Essentially Different Ltd v Bank of Scotland Plc

This has been the hearing of the issues of liability and causation in respect of a claim by the Claimant, Essentially Different Ltd (“EDL”), against the Defendant, Bank of Scotland plc, arising out of the making of a loan by the Defendant bank to the Claimant, a ‘start-up’ technology company, which owned a licence to exploit the intellectual property in software called SmartBlobz, under the DTI’s Small Firms’ Loan Guarantee Scheme (“the Scheme”). The Scheme was available only to small businesses which were unable to obtain finance on standard commercial terms (for example, because of a lack of security): the DTI guarantees 75% of the loan in event of the borrower’s default.

The loan was to have been made in two tranches, the first of £100,000, which was in fact made on 25 February 2004, and the second of £145,000, which was to be made on 25 May 2004, but which was not made (although paid out on 22 June 2004 into the Claimant’s account with the Defendant, the transaction was reversed on 24 June 2004), and the Defendant refused to pay the second tranche. By two letters dated 24 June and 25 June 2004, the refusal to pay the second tranche was justified by reference to an allegation that there were three conditions precedent to the payment of the second tranche, none of which appeared in the Facility Letter signed by the Claimant on 11 February 2004. The Defendant only now relies on one of the three conditions precedent as justifying its non-payment, and by a proposed amendment put forward on the second day of the hearing, it puts that condition precedent in two alternative ways, as will appear.

The Defendant also subsequently justified the non-payment by reference to its case that there were material misrepresentations or misstatements made by the Claimant, and reliance is placed on two clauses of the Facility Letter as follows:

“6.01.

The Borrower represents and warrants that:

…

(e)

the information given by the Borrower in the Application was and remains true, complete and accurate in all respects and the Borrower is not aware of any such facts or circumstances that have not been disclosed to the Lender which might if disclosed adversely affect the decision of the person considering whether or not to provide finance to the Borrower.

…

10(01). If any of the following events occur, the Lender shall be under no obligation to advance monies hereunder and may by notice to the Borrower require repayment … of all sums outstanding hereunder together with accrued interest thereon and/or cancel any portion of the Facility then undrawn, that is to say, if:

…

(b)

any statement or representation or warranty made by the Borrower in or in connection with the Application of this agreement or any certificate, statement or document delivered or made by the Borrower pursuant hereto proves to have been incorrect or inaccurate when made or would be incorrect or inaccurate if made at any time during the continuation of this agreement.”

The issues before me are:

It was agreed between Counsel, after I raised the matter just prior to the start of the hearing, that the Defendant ought to open, and bore the burden in relation to the first two issues, given that it was accepted that, unless justified, the non-payment of the second tranche constituted a breach of contract. I heard evidence from Mr Andrew Cheetham, who worked for the Defendant in 2003 and 2004 as a Director of Start Ups: he left the Bank in October 2005. He had virtually no recollection of the events, and relied wholly upon the contemporaneous documents which had been shown to him for the purpose of this hearing. He made a statement dated 10 November 2010, and a second statement dated 14 February 2011, just prior to the start of the hearing, which latter statement formed the basis of the proposed amendment, to which I shall refer. The second witness for the Defendant was Mr George Somerville, who remains an associate Director of the Bank. In 2003 and 2004 he was a Senior Relationship Manager at the Bank. However he had virtually no contact with the Claimant, and was really only able to speak in relation to the decision not to make payment of the second tranche. The two witnesses for the Claimant company, Ms Jo Connelly and Mr Matthew Bate, the two directors, respectively Chief Executive Officer and Chief Technical Officer, for obvious reasons had retained much more of a recollection of the events of 2003 and 2004, which impacted so heavily upon the Claimant’s business, although they too were affected by the fact that the events now being spoken of were some 7 years ago.

This is pleaded as follows by Mr Giles Wheeler, on the Defendant’s behalf, in paragraph 10(4) of the Defendant’s Counterclaim:

“(a)

On 19 November 2003, Mr Mark Laming of the Credit Sanctioning department of the Bank informed Mr Cheetham that a loan to the Company of £245,000 had been approved, subject to the condition that the loan be in two tranches, the first being of £100,000 and the second to be drawn on the provision of evidence of contracts sufficient to service the full £245,000 debt after the costs of the business had been met.

(b)

Mr Cheetham informed Ms Connelly of the Company that the loan had been approved subject to the said condition (“the Condition”) on or about 20 November 2003.

(c)

On behalf of the Company, Ms Connelly then informed Mr Cheetham that the company would agree to accept the loan subject to the Condition.”

In paragraph 27 of the pleading, rectification of the Facility Letter was sought “in order that it should reflect the full terms of the Agreement and/or the common intention of the parties (as expressed on or about 20 November 2003 and unchanged thereafter) that the second tranche of the loan would be advanced by the Bank only upon the Condition being fulfilled.”

The issue arises in the following way. As the date for the payment of the second tranche (25 May 2004) approached, Ms Connelly sent an email on 5 May to ask Mr Somerville how the next drawdown would take place, and, after an acknowledgement of the same day from Mr Somerville, nothing was then heard until 19 May, when she received a telephone call from someone at the Bank, but who did not give his name, saying that there were terms in the Facility Letter that had not been complied with, although he did not know what they were: that the Claimant had failed to supply the documents that it should have done in order to receive the second tranche: and that he would revert with more detail. Ms Connelly and Mr Bate checked the Facility Letter, but were unable to find any outstanding requirements or conditions, and Ms Connelly then tried to obtain a response from the Bank by telephone on a number of occasions. On 25 May, which is the day that the second tranche was supposed to have been paid, having not had any further communication from the bank, Mr Bate wrote a letter expressing his irritation, surprise and concern:

“Having been briefed by … Jo Connelly it has come to my attention that [the Defendant] has imposed conditions restricting the drawdown of the second tranche … on the basis that we are unable to supply documents that were not requested or mentioned in the contracted agreement.

I would like to express my surprise and concern that a condition to the drawdown has apparently been stipulated at the last minute without my prior knowledge and without any form of prior agreement … We have now reached the appointed drawdown date without any member of [the Bank’s] staff contacting us.

I have searched at great length through out records of the transaction and can find no mention of any requirement for as yet unsupplied documentation.”

After acknowledgment by the Bank on 9 June, and an intervening reference by the Claimant to the Financial Ombudsman on 20 June, the second tranche of £145,000 was paid into the Defendant’s bank account on 22 June, but was then re-debited, and on 24 June, more than seven weeks after Ms Connelly’s initial email to Mr Somerville, and more than four weeks after the second drawdown was due, the Bank, by a Mr Fulham, described as Relationship Manager, but unknown to the Claimant, wrote as follows:

“I write to advise that the 2^nd Tranche of the Small Firms Loan Guarantee Scheme was disbursed to your current account on the 22^nd June prematurely. We have today corrected this error.

In order for us to release the 2^nd Tranche, it is a requirement of the facility letter that the undernoted conditions are satisfied:

1.

The Bank requires sight and satisfaction that the company can comfortable [sic] service the full £245,000 lending. Can you arrange to forward confirmation of contracts to support the cash flows.

2.

An ongoing requirement is the receipt of Quarterly Management Accounts. To date, we have not received these. Please make arrangements for the latest quarterly Managements Accounts to be sent to this office.

3.

There was a condition subsequent in the facility letter, which stipulates … an assignation [sic] of life policy on the lives of Jo Connelly and Matthew Bate to the sum of £245,000 over the life of the loan (i.e. 60 months). This issue remains outstanding.

The points raised above are conditions, which must be satisfied prior to the release of the 2^nd Tranche of your Small Firms Loan.”

Mr Bate had an irate and unsatisfactory conversation with Mr Somerville on the following day, which ended with Mr Somerville saying that he would be writing to them that day to give the reasons why the Bank would not be paying the second tranche. This letter did not refer to the Facility Letter. Leaving aside the reference to the second and third conditions, which were materially repeated in Mr Somerville’s letter from Mr Fulham’s letter quoted above, the substance of it was as follows:

“Following discussions with both yourself and the Bank’s legal advisers, I write to confirm the requirements to allow release of the second tranche of the loan. These conditions are

•

the business to satisfy [the] Bank that sufficient contracts have been achieved to service the full loan after all costs of the business have been met.”

More correspondence, not surprisingly, ensued, and a somewhat unhelpful letter was sent by the Defendant’s then solicitors to the Claimant’s then solicitors dated 16 July 2004 saying that the Facility Letter “must be read in conjunction with the Terms and Conditions”. After yet more correspondence, their position changed, by letter dated 13 August 2004, which, while repeating all three conditions (though acknowledging that management accounting information had been supplied), now asserted:

“Our clients have passed us a copy of the attached email dated 20 November from Andrew Cheetham to Jo Connelly. You will note that it is stated in that email that “the remainder to be drawn on evidence of contracts sufficient to service £245k debt after all costs of the business are met”. Your clients were therefore advised in writing of the condition at the time of agreement of the facility.”

I shall refer later to the content of that email. They followed this with a letter dated 17 August 2004, stating:

“Our clients’ position is that it was understood and agreed before the facility letter was issued that the terms and conditions now in dispute would form part of the terms and conditions of loan … if necessary, our clients will raise an action for rectification of the facility letter …”

The Claimant’s solicitors replied, by letter dated 18 August 2004:

“To avoid [the Bank] unnecessarily issuing rectification proceedings, please provide us by return with full evidence clearly demonstrating that the parties agreed for the alleged conditions 1-3 to be included within the Facility Letter … In the absence of such evidence, we strongly consider that any attempt by [the Bank] to rectify the Facility Letter … will be unsuccessful.”

It seems that the Bank, faced with not only the solicitor’s correspondence, but the Claimant’s complaint to the Financial Ombudsman, appointed a Manager of Corporate Customer Care, a Ms Elaine Webster, to carry out an investigation, and she appears to have contacted Mr Cheetham and obtained his input: apparently at the material time Mr Cheetham did have access to his emails, but not to his entire file. The central part of the letter of 28 September 2004, in which Ms Webster set out the Bank’s position, is in paragraph 17 (“Webster para 17”):

“The conditions mentioned in [Mr Somerville’s] letter of 25 June were the same conditions that had been discussed with you at meetings with Andrew Cheetham. There is no doubt in Andrew’s mind that these conditions were discussed. The conditions which are disputed were imposed by the Bank’s Credit Sanctioning Committee in response to your representations that you did not feel you would be able to meet the conditions imposed in its initial approval of 29 October 2003. The condition on the ability to service the debt is included in Andrew’s email to Jo Connelly dated 20 November 2003. Andrew has a clear recollection of the condition being discussed with Jo Connelly. Indeed he recalls that Jo Connelly was delighted with the condition because she considered it easily achievable.”

The last relevant piece of correspondence is dated 17 November 2004, sent by the Bank to the Financial Ombudsman, which reads as follows:

“Andrew Cheetham contacted Jo Connelly to advise that the facility had been granted subject to conditions. He explained the conditions to Jo Connelly. Andrew Cheetham has a clear recollection that Jo Connelly was delighted with them, since she thought they were easily achievable. The following day Andrew Cheetham emailed Jo Connelly saying:

“His actual wording –remainder to be drawn in evidence of contracts sufficient to service £245k after all costs of business are met …”

The phrase “his actual wording” is consistent with an earlier discussion with Jo Connelly about the fact that the Credit Sanctioning Committee had agreed to make the facility available subject to the condition about turnover, albeit that there was uncertainty about what the level should be.”

In their witness statements, both Ms Connelly and Mr Bate deny that there was such an agreement. There was a meeting between them and Mr Cheetham on 25 November 2003, when the Scheme Application Form was signed. Mr Cheetham, in his first witness statement, served on 10 November 2010, said as follows:

“11.

… I think it is very likely that Mark Laming and I would … have discussed the wording of a revised condition which was acceptable to Mark Laming and which I though EDL would accept. Therefore on 19 November 2003 Mark Laming wrote to me stating the wording of the second condition … This wording was that the second tranche of the loan was to be drawn down only upon the prior provision of evidence of contracts won by EDL which were sufficient to service the complete debt of £245,000 after all costs of business are met.

12.

On a date after EDL’s rejection of the first condition, but before 29 November 2003, I verbally conveyed the details of the second condition to Jo Connelly of EDL …

13.

… it is my recollection that the condition was discussed specifically with Jo Connelly of EDL as being a condition that had to be satisfied before the second tranche of the advance was released.”

On 14 February, a week before the hearing, the Defendant served a second witness statement from Mr Cheetham for which permission had to be given on the first day of the hearing. In paragraph 36 he now said:

“I understand that, notwithstanding EDL’s allegation that I did not discuss the second condition with EDL and that EDL did not receive my email of 20 November 2003, which I wholly refute, EDL claim that the condition was “unworkable” as “no figure had been mentioned” (at paragraph 67 of the witness statement of Jo Connelly). Again, my recollection is very different to that of Jo Connelly, I did discuss a figure with both Jo Connelly and Matthew Bate. I recall discussing a figure on the telephone before I sent my email on 20 November 2003, and I certainly discussed the figure at the meeting on 25 November 2003. The value of the contracts which would be required to demonstrate to the Bank that EDL had won sufficient business, in the three months from the first tranche of the loan being drawn down, such that it could be confident of being able to service its debt, as discussed and agreed with Jo Connelly and Matthew Bate as being achievable, was £120,000.”

On the first day of the hearing, I enquired of Mr Wheeler as to the position in relation to what was stated in that last sentence, and as a result he formulated an amendment to paragraph 10(4) of the Defence and Counterclaim set out in paragraph 6 above. The nub of it was in the amendment to subparagraph (b), to which the following sentence was added:

“The said approval was subject to the condition (“the Condition”) that the second tranche of the loan would be available for drawdown only on the Company providing evidence that it had entered into contracts:

(i)

with a value to the Company of £125,000 or more:

(ii)

alternatively of sufficient value to service the full £245,000 debt after the costs of the business had been met.”

An additional subparagraph (d) was added as follows:

“The Condition was further discussed between Mr Cheetham and Ms Connelly and Mr Bate of the Company at a meeting between them on 25 November 2003. At the meeting, Ms Connelly and Mr Bate reiterated the agreement of the Company (alternatively agreed on behalf of the Company) to the drawdown of the Second Tranche of the loan being subject to the Condition.”

The rectification claim in paragraph 27 is then amended so as to seek to include, in the alternative, either the term set out in 10(4)(b)(i) above or 10(4)(b)(ii), as in paragraph 18 above.

On the last day of the hearing, a proposed amendment to the Reply and Defence to Counterclaim was put forward by Mr Jonathan Price of Counsel, on behalf of the Claimant, denying that either of the conditions contended for was mistakenly omitted from the Facility Letter, and in the alternative pleading with respect to the second alternative that it is “in any event void for uncertainty in that it fails to specify sufficiently the matters to be taken into account in calculating the ‘value’ of the contracts to be evidenced.”

It is common ground, so far as rectification is concerned, that the principles are most lucidly set out in the judgment of Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560 at paragraphs 33 and 34, namely:

“33.

The party seeking rectification must show that:

(1)

the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;

(2)

there was an outward expression of accord;

(3)

the intention continued at the time of the execution of the instrument sought to be rectified;

(4)

by mistake the instrument did not reflect that common intention.

34.

I would add the following points derived from the authorities:

(1)

The standard of proof required if the court is to order rectification is the ordinary standard of the balance of probabilities.

"But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties' intention displayed by the instrument itself": Thomas Bates and Sons Ltd v Wyndham's (Lingerie) Ltd [1981] 1 WLR 505 at page 521 per Brightman LJ.

(2)

Whilst it must be shown what was the common intention, the exact form of words in which the common intention is to be expressed is immaterial if in substance and in detail the common intention can be ascertained: Cooperative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 at page 54, per Dillon LJ, with whom Kerr and Eveleigh LJJ agreed.

(3)

The fact that a party intends a particular form of words in the mistaken belief that it is achieving his intention does not prevent the court giving effect to the true common intention: see Centremoor at page 55 A-B and Re Butlin's Settlement Trusts [1976] Ch 251 at page 260 per Brightman J.”

As set out in paragraph 1 above, the Scheme is available to borrowers who have failed to obtain lending in the ordinary way, and the Claimant had indeed unsuccessfully sought such funding in respect of its new product SmartBlobz. Mr Cheetham was approached on exactly that basis via an intermediary, Wired Sussex, as being potentially eligible for the Scheme, and Ms Connelly and Mr Bate met with him on two occasions on 4 September and 29 September, at both of which meetings they supplied to him documentation about the Claimant, to which I shall return. Whereas the Claimant was seeking the maximum amount available under the Scheme, £250,000, and in one tranche, Mr Cheetham suggested at the meeting on 29 September that the application would be more likely to succeed if the Claimant sought it in two tranches, and asked for slightly less than the maximum, and he suggested a split of £145,000 for the first tranche, followed by £100,000 three months later. Subsequent to the second meeting, Ms Connelly sent an email to Mr Cheetham dated 1 October 2003. In material part it stated as follows:

“The purpose of the loan and timing I would request is as follows:

Tranche one initially £145,000 followed by £100,000 in three months. To be repaid over 10 years at a fixed rate with 12 months payment holiday. The payment holiday is requested due to the fact that we are selling enterprise level products which have a typically long sales cycle with an average of around 6 months. The fixed rate would be preferable to enable early repayment.”

She then set out what in general terms the Claimant company intended to do with the money to be supplied by way of the first and second tranches. The Claimant’s case is that they were never subsequently told that, in the event, the order of the tranches was to be reversed, with £100,000 in the first tranche and £145,000 in the second, and only discovered this when they received the draft of the Facility Letter, after very considerable delay, as will appear, in February.

There was very considerable contact between the Claimant and Mr Cheetham over this period. Mr Cheetham was what was in banking terms called a “hunter”, namely out in the field finding potential borrowers, and in due course there would be a relationship manager back at Head Office (subsequently Mr Somerville), called the “farmer”. Mr Cheetham made it clear, and the Claimant understood, that he did not have authority to finalise the loan, but he gave them every encouragement to believe that one would be forthcoming in accordance with the terms discussed at the meeting of 29 September. They had no other communication from anyone else at the Bank during the negotiation period. He told them that the Bank’s Credit Department (in fact, as is now clear, Mr Laming the Credit Risk Manager) was insisting that there be a condition of provision to the Bank by the Claimant of a Letter of Intent confirming one sales order of approximately £1m. When Mr Cheetham informed Mr Bate and Ms Connelly of this by telephone, on or about 29 October, they stated to him that such a condition would be impossible. They pointed out to him that, according to their financial projections, which they had supplied to him, EDL did not expect to be cash positive until the fourth quarter of the first year, and that this was why they had requested a payment holiday. If EDL had such contracts, they would have been able to borrow on a normal basis, and would not have been eligible for the Scheme. Mr Cheetham told them that he understood, and that it was a mistake, and they were not to worry and he would sort it out.

There then follow the significant documents which have formed the basis of the dispute between the parties as to the existence of the alleged condition(s) precedent:

As discussed in paragraph 16 above, Mr Bate signed the Scheme application form on 25 November 2003 at the meeting referred to. Mr Cheetham wrote an email, dated 4 December 2003, asking the Claimant whether they had got a quotation for the insurance – life and business. The Business Banking Division recorded, in a document never supplied to the Claimant, that there were three Conditions Precedent to Drawdown, two of which are immaterial and the third “Life cover charged to the bank within two months of drawdown”. There was however no record of the alleged condition(s) precedent in issue before me.

There were unfortunately delays, for which the Defendant subsequently apologised, in providing first the documentation and then the money. Ms Connelly wrote an email of 21 January 2004 stating: “Do you have any news yet? We are at a critical point here in that we have three customers awaiting demonstrations … and as we were expecting to have the money through by early Jan and have not made any other arrangements for temporary funding I would really appreciate it if you could find out anything you can”. There was a further chaser of 29 January 2004. Eventually the Facility Letter, containing the terms set out in paragraph 3 above, but none of the conditions set out in Mr Fulham’s letter of 24 June, or Mr Somerville’s letter of 25 June 2004 (nor either of the two alternative conditions precedent relied upon in this action) was produced and signed on 11 February.

There is no evidence as to how, on the Defendant’s case, such terms, if agreed, came to be left out of the Facility Letter, which is said to have been prepared “in Scotland”. The ‘payment holiday’ of 12 months, so far as repayment of capital is concerned, was included: repayment by way of 48 equal monthly instalments of £5104.17 was to commence 12 months after initial drawdown.

The first tranche was paid on 25 February 2004. The ‘hunter’ Mr Cheetham, then disappeared from the scene, and the ‘farmer’ Mr Somerville, took over responsibility as the Relationship Manager, although he does not appear to have had much contact with the Claimant until shortly before the due date of the second tranche, as set out in paragraph 8 above. On Mr Cheetham’s handover from hunter to farmer, which appears to have taken place prior to the first drawdown, Mr Cheetham prepared a handwritten file note, which read, in material part:

“Profile: Computer Software: High Potential and dealing with large company’s [sic[. Process of selling system call [sic] SmartBlobz.

Customer contact: Jo Connery [sic].

Deal: SFLG [the Scheme]: £100k now £145k in approx 3 months subject to evidence (see File).”

This seems to have accompanied a standard form “Hunter/Farmer handover – sign off sheet”.

The Claimant’s case is that there were no conditions precedent, whether as alleged or at all, agreed in November 2003 and/or left out of the Facility Letter. Both Ms Connelly and Mr Bate have been consistent in this position since the suggestion (as to the three conditions precedent, only one now being pursued) in May/June 2004, in their witness statements and in evidence before me. The Defendant relies on the contemporaneous documents, to which I shall refer, and, so far as he has any independent recollection, upon Mr Cheetham. Mr Laming, who is suggested to have agreed to the £120,000, and/or imposed or insisted upon the ‘sufficient to service £245k debt”, has not been called.

Mr Wheeler, who has been both persuasive and persistent on the Defendant’s behalf, relies on the following aspects from which inferences can be drawn in favour of the Defendant:

I turn first to deal with the now pleaded alternative case as to the condition that there would be, by the time of the second drawdown, contracts entered into by the Claimant with a value of £120,000 or more. I rely, assisted by Mr Price for the Claimant, upon the following factors:

In his oral evidence he said that the £120,000 figure had been agreed with Ms Connelly in the telephone conversation on 20 November, and agreed again at the meeting with Ms Connelly and Mr Bate on 25 November. It is noteworthy that, in paragraph 14 of his first witness statement, he was in “no doubt that the second condition was discussed with Jo Connelly following EDL’s representation to me that it rejected the first condition … I discussed the second condition with Jo Connelly on or before 20 November 2003, and I confirmed the wording of the second condition in writing by my email of 20 November 2003”. This was of course at a time when he was not raising the issue of £120,000, but it is significant that he uses the consistent word “discussed”, rather than “agreed”, and no reference was then made to agreement at the 25 November meeting. In paragraph 35 of his second witness statement, just prior to the passage which I have set out in paragraph 17 above, he refers to discussing the condition on the telephone on or before 20 November 2003 and discussing it specifically again on 25 November 2003. Then in paragraph 36 he reiterates recalling “discussing a figure on the telephone … and I certainly discussed the figure at the meeting of 25 November 2003”. It was only at the end of paragraph 36 that he states firmly (without specific reference to the occasion of it) that the figure of £120,000 was “discussed and agreed”. Although Webster para 17 does not refer to the £120,000, Mr Cheetham professed to see no difference between the content of that paragraph and his present evidence, and he confirmed the content of Webster para 17. The significant aspect of that paragraph is the assertion that “Jo Connelly was delighted with the condition because she considered it easily achievable”.

I have already indicated in paragraph 33(iii) above my conclusion that there was no discussion or agreement as to the £120,000 in the telephone conversation on 20 November. The above narrative is also a wholly unpromising basis for any suggestion that it was agreed at the meeting on 25 November. In the event, I am entirely satisfied that it was not agreed. I see no basis upon which Ms Connelly or Mr Bate could have agreed the condition, not to speak of being delighted with it. They had already supplied to Mr Cheetham, among the substantial amount of documentation which they had provided, cash flow statements showing that, in the first quarter of the year following on from the injection of cash (by way of the first tranche) by the Defendant, the Claimant expected to receive a total income of £25,000. A 12-month payment holiday had been agreed. Even if Mr Cheetham had not read, or had forgotten, that fact, it is totally clear that Mr Bate and Ms Connelly would have had it well in mind. In those circumstances, it seems to me wholly unlikely that they would have agreed to, or been delighted to accept, a condition that they would have within that first quarter entered into contracts to the value of £120,000. Insofar as there is a suggestion that the Defendant would not have been looking for income of £120,000 prior to 25 May 2004, but simply to a contract to that value, it is plain that the basis upon which it was intended that these SmartBlobz contracts would operate was by way of substantial upfront payment; and, in any event, the £25,000 itself seems to have been a projection by reference not to a new SmartBlobz contract, but to receipts from existing or projected contracts using the less profitable, and much less innovative, and already existing, “SmartBlobz Data” software. In any event, I do not accept that the condition would have been accepted without considerable discussion and reluctance.

For all the reasons above set out, I am entirely satisfied that this belated suggestion of the £120,000 condition precedent, with the consequent late amendment of the pleading, is not supportable and not established on the evidence. Although I gave leave to amend the pleading during the course of closing submissions, without prejudice to the Claimant’s case that the proposed pleading was unarguable, I am satisfied it fails.

I turn to the originally pleaded case, by reference to “sufficient contracts … achieved to service the full loan after all costs of the business have been met”. This, of course, is the proposed condition which, together with the other two, was expressed in the letters of 24 and 25 June 2004, though in slightly differing terms (Mr Fulham referred to “sight and satisfaction that the company can comfortable service the full £245,000 lending”). This too was not in the Facility Letter, nor in Mr Cheetham’s handwritten handover note, and, in the agreed transcript of Mr Somerville’s conversation with Mr Bate on 25 June 2004, referred to in paragraph 10 above, Mr Somerville did not say that it had been agreed, but simply that “it would not be in the Bank’s or the Company’s interest to deliver the tranche when they did not have documentary evidence that the loan could be repaid.”

In the Defendant’s solicitor’s letters of 16 July and 13 August, no indication was given as to when and how it was said that this condition was agreed. I have already indicated my conclusions in relation to the contested email of 20 November 2003 that, although it may well have been a contemporaneous email, it does not indicate that there had, by that time, been an agreement in relation to the alleged £120,000, and I reach the same conclusion that there was also not, by that time, agreement in relation to any condition apparently being required by Mr Laming, whose “actual wording” was simply being passed on. When Elaine Webster had her investigation, and her discussion with Mr Cheetham which emerged into Webster para 17, it is this condition with which it was suggested that “Jo Connelly was delighted … because she considered it easily achievable”.

In those circumstances, I must consider whether I am satisfied that Ms Connelly did agree to such a condition, whether delightedly or otherwise:

Effectively at my initiative, Mr Price backed the expressed view of Ms Connelly in paragraph 67 of her witness statement that such a condition (without the agreement of a figure) would have been “unworkable”, by putting forward, in the course of closing submissions, a proposed amendment to the Reply and Defence to Counterclaim, asserting that the suggested condition was void for uncertainty. Mr Price also adopted the passage in the Defendant’s letter to the Financial Ombudsman dated 17 November 2004, set out in paragraph 15 above, in which the Bank referred to “uncertainty about what the level should be”, at least without the alleged subsequent agreement of the £120,000, which of course had not surfaced at that stage. I asked Mr Somerville, when he was in the witness box, what would have happened in June 2004 if the Claimant had accepted that there was such condition as he had set out in his letter of 25 June (i.e. without the £120,000), and he indicated that he felt sure that, with some discussion, the parties could have reached a compromise: but that of course is not the issue, indeed it almost suggests that there is simply an agreement to agree.

I am not persuaded that the suggested condition is so riddled with uncertainty that it is void. Although it leaves unwarranted discretion to the Defendant, it seems to me that it is capable of discussion, and calculation, and that, with one or two implied terms as to what is meant by the value of the contract and what is meant by the “costs of business”, it could have been rendered workable. But I conclude that it is wholly unlikely that such a condition would have been accepted by Ms Connelly and Mr Bate at the meeting of 25 November 2003, at least without considerable further discussion. They had rejected the earlier £1m condition, and it seems to me likely that they would have rejected this new condition, had it been explained in any detail, without either a figure being agreed, or at any rate a much more workable formula being arrived at. Ms Connelly says, in paragraph 70 of her witness statement, that, had there been such condition, “we would not have known in advance if we were going to get the second tranche”. One could add that they would also not have known, without full discussion, the basis upon which the condition would be calculated.

In those circumstances I return to Mr Wheeler’s submissions, set out in paragraph 32 above (by reference to subparagraph numbers):

The Defendant’s claim is for rectification of the Facility Letter so as to incorporate a missing condition precedent. It is noteworthy that (as set out in paragraph 12 above) the Defendant’s solicitor threatened an action for rectification of the Facility Letter on 17 August 2004, and on the next day the Claimant’s solicitor responded asking for full evidence in support of such a course. Only with the issue of the Defence and Counterclaim did that ensue, and now, by the Amended Defence and Counterclaim, rectification is sought to incorporate one of two possible conditions precedent, which I suspect is not a usual, or a favourable, platform for such already unusual course: I have set out in paragraph 22 above the principles for rectification, which does fall to be resolved by reference to the balance of probabilities. But, as Peter Gibson LJ made clear, given that it is an unusual course to question and go behind a written document, the Courts will ordinarily require such balance of probabilities to be satisfied by “convincing proof”. I have already indicated that, so far as one of the two alternatives suggested is concerned, I am quite satisfied that the £120,000 was never agreed. As for the alternative suggestion of “sufficient contracts to service the full loan”, this may have been discussed at the meeting on 25 November 2003. Mr Cheetham is unable to give any oral evidence about it, and the furthest he can go is as recounted to Elaine Webster in September 2004. For Mr Bate and Ms Connelly it is also a long time ago, and, although they are quite clear that they did not agree, and would never have agreed, such a term, they too cannot be expected to recall what was said seven years ago. It seems to me that Mr Laming’s new condition may well have been raised by Mr Cheetham, but in a somewhat half-hearted way, and in the context of his manifest enthusiasm to go ahead with the deal under the Scheme. I do not believe there can possibly have been any discussion as to how they thought the condition, if applied, would work, not least because I consider that, within moments, his suggestions floated to Mr Laming in his internal email of 17 November would have been shot down. I have to be satisfied that the alleged condition precedent was agreed or at any rate (for the purpose of rectification) that it was and remained the common intention of the Claimant and Defendant from 25 November 2003 until the Facility Letter, and beyond, that the second tranche would be subject to a condition precedent such as is alleged. I am not so satisfied.

I must have in mind at all times the precise terms of Clauses 6.01(e) and 10.01(b), set out in paragraph 3 above. Mr Wheeler does not rely specifically on non-disclosure, but rather on the incorrectness of statements made, when made, or their having become incorrect subsequently, and not corrected.

Before considering the issues, I set out a number of matters which have informed my conclusions:

Mr Wheeler summarises his case that the information supplied by the Claimant to Mr Cheetham was inaccurate by reference to the following misrepresentations by the Claimant – as set out above, these can only reliably be drawn, not from any oral evidence of Mr Cheetham, but from the content of the documents he was given:

All these representations, which Mr Wheeler submits can be spelt out from the documents, to which I shall now turn, were, he submits, incorrect. In those documents he points to one or two statements which he submits to be actually false. But, generally, and notably in the Schedule which he prepared for the purposes of his closing submissions, by reference to each document upon which he relied he drew a distinction between what I have referred to in paragraph 35 above as ‘SmartBlobz Data’, which the Claimant was already to an extent using and marketing (which he calls “limited”), and the new concept of SmartBlobz itself, which he calls “ongoing” or “full”, and he submits that each of the identified comments upon which he alights in those documents is false in indicating that “EDL was in a position to undertake, and in fact had undertaken, business of both the limited (data) and ongoing (full) varieties”.

Before I consider those documents, two factors which I consider to be significant must be set out:

I turn then to the statements in the documents relied upon by Mr Wheeler:

Again Mr Wheeler’s diligence was marked, but particularly in the absence of any convincing evidence from Mr Cheetham, I am not satisfied that any of the statements amounted to breaches of the two clauses, or that Mr Cheetham was not kept up with the developments so that, insofar as some of the statements did not remain accurate, there was no relevant non-disclosure of that fact. With regard to the four general representations, which he seeks to derive from such evidence as was given by Mr Cheetham and from the documents, as set out in paragraph 41 above:

Accordingly, I dismiss the Defendant’s counterclaim for rectification and for mis-statement/misrepresentation, and conclude that the Defendant was not entitled to withhold the second tranche. Of course the Defendant is entitled to repayment of the first tranche, together with appropriate interest, but such sum as is otherwise due to the Defendant will fall to be set off against the sum, if any, which the Claimant can establish is due in respect of the Defendant’s failure to advance the second tranche.

The parties have asked me, not to assess what loss, if any, the Claimant suffered as a result of the Defendant’s breach, but simply to determine, if I can, whether I can be satisfied that there is no loss recoverable by the Claimant, by reference to the issue set out in paragraph 4(iii) above. That is the Claimant’s case, namely that, as a result of the refusal by the Bank to pay over the second tranche, the Claimant was not able to pursue the Smartblobz project. It is quite apparent that the project may, despite all the hopes and expectations, not have come to anything at all, and all the possible prospects may have fallen away, but that is not for me to decide: what is for me to decide is whether, as a result of the Defendant’s breach, the Claimant was unable to pursue the project.

Although the Defendant did not cross-examine either Ms Connelly or Mr Bate on the basis that the project had no prospect of success, inevitably, for the purpose of the Claimant’s misrepresentation case, there was a good deal of concentration on the unlikelihood of its success, and I have already indicated my conclusion, having heard Ms Connelly in particular, that she was over-optimistic as to the prospects of success for the project. But what Mr Wheeler submits, for the purposes of this issue, is as follows:

Ms Connelly and Mr Bate would start their story earlier. They point out that there had been the substantial delays up to February 2004, which had meant that they had not at that stage been able to get on with new connectors and demonstrations, and that, in February, once the first tranche came in, they had effectively to restart, not least because, during the interim period, they had lost their programmer, and had to employ a new one. Mr Bate describes how, when the first tranche arrived, the Claimant became “very busy, working on the new demonstration, connectors, and new computer service and infrastructure and the redesign and reorganisation of plans to account for delays and the lower than expected amount of the first tranche” (paragraph 30 of his witness statement). Mr Bate was criticised for the fact that, upon the non-arrival of the second tranche, “on 27 May … we had no option but to suspend all non-essential activities in the Company to try and conserve the funds we had. We had, of course, to tell our customers, partners and programmer that there may be a slight delay with our demonstration, but that we would keep them informed” (paragraph 35 of his witness statement), but it is to be noted that he reversed that suspension, and employed a new office assistant, once the second tranche was, after all, paid in to the bank account on 22 June; and then that payment was reversed on 24 June. As Mr Price pointed out, Mr Bate was not materially challenged as to his account of what happened thereafter, namely his attempts to keep InterSystems interested, but without being able to spend any money, even though Mr Payne of InterSystems noted, at the beginning of September 2004, that it was “good to hear that you are on the move again”: and his attempt to interest relevant senior executives at a conference in Atlanta on 4 December without having any funding for a proper demonstration of the technology.

It is quite plain that the failure to supply the second tranche really knocked the stuffing out of, in particular, the driving technological force on the Claimant’s side, Mr Bate. The Claimant needed money to finish off its development and secure the sales prospects which it plainly had, and that is why they had approached the Defendant and waited since September 2003 for the promised funding. The real question is whether Mr Wheeler is right that, given that the Claimant had £35,000 odd in the bank account, the fact that the project could not go forward is probative of the fact that it would not have gone forward in any event, even had £145,000 been forthcoming in accordance with the contract. I am persuaded as to the following:

With some degree of doubt, and inevitably without the disclosure and expert evidence which would be likely to be forthcoming if and when there were a full-blooded dispute as to quantum, I am unable to say, as the Defendant invites me to do, that the Claimant suffered no loss as a result of the failure by the Defendant to provide the second tranche, and in particular I conclude that, had the Bank paid the second tranche, the Claimant would have gone on exploiting SmartBlobz and pursuing the potential prospects, in particular Sun Services, Alcatel and InterSystems, who were still available to them in May 2004, when the second tranche should have been paid: and that, without the £145,000, the Claimant was unable to do so. I therefore resolve the issue in favour of the Claimant, but I have already stated that I reach no conclusion, and am not asked to reach any conclusion, as to whether, had the Claimant continued to pursue the project, as I am satisfied it would have done, it would have reaped any reward from it. That question will have to be resolved on another day if the parties are unable, notwithstanding the efforts which I very much hope will now be taken, to reach a compromise.