cannot reasonably signify that in every instance the factor was adopting the most vigorous, or indeed any particular, form of pursuit of debts. Some flexibility was necessarily inherent, not least because of the importance to all concerned of avoiding unnecessary damage to client/customer relationships.

[34] So far as the latter part of the second sentence of sub-paragraph (c) is concerned, this was hardly touched on in the evidence. There is no basis for any suggestion that this was to a material extent an inaccurate statement of the experience of the business as a whole.

[35] In any event, in relation to none of the particular representations in sub-paragraph (c) (except "credit control") so far discussed, did Mr Sharp testify that he had relied upon them specifically when deciding to accept the risk. In relation to "credit control" he said that he understood that that would usually involve the collation of invoices and the balancing of them against incoming cash . I accept that he so understood "credit control" and that, in that broad sense, he relied on the representation that this was, in respect of the business viewed as a whole, carried out on a daily basis; but this, subject to the particular position of PCL in relation to the absence of original invoices and of reconciliation with original remittance advices (both discussed hereafter), was what the credit controllers in fact did.

[36] Mr Sharp spoke to his attitude towards the third sentence of sub-paragraph (c). His evidence was to the effect that he understood the phrase "in most cases" in its context to mean in every case except on some very rare occasion when there was a (particular) reason for doing otherwise. He appeared to find support for this construction in the word "almost" in the first line of sub-paragraph (b). If Mr Sharp so construed that phrase at the time of accepting the risk (and I find it hard to accept that he could have done), it was, in my view, a plain misreading of what was written. It was not suggested that "in most cases" had any technical sense. While as a matter of ordinary language that phrase might be read as importing a greater proportion than a simple majority, it cannot, in my view, mean "virtually always". (Mr Sharp's interpretation was, unsurprisingly, not put to Mr Russell, the signatory of the proposal form, nor to Mr Doyle, who had prepared the report). In particular the phrase cannot import more than 114 out of 117 clients. Nor, if the total values of invoices is to be taken as the measure (and there is nothing in the context which suggests that it should), does 7.37%, or even 14.74%, amount to "in most cases". It was not suggested that the measure should be the number of invoices, whatever their value; and in any event, there was no evidence as to the proportion of PCL invoices as against those issued by all other clients. It is also relevant to notice in this context that the defender's expert on insurance matters (Mr Head) testified that, in the factoring business, the sending of original invoices to the customer by the client and the sending of these by the factor were acceptable alternatives and recognised as such by underwriters, whose function was not to direct the factor on how to run his business. The other expert testimony was to a like effect. In those circumstances it is difficult to suppose that "in most cases" was read or could reasonably have been read as meaning "virtually always". Moreover, against such practice, which must be taken to have been within the knowledge of the prudent insurer, it cannot be said that, objectively regarded, the statement in relation to original invoices, however interpreted, was material. In all those circumstances it has not, in my view, been proved that the underwriters were entitled to avoid liability on any ground related to the non-provision of original invoices in respect of the PCL account.

[37] Mr Brailsford also made something of the circumstance that the pursuer did not send out monthly statements to PCL's customers. There was, however, no express statement in the Client Management Procedures that it did send out such statements either in every case or in any proportion of cases; nor can any statement to that effect be, in my view, implied either from the remainder of the text or from any other evidence led in the case. There was accordingly no representation to that effect. There were good reasons why this was not done in the case of PCL's customers, whose own procedures would have tended to render it a futile exercise. While a positive reaction occurred when Mr Russell wrote in late September 1997 to senior officials of certain of those customers enclosing statements, that was because of the terms, content and particular addressee of the letter. There is nothing to suggest that a regular dispatch of monthly statements would as a generality have made any material difference. It is possible that in the case of one of PCL's customers, namely, Fife Council (where no instructions for new work were given after about March 1997), the sending of monthly invoices showing charges for later dates might have provoked an earlier reaction; but even this on the evidence is, given the separation of operational and finance functions in the local authority, far from certain. Accordingly, even if, contrary to my view, a misrepresentation can be spelled out, it was not material. Nor was there any material non-disclosure in this respect. In any event, Mr Sharp gave no evidence touching on the matter of monthly statements. There is no evidence that the underwriters were induced by any understanding relative to monthly statements to agree to provide cover on the terms which they did. Nor is this matter (or any of the other matters discussed below which Mr Sharp did not expressly testify as having relied on) of such obvious importance that any inference of reliance can properly be drawn.

[38] As noted at an early stage in this Opinion, a PCL No. 2 account was in 1995 opened at the Queen Street branch of the bank to deal with the situation created by British Gas plc's insistence that it made payment to PCL rather than to the pursuer as factor. That account continued to be operated notwithstanding that PCL's business with British Gas plc fell away and was replaced by business with the local authorities and housing associations. There were, it seemed, occasions on which the latter or some of them, despite notice of assignation having been given, made payment direct to PCL. The existence of a No. 2 account allowed for a ready mode of transmission to the pursuer as factor of such wrongly directed monies, PCL being able to lodge them in its No. 2 account with automatic and immediate transfer to the pursuer's account rather than having to draw and dispatch its own cheque. However, there is reason to believe that, at least in the months immediately preceding September 1997, the No. 2 account was used by PCL for a more sinister purpose. Sums were paid to the pursuer through that account purportedly in discharge of debts incurred by PCL's customers when in substance these were monies which PCL had received from the pursuer by way of advances on assigned debts. This circulation of monies, which was also facilitated by the fact that the pursuer did not have sight of original remittance advice notes from PCL's customers, allowed, it seems, the fraud to be perpetuated for longer than might otherwise have been the case. It is not clear on the evidence whether the loss was greater (or, if so, to what extent) than it would have been otherwise.

[39] The defender avers that the operation of the No. 2 account "constituted a material exception to the Declared Procedures and ought to have been disclosed by the pursuers to the underwriters". Much of the focus in the evidence was directed to the existence and operation of this account. But such existence and operation per se was, in my view, neither a material exception to the Declared Procedures nor a matter which ought to have been disclosed. It was a sensible and, for aught seen, a not unusual arrangement for the prompt redirection of misdirected payments. It only became a channel by which the fraud could be perpetuated because of what, in so far as it operated, must have been a sophisticated and elaborate scheme within PCL, involving the generation of detailed schedules setting out amounts (with relative invoice particulars) of monies purportedly received by PCL from customers. The lack of a true focus for this complaint is illustrated by the fact that none of the pursuer's lay or expert witnesses was examined about remittance documentation being passed from PCL to the pursuer in secondary rather than in original form; nor was either the defender's expert (Mr Head) or the lead underwriter (Mr Sharp) examined on this matter. Accordingly it is impossible to make a finding of the extent to which secondary forms of remittance advice were used in relation to either the PCL account or any other client's account; it is also impossible to hold that there was any material non-disclosure in this respect or, if there was, that the underwriters were in fact induced by it to enter upon the contract in the terms which they did. Although there was evidence from Mr Lazarevic that a substantial proportion of the monies latterly coming to the pursuer purportedly from PCL's customers came by the No. 2 account route, none of the pursuer's witnesses, managerial or executive, was questioned on this aspect. There is accordingly no proper basis for a finding that this was a circumstance known to or to be treated as known to GIFL which ought to have been disclosed.

[40] One further particular aspect should be mentioned. The defender has averments (pp. 16D-17C) to the effect that accounts at PCL provided to the pursuer within the months prior to August/September 1997 and certain other information known to its management in that period disclosed certain trading patterns which ought to have been disclosed to the underwriters. Although there was some evidence bearing on this aspect, it was hardly touched on by Mr Brailsford in submission. In these circumstances I find it unnecessary to make a detailed examination of that evidence. Suffice it to say that there was no evidence that these matters, viewed from the position of a prudent insurer, were material; moreover, Mr Sharp gave no evidence which can properly be construed as amounting to reliance in fact on this aspect. In so far as any question arises of conflicting accountancy testimony, I prefer (though without having had the advantage of any submissions on this evidence) that of Professor Baillie over that of Mr Lazarevic.

[41] Looking at matters in the round ("the totality of the system", as Mr Brailsford put it), I am satisfied that, in respect of what was said and what was not said in the completed Proposal Form or otherwise, GIFL through its broker made a "fair presentation" for the purposes of the proposed insurance of its business and of the practices and incidents of that business. In so far as the presentation may have suggested, in terms of risk, a better than average standard (for example, insisting in most but not all cases rather than not at all on receiving and transmitting original invoices), such a better standard was in fact practised. (In so far as Mr Sharp gave evidence, unsupported by any other testimony, that the represented risk resulted in a premium being charged at below current market rates, Mr Brailsford made clear at submission that he was not seeking to rely on such evidence). If, contrary to my view, the presentation was either generally or in some particular respect unfair, then any relevant misrepresentation or non-disclosure has not in my judgement been proved to have been material (in the sense approved by the House of Lords in Pan Atlantic). Nor did they or any of them in fact induce the making of the contract of insurance.

[42] I should add that, if I am wrong in rejecting the "basis of contract" approach urged by Mrs Wolffe, I am also not satisfied that the defender, on whom again the onus lies, has proved that any of the statements contained in the Proposal Form was, properly construed, in fact inaccurate, so giving rise to a breach of warranty. Mr Brailsford did not address me separately on the evidence in relation to this aspect but I refer to my views earlier expressed on the interpretation and accuracy of the statements. It may, however, also be noted in this context that, while warranties require exact compliance, they may fall to be interpreted restrictively (MacGillivray on Insurance Law (9^th ed) paras. 10-45 et seq). I was not addressed on this aspect. As regards any non-disclosure, the "basis of contract" approach has, in my view, no relevance to any such matter.

[43] In the whole circumstances the defender has failed to satisfy me that the underwriters were entitled to avoid the policy.

[44] While this case was at avizandum and on the eve of judgment being issued, the pursuer lodged a minute of amendment primarily designed to add a conclusion for payment of the sum referred to in the existing conclusion together with interest on that sum from the date of citation until payment. Counsel were heard on the pursuer's motion, which was opposed, to amend the record to that effect. At the hearing it was made plain that this step was taken not because of any concern that payment of the sum referred to would not, in the event of the declaratory conclusion being granted in a final decree, be made (the whole proceedings having been conducted by both parties on the basis that the defender was in that event able and willing to do so) but because an issue had arisen as to whether interest would be payable on that sum.

[45] Much was common ground. Counsel were agreed that under Scots law, in contrast with the rule in England, the right of action of an insured in the event of non-payment under a policy of insurance is a contractual right to payment of a debt (Scott Lithgow v Secretary of State for Defence 1989 S.C. (HL) 9, per Lord Keith at p.20). They were further agreed that, subject to exceptions which are for present purposes immaterial, modern authority indicated that in general interest runs on contractual debts "from judicial demand" (Elliott v Combustion Engineering Limited 1997 C. 126 at p.131E-F). Mr Brailsford accepted that amendment at this stage was competent and that the defender would not, in the proper sense of the expression, be prejudiced thereby, albeit it would not be to his advantage if it were allowed.

[46] As the discussion proceeded it became clear that the real issue between the parties was whether there was a "judicial demand", in the sense relevant for the running of interest, on the raising of the proceedings with the declaratory conclusion alone or only on the introduction of a petitory conclusion for the sum referred to in the declaratory conclusion. In these circumstances I allowed amendment as proposed (which also effected a correction to the spelling of the defender's name) reserving for decision whether, in the event of the declaratory conclusion being granted, interest ran from citation or only from amendment.

[47] As I am to grant the declaratory conclusion, the matter of the date from which interest runs is a live issue. Counsel were unable to refer me to any authority directly in point, although Mr Brailsford cited Walker - Civil Remedies at p.105, where the nature of a declaratory conclusion is discussed and there is a citation from Erskine - Institutes IV.1.46 -

Erskine in the next paragraph discusses, by way of contrast, petitory actions.

[48] I have come to the view that in the circumstances of this case the raising of the declaratory action did constitute judicial demand for the purposes of the running of interest. The context in which the action was raised in that form was that, the underwriters having (purportedly) repudiated liability under the policy, the parties were at issue as to whether that repudiation was or was not justified. They reached a measure of agreement as to how their dispute was to be resolved. At the request of the pursuer's agents the underwriters nominated the defender to be the representative underwriter for the purposes of judicial proceedings and service was accepted by him on their behalf. The whole litigation has proceeded on the basis that, in the event of the court granting the declaratory conclusion, the defender and the other underwriters will pay the sum so declared to be the monetary extent of their obligation. A specific sum, albeit subject to amendment, has throughout been specified in the declaratory conclusion.

[49] In the authorities concerned with entitlement to interest the expression "judicial demand" has generally been used in contradistinction to an extrajudicial demand. The form of a judicial demand will usually be the raising of a petitory action, that is, one containing a conclusion or crave for payment of a sum of money. On decree being granted in such an action diligence can be executed for recovery of that money. But the raising of an action in petitory form is not, in my view, a prerequisite to a judicial demand for that money. Parties may be content, or indeed prefer, to have a dispute between them over a contractual debt resolved judicially by the grant or refusal of a declarator that the debt is due. They may, for example, for good commercial reasons, prefer to avoid a public decree for debt passing against the defender. If the party claiming that it is due raises an action in court for declarator to that effect, by that act he gives judicial intimation of his claim and makes, in my view, a judicial demand for that debt with the result that interest then begins to run on it.

[50] In the whole circumstances I shall repel the defender's pleas-in-law, sustain the pursuer's pleas-in-law and grant in its favour decree in terms of the first and second conclusions of the summons (as amended).