Porter Capital Corporation v Masters

This is the trial of a number of preliminary issues in accordance with the Order of Master Price dated 15 September 2016. That Order was made in consequence of an Order of the Court of Appeal dated 15 January 2016 (“the CA Order”). That in turn was the product of an appeal by the Claimant (“Porter”) and a cross-appeal by the Defendant (“Mr Masters”) against the Order of Nicholas Strauss QC sitting as a Deputy Judge of the High Court dated 5 February 2014 (“the Strauss Order”) whereby Mr Strauss QC made 13 declarations which reflected his determination of an earlier set of 15 preliminary issues. By the CA Order, the Court of Appeal varied the Strauss Order by allowing in part both Porter’s appeal and Mr Masters’ cross-appeal. The preliminary issues that are now before me relate to the taking of an account pursuant to the Strauss Order as varied by the CA Order. Once those issues have been determined (and subject always to any further appeals) the case can progress to the taking of that account.

Mark Cawson QC appeared for Porter and Iain Pester for Mr Masters. I am grateful to both of them for their clear and helpful written and oral submissions.

The proceedings were begun by a Claim Form issued on 9 February 2012. They involve a claim by Porter, a company incorporated in Alabama, USA, against Mr Masters, to enforce the terms of a Performance Covenant and Waiver dated 18 November 2004 (“the PCW”). By the PCW, Mr Masters guaranteed the liabilities to Porter of Cura Pharmaceutical Company Inc. (“Cura”) under a Commercial Financing Agreement also dated 18 November 2004 (“the CFA”) whereby Porter advanced money to Cura against receivables. Both the PCW and the CFA are governed by the laws of the state of Connecticut in the USA. Cura was a customer of Porter between 2004 and 2010, before entering bankruptcy on its own petition dated 18 March 2010. Mr Masters was, at various times, a founding member, a shareholder, a director and vice president of Cura.

By an Amended Particulars of Claim dated 20 November 2012, Porter sought to recover from Mr Masters as guarantor “not less than $1,996,634.70” (converted to £1,272,390.20 at the rate of exchange then said to be applicable) or such other sum as might be ascertained to be due from Cura under the running account between Porter and Cura. By a Re-Amended Defence dated 6 June 2013, Mr Masters raised various issues concerning the enforceability of the PCW and the true state of account between Porter and Cura. These issues were tried by Mr Strauss QC over 6 days in June and July 2013, and resulted in a reserved judgment (handed down on 10 December 2013) and the Strauss Order. Both parties appealed a number of aspects of the Strauss Order to the Court of Appeal. That resulted in a hearing on 9 and 10 December 2015, a reserved judgment of Vos LJ with whom Davis LJ and the Chancellor agreed of 15 January 2016 (see Porter Capital Corporation v Masters [2016] EWCA Civ 5), and the CA Order.

In sum, the upshot of those decisions was that the PCW was held to be enforceable and to have not been discharged by reason of the release of security, Porter was held entitled in principle to recover enforcement legal fees and costs, and an account was directed in order to determine what adjustments were required to the state of account as between Porter and Cura and Mr Masters in light of the various findings. These included findings that Porter had misapplied the provisions of the CFA by wrongly charging higher interest on “over advances” and that Porter had no right to charge compound interest. The details of the relationship between the parties, the history of the proceedings, the terms of the CFA and the PCW, and the reasoning of Mr Strauss QC and the Court of Appeal can be found in the earlier judgments. It is unnecessary to rehearse those matters in this judgment, save to the limited extent that appears herein.

Vos LJ summarised “some of the basics” as to how the CFA operated in Porter Capital Corporation v Masters [2016] EWCA Civ 5 at [6] as follows:

“Under the CFA, Porter agreed to advance money to Cura against those of its customers' receivables that it chose to purchase. Porter agreed to collect the receivables from the customer for a fee of between 2% and 6% depending on how quickly the customers paid (the "collection fee"). Porter charged Cura a range of other fees and interest. The purchase price for each receivable was its full value less the maximum collection fee (i.e. 94%), but there was a rebate of between 1% and 4% paid to Cura if the receivable was paid by the customer in less than 75 days. In respect of each invoice, Porter advanced a maximum of 75% of its value to Cura, deducting a basic "reserve" of 19% in addition to the maximum possible collection fee of 6%. Porter was to maintain a Reserve Account for Cura into which it would place the 19% reserve amount (or a greater percentage if Porter decided to do so) to be applied against charge backs or any "Obligations" of Cura to Porter defined in clause 15 as including any sums due by Cura to Porter under the CFA and any other indebtedness or liability of Cura to Porter. In practice, Porter exercised its discretion under the CFA to advance far less than the 75% of the value of the receivables to Cura. The actual average figure was approximately 20%. Exhibit B to the CFA specified that Cura should pay Porter interest on the average monthly outstanding balances on all advances at the rate of the greater of 8.5% and the Prime Rate plus 4% on an annualised basis, charged daily, collected at the end of each month until all advances are paid in full and all Obligations satisfied. Clause 8 allowed Porter to make "over-advances" to Cura to ease its short-term cash-flow problems, by way of a negative balance on the Reserve Account in return for a "one-time processing and administrative fee" of up to 3% of the over-advance, and interest on the outstanding over-advance balance at the rate of 1½% per month.”

By paragraph 9 of the CA Order, it was ordered that the claim should be remitted to a Master in the Chancery Division in order to give further directions in respect of:

Following the CA Order, Porter served the 7^th Witness Statement of John Land, the Senior Vice-President of Porter, (“Mr Land”) dated 28 April 2016 (“Land 7”), which exhibited an account as “JL4”. Porter claimed that it was entitled to appropriate payments in the way that is set out in the account in “JL4”. Mr Masters disputed this on the grounds that were set out in a witness statement of Simon Patrick Winter (“Mr Winter”), a partner in Charles Fussell & Co LLP, dated 1 September 2016 (“Winter 1”). Although he explains (at paragraph 38) that “I do not seek to take every conceivable point which Mr Masters might wish to take at the final hearing of the account”, Mr Winter states: “As matters stand it appears that there is, in short, one issue of principle from which a number of points flow: that issue is whether Porter is entitled to rewrite the history of its relationship with Cura. That determines the following issues: (1) the appropriation of payments received by Porter to debts owed by Cura; (2) whether Porter can “charge back” invoices; and (3) whether Porter is entitled to revisit fees charged during the course of that relationship”. Cura’s reply to Winter 1 was contained in Mr Land’s eighth witness statement dated 7 September 2016 (“Land 8”).

The directions envisaged by the CA Order were given by Master Price on 15 September 2016. By paragraph 3 of his Order of that date, the Master directed that the following issues be tried as preliminary issues for the purposes of taking the account:

This is how these four preliminary issues came before me for determination.

In his closing oral submissions before me, Mr Pester raised an argument that there was a wide gulf between the declarations made by Mr Strauss QC, on the one hand, and the exercise carried out by Mr Land and disputed by Mr Winter and the issues discussed in the expert evidence before me, on the other hand. The thrust of that argument was to the effect that the declarations made by Mr Strauss QC required various adjustments to be made to the running account to correct (and principally to strip out) errors made by Porter in the operation of the CFA, which substantially if not entirely boiled down to a book-keeping exercise, whereas Mr Land had engaged in an entirely different exercise.

I expressed some sympathy for the concern underlying that argument, because I consider that it is at least possible that the Court of Appeal did not envisage that the outcome of the appeal would be or might be to require a raft of further preliminary issues concerning Connecticut law to be formulated by the Master and then determined, with still further issues of fact (including, perhaps, foreign law) to be determined on the taking of the account thereafter. In my view, however, if it had been intended that the issues should be limited in the way that Mr Pester only suggested at this late stage of the proceedings before me, then they could and would have been formulated differently (e.g. “Is the appropriation of payments that has been carried out by Mr Land apposite in light of the declaration made by Mr Strauss QC that an adjustment to the account is required in light of the finding that Porter wrongly charged interest at 1½% per month on amounts which, on the true interpretation of the CFA, are not over-advances?”).

Whether or not what has happened since the hearing before the Court of Appeal is in line with what was envisaged by Mr Strauss QC and the Court of Appeal, there is no doubt that the parties have chosen to proceed by putting in the witness statements of Mr Land and Mr Winter, attending before the Master, not seeking to appeal or otherwise revisit the Master’s Order, serving the expert evidence that is discussed below, and preparing for and conducting the hearing before me on the basis described below.

In these circumstances, where the parties have chosen to conduct their dispute in this way following the decision of the Court of Appeal, and where there is no suggestion that Porter has been guilty of an abuse of process or any other form of misconduct, I consider that it is far too late for Mr Masters to raise this argument in Mr Pester’s closing submissions, even if, which I do not decide, it had any merit in the first place.

Pursuant to paragraph 4 of the Order of Master Price, the parties were granted permission to rely upon expert evidence as to Connecticut law in relation to the trial of these four preliminary issues (limited to one expert on each side). Before me, as they had also done before Mr Strauss QC, Porter relied on the evidence of Professor Brunstad and Mr Masters relied on the evidence of Mr Riley. Professor Brunstad has over 30 years of experience of commercial law, and has practised in Connecticut for all of that time. He has a degree from the University of Michigan. Having obtained a masters and a doctorate in law at the Yale Law School, he began a teaching career there in 1990, and he is currently (among other things) a partner with Dechert LLP and a Senior Research Scholar at the Yale Law School. Mr Riley is a graduate of Georgetown University, was admitted to the Connecticut Bar in 1985, and has practised as a litigator since then, principally in Connecticut but also in other jurisdictions in the USA. He is currently the co-head of the litigation group of Whitman Breed Abbott & Morgan LLC. His practice focuses on commercial disputes. He also sits as a Special Master of the Superior Court of the state of Connecticut. Each expert produced a report dated 22 December 2016; Professor Brunstad produced a supplemental report dated 26 January 2017; and the experts produced a joint statement dated 4 April 2017. The evidence before me comprised this written material, and the cross-examination of these experts.

As stated in paragraph 8 of their joint statement, “there are certain points of Connecticut law on which the experts agree”. However, this area of agreement is much narrower than the areas in which there is a substantial measure of disagreement between the two experts, with Professor Brunstad’s views entirely favouring Porter and Mr Riley’s views entirely favouring Mr Masters. This state of affairs is unfortunate, because the greater the number of differences which require to be resolved the greater the legal costs of the parties and the greater the amount of court time that has to be devoted to this litigation. If any further preliminary issues of foreign law need to be decided in future, I urge the parties to agree to accept the views of a single joint expert.

At the end of the hearing before me, I encouraged the parties to endeavour to narrow the differences between them, and in particular to explore whether they could reach agreement as to the fourth of the preliminary issues identified in the Order of Master Price. I am pleased to say that, by email from Mr Cawson dated 15 June 2017, I was informed that the parties had reached agreement on that issue in the following terms:

There was no dispute as to the principles governing expert evidence as to foreign law.

The expert is expected to inform the English court of the relevant contents of the foreign law, identifying statutes or other legislation (explaining where necessary the foreign court’s approach to their construction); and to identify material judgments or other authorities (explaining what status they have as sources of the foreign law). Where there is no authority directly in point to assist the English judge in making a finding as to what the foreign court’s ruling would be if the issue was to arise for decision in the foreign jurisdiction, it is permissible for the expert to give an opinion as to how a foreign court would decide the question at issue (see G & H Montage GmbH v Irani [1990] 1 WLR 667, Mustill LJ at 684 and Purchas LJ at 691; MCC Proceeds Inc v Bishopsgate Investment Trust plc [1999] CLC 417, Evans LJ at [23], [24]).

Where documents are to be construed in accordance with foreign law, the expert may give evidence as to the relevant principles of construction, but the expert may not express an opinion as to the true construction applying those principles (see King v Brandywine Reinsurance Company (UK) Ltd [2005] EWCA Civ 235; [2005] 1 Lloyd's Rep. 665, Waller LJ at [66–68]). This is an application of the more general principle that it is not the function of expert evidence as to foreign law to opine on the application of foreign law to the specific facts of the case, because that would intrude into the judicial function as to the ultimate issue before the English court (see Phipson on Evidence, 18^th edn, at 33-75 referring toNoza Holdings Pty Ltd v Commission of Taxation [2010] FCA 990; (2011) 273 A.L.R. 621, at [13] & [14], Fed. Ct of Australia).

Mr Cawson submitted that in a number of respects in his report before the court, Mr Riley had exceeded the proper ambit of his remit and had sought to answer the ultimate issue that it is for the court to decide, and that the court should not rely on this evidence. Particular objection was taken to the following paragraphs of Mr Riley’s report: 3.5.1, 3.5.3, 3.6.1, 3.6.10, 4.6, 4.8, 4.10, 5.2, 5.4, 5.7, 5.9, 5.12, 6.13, and 6.20. I consider that there is some substance in this complaint. For example, at paragraph 3.5.3 of his report Mr Riley states “In my opinion, the terms of the CFA, interpreted in light of Connecticut’s principles of contract construction, require [Porter] to cease charging interest on any Advance Amounts associated with a Purchased Receivable that has been paid by one of Cura’s customers”. On the other hand, there are occasions on which Professor Brunstad displays a hint of advocacy. For example, in paragraph 34 of his second report, he states with regard to an opinion expressed by Mr Riley relating to Porter’s entitlement to recover revised fees from Mr Masters that “This issue was not raised before. Further, Mr Riley’s statement is made in the form of a conclusion, rather than as an articulation of the legal principles a court would use in drawing its conclusion”. I have borne these matters in mind when considering the expert evidence.

Porter contends that the account exhibited as “JL4” to Land 7 properly reflects Porter’s entitlement to appropriate payments received by Porter in respect of the running account with Cura, in accordance with the provisions of the CFA and the law of Connecticut. Mr Masters disputes this. In order to make sense of that dispute, it is convenient to begin with an exposition of how that account has been compiled.

The CFA provided for advances to be made by Porter to Cura both against invoices (also known as receivables) and otherwise, in each case bearing interest. When performing the CFA, Porter utilised a proprietary factoring accounting system that recorded the transactions on Cura’s account with Porter, including invoices purchased by Porter, payments made to Cura, payments received by Porter in respect of both factored and non-factored invoices, other payments and advances made by Porter to Cura, and the application of various fees and, also, compound interest. The various debits and credits were included within a running account of the amount owed by Cura to Porter, which appeared under the heading “Net Funds Employed” (“NFE”).

Porter’s software package operated the NFE as a running account not only in respect of sums advanced, whether against invoices or otherwise, but also of outstanding fees. Further, interest was calculated on a daily basis and, once a month, accrued interest was compounded and added to the running account (i.e. to the NFE balance). Payments received were credited against this combined running account of advances, fees and interest, without any appropriation being made in respect of advances, fees or interest.

Porter also claimed to be entitled to operate an accrued and un-accrued Reserve Account. Mr Strauss QC held that Porter had wrongly charged interest at 1.5% per month (as provided for by Clause 8 of the CFA) on amounts which it had treated as over-advances, but which were not properly to be treated as over-advances in light of the proper construction of Clause 8. In short, Porter was found not to have credited to the Reserve Account (as defined and provided for by Clause 5.2 of, and exhibit B to, the CFA), the full difference between the purchase price of invoices (94% of the value of the same) and the amount of the advance made against the same, but had operated a second nominal (or non-cash) reserve account and had only credited sums to the Reserve Account (as defined) upon payment as against relevant invoices. Porter was unsuccessful in respect of its appeal against this aspect of Mr Strauss QC’s decision. The Court of Appeal held that an over-advance was a negative balance on the Reserve Account, and made a ruling as to when the over-advance rate of interest was payable pursuant to Clause 8 of the CFA in accordance with this holding.

Porter’s case is (a) that the findings that Porter was not entitled to compound interest (i.e. to charge interest on interest) or to charge interest on fees mean that it is necessary to re-write the account with three separate running accounts of principal, interest and fees, and (b) that in turn raises the question as to how payments that were received ought then to be treated as applied as between interest, fees and principal - given that they had not previously been appropriated by Porter to any particular class of liability.

Further, in re-writing the account it is necessary to have regard to the definition of “over-advance” as found by Mr Strauss QC and the Court of Appeal (i.e. a negative balance on the Reserve Account). It is also necessary to know at any time whether there was a negative balance on the Reserve Account at the time of any advance to Cura (whether against inventory or not), because it is only if there was a negative balance that the advance is an “over-advance” which attracts the higher rate of interest and fees.

Because Porter’s claim in respect of principal as against Mr Masters was limited to the sum of $1,672,326.13 claimed as being due as at 19 March 2010, Porter accepts that it should use this sum as the base starting point for the purposes of the account covering the period from 19 March 2010 to 31 January 2016 which forms part of the exhibit to Land 7. On that basis, Porter claims that the sum due as at 31 January 2016 is $2,553,676.29, and that interest and collection expenses continue to accrue on this sum.

This sum of $2,553,676.29 is greater than the principal debt originally claimed in the present proceedings. However, Porter contends that this is a consequence of the running account being operated in the way contended for by Mr Masters, as reflected in the decision of Mr Strauss QC as varied by the decision of the Court of Appeal.

On behalf of Mr Masters, Mr Pester submitted that in light of the findings adverse to Porter made by both Mr Strauss QC and the Court of Appeal, one might expect the amount being claimed by Porter to have gone down, not up. This expectation underpins Mr Masters’ rejection of the approach taken by Mr Land in re-calculating the account.

According to Porter’s Amended Particulars of Claim, the balance as at 19 March 2010 (before the addition of legal fees and collection expenses, default interest and liquidated damages) stood at $1,672,326.13. The principal differences to the figures making up this balance (“the APOC balance”) which have resulted in re-writing the running account to produce the account that is detailed in Land 7 are as follows:

Turning to the position after 19 March 2010, this, in summary, is as follows:

The main points taken on behalf of Mr Masters in Winter 1 in response to Land 7 may be summarised as follows:

Porter’s response to these points as set out in Land 8 is, in short, as follows:

The preliminary issues with which the present trial is concerned were formulated at the hearing before Master Price on 15 September 2016 in light of these witness statements.

Professor Brunstad’s evidence on the issue of appropriation of payments is contained in paragraphs 11-16 of his first report, and comprises the following principal points:

In reliance on this evidence, Porter contends that the United States Rule applies, entitling Mr Land, in re-writing the account, to treat payments received as appropriated first to interest, before being appropriated to principal. Porter further contends (in reliance on paragraph 27 of Professor Brunstad’s first report) that the same principle applies to fees, entitling Mr Land to appropriate payments to fees ahead of principal.

Turning to Mr Masters’ case, Mr Riley’s evidence in relation to the issue of appropriation of payments begins with a rehearsal of a number of principles of Connecticut law of general application (see paragraphs 3.2.1-3.2.9 of his report).

Mr Riley then expresses the opinion that there is a threshold question to be addressed by the court in approaching this issue, namely whether the CFA constitutes “true sales” of the account receivables from Cura to Porter, or whether the CFA is instead a secured lending agreement, where Cura continued to own the account receivables, subject only to Porter’s security interest (see paragraph 3.3.1). Mr Riley’s central point is that if the CFA is properly characterised as giving rise to “true sales” of the account receivables, when Porter receives a payment from one of Cura’s customers, the payment becomes Porter’s own money, and there is no need to appropriate Porter’s money to any obligation of Cura (see paragraph 3.3.3). In these circumstances, in the words of Mr Pester’s opening written submissions: “Such payment stops further interest from running on the Advance Amount, any rebate must be credited, and Porter is thereafter prohibited from charging back the receivable”.

Mr Riley next identifies (at paragraphs 3.3.6-3.3.7) and discusses by reference to the terms of the CFA in the present case (at paragraphs 3.4.1-3.4.17) a total of 17 factors, which, in his view, demonstrate that the CFA is a “true sale” of account receivables. For example, Mr Riley contends that clear and unequivocal language of purchase and sale is contained in Clause 4 of the CFA (“…Upon acceptance by [Porter] of an Invoice Schedule, [Cura] shall be deemed to have sold, assigned, transferred, conveyed and delivered to [Porter], and [Porter] shall be deemed to have purchased and received from [Cura], all the right, title, and interest of [Cura] in and to the Accounts Receivable listed on the Invoice Schedule …”) and in Clause 5.1 of the CFA (“[Porter] agrees to buy the Accounts Receivable set forth in the Invoice Schedule … from [Cura] for the Purchase Price Percentage … of the face value of each such acceptable invoice (the “Purchase Price”) …”). Mr Riley also relies on Clause 15 of the CFA, entitled “Security Interest”, which provides: “… Notwithstanding the creation of the above security interest, the parties agree that the relationship of the parties is and shall be that of purchaser and seller of Accounts, and not that of lender and borrower …”. Mr Riley concludes (at paragraph 3.5.1) that, in his opinion, “a Connecticut court would treat the parties’ purchase and sale of Accounts Receivable under the CFA to be “true sales” of those Accounts Receivable from Cura to [Porter]”.

Mr Riley also addresses (at paragraphs 3.6.1-3.6.23) the question of how appropriation should be carried out on the footing that the CFA is construed as involving a secured lending agreement. Mr Riley’s views under this heading are, in summary, as follows:

It is apparent from Professor Brunstad’s supplemental report that he disagrees with Mr Riley’s analysis that the CFA gives rise to a true sale of receivables. Professor Brunstad expresses the view that “whether the lender has “recourse” to the debtor if the account is not paid by the account debtor” is “the central inquiry in the analysis of whether a true sale of accounts has occurred” and that relevant case law is to the effect that what matters is whether it is the lender or the debtor who bears the risk of non-payment or underpayment (paragraphs 5-6). Professor Brunstad further opines that “a careful reading of [Clause 13 of the CFA] demonstrates that [Porter] retained virtually full recourse against Cura, and that Cura correspondingly carried essentially the entire risk associated with the non-payment of any of its accounts” (paragraph 7). He also relies on the proposition that the fact that certain language in the CFA refers to a “purchase” or “sale” of the Accounts Receivable does not change the fact that in practice the relationship between Porter and Cura was a debtor/creditor relationship between a secured lender and a borrower (paragraph 8): under Connecticut law the Court is concerned with the substance of the transaction and not the label attached to it by the parties (see Reaves Brokerage Co. Inc. v Sunbelt Fruit & Vegetable Co. Inc., 336 F. 3d 410 (5^th Cir, 2003), at 414). Finally, Professor Brunstad identifies a number of “additional difficulties with Mr Riley’s conclusion”, including the following:

For the reasons set out in paragraphs 11-17 of his second report, Professor Brunstad also disagrees with Mr Riley’s reasons for saying that, in the event that the CFA involves secured lending, the United States Rule does not apply to Porter’s entitlement to appropriate payments as between interest (and fees) and principal. In summary:

Against this background, Mr Cawson submitted that the issue as to appropriation of payments gives rise to the following principal sub-issues:

Mr Cawson developed his submissions in respect of the “true sale” point under two heads: first, it is not open to Mr Masters to take the point at this stage of the proceedings; and, second, it is a bad point in any event, because (a) it is obvious that the CFA involves, in substance, secured lending, and (b) the notion that payments can be applied to the advance referable to the receivable does not work because the payments will almost inevitably exceed the amount of the advance (as only 20% of the invoice value was advanced on average).

In respect of the timing argument, Mr Cawson submitted that the “true sale” point had been raised for the first time in Mr Riley’s report, and was outside the scope of the first preliminary issue identified in Master Price’s Order of 15 September 2016, in which the reference to the appropriation of payments to Porter’s “running account” with Cura is to the running account of advances made against receivables and over-advances and thus to a running account of Cura’s indebtedness to Porter in respect of the same.

Further, Mr Cawson submitted that the case has proceeded at all times on the basis that the CFA involved Porter making advances against receivables so as to give rise to indebtedness on the part of Cura to Porter on which Cura paid interest. By way of example, Mr Cawson relied on (a) the references to “the indebtedness genuinely owed by Cura” and the “true indebtedness owed by Cura to [Porter]” in sub-paragraphs 10.2 III and 10.2 IV of the Re-Amended Defence, and (b) the arguments before Mr Strauss QC and the Court of Appeal about the rate of interest payable, and whether interest should be compounded, in respect of “the outstanding balance on all advances” referred to in Exhibit B to the CFA as well as on over-advances provided for in Clause 8 of the CFA, as illustrated by the judgment of Vos LJ in the Court of Appeal at [25]-[27].

In respect of the substantive issue about true sales, Mr Cawson submitted that the “true sale” point is without merit for the reasons given by Professor Brunstad. In particular:

For all these reasons, Mr Cawson submitted that the true sale point does not assist Mr Masters, and does not provide a reason for Porter not being now entitled to treat payments as appropriated first to interest (and fees) before any application to principal.

On the footing that the CFA involves secured lending rather than a “true sale”, Mr Cawson’s central submission was that there is no good reason to depart from the United States Rule, which permits Porter, on re-writing the account, to treat payments received as appropriated first to interest (and fees), before appropriating the same to principal.

Mr Cawson submitted that Mr Riley’s suggestions that Clause 7 of the CFA has the effect of displacing the United States Rule on the basis that it points to a contrary intention, and a condition precedent of “default”; that the CFA should be construed contra proferentem; and concerning Cura’s powers to direct how payments should be applied, are all wrong for the reasons given by Professor Brunstad in his second report.

With regard to the “true sale” point, Mr Pester submitted that the wording of the first issue that Master Price ordered to be tried was deliberately open, especially in referring to how payments received by Porter “are to be appropriated in respect of the running account with Cura”, and was wide enough to encompass the point. As part and parcel of the inquiry concerning appropriation it is necessary to consider as a preliminary point whether the CFA created a debtor/creditor relationship. Mr Pester accepted that the “true sale” point was not raised in terms prior to the production of Mr Riley’s report. However, in light of the outcome of the hearings before Mr Strauss QC and the Court of Appeal he submitted that it would be an artificial exercise to go back to the issues that were originally pleaded. On the contrary, just as Porter’s approach had shifted in the manner that is manifest in Land 7, it was open to Mr Masters to change his position as well, and to challenge the re-doing of the account on grounds that include the argument that the CFA dealt with a series of sales of receivables which extinguishes any indebtedness on those receivables. Mr Pester also submitted that there was no prejudice to Porter in allowing the “true sale” point to be taken as late as it was.

On the remaining issues, Mr Pester submitted that Mr Riley’s evidence was to be preferred to the evidence of Professor Brunstad, among other things on the grounds (as he said) that Mr Riley gave evidence in a straightforward manner and made concessions where appropriate, whereas Professor Brunstad had a tendency to make speeches and was aware that he was not answering questions put to him in cross-examination. In the event that Mr Masters did not succeed on the “true sales” point, Mr Pester placed particular emphasis on the summary contained in paragraph 3.2.23 of Mr Riley’s report as to how, in Mr Riley’s view, Porter was obliged to appropriate or apply payments received from Cura’s customers first to the specific Advance Amount to which those payments related, and only after that to Cura’s other obligations (including interest and fees) not specifically tied to those Accounts Receivable. This was part of a wider debate about the inter-relationship between the discharge of the obligations that a customer owed to Cura, and in respect of which to the extent that Porter stood in Cura’s shoes then Porter could no longer have recourse against a customer, and the discharge of the obligations that Cura owed to Porter. I have kept that debate in mind in the analysis which follows, including the suggestion, which attracted me at one stage, that Porter must have kept records in which payments were attributed to specific receivables.

On the question of whether it is open to Mr Masters to take the “true sale” point at this stage of the proceedings, I accept Mr Cawson’s submissions. In my view, if Mr Masters wanted to rely upon this point he could and should have raised it before the preliminary issues which are now before me for trial were formulated by Master Price. If that had been done, I consider the preliminary issues would have been formulated differently, making express reference to whether the CFA involves “true sales” or secured lending. In all probability that would have been made an initial question, followed by further questions as to how the account should be re-written in light of the answer to it. Put in other words, I do not consider that it is open to Mr Masters to take this point on the issues as presently formulated. Moreover, I do not consider that this difference is akin to a mere pleading point. On the contrary, how preliminary issues are formulated is a matter of fundamental importance to a trial of those issues; and I do not consider that it is open to a party to ask the court to try issues which, like the “true sale” point, differ significantly from the issues that have been formulated for trial, at least in the absence of an application to amend the issues for trial or the agreement of the opposing party.

In any event, I consider that Mr Cawson is right in his submission that, for the reasons that he gives based on Professor Brunstad’s evidence, as a matter of Connecticut law the CFA did not give rise to “true sales”, but instead gave rise to secured lending.

The point which weighs most heavily with me in this context is that it must have been in the contemplation of Porter and Cura when the CFA was made that, as indeed happened in the manner described in Vos LJ’s summary of “some of the basics”, the proceeds realised on payment of receivables would significantly exceed the sums advanced against those receivables. Yet the parties did not envisage that the excess would belong to Porter. On the contrary, they contemplated that Porter would apply any excess towards Cura’s overall indebtedness to Porter. To my mind, none of the points made by Mr Riley grappled with how that is reconcilable with the notion of “true sale”.

Closely allied to this (in my view) fundamental point are the further points that (i) in light, in particular, of the restrictive wording of Clause 13, under the CFA almost all the risk of non-collection of receivables was retained by Cura, (ii) the CFA contains a number of provisions that only make sense if the relationship created by it was one of secured lending, including and in particular in respect of receivables (although it is also fair to say that the CFA is not particularly happily drafted, and that a number of provisions in it, and not least part of Clause 15, at least if read in isolation, would point towards the conclusion that the relationship created by the CFA is not one of lender and borrower), and (iii) because Clause 8 allowed Porter to make “over advances” to Cura, it must have been in the contemplation of the parties when the CFA was made that it would not or would not necessarily be workable (or indeed, perhaps, in Cura’s best financial interests) for payments made by Cura’s customers to be appropriated by Porter to the particular advance amounts to which those payments related (and it seems that in practice neither party expected Porter to do this). On all these points, I prefer the evidence of Professor Brunstad to that of Mr Riley as to Connecticut law and as to how a Connecticut court would seek to arrive at the true meaning and effect of the CFA.

In light of those conclusions, it is unnecessary to give separate consideration to all the other points covered in Professor Brunstad’s evidence and argued by Mr Cawson on Porter’s behalf. I do not necessarily accept all those points. For example, I am not persuaded that in deciding the substance of the transaction a Connecticut court will look not only at the terms of the CFA but also (as I understood Professor Brunstad to suggest) at the way in which the CFA was operated in practice. However, I consider that Professor Brunstad’s views are, overall, more persuasive than those of Mr Riley.

I also accept Mr Cawson’s submissions on the appropriation of payments issue. In this regard, it seems to me that the correct analysis, shortly stated, is as follows:

As set out above, in reliance on Clause 13.3 of the CFA, when re-writing the account in respect of the period after 19 March 2010, Mr Land has charged back to Cura all receivables that remained unpaid after assignment to Porter. These charged-back invoices were debited from the Reserve Account, thereby increasing the negative balance on the Reserve Account, and, thus, the level of over-advances on which an increased rate of interest is payable by Cura, in accordance with the true interpretation of the CFA as determined by the decisions of Mr Strauss QC and the Court of Appeal.

Mr Masters disputes that Porter is entitled retrospectively to apply charge backs in this way. As Mr Pester points out, Porter did not exercise this right following Cura’s initial default and bankruptcy, but only purported to do so following the finding of the English courts that Porter was not entitled to claim default interest (essentially on the basis that, as held by Mr Strauss QC, Clause 25.8 of the CFA is unenforceable as a penalty).

In his first report, Professor Brunstad expresses the view that, when rewriting the account, there is no obstacle to Porter charging back receivables that it had previously purchased from Cura. At paragraphs 18-21 of that report, he discusses the doctrine of equitable estoppel to which Mr Winter had referred in Winter 1 (at paragraph 45(2)), and refers to various cases applying Connecticut law. At paragraph 21, he summarises his conclusions by stating that before a Connecticut court would find that Porter is estopped from charging back invoices, Mr Masters “will have to demonstrate that (1) by previously declining to charge back certain invoices, [Porter] intended to deceive Cura, or at the very least committed gross negligence amounting to constructive fraud, to induce Cura to believe that such invoices would never be charged back, and (2) that Cura, after exercising due diligence to determine the truth, acted on its belief that the invoices would not be charged back, resulting in injury”.

Professor Brunstad also discusses Clause 28 of the CFA at paragraph 22 of his first report. Clause 28 provides: “[Porter] shall not be deemed to have waived any right or remedy it may have hereunder unless such waiver is in writing and signed by [Porter]”. He states that, under Connecticut law, while the mere existence of such a non-waiver clause is not an absolute bar to the defence of equitable estoppel, nevertheless it will operate as a bar “where there is no express conduct on the part of the plaintiff indicating an intent to relinquish a contractual right despite the existence of a non-waiver clause”.

At paragraphs 4.6-4.12, Mr Riley identifies various reasons why Porter is prevented from now seeking to charge back receivables to Cura in accordance Connecticut law. At paragraph 4.6, Mr Riley summarises these reasons as including limitations on the scope of a guarantor’s liability, restrictions on a creditor’s ability to restate an account in a manner intended to increase a guarantor’s liability, estoppel and lack of notice.

At paragraph 4.7, Mr Riley states that, because the liability of a guarantor is derivative of that of the principal debtor, a creditor is not permitted to change the manner in which payments were previously allocated or appropriated against the principal obligor so as to increase the liability of a guarantor.

At paragraph 4.8, Mr Riley expresses the view that a Connecticut court would also reject Porter’s attempt to charge back receivables now, when it had not done so previously, under the doctrine of estoppel. Under Connecticut law, the doctrine of equitable estoppel operates to bar a party from asserting a right that it would otherwise have but for its own conduct. Mr Riley states that the two essential elements of the doctrine of estoppel are (1) the party must do or say something that is intended or calculated to induce another to believe in the existence of certain facts and to act upon that belief and (2) the other party, influenced thereby, must actually change his position or do some act to his injury which he otherwise would not have done. At paragraph 4.9, Mr Riley identifies the reliance element on the facts of this case as arising because Mr Masters “presumably relied on [Porter’s] previous statements of account (which did not include charge backs) in formulating his defense and settlement strategy”.

At paragraphs 4.10-4.12, Mr Riley states that Porter would be prohibited from charging back receivables at this stage of the proceedings (i.e. after the trial before Mr Strauss QC and, for that matter, the appeal to the Court of Appeal) on the basis of what he says a Connecticut court would describe as a lack of notice to Mr Masters of the purported increase in Cura’s indebtedness. Mr Riley is of the view that it would be an abuse of process to allow Porter to “rewrite the history of its dealings with Cura” at this stage. There are a number of grounds on which Mr Masters could have challenged Porter’s attempts to restate the account as Porter seeks to do, and what matters is not whether those defences would have been successful, but rather that Mr Masters was deprived of his ability to assert the same. Mr Riley identifies the following potential defences in this regard: (i) that notice had not properly been given to Cura under the terms of the CFA; (ii) that Porter’s actions would have constituted a violation of the automatic stay which applied on Cura’s bankruptcy; (iii) that such charge backs were not allowed under the CFA on various grounds; (iv) that Porter had waived any right to charge back receivables; and (v) that Porter’s claim was barred by limitation of actions or by laches.

In reply, at paragraph 18 of his second report, Professor Brunstad states that Porter is not seeking to establish a greater liability against Mr Masters than that pursued against Cura, but rather to establish the correct amount of indebtedness. At paragraphs 19-28, Professor Brunstad takes issue with each of Mr Riley’s propositions of law.

At paragraph 20, Professor Brunstad states that the proposition that the liability of the guarantor is based on the liability of the debtor means only that the guarantor cannot be liable for a debt that the debtor could never have been liable for, and that the cases cited by Mr Riley are not to the contrary – see, in particular, Cadle Co. of Connecticut, Inc. v C.F.D. Dev. Corp., 44 Conn. App. 409, 689 A.2d 1166 (1997). Further, he states that In Matter of LaBonne, 84 B.R. 309, 310 (Bankr. D. Conn. 1988), relied on by Mr Riley, is dealing with a different point, where the amount of the debt has been “fixed by a judgment at law”. In the present case, the amount has not been so fixed, but is at large.

At paragraph 21, Professor Brunstad states that the cases cited by Mr Riley establish that, “[a] guarantor’s liability depends primarily on the construction and application of the guaranty contract” – see Calderock Joint Venture II, L.P. v Milazzo, 2011 WL 5925101 , at 6*. As demonstrated by TD Bank, N.A. v School St. Plaza, LLC, 2012 WL 386467, at 5*, where the guarantee is absolute, and subject to no condition except for the default of the principal debtor, the guarantor is primarily liable for the debt and the creditor may maintain an action against the guarantor immediately upon default of the debtor, without prior demand on the debtor for payment, and without first proceeding against the debtor.

At paragraph 22, Professor Brunstad states that in the present case Mr Masters guaranteed any and all debts incurred by Cura under the CFA, regardless of whether the particular debts were first claimed from Cura – see, for example, Clauses 1, 6, 14, 17, and 19 of the PCW. Professor Brunstad says that the “broad sweeping terms of the PCW” support his view that this is the nature of Mr Masters’ guarantee of Cura’s debts.

Turning to the doctrine of estoppel, at paragraphs 23-25 Professor Brunstad reiterates that, contrary to the views of Mr Riley, Connecticut law is clear that reliance alone is insufficient, and that an intent to deceive or constructive fraud, i.e. some form of unconscionable conduct, requires to be established in addition (see in particular Novella v Hartford Acc. & Indem. Co., 163 Conn. 522, 564,316 A.2d 394 (1972)). As to Mr Riley’s reliance on Karadish v Ceridian Corp., No. 3:09-CV-935 JCH, 2011 WL 3924182 at 7* (D. Conn. Sept. 7, 2011), Professor Brunstad states that this is a federal case set in an employment context, and it is not determinative as to the applicable law in Connecticut, which is otherwise well established. In any event, as to paragraph 4.9 of Mr Riley’s report, a Connecticut court, applying Connecticut law, would not find that Porter was estopped from charging back invoices simply because Mr Masters relied on Porter’s previous statements of account (which did not include charge backs) when formulating his defence and settlement strategy.

As to Mr Riley’s suggestion that a Connecticut court would not permit Porter to charge back invoices it had not previously charged back due to “lack of notice”to Mr Masters, at paragraph 27 Professor Brunstad points out that, by clause 13 of the PCW, Mr Masters expressly waived “presentment and demand for payment of the Obligations or any portion thereof”, as well as “all notices to which [he] might otherwise be entitled provided notice is given to[Cura] if required pursuant to the terms of the [CFA].” In short, Professor Brunstad suggests that there can be there is no such thing as a legal “lack of notice” defence where the contract expressly states that the creditor may exercise its rights without prior notice. Further, he states that the cases cited by Mr Riley establish only that a party must be given notice of the claims or theories of liability asserted against it, not the manner of calculating damages on a particular claim.

At paragraph 28, Professor Brunstad addresses the potential defences which Mr Riley maintains that Mr Masters could have raised in response to Porter’s restatement of the account applying charge backs. He states that (i) by reason of Clause 28 of the CFA, Cura was on notice of Porter’s ability to assert its rights at any time; (ii) Porter’s action is not a violation of the automatic stay which applied on Cura’s bankruptcy, because that stay only applies to claims against Cura, not Mr Masters; (iii) Mr Riley’s assertion that Porter waived any right to charge back receivables is unsupported by analysis and is in any event met by a non-waiver clause which is enforceable under Connecticut law; and (iv) Mr Riley’s assertions that Porter’s claim is (or may be) time-barred or barred by laches and that a Connecticut court would consider it an abuse of process for Porter to charge back invoices not previously charged back are similarly without legal support.

In the course of cross-examination, Professor Brunstad clarified that, in his opinion, under Connecticut law, where a party is required to restate an account that party is entitled not only to correct mistakes that it had made when operating the account in the first place but also (subject only to any defences available to the other party) to invoke rights that it did not invoke to begin with: “If you were entitled to do it contractually to begin with, then when you are restating the account, in general you are entitled to, in the restatement process, take advantage of all the things that you were contractually entitled to take advantage of”. He also clarified that he had been unable to find a Connecticut case which dealt with the position like that in the present case, and indeed he said “Connecticut law does not recognise a cause of action for an account stated”.

With regard to all these points, Mr Cawson submitted that Professor Brunstad was right for the reasons set out in his first and second reports, and Mr Pester submitted that Mr Riley was right for the reasons set out in his report.

In addition, with regard to the individual points put forward by Mr Riley in paragraph 4.12 of his report, Mr Cawson submitted that “the more fundamental point” is that it would be open to Mr Masters to take these individual points on the taking of the account, but that does not mean that, in principle, Porter is not entitled to apply charge backs through any “lack of notice”.

Against this background, Mr Cawson submitted that the determination of the issue as to whether invoices factored to Porter can be charged back involves asking whether Porter is prevented from charging back invoices that remained unpaid for 90 days pursuant to Clause 13.3 of the CFA and holding Mr Masters liable by reference to the same as guarantor due to:

On the face of it, the statement in paragraph 4.7 of Mr Riley’s report that, under the law of Connecticut, “a creditor may not claim something against a guarantor that it had not claimed against the principal debtor” is unqualified. However, Mr Riley accepted in cross-examination that there is no absolute rule to this effect. When asked where the line is drawn between what is and what is not permissible in this regard, Mr Riley said that “I believe the line is drawn in terms of seeking an entirely different component of damage or relief from a guarantor that has not been sought from the principal debtor” and that “A charge back requires an affirmative act on the part of Porter … Cura would have the right to object … So having not exercised or attempted to exercise that right with respect to Cura, that is not in my opinion something that Porter can do against the guarantor”. Subsequently, in answer to a question from the court, Mr Riley agreed that if Porter had sued Cura and it had emerged in those proceedings that the account had been compiled erroneously and had to be re-stated, then, as starting point, Porter would have been entitled to make claims that it had not made before, and, in the event that Cura had no answer to those claims and then did not pay, there would be no problem with Porter making a claim against Mr Masters based on the re-stated account.

With regard to the stay of proceedings against Cura that arose on bankruptcy, Mr Riley accepted that this applied only to proceedings against Cura and did not itself bar remedies against Mr Masters. Mr Riley also accepted that, without violating the stay, Porter could have re-quantified its claim against Cura if it had got the amount of the claim wrong due to some mathematical error. However, he said that “I view charge backs as an entirely separate category”. He explained that this was so on two grounds. First, the decision to make charge backs involves a positive act by Porter with regard to Cura. Mr Riley did not accept that charging back was no more than a book entry which produced a different figure. Second, Cura would have had the right to object on grounds such as delay, abuse of Porter’s discretion to charge back invoices, or on the basis that the customer has a “Credit Problem” (as defined in Clause 13 of the CFA) such that Porter has no entitlement to charge back the invoice pursuant to Clause 13.

I found Mr Riley’s exposition unclear and unconvincing. If Porter would have been entitled to make charge backs if it had emerged in proceedings between Porter and Cura that the account had been compiled erroneously and had to be re-stated, and if the stay of proceedings against Cura that arose on bankruptcy does not bar remedies against Mr Masters, it is hard to see a principled basis for saying that Porter is not entitled to make charge backs if it emerges in proceedings between Porter and Mr Masters that the account has been compiled erroneously and needs to be re-stated. It seems to me that making charge backs is properly to be treated as a legitimate response to a ruling that the account has been compiled erroneously, the thrust of which is to change book entries. However, even if that is wrong, the suggested positive act of Porter in making charge backs is the same in either set of circumstances. I believe that Mr Riley may have approached matters on the basis of an initial impression that it would be wrong for Porter to charge back receivables and to have then looked for reasons as to why that should be so. He said: “I sort of struggled … as I came to understand what Porter was seeking to do … I had to go through the reasons why they couldn’t and largely it’s because they never undertook it with respect to Cura and that’s the starting point”.

I do not have the same misgivings about Professor Brunstad’s evidence in cross-examination, which I have already referred to above. His evidence appeared cogent to me, and he avoided overstatement by accepting the dearth of directly relevant case law.

For these reasons, I take the view that, as a matter of Connecticut law, the line that Mr Riley seeks to draw between making charge backs and re-quantifying a claim on other grounds is untenable. I consider that his views are not supported by the cases to which he referred, whereas the converse is true with regard to Professor Brunstad. For example, the proposition quoted from 60 American Jurisprudence, 2^nd edn, §60 (February 2017 update) that “Once a payment has been applied to an obligation for which a surety or guarantor is bound, such surety or guarantor is discharged to the extent of the payment unless they agree to the change” which is referred to in paragraph 4.7 of Mr Riley’s report, does not, in my view, apply to the facts of the present case, because Mr Masters does not assert that he was discharged in respect of his obligation to make good Cura’s failure to perform the CFA in respect of any of the individual receivables that Porter now seeks to charge back. In all the circumstances, I do not consider that Porter is prevented from charging back invoices on the basis of limitations on the scope of Mr Masters’ liability, or due to a restriction on Porter’s ability to restate the account in a manner that is intended to increase Mr Masters’ liability, or because that constitutes a violation of the automatic stay which applied on Cura’s bankruptcy.

Mr Riley’s lack of notice point is, in essence, that (a) a number of arguments may have been available to Cura to dispute the charge backs which Porter now seeks to make, and (b) if Porter is allowed to make those charge backs now, Mr Masters will be deprived of the opportunity to challenge Porter’s attempts to restate the account by including those charge backs. I consider that, in light of the position adopted by Mr Cawson that it will be open to Mr Masters to raise all these arguments on the taking of the account, the short answer to the point is that allowing Porter to charge back invoices factored to Porter will not deprive Mr Masters of that opportunity. I confess that I have some misgivings about the ramifications of that position, because it is possible to envisage a raft of factual issues arising on the taking of the account (e.g. as to whether some or all of the charge backs that are sought to be made are not allowed under the CFA on one ground or another; and as to the Connecticut law of waiver, limitation of actions, laches and maybe abuse of process). However, I have no reason to doubt that Porter’s position has been carefully thought through, I consider that it does not clearly contradict the way in which the third issue that is now before me has been formulated, and it seems to me to afford Mr Masters all the protection that he needs in respect of the lack of notice arguments that Mr Riley has suggested may be available to be taken as to charge backs.

If I had been required to reach a decision in respect of Professor Brunstad’s answers to Mr Riley’s individual lack of notice points, my provisional view is that Professor Brunstad’s evidence is to be preferred. In particular, I consider that there are real difficulties with the suggestion that Porter has waived the right to charge back receivables. I also consider that there is force in the contention that Mr Riley’s references to the potential availability of limitation of action, laches and abuse of process arguments are made in something of a vacuum. If I had been required, on the material before me, to say whether there is anything of substance in these suggested grounds of challenge to Porter’s entitlement to charge back receivables when re-stating the account, it is more likely than not that I would have given a negative answer to that question. In light of Porter’s position discussed above, however, none of that arises.

That leaves for determination only the arguments relating to estoppel. The first issue under this head is what Connecticut law requires with regard to the first element. Is it, as Professor Brunstad states, some form of unconscionable conduct, such as an intent to deceive or constructive fraud? Or is it, as Mr Riley states, merely words or conduct intended or calculated to induce another to believe in the existence of certain facts?

Novella v Hartford Acc. & Indem. Co., 163 Conn. 522 (1972) is a decision of the Supreme Court of Connecticut. The plaintiff obtained judgment for damages for personal injuries sustained in a motor vehicle accident, and brought a subrogated claim to recover those damages against his employer’s motor insurers. The defendant raised a number of defences based on the wording of the insurance policy, and the jury returned a verdict for the defendant. The plaintiff applied to set aside that verdict and for judgment notwithstanding the verdict, but the trial judge entered a judgment for the defendant. The plaintiff appealed against those rulings, and on other grounds, such as errors with regard to findings of fact made by the trial court and in respect of rulings during the trial. The Supreme Court dismissed the plaintiff’s appeal. The judgment was given by MacDonald J, with whom the other four judges of the Supreme Court agreed.

One of the issues raised by the plaintiff’s appeal in the Novella case was whether the defendant had implicitly waived its right to plead various policy exclusions against the plaintiff. In considering this argument, MacDonald J stated that implied waiver was “somewhat similar to estoppel” and cited extracts from a large number of cases concerning estoppel. The citations from those cases use different formulations. One formulation cited by MacDonald J is that adopted by Mr Riley: “There are two essential elements to an estoppel - the party must do or say something that is intended or calculated to induce another to believe in the existence of certain facts and to act upon the belief, and the other party, influenced thereby, must actually change his position or do some act to his injury which he otherwise would not have done”, although as authority for that proposition Mr Riley cites a later case (Glazer v Dress Barn, Inc., 274 Conn. 33, 60 (2005)). Another formulation cited by MacDonald J is that adopted by Professor Brunstad: “(T)here must generally be some intended deception in the conduct or declarations of the party to be estopped, or such gross negligence on his part as amounts to constructive fraud, by which another has been misled to his injury”.

In fact, the resolution of the appeal in the Novella case did not depend on this element of the doctrine of estoppel. On the contrary, MacDonald J explained that the court could not say that the doctrine of implied waiver or estoppel was present because “We cannot predicate an estoppel in favor of one whose own omission or inadvertence has contributed to the problem in hand” and because estoppel “dictates that the conduct of the insureds as well as that of the defendant be considered” and “The evidence in the case reveals a pattern of inconsistent conduct and statements by the insureds on … material issues” and “The plaintiff, having been subrogated to the position of the insureds, may not prevail on this ground”. The Supreme Court further held that the trial judge had properly left to the jury the issue of whether the plaintiff was prejudiced by the defendant’s conduct, “prejudice being an essential element of estoppel”. Dealing with a complaint raised by the plaintiff on appeal about the charge that was left to the jury, the Supreme Court held that: “… it is apparent that the charge adequately instructed the jury on the principles of estoppel or implied waiver and their application to the case at the bar. The charge stated that estoppel may be based on representations, admissions, silence, acts, omissions to act and misleading conduct.”

In paragraph 25 of his second report, Professor Brunstad referred to two further cases in support of the formulation that he derived from the Novella case. One of these additional cases, Green v Connecticut Disposal Svc., Inc, 62 Conn. App. 83, 91-92, 771 A.2d 137 (2001) is a decision of the Appellate Court of Connecticut and in substance repeats the same statements of principle as were quoted by MacDonald J (in Green,a decision in 1978 is cited as authority for the formulation adopted by Mr Riley, and the Novella case is cited as authority for that adopted by Professor Brunstad). In Green, the Appellate Court ruled that the defendants were estopped from challenging their agreement to arbitrate because they “clearly argued to the court several times that they agreed to arbitrate theirdisputes with the plaintiff. In so doing, their intent was to induce the plaintiff into pursuing an alternative dispute resolution strategy, which he in fact did.” The second of Professor Brunstad’s additional cases, T.D.Bank, N.A. v M.J. Holdings, LLC, 71 A.3d 143 Conn. App. 322, 337-38, 71 A.3d 541 (2013) (quoting another case), is cited by him as authority for the proposition that equitable estoppel applies “where one, by his words or actions, intentionally causes another to believe in the existence of a certain state of things, and thereby induces him to act on that belief, so as injuriously to affect his previous position” and that the doctrine “rests on the misleading conduct of one party to the prejudice of another”.

In cross-examination, Mr Riley described the rehearsal of earlier statements concerning estoppel in the cases on which Professor Brunstad relied as “A boilerplate recitation that did not impact the decision in the case”. Mr Riley suggested that the true statements of principle could be gleaned from other cases, in which discussion of estoppel was more than mere dicta. In Steinegger v Fields, 37 Conn. Supp. 534(1980), for example, the Superior Court of Connecticut, Appellate Session stated: “The notion that an equitable estoppel requires proof of actual intention to mislead or a deceitful purpose has been expressly rejected in this state … Gross negligence has been interpreted as being equivalent to intended deception for the purpose of the doctrine of equitable estoppel” and endorsed the formulation that the first element of estoppel is “that one party must do or say something which is intended or calculated to induce another to believe in the existence of certain facts and to act on that belief”. The court went on to state that the use of the word “calculated” in this formulation would be redundant if the doctrine was meant to encompass only intentional conduct, and to state that the word “calculated” was used in juxtaposition with the word “intended” to include those acts which are (objectively) likely or suited to produce a certain result.

Mr Riley also relied on Town of West Hartford v Rechel, 190 Conn. 114 (1983), a decision of the Supreme Court of Connecticut concerning the extent to which estoppel could be invoked in municipal zoning cases. This case also rehearses the formulation adopted by Mr Riley, and includes the statement in the judgment of the Court that “It is sufficient if actions are taken with an awareness that they would be relied upon; it is not necessary to prove that the actions were intended knowingly to mislead the party claiming estoppel”. Professor Brunstad maintained that this was merely a statement of the law of municipal estoppel. He did not accept that this applied equally or perhaps with even greater force in a private law case. On the contrary, he asserted that (a) municipal estoppel was less restrictive than private law estoppel at the first stage, (b) however, it was then more restrictive than private law estoppel at the next stage, because at that stage it could only be invoked subject to three additional caveats, and (c) misconduct “creeps back in” at the second stage, in part due to the second of those caveats (i.e.“only when the resulting violation has been unjustifiably induced by an agent having authority in such matters”) because he said that means that “there has to be some misconduct by the agent of the municipal authority who has to be unjustified”.

This led on to an interesting debate during the cross-examination of both experts about the relative persuasiveness under Connecticut law of a decision of a court of a superior court, which Professor Brunstad explained is not precedential, compared to dicta in a decision of the Court of Appeal, which is precedential, or a decision of the Supreme Court, which he described as “absolutely precedential”. This was complicated by the fact that the court which decided the Steinegger case no longer exists, although Mr Riley said that its decisions “did have precedential value on those of a superior court”.

However, I do not have to resolve that debate, because I am entirely satisfied that Mr Riley’s evidence as to the elements of estoppel under Connecticut law is to be preferred to that of Professor Brunstad, for the following principal reasons. First, although the cases of Novella and Green represent the high water mark of Professor Brunstad’s analysis, I consider that they do not support his approach either in terms of recitation of principle or in terms of application of the doctrine to the facts: rather, I read them as rehearsing a number of different formulations of the doctrine in a way that suggests that the formulation adopted by Professor Brunstad is not comprehensive and is unduly restrictive, and as applying the doctrine in a broader manner than would accord with that formulation. Second, I consider that Mr Riley’s formulation is supported not only by a proper reading of the Novella and Green cases and the cases cited by Mr Riley but also by the T.D.Bank, N.A. case cited by Professor Brunstad. Third, I reject Professor Brunstad’s evidence concerning the Town of West Hartford case and the distinction that he suggested existed between public authority estoppel cases and private law estoppel cases: his concession that Mr Riley’s formulation was endorsed by the Supreme Court in that case cannot be limited to public authority cases as he asserted, and his suggestion that misconduct “creeps back in” at a later stage in public authority cases is not well founded and cannot be extracted from, or read into, the material caveats.

In the event, the difference between the experts as to the contents of the first element of estoppel does not matter because, even adopting Mr Riley’s formulation, I do not consider that Mr Masters has made out either (a) that Porter did or said anything that was intended or calculated to induce Mr Masters to believe in the existence of certain facts and to act upon that belief, or (b) that Mr Masters, influenced thereby, changed his position or did some act to his injury which he otherwise would not have done.

In this regard, according to paragraph 4.9 of Mr Riley’s report, the material conduct of Porter was not exercising whatever rights Porter had against Cura with respect to charge backs, and the material reliance by Mr Masters is that he “presumably” relied on Porter’s previous statements of account (which did not include charge backs) in formulating his defence and settlement strategy in the current proceedings.

As to the first element, there is nothing, and certainly no evidence, to support the contention that Porter intended to induce any belief that Porter would not exercise its rights under Clause 13 of the CFA. Nor, in my judgment, do any of the materials or arguments that have been deployed before me justify the conclusion that Porter’s acts or omissions, were, viewed objectively, likely to induce that belief.

As to the second element, there is equally nothing, and certainly no evidence, before me to support the contention that Mr Masters was in fact induced either to defend the proceedings as he has done or to adopt whatever strategy towards settlement he may have adopted by reliance on the fact that the running account operated by Porter did not include charge backs. Mr Masters, and his legal advisers, may well not have foreseen that the consequence of raising the arguments which he has deployed in the defence of these proceedings would be that the account would be re-stated in the manner set out in Land 7. However, that is not the same thing as saying that he relied on Porter not seeking to recover charge backs in the manner presumed by Mr Riley. On that basis, one does not even reach the question of whether, if there was such reliance, it would suffice to satisfy the second element, and I prefer not to express any view on that point.

Accordingly, I decide the second preliminary issue before me in favour of Porter.

However, in light of the arguments deployed before me on behalf of Porter, this is subject to the proviso that this ruling does not prevent Mr Masters from raising on the taking of the account all or any of the arguments that Mr Riley has identified as being potentially available under what he says a Connecticut court would term lack of notice.

This issue relates to two classes of fees, namely over-advance fees and renewal fees. Porter’s case is that the over-advance fees arise because the re-writing of the account has the effect that more over-advance fees are to be treated as having become payable. On the other hand, Porter accepts that the renewal fees involve Porter seeking to add to the account fees that it could have charged at the time but did not. Accordingly, Mr Cawson suggested that different considerations apply to these two classes of fees.

There is a substantial, but not complete, overlap between the arguments relating to these fees and those which arise in respect of charge backs. Further, although Mr Riley states that there are legal impediments to Porter’s entitlement to claim any of these fees, he appears to accept that Mr Masters faces greater difficulty in raising arguments in respect of the over-advance fees than Mr Masters faces in respect of the renewal fees.

In his first report, Professor Brunstad expresses the view that, when rewriting the account, there is no obstacle to Porter charging either of these classes of fee. At paragraphs 24-26 of that report, he discusses the doctrine of equitable estoppel to which Mr Winter had referred in Winter 1 (at paragraph 45(2)), refers to cases applying Connecticut law from which he extracts the proposition that “Agreements of this kind are generally enforceable to the extent they are designed to compensate a lender for its losses or expenses and are not punitive in nature”, and states that “The same principles of equitable estoppel and those governing non-waiver clauses discussed in relation to charge backs also apply to [Porter’s] assessment of fees”. At paragraph 27, he states that the same order of allocation should apply to fees as applies to interest and principal (i.e. the creditor may elect to apply payments first to fees and second to principal).

At paragraphs 5.3-5.6 and 5.9, Mr Riley puts forward essentially the same grounds of objection in respect of renewal fees as he advances in the case of charge backs. This includes the statements, with regard to the doctrine of equitable estoppel, that Cura “arguably” changed its position in reliance on Porter’s conduct in not charging renewal fees and that Mr Masters “presumably” relied on Porter’s previous statements of account (which did not include $300,000 in renewal fees) in formulating his defence and settlement strategy in the current proceedings.

At paragraphs 5.7-5.8, Mr Riley adds a further point, namely that, notwithstanding the terms of Clause 28 of the CFA, a Connecticut court “may have” concluded, depending on the evidence offered, that Porter “waived its right to charge additional Facility Fees by failing to charge the same during its relationship with Cura”.

At paragraphs 5.10-5.12, Mr Riley moves on to over-advance fees. At paragraph 5.11, he effectively concedes that the principles of estoppel and waiver do not apply for the reason that the additional over-advance fees are the product of the Court’s directive that Porter re-state the account. At paragraph 5.12, Mr Riley states that, in his view, a Connecticut court would reject Porter’s claims for increased over-advance fees on one or more of the following grounds: (i) by applying the same derivative liability principle as Mr Riley raised in respect of charge backs, (ii) on the basis that neither Cura nor Mr Masters had the opportunity to defend Porter’s attempt to impose such fees, and (iii) “it would be inequitable to allow [Porter] to profit from its misapplication of the Over-Advance Clause set forth in its own agreement … , thereby giving rise to a defense of unclean hands and/or breach of the covenant of good faith and fair dealing implicit in every contract.”

At paragraphs 29-30 and 34-35 of his second report, Professor Brunstad disagrees with Mr Riley’s arguments in respect of the derivative, estoppel, and the lack of notice points for the same reasons as Professor Brunstad says apply in respect of charge backs.

At paragraphs 31-33 of his second report, Professor Brunstad states that the waiver argument raised by Mr Riley in paragraphs 5.7-5.8 is wrong for the following reasons:

At paragraphs 37-38 of his second report, Professor Brunstad disagrees with Mr Riley’s arguments in respect of unclean hands and breach of the covenant of good faith and fair dealing which Professor Brunstad accepts is implicit in every contract for the following reasons:

With regard to all these points, Mr Cawson submitted that Professor Brunstad was right for the reasons set out in his first and second reports, and Mr Pester submitted that Mr Riley was right for the reasons set out in his report.

In addition, Mr Cawson submitted that, on the facts: (a) with regard to the waiver point, (i) a reasonable observer could not properly conclude that Porter’s prior decision not to charge the relevant fees indicated that Porter intended to relinquish its right ever to charge the same in the future, (ii) there is no suggestion that Porter signed a written waiver such as is contemplated by Clause 28 of the CFA, and (iii) there is no express conduct on the part of Porter indicating an intent to waive its contractual rights in spite of the existence of Clause 28, and (b) there is no evidence of dishonesty or of any other conduct or state of mind such as could breathe life into possible defences based on unclean hands or breach of the implied covenant of good faith and fair dealing.

Against this background, Mr Cawson submitted that the determination of the issue as to whether Porter can revisit fees charged and recorded in its accounts gives rise to the following principal sub-issues:

Dealing first with renewal fees, as set out above Mr Riley’s grounds for saying that Porter is not entitled to charge these fees involve in part a repeat invocation of the grounds given by Mr Riley in respect of charge backs. With regard to those grounds, I reject Mr Riley’s approach and rule in favour of Porter for the same reasons as I have given above in relation to charge backs mutatis mutandis. In the result, I reject the derivative liability and equitable estoppel arguments put forward by Mr Riley. However, so far as concerns the individual points referred to by Mr Riley under the heading of lack of notice, which Mr Riley suggests may have resulted in prejudice to Mr Masters by depriving him of the opportunity to assert various defences, it seems to me that it would be inconsistent to adopt a different approach in relation to renewal fees to that which I have set out above in relation to charge backs. Accordingly, and subject to further argument as to why a different approach would be appropriate in this context, I consider that the ruling that I would otherwise make that Porter is entitled to include renewal fees in the re-stated account should be subject to the proviso that this ruling does not prevent Mr Masters from raising on the taking of the account all or any of the following arguments: (i) that notice had not properly been given to Cura under the terms of the CFA; (ii) that Porter’s actions (in seeking to charge renewal fees as it now seeks to do) would have constituted a violation of the automatic stay which applied on Cura’s bankruptcy; (iii) that renewal fees were not allowed under the CFA on various grounds; and (iv) that Porter’s claim was barred by limitation of actions or by laches.

The additional point that Mr Riley makes in relation to renewal fees which he did not make in the same way in relation to charge backs is that a Connecticut court might conclude that Porter waived its right to charge such fees by failing to charge the same during its relationship with Cura. On this point, I accept Professor Brunstad’s evidence as to Connecticut law, and Mr Cawson’s submissions based on that evidence. On Mr Masters’ behalf, it is not suggested that Porter signed a written waiver as contemplated by Clause 28 of the CFA, and no evidence of express conduct on the part of Porter indicating an intent to waive its contractual rights has been identified; and I agree with Mr Cawson that, on the materials before me, there is no basis for saying that a reasonable observer could properly conclude that Porter’s decision not to charge these fees indicated that Porter intended to relinquish its right to charge the same in the future, especially where it was required to re-state the account by decisions of the court.

Because the waiver argument has been expressly raised by Mr Riley and expressly rejected as set out above, I have excluded the argument that Porter waived any right to claim renewal fees from the list of individual points that I consider that Mr Masters should be entitled to raise on the taking of the account in relation to renewal fees.

Turning to over-advance fees, it is common ground that these fees are a corollary of the account being re-stated in accordance with the decisions of Mr Strauss QC and the Court of Appeal. As a starting point, therefore, it seems to me to be an unsurprising consequence of those decisions that Porter should be entitled to revisit these fees. Neither estoppel nor waiver arises in these circumstances. Further, the derivative liability argument suggested by Mr Riley must be rejected for the reasons given above.

On the issues of whether a Connecticut court would consider it inequitable to allow Porter to profit from its own misapplication of the CFA by charging over-advance fees and whether Porter is prevented from recovering such fees either on the basis that Porter has unclean hands or the basis that Porter is manifesting a lack of good faith, I have no hesitation in preferring the evidence of Professor Brunstad to that of Mr Riley. I also accept Mr Cawson’s submission that, even if these legal issues arose in principle, there is no evidence to support their application on the facts. I consider the suggestion that Porter is precluded from claiming over-advance fees on any such grounds sits ill with the acceptance that the doctrines of waiver and estoppel have no application to fees which arise in consequence of the requirement that the account should be re-stated to comply with what the Court has held to be the proper interpretation of the CFA. I found Mr Riley’s evidence under this heading surprising, and its inclusion in his report confirmed me in my overall preference for the evidence of Professor Brunstad.

To the extent that Mr Riley suggested that Porter should not be entitled to claim increased over-advance fees on the basis that Mr Masters has been deprived of various potential defences as a result of Porter not seeking to recover the relevant fees earlier, and subject to further argument as to why a different approach would be appropriate in this context than applies in the context of charge backs, I consider that the ruling that I would otherwise make that Porter is entitled to include over-advance fees in the re-stated account should be subject to the proviso that this ruling does not prevent Mr Masters from raising on the taking of the account any of those potential defences.

So far as concerns the appropriation of payments, I consider that Porter is entitled to apply payments first to the fees that it is entitled to charge when re-stating the account and second to principal, for the same reasons as are set out above in respect of the appropriation of payments between interest on the one hand and principal on the other.

For all these reasons, I decide these issues in favour of Porter, subject to the proviso relating to the lack of notice argument discussed above. I ask Counsel to agree an order which reflects these rulings. I will hear submissions on any points which remain in dispute as to the form of the order, and on any other issues such as costs and permission to appeal, either when judgment is handed down, or at some other convenient date.