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Cite as: [2005] ScotCS CSIH_38, [2005] CSIH 38

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Brady v. Bibby Factors Scotland Ltd [2005] ScotCS CSIH_38 (18 May 2005)

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Nimmo Smith

Lord Emslie

[2005CSIH 38]

XA78/03

OPINION OF THE COURT

delivered by LORD EMSLIE

APPEAL

in the cause

BIBBY FACTORS SCOTLAND LIMITED

Pursuers and Respondents;

against

JOSEPH BRADY

Defender and Appellant:

_______

For pursuers and respondents: G. M. Henderson; Lindsays, W.S.

For defender and appellant: Party

18 May 2005

Introduction
[1] On 17 January 2001 the pursuers entered into a written Factoring Agreement with a company known as Investfast Limited. In terms of that agreement they were to purchase debts owed to the company by its customers. Subject to later readjustments, the company would receive immediate advances against the anticipated value of the purchased debts, and for their part the pursuers would be entitled to charge fees for the factoring services which they were providing. Before entering into the Factoring Agreement, the pursuers insisted on obtaining security from individuals who were connected with the company. In particular, a formal Guarantee and Indemnity was obtained from the defender, who was a shareholder in the company but apparently not a director. Another appears to have been obtained from one Anthony Byrne.

[2] The Guarantee and Indemnity granted by the defender (hereinafter referred to as "the guarantee") was executed by him on 25 January 2001 and, so far as material for present purposes, provided as follows:

"B In consideration of your agreeing at my/our request to conclude an agreement with the Company to purchase the Debts of the Company or continuing to purchase the Debts of the Company and/or approving any Debt under the terms of any existing agreement between you and the Company (either of which agreements are herein called "the Factoring Agreement") NOW the Indemnifier HEREBY:

1 Guarantee to you the due and punctual performance of all obligations by the Company to you under the Factoring Agreement.

2. Undertake to pay you on demand all money now or at any time owing to you by the Company.

3. Indemnify you from all losses costs damages expenses claims and demands of whatever nature arising from your purchasing the Debts (as that word is defined in the Factoring Agreement) of the Company and in particular (without prejudice to the generality of the foregoing) those arising out of the non performance or breach by the Company of any of its obligations under the Factoring Agreement.

...

6. Acknowledge that a written certificate signed by your Company Secretary of any of the amounts due hereunder or under the Factoring Agreement shall be conclusive evidence (save for manifest error) in any legal proceedings against me/us.

...

8. Agree that:

(i) my/our obligations hereunder shall continue even though you may at any time relinquish in whole or in part any charge lien or security taken from the Company;

(ii) my/our obligations hereunder shall be a continuing guarantee for the whole amount which the Company may from time to time owe to you under the Factoring Agreement;

(iii) my/our obligations hereunder shall not be impaired by any time or indulgence which you may grant, or by your releasing or failing to enforce any right against, the Company or any debtor of the Company or any Indemnifiers;

...

(viii) this Guarantee and Indemnity shall be in addition to and not in substitution for any other security taken by you for the performance of the Company's obligations;

(ix) you may alter or amend the provisions and operation of the Factoring Agreement without my/our consent even though my obligations to you may be increased;

...

(xii) this Guarantee and Indemnity shall not be discharged nor shall my/our liability be affected by reason of any failure of, or irregularity defect or informality in, the Factoring Agreement nor by any legal limitations, disability, incapacity or want of power of the Company or want of authority of any director, manager, official or other person appearing to act for the Company in any matter in respect of the monies or liabilities hereby secured and such monies will be recoverable by you from the Indemnifiers as sole or principal debtor;

..."

[3] The Factoring Agreement operated as between the pursuers and the company for approximately 11 months until, in about December 2001, the company ceased to trade. This was an event which contractually entitled the pursuers to terminate the Factoring Agreement. That step was duly taken, thereby bringing into play certain contractual termination provisions including inter alia the imposition of termination charges. A short time thereafter, the pursuers sought to recover from the defender, in terms of the guarantee, all sums which were then owed to them by the company, and in due course the present action to enforce the guarantee was raised against the defender in Glasgow Sheriff Court. In his defences the defender maintained that, on a proper construction of the guarantee, its scope was restricted to sums properly payable by the company to the pursuers under the Factoring Agreement, and that he was not liable in respect of certain sums advanced by the pursuers to the company, believed to be of the order of £50,000, which did not relate to trade debts of Investfast Limited and which were therefore not advanced in terms of the Factoring Agreement. Against the background of that dispute between the parties, a debate took place before the Sheriff in July 2002 as to the proper interpretation of the guarantee. Put shortly, the issue focused for the Sheriff's decision was whether clause B2 of the guarantee should (as the defender contended) be read as restricted to sums owed to the pursuers by the company in terms of the Factoring Agreement, or whether (as maintained by the pursuers) the plain words of that clause were entirely unrestricted and covered all sums due by the company, whatever the ground of liability might be.

[4] On 30 July 2002 the Sheriff determined the foregoing issue of construction in the pursuers' favour, pronouncing an interlocutor which repelled the defences on the merits and allowed a proof restricted to quantum only. On 4 December 2002 the Sheriff Principal affirmed that decision on appeal, essentially on the basis that the wording of clause B2 was plain and unambiguous and admitted of no restriction; that, having regard to the scope of clauses B1 and B3, clause B2 would lack substance if the defender's construction was correct; and that in addition clause B6 was expressed in terms which appeared to envisage the defender's liability extending beyond sums due by the company under the Factoring Agreement alone.

[5] No appeal to this court was taken at that time, and a proof on quantum duly took place before the Sheriff in May 2003. At that proof the only witness led was Mr James Bryden, the managing director of the pursuers. According to the Sheriff's note of proceedings, Mr Bryden essentially gave evidence in support of the pursuers' final statement of account No. 5/15 of process, which bore to spell out the extent of the company's residual indebtedness as at 4 February 2003. Factoring and other charges incurred by the company were there stated at £64,888.31; advances made in the company's favour amounted to £604,677.70; debts actually collected by the pursuers totalled £626,730.80; and, after off-setting the total charges by the unpaid balance of collections over advances, the statement brought out a net sum due by the company to the pursuers of £42,835.21. Judging by the Sheriff's note, only a limited amount of documentation was available to enable these figures to be tested, and no witness from the company was led on either side. The defender's criticism of the statement appears to have been limited to querying (i) the reliability of the figures for advances and collections and (ii) the percentage relationship between advances made to the company and the overall price or value of the factored debts. In particular, according to the defender, the Factoring Agreement only provided for advances of up to 70% of purchase price, with the consequence that any advances beyond that limit were outwith the scope of the Factoring Agreement and, in turn, beyond the scope of the guarantee. By interlocutor dated 29 May 2003, the Sheriff granted decree against the defender in the foregoing sum of £42,835.21, together with interest and expenses. In so doing, he held Mr Bryden to be a credible and reliable witness, and rejected the defender's challenge to the figures in No. 5/15 of process. It is against that interlocutor that the present appeal is taken.

Construction of the guarantee
[6] In developing his second Ground of Appeal before us the defender, who appeared on his own behalf, made it plain that, although the appeal was marked against the Sheriff's final judgment in 2003, his real concern was with the earlier decisions on the construction of the guarantee in 2002. According to him, both the Sheriff and Sheriff Principal had construed the guarantee in a way that the parties could not sensibly have intended. Properly construed, the guarantee was indeed limited to sums due by the company to the pursuers in terms of the Factoring Agreement, and the factual dispute between the parties in that connection could only be resolved by means of a further proof. In particular, the defender submitted that the Sheriff and Sheriff Principal had illegitimately read words (".. howsoever that indebtedness arises") into clause B2 which were not there, and in this way had materially altered the intended scope of the guarantee. By reference to Gloag & Irvine, Law of Rights in Security, at pp. 734-5 in particular, he maintained that prima facie a guarantee should be strictly construed, in the sense that the cautioner's obligation should not be extended to any other subject, person, or period of time, than was expressed or necessarily implied in the contract. The obligation of a cautioner should not, in other words, be "... extended by mere latitude of interpretation beyond the precise terms of his engagement":- Gloag & Irvine, supra, a p. 734. Against that background, there was nothing in the guarantee itself or in the Factoring Agreement which could justify giving the former deed a scope far wider than that of the latter. If the pursuers' approach was correct, the defender would at no stage have had any means of identifying the source or amount of the primary liabilities that he was guaranteeing, and he would never have signed the deed on such a basis. That would potentially have exposed him and his family to financial ruin, whereas in commercial reality the guarantee was only required to protect the pursuers against the remote possibility of false or fraudulent invoices passing under the Factoring Agreement.

[7] In reply, counsel for the pursuers began by adopting the reasoning and conclusions of the Sheriff and Sheriff Principal in 2002. Nothing had been said by the defender to displace the plain and unrestricted meaning of clause B2 of the guarantee; on the defender's approach to construction, clause B2 would overlap with clauses B1 and B3; and certain other clauses, notably B6 and B8(iii), appeared to envisage a wider liability having been undertaken by the defender. Counsel did not, however, suggest that clause B2 would be altogether deprived of content if the defender's construction were to be preferred, nor did he seek to dispute that, as a general proposition and in the absence of clear stipulation to the contrary, the scope of a secondary obligation such as a guarantee may prima facie be expected to coincide with that of the related primary obligation. Here, he conceded, the preamble to the guarantee contained no reference to any primary obligation independent of the Factoring Agreement, and no such reference appeared elsewhere in the body of the deed.

[8] Having considered the foregoing submissions we conclude, without much hesitation, that the defender's challenge to the soundness of the decisions of the Sheriff and Sheriff Principal in 2002 is well-founded, and that there is no legitimate justification for construing clause B2 of the guarantee as covering anything beyond sums owed by the company pursuant to the Factoring Agreement. Prima facie it would be strange to find a cautionary obligation extending to limitless unidentified primary obligations undertaken or incurred by the principal debtor. A guarantee granted in a particular contractual context would not normally be expected to cover delictual obligations incurred by the principal debtor, or even unrelated contracts which he might choose to enter into. Yet that would be the practical result of the construction for which the pursuers contend in the present case. Against that background it seems to us that, on a plain and straightforward reading of its terms, the guarantee must be understood as covering no more than the monetary obligations of the company under the Factoring Agreement. The preamble refers specifically to the Factoring Agreement and to no other primary source of obligation. No other primary source of obligation is identified in certain subsequent provisions of the guarantee, notably clauses B6 and B8(ix) and (xii), where such a reference might have been expected to appear had the pursuers' contentions been correct. On the contrary clause B8(i), which does identify other primary sources of obligation in the form of "... any charge lien or security taken from the Company", makes it clear that these would not be covered by the guarantee, thus making it impossible to accept the approach to construction which was taken in the courts below. Moreover, in our opinion, clause B2 makes sound commercial sense if read as referable to sums owed by the company in terms of the Factoring Agreement, and we can see no force in the argument that such a construction would have the effect of depriving the clause of content. Clause B1 covers the company's whole obligations arising under the Factoring Agreement, which extend well beyond the monetary payments to which clause B2 relates, and clause B3 covers liability for non-performance or breach of contractual obligations by the company. In these circumstances, applying ordinary principles of construction and taking account of the commercial sense of the transaction, we find ourselves unable to affirm the decisions of the Sheriff and Sheriff Principal on the issue of construction in 2002. Since the guarantee, Factoring Agreement and related Standard Terms and Conditions are all before us, there is in our view no need for any proof in this connection.

Resolution of the construction issue: practical consequences
[9] Had there been room for doubt as to whether the pursuers' claim comprised or included sums due by the company otherwise than under the Factoring Agreement, it would have been necessary to consider remitting the case back to the Sheriff Court for further inquiry. Before us, however, the pursuers strongly maintained that, even if the defender was correct in his interpretation of the guarantee, they were still entitled to succeed because their claim did not in fact extend beyond the liability of the company under the Factoring Agreement. This was clear, counsel argued, from the pursuers' statement of account No. 5/15 of process, and there was nothing in the Sheriff's note of the evidence and submissions at the proof in 2003 to suggest otherwise. While it was true that the witness James Bryden had been challenged on the reliability of the stated figures for advances and collected debts, there was no suggestion that the pursuers' claim was founded on any primary obligation of the company independent of the Factoring Agreement. The highest point of the defender's argument involved the proposition that advances of more than 70% of the purchase price of factored debts were excessive and illegitimate, but (i) this appeared to be based on a misreading of clause 4(a), (e), (f) and (g) of the pursuers' Standard Terms and Conditions applicable to the Factoring Agreement, and (ii) in any event the claim did not seek repayment of any sum which the company had received.

[10] As regards the defender's position on this issue, we note at the outset that his pleadings are inspecific as to the precise basis on which advances outwith the scope of the Factoring Agreement were allegedly made. At the hearing before us, he was unable to point to any figure in the statement of account No. 5/15 of process which plainly did not arise under the Factoring Agreement, and it appeared that his only real complaint concerned the making of advances to the company beyond what was in his submission a fixed limit of 70% of the purchase price of factored debts. The defender was not, however, a director of the company; in his own words he "...did not have the remit or skills" to challenge what Mr Bryden had said at the proof; and ultimately he maintained that, as a matter of fairness, the debt should have been constituted against the company before any question of enforcement of the guarantee arose.

[11] Having given this matter anxious consideration in light of the Sheriff's narrative of the evidence and submissions at the proof, we are not persuaded that there is any arguable basis on which resolution of the construction issue in the defender's favour might be thought capable of making any difference to the outcome of this litigation. Ex facie of No. 5/15 of process, the whole of the pursuers' claim concerns sums due by the company in terms of the Factoring Agreement. No witness from the company was led on the defender's behalf to say otherwise, with or without supporting documents. And on examination of clause 4 of the pursuers' Standard Terms and Conditions applicable to the Factoring Agreement, we do not see anything which would prevent an initial payment or drawdown of sums at credit of the Client Account exceeding the 70% limit set on the company's entitlement. Indeed clause 4(f), in providing that "The Client shall repay to the Factor on demand the amount by which any Prepayment exceeds the amount of Purchase Price", would appear to confirm the opposite.

[12] In the foregoing circumstances, notwithstanding the view which we have reached on the proper construction of clause B2 of the guarantee, we do not consider that there is any basis on which the present appeal can be sustained, or on which any further proof would be justified. If, as we believe to be the case, the decree of 29 May 2003 related to sums due by the company under and by virtue of the Factoring Agreement, the defender is liable for such sums under clause B2 of the guarantee whichever of the two competing approaches to construction is preferred.

Other Grounds of Appeal
[13] We can deal with these shortly. Under his first Ground of Appeal the defender sought to persuade us that the existence of parallel (but not identical) proceedings directed by the pursuers against the other guarantor Mr Byrne rendered the present action unfair and incompetent. In similar vein, under his fifth Ground of Appeal, the defender argued that the pursuers' present claim should properly have been constituted against the company as primary debtor before recourse was had to any guarantee. The company was in the best position to say what sums were due under the Factoring Agreement, but since the pursuers had been allowed to bypass that hurdle the defender as guarantor had been denied a fair hearing. In our opinion these contentions are without substance. For one thing, it is clear that in terms of clause B8(iii) and (viii) of the guarantee, the defender expressly empowered the pursuers to come directly against him as guarantor without any prior enforcement of their rights against the company or any other indemnifier. While the defender may have claims for relief against the company and/or Mr Byrne, we do not accept that the present action against him alone is incompetent or in any way unfair. Moreover, even if the defender himself had no personal knowledge of the company's position on the subject-matter of the proof in 2003, it was up to him and his advisers to precognosce and cite one or more witnesses from the company, and to recover relevant documents, to enable the pursuers' claim to be properly considered and tested.

[14] Finally, the defender said that his third Ground of Appeal added nothing to his arguments on Grounds 1 and 2, and so we need say nothing more on that score.

Conclusion
[15] In the whole circumstances, we do not consider that the defender has made out any ground for disturbing the Sheriff's final interlocutor of 29 May 2003. This appeal must therefore be refused. The case will be continued to enable parties to be heard on all questions of expenses which may arise in consequence of our decision.