Fairfax Gerrard Holdings Ltd & Ors v Capital Bank Plc

This is an appeal against the judgment of HHJ Mackie QC, sitting as an additional judge of the Commercial Court, who handed down a judgment on 28 November 2006, now reported at [2007] 1 Lloyds LR 171. The appeal is brought with permission granted by Rix LJ on 19 March 2007. The defendant/appellant is now (by substitution) the Bank of Scotland plc.

The appeal relates to a retention of title clause. Dimond International Limited (Dimond) wished to purchase certain die cutting machines from Chinese vendors (Shenzhen) and sell the same on to customers in this country, including a company Carrprint Limited (Carrprint). In order to obtain the machines Dimond needed to obtain finance. That was arranged with the first appellants (FG Holdings). The form of the transaction involved FG Holdings arranging for the second appellants (FG International) to open letters of credit in favour of Shenzhen and for the third appellants (Assetline) to purchase the machines from Shenzhen and sell the same to Dimond. It was this latter which contained a retention of title clause pending payment.

Carrprint also required finance and, although originally that finance was to be obtained from Yorkshire Bank, it was ultimately obtained through the defendant whom I will call Capital. The finance obtained by Carrprint was obtained by Capital purchasing the machine from Dimond, and then leasing the same to Carrprint. On 6 September 1999 Dimond received £152,200 from Capital. As between Dimond and Assetline some monies were paid as deposit but a substantial part of the purchase price was not paid. The machine was ultimately delivered to Dimond, where it was commissioned. Dimond thereafter delivered the same to Carrprint, Carrprint having entered into the lease from Capital. Dimond went into liquidation before paying any further sums.

The appellant companies sued Capital, on the basis that the retention of title clause had prevented Dimond passing title to Carrprint or Capital. Thus it was alleged that, in entering into the leasing arrangement with Carrprint and collecting rent thereunder, Capital had thereby converted the machine. Before His Honour Judge Mackie QC, Capital relied on Dimond having actual authority, express or implied, to transfer title, alternatively, on s.2(1) of the Factors Act 1889 and/or s.25 of the Sale of Goods Act 1979. The judge held that Dimond had no express or implied authority to pass title. He also ruled that Capital could not rely on s.2 of the Factors Act or s.25 of the Sale of Goods Act, one basis for his so ruling being that Capital had not established they were a purchaser in good faith. He thus held Capital liable in conversion and assessed damages at £132,500.

Capital, through the Bank of Scotland, do not appeal the rulings on s.2 or s.25 but appeal against the finding of liability, based on actual authority, expressed or implied. In the alternative they argue that the judge erred in his assessment of damages.

As the judge rightly stated it is the finance agreement of 9 July 1999 between Dimond and Fairfax with its retention of title clause which is at the heart of the dispute. The essential commercial background against which that finance agreement has to be construed is as follows. First, Dimond was a buyer and seller of machines. On 7^th July Carrprint had placed a purchase order on Dimond for the machine at a price of £175,000 + VAT. On the same day Dimond had placed an order on its supplier, Shenzhen, at the price of US$140,000 cif Southampton. On 20 July Dimond invoiced Carrprint for the deposit and VAT. In the meanwhile, on 9 July a finance agreement was entered into as between FG Holdings and Dimond. By this stage it is common ground that Assetline would now become the purchaser from Shenzhen and sell the machine to Dimond. Accordingly, the letter of 9 July 1999 spells out the position in the following terms so far as relevant.

The letter commenced by describing Dimond’s purchase of three machines for three different customers, Photovalue Ltd, The Print Factory and Carrprint. It spells out the terms of those contracts of which FG Holdings had copies. In respect of two customers it would seem Dimond’s terms required payment for the machines “upon delivery”. Although the letter does not set the terms out, so far as Carrprint was concerned, Carrprint were to pay 35% deposit plus VAT with the order and to have ninety days from delivery to pay the balance. I point out the distinction between the terms of the respective contracts only to draw attention to the fact that a retention of title clause is much easier to apply where the machinery remains in the possession of the buyer, as would be the case where money had to be received on the resale before Dimond parted with possession as in two of the contracts.

The most critical term is paragraph 6:-

Further terms of relevance seem to me to be conditions 8 and 12, which provide as follows:-

Following receipt of the payments from your customers against the sales invoice, any excess funds (minus any charges and outstandings mentioned in paragraphs 5 and 11 above) shall be transferred to you.”

The letter also stated:-

It is only in the event that we are not repaid within fourteen days of scheduled repayment that we shall seek any form of other recompense. However, if we were not repaid within those fourteen days we would have the right to recover our funds from the various forms of security we hold.

The Letters of Credit should be opened by our subsidiary, Fairfax Gerrard International Limited. The sales transaction under this agreement shall be operated by our subsidiary, Assetline Limited.

We shall retain title to the machines until we have been repaid in full.”

The letter was sent by Fairfax Gerrard, which, as the letter makes clear, is the trading name of FG Holdings. The reference in paragraph 6 to “the terms of our standard Trust Receipt” had a meaning to the parties. There are in the bundle before us copies of standard trust receipts, one signed and one unsigned for reasons which will appear hereafter. Both are addressed to FG Holdings, containing the following terms:-

that the goods remain your absolute and unencumbered property until you have been paid for them in full, and

that if you have not been paid for the goods by the expiry of the credit period, or in the event of our insolvency or apparent liability to you to pay you in full on time, or in the circumstances of any breach by us of any agreement between us and you, you shall have the right to recover the goods and sell them elsewhere, if not so paid. So that you may exercise your right to recover goods from us we hereby grant you (and your agents) the unrestricted right to enter any premises for the time being occupied by us, and

that until the passing of title and the goods to us we shall be the bailee of the goods to you and until they have been mixed with other goods in the ordinary course of our business the goods shall be stored separately from any other goods, be fully insured and be marked as your property. We may sell the goods in the ordinary course of our business, subject to the other provisions of this trust receipt, and

that we shall place and hold any or all proceeds of sale of the goods, or the proceeds of any claim made under any insurance policy which may have been written in our favour in respect of the goods on trust for you in a separate bank account in your name or otherwise clearly designated as a trust account and to pay the aggregate amount of such proceeds to you, or as you shall direct (or failing such direction upon receipt by us) until your invoice for the goods has been paid in full. If the goods have been mixed by us with other goods we shall pay you a fair portion of the gross proceeds delivered therefrom, and

that without your previous written consent we shall not sell the goods or parts thereof on terms for less than the price set out in the supplier invoice (or pro rata to the unit price), and

that your knowledge of any breach, failure or omission in respect of any of our obligations hereunder shall not operate as a waiver of or otherwise detract from any of your rights hereunder, and you may, without notice to us, demand to be repossessed of the said documents of title and/or the goods, in which case we will deliver them to you forthwith. The undertakings given to you in this document shall be in addition to, and not in substitution for, any other rights and security we from time to time may give, or have already given to you.”

The explanation of the two trust receipts in the bundle is that a trust receipt was signed for and on behalf of Dimond in respect of this particular machine, but it was described in that trust receipt “as ordered by The Print Factory (London) 1991 Ltd”. There was a change of heart in relation to the customer to receive the particular machine and a decision taken that it should be delivered under the order from Carrprint. That resulted in a second trust receipt being sent to Dimond, with exactly the same conditions but now describing the same machine “as ordered by Carrprint Limited.” That trust receipt was never signed by Dimond.

The respondent’s case before the judge and before us, in simple terms, was that the finance agreement contemplated a trust receipt being returned signed before Dimond could have authority to transfer title to the customer, and since there was no trust receipt signed authorising Dimond to transfer title to the particular customer Carrprint, Dimond never had authority to pass title to anyone let alone Carrprint’s financier, Capital. At one time, it seemed as though some argument might be raised in the Court of Appeal as to whether, even if there had been a signed document authorising a sale to Carrprint, that would not have provided authority to transfer title to Capital. However, Mr Randall QC objected to any such point being taken, having regard to the fact that, he submitted, evidence would have been available to demonstrate a consistent practice under which authority to transfer to a customer would have provided authority to transfer title to a financier. By a note delivered after the hearing Mr Mills has made clear that such argument would not be pursued. No distinction is thus to be made between the customer Carrprint and the financier Capital.

The argument before us took place in the context of a number of cases which have dealt with reservation of title clauses. They commence with Aluminium Indusiey Vaasen Bv v Romalpa Aluminium Ltd [1976] 1 WLR 676. Many are helpfully referred to in Reservation of Title by McCormack, 2^nd Ed (1995), an extract of which is also in the authorities supplied to us. What is of some interest so far as the authorities are concerned is that some are concerned with the effect of the reservation of title clause where the machinery or product is still in the possession of the original buyer, where the position is more straightforward. Some are concerned with the proceeds of sale of the piece of machinery where there has been a resale. So far as I can ascertain, in only one case has a point arisen as to whether a piece of machinery sold to an ultimate customer can be recovered from the ultimate buyer. It is true that in the Romalpa case the implied right to sell in the ordinary course of business was not in issue, but since business would have come to a halt without a right to sell in the ordinary course of business and indeed an express right to sell was granted in relation to goods manufactured in part with the products in which title was otherwise being retained, the fact it was not in issue cannot be a matter of surprise.

The only case where the seller seeking to retain title sought to suggest that title had not passed on a resale to the ultimate customer was Four Point Garage Ltd v Carter [1985] 3 All ER 12. In that case a simple retention of title clause was argued to have the effect of preserving title, despite the sale to an ultimate customer. However Simon Brown J, as he then was, held that in that case there was an implied right of sale, the context being one in which it would have been unreal to think that the garage would not have continued to sell cars to customers.

I cannot, of course, place too much reliance on the absence of authority because in most cases, where there has been a resale, the ultimate buyer will be able to rely on s.2 of the Factors Act or s.25 of the Sale of Goods Act, or alternatively be able to rely on an estoppel, as recognised by s.21 of the Sale of Goods Act. That section provides:-

In this case no reliance was placed on estoppel and it is important to emphasise that the s.2 and s.25 cases were defeated before the judge on the basis that Capital could not establish that they did not have notice of any want of authority (if there was a want of authority). What Capital must establish in this case is, therefore, that Dimond sold machinery with the authority or consent of Assetline, that authority or consent being express or implied. One must not confuse that exercise with such notions as “ostensible” authority, which could not arise on the judge’s findings in relation to section 2 and section 25.

Although Mr Randall wishes to rely if necessary on the request for a letter of credit and/or on the trust receipt that was in fact signed (not points taken in the court below), if his main argument fails, it is his main argument on the proper construction of paragraph 6 of the finance agreement to which most of the debate was rightly directed. The facts post entry into the finance agreement can affect that question very little, but I should briefly rehearse them to show how the issue arises. I will take the same in the main from the judge’s judgment, without certain of the comments relevant to other issues before him.

Following the contract made between Dimond and Carrprint, and following the finance agreement of 9 July, the history was as follows. On 14 July Dimond signed a request for a letter of credit addressed to “FG Holdings and its subsidiaries”. FG International requested the opening of a letter of credit in favour of Shenzhen, and that letter of credit was opened in terms obliging Shenzhen to invoice FG International. The machine was then shipped by Shenzhen on 30 July 1999.

At the end of August 1999 Carrprint were negotiating with Capital and others for finance. On 27 August 1999 Dimond invoiced Carrprint but that was replaced by an invoice to Capital of the same date. On 2 September an agreement was concluded with Capital, under which Capital were to purchase the machine from Dimond and lease it to Carrprint. Capital were aware of the finance agreement of 9 July between Dimond and FG Holdings. On 6 September, taking (as Mr Randall put it) a serious risk in the absence of documents entitling Capital to possession of the machine, Capital paid Dimond £152,200. At this time the machine was still on the high seas.

On 9 September Dimond paid to FG Holdings a deposit of £61,250. Payment was made under the letter of credit and FG International obtained the documents. On 10 September FG International sent its standard trust receipt, addressed to FG Holdings, relating to the machine. This document nominated the Print Factory as Dimond’s customer. This was signed on 13 September by Dimond. On 13 September a further trust receipt was sent, recording the change of heart, under which Carrprint was now the customer, and this document identified the machine and Carrprint.

The machine arrived at Southampton on 12 September. On 17 September Assetline raised an invoice on Dimond for £102,546.60. On 24 September FG International confirmed to an entity, NORTEX, that the machines had been delivered to Dimond.

On 14 October, FG Holdings sent a fax to Dimond reminding them to put a notice on invoices raised to Carrprint, and requiring customers to be reminded that monies should go to Assetline’s account and not to Dimond.

On 1 November commissioning was completed by Dimond at Dimond’s premises and Carrprint were informed that the machine was being “disassembled for transportation to yourselves”. On 9 November, as between Capital and Carrprint, payments were agreed to ensure the equivalent of the 90 day pause assessed from commencement of the agreement, i.e. 12 September or thereabouts. On 19 November FG Holding requested Dimond to send a copy of the invoice showing assignment to Assetline.

Claims were then made on the guarantees given by the individual directors of Dimond. On 6 March 2000 FG Holdings claimed against Dimond that they had wrongly banked the monies including “amounts due from Carrprint”. On 30 October 2000 Dimond went into liquidation, without having made any further payment.

The question is whether Capital or Carrprint obtained title to the machine. That depends (now that s.2 of the Factors Act and s.25 of the Sale of Goods Act are no longer in issue) on whether at the time when Dimond purported to transfer title either it had title (which is not alleged) or had the express or implied consent of Assetline. Since it was always for Dimond to commission the machine, as between Dimond and Carrprint/Capital, unless one could spell out some different intention, s.18, rule 2 of the Sale of Goods Act would indicate that Dimond would be intending to pass property once the machine was in a deliverable state and Carrprint/Capital had been so informed. That would seem to be at the beginning of November. Thus the question is whether as at that date Dimond had the express or implied authority or consent of Assetline to pass title to Carrprint or Capital. The alternative, which may have been the basis on which the judge approached the matter, would be to apply s.18 rule 1, which would involve Dimond intending to pass the property when the contract was made with Capital as at the 12 September or thereabouts. The distinction between the two dates has no materiality to the construction point, but it might have materiality to alternative ways in which Mr Randall put his case.

If one looks at clause 6 of the finance agreement alone in this case, it seems to me that it recognises that, by implication, prior to payment title will be passed at least to the customers identified in the letter. The only purpose of putting in a requirement that invoices to customers bear the notice set out in clause 6 could be that Dimond would have the authority to deliver and pass title to the customer, with the effect of the proceeds of sale thereafter taking the place of the machinery. That is also consistent, as it seems to me, with a period of credit having been given, both to Dimond and to the knowledge FG Holdings, to Carrprint.

What is of course strange is that there is an inconsistency between clause 6 and the terms of the trust receipt. In the trust receipt again what is contemplated is that there should be an entitlement to pass title in the goods, but in place of the goods Dimond would be required to hold the proceeds of sale effectively on trust for FG Holdings. If the two conditions have to be read together, then it would seem to me the way it would work would be that the position as set out in the trust receipt would apply, only if the proceeds of sale came into the hands of Dimond. That might happen, because the customer took no notice of the endorsement on an invoice, or because (as in fact happened) Dimond had failed to put a notice on the invoice. I do not accept Mr Mills’ submission that one must reject the provisions of the trust receipt because it does not fit with paragraph 6 or makes commercial nonsense. Mr Mills’ submission to that effect has various strands. I quote paragraph 60 of his skeleton:-

Dealing with the points he makes, the fact that the trust receipt is addressed to FG Holdings, rather than Assetline, hardly seems a point in the respondents’ favour. It is difficult to argue that the trust receipt is totally unworkable and at the same time argue that until the trust receipt was signed no authority was given to Dimond to pass title. It seems to me that the terms of the trust receipt were certainly intended as between FG Holdings acting for Assetline and Dimond to confirm, (that being one of the words used at the commencement of the terms) that Dimond should have authority to sell. There is furthermore no reason why the terms cannot be read so as to be consistent with paragraph 6 in the way I have indicated.

My view is that the natural meaning of paragraph 6 of the letter is to incorporate the terms of the standard trust receipt. Those terms were naturally incorporated as between Assetline (and/or any relevant Fairfax entity) and Dimond. It is furthermore my view that all the terms are doing is confirming what is implicit in paragraph 6, which is that Dimond will have authority to sell, and that on a sale Dimond should assign any debt from the ultimate customer to Assetline.

Is it a precondition of the authority that Dimond should have executed the assignment or put some notice on the invoice? I see no basis for saying so. The probability is, as Mr Mills contends, that as between Assetline and Fairfax there was an equitable assignment by virtue of the words of paragraph 6. The failure to give notice is a breach as between Dimond and Assetline, but the putting of a notice on an invoice was not, by the terms of paragraph 6, some precondition to Dimond having authority.

Mr Mills’ fundamental point, which had the support of the judge, is that in some way paragraph 6 has to be construed as requiring Dimond to sign a trust receipt before there is authority to sell. In my view that would involve implying a term to that effect. The judge seemed to rely on condition 6, the retention of title provision in the finance letter, as supporting his view. However, there is no inconsistency between a retention of title clause and an implied or even express right to sell. Indeed, the terms of the trust receipt have a retention of title clause and grant the power to sell. It is, of course, possible to enforce the retention of title clause by reference to the machinery itself, if and insofar as machinery remains in the possession of the first buyer. Thereafter the terms as to assignment or setting aside proceeds give effect to the retention of title clause, or attempt to do so, by providing that the proceeds of sale become the seller’s or are held in trust by the first buyer for the seller.

Mr Mills also raised an argument based on the interpretation of the word "supplier" in paragraph 5 of the terms of the Trust Receipt. He submitted that there was a limit on Dimond's authority to sell, that limit being to sell at a price higher than that charged by the supplier. Mr Randall did not dissent from this argument thus far. Where Mr Mills and Mr Randall differed was that Mr Mills submitted that "supplier" meant Dimond whereas Mr Randall submitted by supplier was meant Shenzen. If Mr Mills were right he would also be right in contending that since the invoice to Capital showed a price below Dimond's invoice to Carprint, Dimond had no authority to pass title. In my view however Mr Randall is clearly right that supplier meant the original supplier, Shenzen, and this argument of Mr Mills accordingly fails.

As I have said, paragraph 6 of the letter on its language seems to me to carry, by implication, an authority to sell. There is no necessity to imply a term requiring a signature on a trust receipt. Furthermore, the fact that the trust receipt’s wording includes the word ‘confirmed’ supports the view that I have formed.

I would thus uphold Mr Randall’s submission in relation to his first main point and in those circumstances it is unnecessary to deal with his other points or with such point as might have arisen on damages.

I cannot however resist adding that it seems to me that when one spells out the history of the matter, even if the construction which I have placed on the finance agreement were wrong, there was clearly ultimately consent from Assetline or Fairfax Holdings to the transfer of title to Dimond’s customer. That, it seems to me, would flow from the signature of the trust receipt that was signed and the way in which matters developed when the second draft was sent including simply reminders to Dimond to put the requisite notice on the invoice without any suggestion that Dimond had no right to transfer the machine to Carrpoint until return of the receipt signed. However, as I say, the point does not arise and I will take the matter no further.

I agree.

I also agree.