The claimant is a factor which purchased the debts of its client Jenks Sales Brokers Limited (referred to hereafter as “the company”) pursuant to an Agreement dated 30 June 2003. The defendants were the directors of the company. Each of them entered into a deed of indemnity with the claimant (dated 2 May 2007 in the case of the first and second defendants and 10 December 2008 in the case of the third defendant). In May 2009 the company entered administration and many debts were disputed. The claimant employed a specialist collection agent and when they had exhausted the collection process after some two years, the administrators of the company acknowledged in writing to the claimant that the company was indebted to the claimant in the sum of £8,924,783.

The claimant commenced these proceedings in April 2012 seeking to recover that sum from the defendants under the deeds of indemnity. The defendants served a Defence in June 2012 denying liability on a number of grounds including that their liability was secondary and not primary and their liability was discharged by material variations to the Agreement, that the claimants had not taken proper steps to collect and enforce the debts and that the claimant had represented to the company that it could continue to notify new debts as approved debts notwithstanding the knowledge that the invoices could not be guaranteed for full payment, so that the claimant is estopped from relying on its strict rights under the Agreement in respect of debts notified after 24 February 2009.

The claimant subsequently served certificates of indebtedness on the defendants originally dated 23 October 2013 which it contends are conclusive against the defendants by virtue of clause 3 of each of the deeds of indemnity. Accordingly on 7 November 2013 the claimant issued this application for summary judgment under CPR Part 24. For reasons set out in more detail below, the claimant no longer pursues a money judgment against any of the defendants at this stage, but it seeks judgment on a number of issues of construction and law on which it contends the defendants have no real prospect of success at trial. Those issues are set out at [18] below.

Before setting out the factual background to the application in more detail, I will set out the terms of the various agreements which are relevant for the purposes of this application.

The Agreement for the Purchase of Debts dated 30 June 2003 between the company and Venture Finance PLC (as the claimant was then known) provided inter alia as follows:

This Agreement is for the Sale by the Client and the Purchase by Venture of all Debts which are in existence at the Commencement Date or which afterwards arise during the currency of this Agreement. On the Commencement Date the Client shall deliver an Offer in respect of each such Debt unpaid at that date. Venture shall only accept such Offer by crediting the value of the Debt, as shown in the Offer, to the Debts Purchased Account, where upon Venture’s ownership of such Debt shall be complete.

WARRANTIES AND UNDERTAKINGS OF THE CLIENT

COMMENCEMENT AND TERMINATION

Special Conditions

This Agreement was a confidential invoice discounting agreement under which the claimant purchased all the present and future debts of the company, which vested automatically in the claimant upon their coming into existence. The claimant did not have to advance funds to the company in respect of all the debts but only those which were approved by it and only when there were sufficient funds in the Current Account. There was a prepayment mechanism under which the claimant would in those circumstances advance a percentage (originally 75% but ultimately 85%) of the value of approved debts notified by the company.

Because under this form of agreement notice of assignment is not given to the debtor customers of the company, it involved a high level of trust between the claimant and its client, the company, which acted as collection agent for the claimant. Accordingly, the Agreement contained the provisions relating to the company’s accounts and records (specifically for present purposes clause 16(3)) and debt-specific and general warranties and undertakings such as clause 18(3)(iv). Furthermore, to a factor under such an agreement, proof of delivery is an essential document to enable any debt to be enforced: hence special condition 12. In the event that there was any dispute with the debtor, clause 10 imposed on the company notification obligations and obligations to issue credit notes promptly. Clause 12 also gave the claimant the sole right to enforce payment and to determine whether any debt should be collected by it or the company and to take or defend proceedings in such manner as it saw fit in its absolute discretion.

The effect of the termination provisions in clause 19 was that, upon a termination event under sub-clause (2), such as occurred here when the company went into administration in May 2009, the claimant was entitled to suspend the facility and demand (i) payment by the company of the outstanding debit balance on the Current Account and (ii) repurchase by the company of debts at whatever price the claimant required.

Each of the deeds of indemnity contained the following provisions:

The business of the company was as importer and distributor of food products. It had a customer base which included a number of the large supermarket chains including Morrisons, ASDA and Tesco. The company purchased large, regular quantities of goods, not necessarily tied to particular orders from its customers. It was often obliged to pay its suppliers before it could receive payment from its customers. Given the scale of purchases it made and the transportation and storage costs it incurred, it needed a financing facility to assist with its cash-flow requirements and it was in those circumstances that the Agreement was entered.

The claimant originally required limited personal guarantees from the then directors, the first and second defendants, but in about May 2007 the company served notice to terminate the Agreement so that the claimant was under pressure to provide better commercial terms. Apparently, indemnities with unlimited liability such as the deeds of indemnity in this case are viewed generally by directors of companies as more attractive than limited guarantees because they are only called upon when the company is in breach, not simply being called upon because a debtor is unable to pay. Accordingly, the first and second defendants signed their deeds of indemnity (which replaced their limited personal guarantees) on 2 May 2007. The third defendant became a director in February 2008 and signed his deed of indemnity on 10 December 2008.

Prior to 2008, the company operated six different distribution outlets and used three different hauliers within the United Kingdom. In the summer of 2008, the company entered into a distribution agreement with Wincanton Group Limited for the latter to provide warehouse and distribution services, using a single distribution centre in Milton Keynes and up-to-date technology. It is the defendants’ case that it was the poor performance by Wincanton of that agreement which led to the financial difficulties which the company suffered. There were over and under deliveries and Wincanton failed to produce a complete set of delivery notes. The company became subject to an increasing number of customer disputes. The claimant was aware of these difficulties and was supportive initially in the efforts to resolve them. It is the defendants’ case that on about 24 February 2009, the claimant actively encouraged the company to notify new debts, notwithstanding that it was aware that such invoices could not be guaranteed full payment. It is that encouragement which is said to give rise to an estoppel or waiver in respect of debts arising after that date. The claimants dispute this, but recognise that that issue cannot be resolved on this summary judgment application.

Ultimately, following an unsuccessful attempt to enter into a company voluntary arrangement in April 2009, the company was placed in administration on 18 May 2009 and subsequently went into liquidation. The evidence of Mr Michael Stock, a portfolio manager at the claimant is that at the date of the administration, the company’s Sales Ledger balance stood at £24,439,997. On 16 June 2009, the claimant wrote to the company making demand under clause 19 of the Agreement for the immediate payment of all Funds in Use together with discount and costs accrued, amounting at that stage to over £13 million. No payment was received at that stage.

The claimant engaged Largo Collections Limited (“Largo”) a specialist collections agency to collect in the outstanding debts. They were incentivised to do so since they operated on a commission only basis. They had access to the company’s records and computer files. They conducted a collections exercise over a period of two years, assisted by the company’s administrators, PWC and by the directors, particularly the second defendant. Nonetheless as PWC said in their letter of 22 September 2011:

The evidence of Mr Stock is that by May 2011, it became apparent that further collaboration with the defendants would be fruitless as the company lacked the necessary documentary evidence to challenge the debtors’ grounds for refusing to pay the debt. At the end of the collections process, £5,529,742.27 had been collected from the company’s debtors, leaving a debit balance of uncollected and disputed invoices, after allowances for bad debt and contra trading, of £18,547,977.38. By their letter of 22 September 2011, the administrators acknowledged that the company is indebted to the claimant in the sum of £8,924,783.34. That sum represents the debit balance on the company’s Current Account.

The defendants dispute strenuously the claimant’s case that every effort had been made to collect unpaid debts. They question whether, despite the fact that Largo have acted in large administrations such as Woolworths and HMV, they have sufficient experience of the food wholesale and retail trade. They rely upon the fact that, at the request of the claimant and Largo, the second defendant undertook a substantial review of disputed invoices and credit claims made by the company’s biggest customers. He contends that he was able to demonstrate, with supporting documentation backing up a detailed spreadsheet, that about half of the disputes he analysed were spurious and should have been rejected. On the sample he analysed, this amounted to some £827,000 of invoices. The third defendant similarly contends that he reviewed 313 debtor disputes from which it was apparent that over half the disputes were unjustified and the debts remained payable.

Mrs Julie Townsend, the Credit Control and Recoveries Manager of the claimant says in her statement that, in respect of the outstanding debtor balances not collected, the claimant was met with compelling challenges to its demands for payment. She reviewed thoroughly the reports prepared by Largo and by the second defendant and says she did not conclude that the debtors’ refusal to pay was unwarranted. She says that when she discussed his review with him in detail in February 2011, he was unable to provide her with or point her to any documentary evidence which adequately supported his position that certain disputes should be rejected.

Obviously, the claimant recognises that there is a major dispute of fact between the parties as to the collections process and its effectiveness, which could not be resolved by the court on a summary judgment application. However, the claimant’s case on this application does not depend on the determination of any such disputes of fact. As already noted above, the claimant also recognises that the defendants have an arguable defence in respect of the period after 24 February 2009. Accordingly, on 23 October 2013, the claimant issued certificates of indebtedness under clause 3 of each of the deeds of indemnity. These certificates erroneously certified the amount due “as at 15 November 2011”, but updated certificates have now been issued certifying the amounts outstanding at 14 May 2014. One certificate certifies that the amount of the losses suffered as a result of breaches of clause 18(3)(iv) of the Agreement [i.e. breach of the warranty that the debtor would accept the goods and the invoice therefor without any dispute or claim] relating to invoices notified before 24 February 2009 is £4,214,248.72. The other certificate certifies that the amount of the losses suffered as a result of breaches of clauses 16(3) and/or 18(3)(iv) of the Agreement [i.e. absence of proofs of delivery] relating to invoices notified before 24 February 2009 is £1,532,478.88.

The claimant pursues its summary judgment application in respect of the following issues (which I have set out in a slightly different order to that in the claimant’s skeleton argument):

Whether upon their true construction, the deeds of indemnity are contracts of indemnity or performance bonds, such that the liability of the defendants is primary rather than secondary so as to prevent them from relying on defences available to the company;

Whether the deeds of indemnity were discharged by subsequent material variations of the Agreement.

Whether the parties agreed on or around 8 December 2008 that the Agreement would be supported by new personal guarantees executed on or around the same date, in substitution for the first and second defendants’ deeds of indemnity.

Whether proofs of delivery constitute “Financial records” within the meaning of the Agreement.

Whether the claimant has failed to collect the debts of the company and/or taken proper steps to enforce the same.

Although the claimant’s case is that the personal guarantees provided by the first and second defendants were supplementary to and not in substitution for their deeds of indemnity, it recognises that the first and second defendants have raised an issue that cannot be resolved at this stage. Accordingly, issue 3 is only pursued against the third defendant who only signed his deed of indemnity on 10 December 2008 and who did not also provide a personal guarantee.

Until the day before the hearing, the claimant sought a money judgment under Part 24 against the third defendant alone, on the basis that, unlike the first and second defendants who had raised the issue referred to in the previous paragraph, he had no defence to the claim for £4,214,248.72, alternatively £1,523,478.88. However, on the day before the hearing, the claimant’s legal advisors discovered for the first time that the claimant had the benefit of some form of credit insurance which had indemnified it. In those circumstances, Mr Mills for the claimant very properly accepted that he could not pursue a money judgment against the third defendant on the basis that the certificate(s) were conclusive, since it may be that, after proper investigation, credit needs to be given against the amount stated in the certificate(s) for the recoveries under the insurance.

However, the parties were agreed that I should decide the issue of principle whether (on the assumption that whatever credit is appropriate has been given) the amount stated in the certificate(s) as relating to the invoices notified before 24 February 2009 is conclusive against the defendants. I have approached issue 5 on that basis.

The first two issues can be considered together. Their context is that the defendants contend that there were a number of variations to the Agreement over time, which were material and which discharged them from the deeds of indemnity pursuant to the so-called rule in Holme v Brunskill (1878) 3 QBD 495. The relevant variations were all extensions to the facility provided by the claimant under the Agreement from time to time. The claimant’s case is that the first and second defendants were aware of and agreed to the variations, which were after all for the benefit of the company, so that the rule does not apply even if the liability under the deeds of indemnity is secondary in nature, and that this defence is not open to the third defendant, since the last of the relevant variations had been agreed before he signed his deed of indemnity.

More fundamentally however, the claimant contends that the liability under each of the deeds of indemnity is primary in nature not secondary, so that the rule in Holme v Brunskill simply does not apply. The claimant refers to and relies upon a passage at [1-13] of Andrews & Millett: The Law of Guarantees (6^th edition):

Mr Mills submits that on its true construction, each of the deeds of indemnity imposes a primary liability upon the relevant defendant. In that context he relied upon a number of the provisions in each deed as pointing to this being a true contract of indemnity rather than merely a guarantee. There are a number of references to indemnification: “agree to indemnify” in clause 1, “agreement to indemnify” in clause 5, the agreement is described as an “Indemnity” in clause 3 and in the Declaration and the relevant defendant is described as the “Indemnifier” in the Declaration and in the execution section of the deed. Of course, Mr Mills accepts that the use of such language is not conclusive, but submits that it indicates that the defendants were taking on more than a secondary liability.

He also relies on the fact that the losses which fall within the scope of the indemnity include matters which have nothing to do with the liability of the company, specifically in clause 1(ii) where the claimant has suffered loss in consequence of any wilful or reckless act or omission of the defendant or (iii) where the defendant is in breach of the warranty given by him in clause 2. He submits that this also points to the liability overall being of a primary nature, rather than some of it being primary and some secondary (i.e. clause 1(ii)) as Mr Gunaratna contended.

Mr Mills placed particular reliance on clause 3 of the deed of indemnity, the so-called conclusive evidence clause. Under that, the defendant is bound by an acknowledgment or admission by the company (such as occurred in the administrators’ letter of 22 September 2011 acknowledging the amount of the indebtedness) as regards his liability under the indemnity and is bound (subject to the issue of manifest error considered below in relation to issue 5) by a certificate signed by a director of the claimant which is conclusive evidence of the amount payable to the claimant by the company or of any losses suffered by the claimant. In other words, submits Mr Mills, the defendant is liable to pay under the indemnity and cannot require the claimant to prove the liability of the company to it. He also points out that the last sentence of the clause provides that the amount certified as payable can include a reasonable estimate of any contingent liability, that is a potential liability of the company to the claimant which the company may or may not be liable to pay in the future, a further strong indication that the defendant’s liability under the deed of indemnity is independent of the liability of the company.

In the context of the conclusive evidence clause, Mr Mills relied on the decision of the Court of Appeal in IIG Capital LLC v Van Der Merwe [2008] EWCA Civ 542; [2008] 2 Lloyd’s Rep 187. That case concerned a contract entered by each of the defendants described as a guarantee, but under which the sureties agreed as principal obligor, not merely as surety, that “if … the Guaranteed Moneys are not paid in full on their due date … it [the guarantor] will immediately upon demand unconditionally pay to the Lender (IIG) the Guaranteed Moneys which have not been so paid”. The definition of Guaranteed Moneys was of moneys and liabilities “due, owing or payable or expressed to be due, owing or payable” to the Lender from or by the Borrower. Clause 4.2 provided that:

The relevant issue in that case was whether the defendants could rely upon defences available to the debtor company, which depended upon whether the contract created primary obligations as an indemnity or secondary obligations as a guarantee. At first instance, Lewison J (as he then was) held that the contract was analogous to a performance bond and that the defendants could not rely upon the company’s defences. That decision was upheld by the Court of Appeal. Waller LJ giving the main judgment recognised at [8] that the Court of Appeal (of which he was a member) in Marubeni Hong Kong and South China Ltd v Government of Mongolia [2005] 2 Lloyd’s Rep 231, had decided that, outside the specific banking context (not applicable in IIG or here), there was a strong presumption against interpretation of a guarantee as a demand bond. At [30] Waller LJ accepted that there was such a strong presumption in the case before the Court of Appeal but held that, on the clear language of the contract, it had been rebutted.

At [31]-[32] he held that:

Mr Mills also relied upon the fact that, in a case where the conclusive evidence clause was in very similar form to that in the present case, Close Invoice Finance Limited v Korpal (unrep. 22 September 2009), Master Fontaine followed and applied IIG in holding that the indemnity there was analogous to a performance bond and precluded the indemnifier from challenging that the company was in breach of the relevant clauses of the debt-factoring agreement. Mr Mills submitted that, as in that case and IIG, the conclusive evidence clause was conclusive as regards both liability and quantum.

The decision in IIG has proved controversial, probably, as Andrews & Millett point out at [1-015], because critics of the case overlook that the result did not turn only on the conclusive evidence clause, but on the fact that the defendants had undertaken to pay on demand unconditionally, not only sums that were due and payable but sums “expressed to be due and payable” and that the reason why Waller LJ considered the conclusive evidence clause put the matter beyond doubt was because that clause was the means by which the sums were expressed to be due.

Mr Gunaratna for the defendants relied upon the decision of Sir William Blackburne in Vossloh AG v Alpha Trains (UK) Limited [2010] EWHC 2443 (Ch); [2011] 2 All ER (Comm) 307 in which the learned judge held that the conclusive evidence clause in that case did not make the relevant contract of guarantee an on demand performance bond. However, I do not consider that that case assists the defendants. Although the learned judge was of the view that the obligations under the guarantee in that case were secondary rather than primary, he considered that even if the guarantee imposed a primary obligation, the critical question, as submitted by Ms Andrews QC, was whether the liability on the guarantor was triggered by demand or whether it was necessary to demonstrate the existence of a breach by the party in the position of the company: see [45]-[46]. In other words, the learned judge recognised that the contract of guarantee might impose primary obligations on the guarantor, even though it was not analogous to a performance bond.

The defendants also relied upon the decision of the Court of Appeal in North Shore Ventures Ltd v Anstead Holdings Inc [2011] EWCA Civ 230; [2012] Ch 31 and specifically the judgment of Sir Andrew Morritt C. In that case (to which I will return in more detail in relation to Issue 5 below) there was a conclusive evidence clause on which the claimant relied to preclude the defendant from arguing that the amount outstanding under the principal contract was less than certified by the claimant’s certificate because the principal contract had been varied. At [48] to [50] the Chancellor considered this issue and would have decided that the clause did not preclude the defendant from relying on the variation, on the basis that the question of the legal effect of the variation was a question of law and the clause was only conclusive as to the “amount” due. However, at [50] he indicated that, in view of a dictum of the majority of the High Court of Australia in Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 at 651 on which Tomlinson LJ relied in his judgment, he preferred to decide the case on the basis that there had been a “manifest error”.

In my judgment, there is nothing in the decision of the Court of Appeal in North Shore which assists the defendants in the present case in their argument that their obligations under the deeds of indemnity were secondary in nature. Quite apart from the fact that what Sir Andrew Morritt C said was clearly obiter, Smith LJ does not address this point in her judgment and Tomlinson LJ at [68]-[69] stated his reluctance to travel down the same path as the Chancellor in the light of Dobbs. In any event, whatever the status of the Chancellor’s judgment, in [46] he states clearly that the guarantors’ obligation was as primary obligors so that the case is of no assistance to the defendants in seeking to establish in the present case that their obligation was secondary in nature. Because this is not a case in which, on analysis, the defendants can demonstrate that the company was not in breach of clauses 16(3) and/or 18(3) of the Agreement for the reasons set out below in relation to Issue 4, it is actually irrelevant whether or not the deeds of indemnity were analogous to performance bonds. All that matters is whether the obligations under the deeds of indemnity are primary in nature as the claimant contends.

Irrespective of the decision of the Court of Appeal in IIG, my firm conclusion in the present case is that the deeds of indemnity impose primary rather than secondary obligations on the defendants. Quite apart from the use of words of indemnification, which, whilst not conclusive, are indicative of assumption of a primary liability, it is clear that clause 3 is imposing a primary liability. The words “I shall be bound by any acknowledgement or admission by the Company and by any judgment in your favour against the Company” indicate that an acknowledgment or admission of liability by the company will suffice to establish liability, even if, on detailed examination, there was no liability. Furthermore, the reference in clause 3 to a reasonable estimate of contingent liability seems to me to demonstrate very clearly that the liability of the defendants under the deeds of indemnity is not dependent upon any conclusive determination of liability of the company to the claimant, a compelling indication that the defendants’ liability under the deeds of indemnity is primary rather than secondary.

Accordingly, in my judgment, on the true construction of the deeds of indemnity, the defendants’ liability in each case is primary, so that the defence based upon the rule in Holme v Brunskill is not available to the defendants. It follows that, irrespective of the factual position which seems to demonstrate clearly that the first and/or second defendants were aware of and consented to the allegedly material variations, the defendants’ case that they were discharged from liability under the deeds of indemnity by virtue of those variations has no real prospect of success at trial and is, bluntly, completely hopeless.

As noted at [20] above, this issue is only pursued against the third defendant. Because his deed of indemnity was not signed until 10 December 2008, the personal guarantees given by the first and second defendants two days earlier cannot discharge him from liability under that deed, whatever their effect on the first and second defendants.

In my judgment, proofs of delivery do fall within the definition of Financial Records in the Agreement because they are “other information pertaining to a Debt”. However, even if this were wrong, they are on any view: “any other records or documents of the Client as Venture may at any time require or any other evidence of the Performance of Contracts of Sale” within the meaning of clause 16(3) of the Agreement. Venture asked for the proofs of delivery and the company could not produce them promptly or at all, so that there was the clearest possible breach of that clause.

Mr Gunaratna’s argument that the obligation to hand over documents as required under clause 16(3) was in some way limited to documents which existed was ingenious but unmeritorious. The short answer to that point is that, under Special Condition 12, the company was required to obtain signed proofs of delivery and retain them for inspection by the claimant. In other words the proofs of delivery should have existed and, if they did not, that was only because the company was in breach of Special Condition 12. The company could not rely upon its own breach to excuse failure to comply with its obligation under clause 16(3).

The defendants have not in fact sought to contend on this application that there was not a breach of clause 18(3)(iv), but any such contention would be hopeless. By that provision the company warranted that in each case the debtor would accept the invoice for the goods without any dispute or claim. Given the extent of the disputed invoices, there was inevitably a breach or more accurately multiple breaches of clause 18(3)(iv). It follows that in relation to both the provisions referred to in clause 1(i) of the deed of indemnity relied upon by the claimant, the liability of the company to the claimant is clearly established.

The defendants’ case is that, on the basis of the evidence of the second and third defendants, they have shown a sufficiently arguable case to go to trial that the claimant did not collect all the outstanding debts that could have been collected and therefore either has failed to mitigate its loss or, if it has suffered a loss, the cause of that loss is not the breach of warranty by the company but the claimant’s decision to bring the collection process to an end in May 2011. The claimant disputes any suggestion that it failed deliberately or otherwise to make full collections against the company’s debtors, but recognises that that is not an issue capable of determination on a summary judgment application. Rather, the claimant contends that, even if factually correct, the defendants’ allegation does not give any of them a defence which has any real prospect of success, essentially for two reasons. First, the claimant contends that any certificate of indebtedness from a director of the claimant will be conclusive of the amount of the indebtedness under clause 3 of the deed of indemnity. Second, the claimant contends that the effect of the terms of the Agreement is that there is no duty to mitigate and the collection of debts is in the claimant’s absolute discretion.

This is not a case in which, on analysis, the defendants can demonstrate that the company was not in breach of clauses 16(3) and/or 18(3)(iv) of the Agreement for the reasons already set out above in relation to issue 4, so that the question of whether, by virtue of clause 3, the acknowledgment by the administrators and/or any certificate of indebtedness issued by the claimant is conclusive in relation to the liability of the company to the claimant, is strictly speaking academic. Nonetheless, if necessary I would conclude that, once the administrators acknowledged the company’s indebtedness to the claimant in their letter of 22 September 2011, that was conclusive as to the company’s liability, subject to any question of “manifest error”, not alleged to arise in this case in relation to liability as opposed to quantum.

In relation to the defendants’ attempt to dispute the irrecoverability of the outstanding invoices and argue that the claimant failed to make all the recoveries it could, the claimant’s answer on this application is that any certificate of indebtedness setting out the amount payable by the relevant defendant issued by a director of the claimant will be conclusive evidence of the amount payable, irrespective of whether the defendants are right that certain of the outstanding debts might have been recovered. The claimant relies upon the definition of “manifest error” by Lewison J at first instance in IIG as one which is: “obvious or easily demonstrable without extensive investigation”. That definition was approved by Waller LJ in the Court of Appeal in that case at [35] and by Sir Andrew Morritt C in North Shore at [51]. Mr Mills submits that, even if the defendants were proved right at the end of a trial, that would require extensive investigation of each outstanding debt and a lengthy trawl through the company’s records. On no view could any error be said to be obvious or easily demonstrable without extensive investigation. Such an extensive investigation of each outstanding debt was precisely what the conclusive evidence clause was designed to prevent.

Mr Gunaratna contended on behalf of the defendants that in circumstances where the defendants could demonstrate, by reference to the reviews they had undertaken, that the claimant had failed to collect in debts where the dispute raised by the debtor was spurious, there was a manifest error in any certificate which included those debts. That conclusion was unaffected by the fact at present they could not demonstrate the error immediately and conclusively, but would require a full investigation at trial. In support of that submission he relied upon the judgments of the majority of the Court of Appeal in North Shore.

Sir Andrew Morritt C dealt with manifest error at [51]-[53] in these terms:

This conclusion imports a condition that there must be a manifest error at the time the certificate is given. That is said to arise from the fact that the certificate is to be conclusive evidence of the amount owing for the time being. In my view that does not follow. It is quite possible for one person to certify the existence of some fact at a particular moment in time which the other person, the recipient of the certificate, cannot verify save after the occurrence of a subsequent event. I can see no reason why the error must be manifest at the time of the certificate. Subsequent investigation shows in this case that the amount certified was that due under the unvaried Loan Agreement when in fact it should have been limited to the amount due under the Loan Agreement as varied; there was a mismatch between the relevant agreement and the certificate.”

Smith LJ reached the same conclusion, albeit with some hesitation, at [60]-[61]:

Tomlinson LJ at [69] decided this point on the narrower basis that there was a manifest error on the face of the certificate, the conclusion Sir Andrew Morritt had also reached at the end of [51]:

Mr Gunaratna relied upon the passages at [53] of Sir Andrew Morritt C’s judgment and [61] of Smith LJ’s judgment to submit that there was a manifest error in any certificate of indebtedness in this case, even though the defendants could not immediately and conclusively demonstrate that error now, but would require an investigation at trial. Accordingly, he submitted that the defendants had an arguable defence that any certificate was not conclusive as to the amount payable by the company to the claimant or as to the amount of the indemnity under the deed of indemnity. He also submitted that, on the evidence before the court, the defendants had a case with a real prospect of success that the claimant had failed to mitigate its loss or, if Mr Mills was right that mitigation played no part in a claim under a contract of indemnity, the claimant had caused its own loss by failing to collect debts which were recoverable. I note that although in his skeleton argument, Mr Gunaratna essentially disavows any case of failure to mitigate and puts his case on the alternative basis of causation, the pleaded defence at [16] of the Defence is of failure to mitigate, as well as a denial of loss caused by reason of the company’s breach.

Mr Gunaratna also contended on behalf of the third defendant that, to the extent that the amount certified against him relates to invoices which were notified prior to his signature of the deed of indemnity on 10 December 2008, the claimant was seeking to impose on the third defendant a retrospective liability. To make the third defendant so liable would require very clear wording in the deed which was absent here. Mr Gunaratna contended that any loss suffered by the claimant was suffered when the debtor customer of the company failed or refused to pay. To the extent that had occurred before 10 December 2008, the third defendant could not be liable to indemnify such loss, since the indemnity only applied to “loss you may suffer” clearly a prospective, not a retrospective, provision.

Attractively though these submissions were put by Mr Gunaratna, I cannot accept them for a number of reasons. To begin with, I consider that what might be described as the wider approach to manifest error in North Shore has to be viewed with some circumspection. The ratio of the decision at least of Sir Andrew Morritt C at [51] and Tomlinson LJ at [69] does appear to have been that, as the judge had found, there was a manifest error on the face of the certificate. In those circumstances, it was strictly unnecessary to go on to decide whether the judge had been right that the certificate had to be manifestly erroneous at the time it was given.

However, whatever Sir Andrew Morritt had in mind by way of a “subsequent event” in [53], it does not seem to me that it can encompass a full blown trial as to which debts might or might not have led to further recovery if the claimants had pursued continuing efforts of collection. Of course, the claimant does not accept that there was any failure to make full collection, pointing to the fact that Largo undertook collection over a two year period and were fully incentivised. The claimant also relies upon Mrs Townsend’s evidence about the defendants’ inability to produce supporting documentation. These disputes about collectability cannot be resolved on a summary judgment application, which is relied upon by the defendants as a reason why the court should not shut them out at this stage. However, what this demonstrates is that to resolve this dispute would require a full trial. I agree with Mr Mills that would render the conclusive evidence clause nugatory. The whole point of that clause is to preclude this sort of dispute as to quantum.

To the extent that any certificate relies upon the absence of proofs of delivery, there is no challenge by the defendants on the evidence to the claimant’s case that they and the company failed to produce proofs of delivery. That breach of clause 16(3) of the Agreement has undoubtedly caused the claimant loss in respect of those invoices where the basis of the dispute was absence of proof of delivery, a matter which is evidently a requirement under the contractual terms of many of the company’s customers, so that the absence of proof of delivery is a complete defence to any claim.

The contention on behalf of the third defendant that the claimant is seeking to make the third defendant liable retrospectively for loss suffered before he signed his deed of indemnity on 10 December 2008 misunderstands when it is that the claimant suffers loss under the Agreement by reason of the company’s breaches of clause 16(3) and/or 18(3)(iv). As Mr Mills pointed out, because during the currency of the Agreement, the Current Account is a running account, where an individual debtor customer disputed and did not pay an invoice, whilst that would give rise to a breach of the warranty in clause 18(3)(iv), that would not at that stage cause the claimant a loss for which it could seek indemnity from the directors. It would simply reduce the amount in the running account, which might in turn lead to the claimant advancing less by way of prepayment on other invoices.

In my judgment Mr Mills is right that the way in which the Current Account operates is as a running account. The correct analysis of the position under an Agreement such as this is that of Millett J (as he then was) in Re Charge Card services Ltd [1987] 1 Ch 150 at 174E-F:

That reasoning applies here. The ultimate balance was only struck when, on 16 June 2009, the claimant exercised its rights under clause 19(3) of the Agreement and made demand on the company for immediate payment of the debit balance on the running account. In my judgment, Mr Mills is correct that it is only at that stage that any loss was suffered by the claimant and only when, thereafter, outstanding invoices proved irrecoverable that the claimant suffered loss in consequence of breach by the company of clause 16(3) and/or 18(3)(iv), all of which post-dated the signature by the third defendant of the deed of indemnity.

The suggestion that the claimant has failed to mitigate its loss or caused its own loss is equally misconceived. Under the Agreement the claimant had purchased and thus owned the entire debt and clause 12(1) made it clear that it was in the claimant’s discretion whether and how to enforce any part of the overall debt. In those circumstances, it cannot be said that the claimant was in breach of the Agreement in failing to collect particular debts. Equally, failure to collect debts does not give rise to a defence of failure to mitigate under a contract of indemnity, as Mr Gunaratna recognised: see the decision of the Court of Appeal in Royscot Commercial Leasing Ltd v Ismail (29 April 1993) and Codemasters Software v Automobile Club de L’Ouest [2009] EWHC 3194 (Ch); [2010] FSR 13 per Warren J at [32]:

Furthermore, in my judgment, the alternative contention that the claimant had caused its own loss by failing to collect all outstanding debts is not a contention which has any real prospect of success. The contention is entirely circular. Since it was in the complete discretion of the claimant whether and how it collected the outstanding debt, and the contention that by not collecting the debt it caused its own loss is no more than a contention of failure to mitigate by another name. I agree with the view expressed by Warren J at [37] of Codemasters (albeit that he did not decide the point) that such a contention is inconsistent with the decision of the Court of Appeal in Royscot, where Hirst LJ, giving the main judgment, accepted that as a matter of law, a party providing an indemnity cannot challenge his obligation to pay under the contract of indemnity which is a claim in debt, by reference to principles relating to the assessment of damages for breach of contract which have no application to debts.

In any event, in circumstances where the company through its administrators has acknowledged the overall indebtedness and a director of the claimant has certified the amount payable under clause 3, in the absence of a manifest error (which I have concluded there was not and the defendants have no real prospect of successfully establishing there was), that clause precludes any argument which the defendants seek to put forward to the effect that the claimant has caused its own loss.

For the reasons set out in this judgment, I do not consider that the defendants have any real prospect of success in any of their defences on the issues on which the claimant has sought summary judgment. The claimant is entitled to summary judgment on those issues. I will hear counsel as to the precise form of Order which is appropriate.