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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Fairfax Gerrard Holdings Ltd.& Ors v Capital Bank Plc [2006] EWHC 3439 (Comm) (10 October 2006) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2006/3439.html Cite as: [2006] EWHC 3439 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		Trial 9th And 10th October 2006

Judge Mackie QC :

1. This is a dispute between two lenders about the ownership of an industrial machine following the insolvency of a customer. The dispute involves construction of a Finance Agreement, issues under Section 25 of the Sale of Goods Act 1979 and Section 2(1) of the Factors Act 1889 and a question about the assessment of damages for conversion.

The Background

2. The First Claimant Fairfax Gerrard Holdings Limited ("FGH") is in the business of trade finance with its subsidiaries which include Fairfax Gerrard International Limited ("FGI") and Assetline Limited ("Assetline"). I will refer to this group of companies, of which the managing director was Mr David Ross as "FG". FG typically provide finance by purchasing goods for a customer and passing title to him only when repaid. The client pays fees and other charges for the service which is particularly sought by traders who do not have the financial resources or creditworthiness to borrow in other ways. One customer was Dimond Machinery Limited ("Dimond") which later changed its name to Dimond International Limited. During a brief existence Dimond offered automatic foil stamping die cutting machines for sale under its brand name, purchasing these as and when required, from manufacturers in China. The Managing Director of Dimond was Mr Howard Rudge. He was assisted by an employee Mr Ian Walmsley and by the Company Secretary Mr Anthony Mitchell who spent little time in the business. Dimond had an existing customer Carrprint Limited ("Carrprint") to whom it had hoped to sell another machine the D1050SS for some £175,000. Dimond had previously used FG to finance purchases from its suppliers and proposed to do so again when purchasing a machine from China, for some US$ 140,000 to meet Carrprint's Order. Carrprint had itself financed purchases of equipment in the past through Yorkshire Bank but in this case was to do so through the Defendant, Capital Bank Limited ("Capital"). Dimond had introduced Carrprint to Capital. Although the case was supported by a substantial number of documents and the evidence I refer to below, some potentially valuable witnesses were unavailable. Mr Barry Laker, an experienced executive, who conducted negotiations for FG sadly died at a young age. Mr Chris Etherington the person primarily involved at Capital has left the company and his colleague Mr Brian Denhim has retired.

Order Placed – July 1999

3. On 7^th July Carrprint placed a Purchase Order on Dimond for the Machine at a price of £175,000 plus VAT. On the same day Dimond placed an order on its supplier in China at the price of US$ 140,000 CIF Southampton. On 10^th July Dimond invoiced Carrprint for the deposit and VAT. On 9^th July FG entered into a Finance Agreement with Dimond ("the Finance Agreement") which is at the heart of the dispute.

The Finance Agreement

4. The parties agree that the Finance Agreement is an unsatisfactory and poorly drafted document. It takes the form of a three page letter signed by Mr Laker and by Mr Ross on FGH notepaper addressed to Mr Rudge of Dimond. The document has to be read as a whole and in its context but omitting that which is irrelevant, for example because it deals with two other machines not part of this case, its effect is broadly as follows.
5. The agreement starts by confirming "details" of three transactions and conversations and adds "please sign below to accept the following proposal, which shall become binding upon you if we implement as proposed". A "proposition" is then set out "in summary" in twelve numbered paragraphs. Paragraph 2 recites that Dimond had sold machines to Carrprint and has received signed Purchase Orders. Paragraph 5 records that Carrprint has agreed to pay a deposit of £61,250 plus VAT of £30,625 in full and these are to be paid to the account of Assetline as security of payment. Paragraph 6 provides as follows:-

"We shall open Letters of Credit on your suppliers in our name and sell the machines to you with reservation of title and subject to the terms of our standard Trust Receipt. You will invoice your customers with the debt assigned to us with the following assignment notice printed on them:

"This invoice has been assigned to Assetline Limited, 45 – 47 Station Road Gerrards Cross Buckinghamshire SL9 8ES – Tel: 01753 887955 Fax: 01753 882634 to whom payment must be made and whose receipt shall be the only valid discharge. Only Assetline Limited may alter this arrangement."

6. By paragraphs 8 and 9 "you" shall bear the costs of delivery to site and commissioning for each machine and "you" (at this point presumably Mr Rudge and Mr Walmsley ) shall jointly and severally guarantee our exposure. Paragraph 11 records that £10,000 is currently outstanding to FG from Dimond for an earlier machine also intended for sale to Carrprint "payment of this balance shall be taken from proceeds from these three machines".
7. The Finance Agreement next has a section in which "we" require eight listed items prior to opening any letter of credit. Some of these requirements, to open Bills of Exchange, to provide cross guarantees, personal guarantee and evidence from an independent party that a particular machine is still at Dimonds premises, have the word "received" in brackets after them.
8. Finally there is a section setting out four numbered provisions of what are "also conditions of this agreement".
9. Paragraph 2 of these states "the Letters of Credit shall be opened by our subsidiary, Fairfax Gerrard International Limited. The sales transaction under this agreement shall be operated by our subsidiary Assetline Limited". Paragraph 3 states "we shall retain title to the machines until we have been repaid in full". Paragraph 4 contains eight bullet points setting out Fairfax Gerrard's charges.
10. The parties disagree about the effect of the Finance Agreement. I will deal with this in more detail later but it is important to bear in mind the essence of each side's case when considering what happened next. Their pleaded case is this. The Claimants say that it was an express term of the Finance Agreement that FGI would purchase the Machine and sell it to Assetline, that Assetline would sell it to Dimond subject to a reservation of title clause and Dimond would then sell on to Carrprint, the debt thereby created being automatically assigned to Assetline. There is an alternative claim that there was an implied term, necessary for business efficacy, that in carrying out their obligations under the Finance Agreement both FGI and Assetline would act as agent for FGH. The Defendants plead that the Agreement was between FGH and Dimond,and that it was an express or implied term that Dimond had authority to pass property in the Machine to Carrprint notwithstanding the purported reservation of title provision, this being either obvious or necessary to give business efficacy to the sub-purchase between Dimond and Carrprint.

Facts agreed or not greatly in dispute – 14^th July 1999 onwards

11. On 14^th July Dimond signed a request for the opening of a documentary Letter of Credit which it addressed to FGH "and subsidiary companies". The request related to the Machine but at that point it was still due to go not to Carrprint but to another Dimond customer, the Print Factory.
12. On the same day FGI asked a bank to open a LC on its behalf for the benefit of the supplier in China. This was opened the following day in terms which obliged the supplier to invoice FGI for the Machine. The supplier raised that invoice and the Machine was shipped from Shanghai on 30th July.
13. The disclosure given by Capital has been late and unsatisfactory but it seems clear that by 20^th August 1999 Mr Etherington was trying to secure a deal by which Capital would buy the Machine from Dimond and hire it to Carrprint. The e-mails and other exchanges between 20^th August and 2^nd September when Capital approved the transaction reveal the traditional tension between Mr Etherington's efforts as a salesman to have the deal accepted and the concerns of his colleagues in the credit department at Capital, that the transactions be financially sound. Mr Etherington was in close competition with Yorkshire Bank and this may have led him to overestimate the security and value of Dimond as a client. Mr Etherington visited Dimond, with someone from a bank competing for the same deal. On 31^st August Dimond sent him a letter recording, amongst other things, that copies of various documents had been sent to him in that day's post by Howard Rudge including "copy of our stocking finance agreement on this machine with Assetline". The transaction was approved at Capital; Mr Etherington e-mailed his colleagues on 1^st September "deal now fully approved. All documentation should be with you today. Pls pay out asap". On 2^nd September Carrprint signed its lease agreement. On 6^th September a meeting appears to have taken place at Dimond's office attended by, amongst others Mr Etherington, Mr Denhim, Mr Walmsley and Mr Mitchell. The evidence of Mr Walmsley was that it was obvious from discussions at that meeting that Mr Etherington had received the letter of 31^st August and was also aware of the Assetline finance arrangements. Mr Mitchell had a similar but very faint recollection. On 9^th September the Co-op Bank released the shipping documents against which they had paid on the LC and debited FGI's account.
14. On 13^th September Mr Laker wrote to Mr Rudge enclosing a Trust Receipt addressed to FGH. This was to replace the previous Trust Receipt signed and returned by Mr Rudge when the goods had been intended for The Print Factory not Carrprint. Mr Rudge did not sign and return this second Trust Receipt and Capital attach significance to the absence of chasing up by FGH. On 15^th September the Machine arrived at Southampton and on the 17^th Assetline sent its invoice to Dimond. On 10^th September Fairfax Gerrard received £61,250 into their account from Dimond and asked whether this was the deposit from Carrprint. It is not clear that Dimond ever answered the question but that sum is shown in a spreadsheet of Assetline , recording its dealings with Dimond as at 14^th October 1999, as being credited to the Carrprint transaction. That spreadsheet shows an exposure of £109,257.94 which the deposit reduces to £48,007.94. By 1^st November Dimond had received the Machine and it was delivered to Carrprint on the 10^th. It is clear from a letter sent by Mr Laker on Assetline paper to Mr Rudge on 19^th November that he had appropriated the deposit of £61,250 to the Carrprint transaction.
15. Soon afterwards Dimond's financial difficulties became severe and FGH demanded repayment of all sums due under various contracts, some £302,430.84, on 13^th December 1999. In October 2000 Dimond went into creditors voluntary liquidation and it was dissolved two years later. On 10^th October 2001 Mr Ross wrote on behalf of FG to Capital asserting title to the Machine. On 16^th October the bank replied stating that its initial response was that by entering into an arrangement with Dimond Assetline had released title.

Evidence of the Witnesses

16. This trial was unusual in that about three quarters of the two day trial was occupied by legal submission and the evidence was brief. I have referred to the evidence of Mr Walmsley and Mr Mitchell about the meeting which they recall taking place on 6^th September. Both witnesses were straightforward and doing their best to recall these events for the assistance of the Court. They were in 2005 recalling a meeting in September 1999 which would have seemed of no great significance at the time. I accept Mr Walmsley's general recollection that Mr Etherington was aware of the involvement of Assetline because of how he spoke and conducted himself at the meeting. Mr Mitchell had understandable difficulty in recollecting anything about the meeting. I therefore, with no criticism of him, place no weight on his evidence.
17. Mr Ross produced a helpful witness statement in which he explained the normal practice of his company and their previous dealings with Dimond. He said that they were used to leasing companies being involved in providing finance for purchases from FG customers. He said that these companies apply due diligence in procedures which he expects to be rigorous for higher value machines. He said that his companies are used to the leasing company demanding proof of title by having copies of supplier invoices and sometimes proof of payment, for the purpose not only of credit control but also money laundering checks. He had assumed that the purchasers of the Machine would have finance from Yorkshire Bank who knew Fairfax Gerrard from previous transactions. Mr Ross said that he had spoken to Mr Etherington as recently as October 2004. Mr Etherington had limited recall of the transaction but was apparently aware that Dimond had previously been financed by Fairfax Gerrard but had not asked "the question" regarding this Machine. Mr Ross recalled that FG had about 7 previous deals with Dimond. A trust receipt mechanism was normal but he could not say invariable. He was perplexed, when he later considered it more carefully, by the way Mr Laker had set out the letter.
18. Mrs Paula Bagnall gave evidence for the Defendant and helped to produce the records still available. Ms Bagnall had however no involvement in or recollection of the relevant events.
19. Against this factual background I turn to the agreed List of Issues. This lists five main issues and numerous sub issues which helpfully set out all the requirements of each defence. I address each main issue but only those sub issues which remain relevant and I run some of these together.

Construction of the Finance Agreement

20. Mr Mills on behalf of the Claimants submits that the meaning of the Finance Agreement is as follows. FGH entered into the Finance Agreement on behalf of itself and as agent for FGI and Assetline. FGI would purchase the machine and transfer title to Assetline. Assetline would sell the machine to Dimond subject to a reservation of title clause. Dimond would sell the machine to Carrprint and the debt thereby created would automatically be assigned to Assetline. The Finance Agreement gave no authority to Dimond to pass property in the machine to a third party. Assetline would sell the machine to Dimond subject to the terms of a standard Trust Receipt by which Dimond would eventually be given authority to sell the machine. Dimond acknowledge that the Claimants would have title at all times until Assetline had been paid in full. The Agreement should be construed by reference to its commercial purpose and to the well known authorities which discourage a semantic approach particularly when a contract is poorly drafted. The Claimants say that these drafting problems are overcome by having all three potential Claimants in the action. It is apparent that FGH entered into the Agreement for itself and also for FGI and Assetline, wholly owned subsidiaries; an approach consistent with that adopted by Mr Justice Jack in the unreported case of P & O Ferrymasters Limited v Fairfax Gerrard Holdings Limited, 22 May 2001. (In a slightly different context the Judge held that Assetline should be substituted for Fairfax as a party to that agreement or that the same result would be achieved by novation or estoppel by convention.) The frequent use of the word "we" is consistent with that interpretation. Once this is established the pattern by which FGI opens the LC but then transfers the property to Assetline so that the sale can take place to Dimond, makes sense. Although the retention of title provision uses "we" that is a reference to Assetline, the company obliged to carry out the sale. That assignment from FGI to Assetline was satisfied by the Agreement and there was no requirement for some subsequent assignment to take place. Far from the Agreement permitting Dimond to pass property to a third party purchaser it provides only that Assetline will sell to Dimond subject to a reservation of title and the terms of a standard Trust Receipt. That Trust Receipt, not the Agreement would grant authority to Dimond to sell. The acknowledgement that "we" would have title in the Machine until Assetline had been paid in full is a reference to whichever Claimant had title at a particular time.
21. Capital rejects that submission drawing attention to the conceded inconsistencies of the wording and emphasising that these are transactions to be implemented in the future. Capital say that the Finance Agreement is an agreement only between FGH and Dimond with a simple retention of title clause which has no effect in respect of a sub-sale. There is no warrant for implying a term to permit a sub-sale because this would defeat the commercial objective which was to enable Dimond to sell the machine to its customer. FG knew that Dimond bought and sold this machinery and that it had already sold the Machine to Carrprint. The Finance Agreement envisaged that Dimond would sell the Machine and had authority to do so (see clauses 5, 6 and 8) and the reference in Paragraph 6 of the Finance Agreement to the terms of the standard Trust Receipt expressly authorised Dimond to sell in the ordinary course of business subject to preservation of the proceeds of sale in a separate bank account. When one looks at the standard Trust Receipt, Clause 3 provides "we may sell the Goods in the ordinary course of our business subject to the other provisions of this Trust Receipt". It is significant that FG did nothing to chase up its request to Dimond to sign and return the replacement Trust Receipt. The Finance Agreement is one of "futurity" addressing in future terms what is to happen as and when the parties implement rights and obligations by taking particular steps.
22. Mr Casement submits that the element of what he calls "futurity" is confirmed by the Particulars of Claim which refer to the express terms of the Agreement in the conditional of "would". The Agreement requires that something else has to be done for these commitments to be implemented. Assetline's invoice of 17^th September 1999 is the only support for the claim that that company itself had bought the Machine and was selling it to Dimond but it is silent about retention of title. Capital also submit that in the absence of any restriction on Dimond's authority to sell the machine to a finance company nominated by Carrprint it had implied authority to sell. Without that authority to sub-sell Dimond would not be able to fulfil the sales to their customers which were the whole commercial purpose of the transactions.

Decision on construction

23. In my judgment the approach of the Claimants is correct and that this becomes obvious when one considers, as of course one must, the position and presumed intention of the two contracting parties. I bear in mind the well known authorities on the approach to contractual construction cited by the parties. I have set out the background above. Dimond needed finance for an apparently profitable transaction and was not an obviously attractive borrower. FG was willing to lend but with a structure that protected it by concentrating on the value of the Machine not the creditworthiness of its customer. Neither party could proceed without the security of the Finance Agreement. Once that was in place Dimond could make binding commitments to its supplier and its customer. FG would be able to lend in the knowledge that its subsidiaries FGI and then Assetline would own the Machine and once Dimond sold to Carrprint would have the debt assigned to it. I recognise that with a poorly drafted document and Counsel as skilled as Mr Casement a contrary argument can be made but in my judgment it is misconceived. Neither of the contracting parties would it seems to me either have expected or permitted the "futurity" for which the Defendant argues. Clause 6 of the "proposition" in the Finance Agreement is explicit and the structure confirmed by the other provisions in particular clause 5 of the same section and paragraphs 2 and 3 of the "also conditions". To borrow from another area of the law of contract, if either party had been asked at the time of the contract whether, should it be necessary, it was agreed that FGH could or should act through its agents FGI and Assetline or some other subsidiary the answer would have been "of course".
24. Similarly I reject the argument that the expression in summary clause 6 "subject to the terms of our standard Trust Receipt" has the effect of immediately authorising Dimond to sell goods in the ordinary course of the business to anyone thereby in effect overriding the express terms of "also condition" 3. Clause 3 prevails over that reference to the Trust Receipt terms and it is improbable that the parties contemplated that the later step of signing a Trust Receipt would be dispensed with. I read Clause 6 to refer to the trust receipt regime as a whole. If FG did not chase up its request for a signature and the return of the Trust Receipt, there could have been valid reasons for doing so consistent with their contractual approach. This last factor is also of course irrelevant to the question of construction as is the fact that the parties to the contract seem to have had no misunderstanding about the meaning of their contract.

Implied Authority

25. The question whether a term is to be implied that Dimond had authority to sell to Capital is of course one of construction but I address an aspect of it separately since Mr Casement has relied on two important cases, Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676; Four Point Garage Ltd v Carter [1985] 3 All ER 12.( See also McCormack "Reservation of Title" 2^nd Edn page 73 to 77 and 168 to 170.) Roskill LJ points out in a well known passage in his judgment in Romalpa that it was common ground that "some implication had to be made into (the Reservation of Title clause) ….. since otherwise the Defendants could not lawfully sell the unmanufactured goods in their possession, at least until they were paid for – for, as already pointed out, they were the Plaintiffs' and not the Defendants' goods. To hold otherwise, as I think both parties accepted, would be to stultify the whole business purpose of these transactions."
26. In Four Point Garage Simon Brown J, when dealing with this aspect of the case held that this principle applied as much where the original product itself was being sold as when material was sold for incorporation within a manufacturing process. He also applied a passage in Benjamin's Sale of Goods "that the buyer has the implied authority of the seller to sell the goods in the ordinary course of business and to confer a good title on sub-purchases" to the particular facts he was considering. He concludes "that the form of Romalpa clause applying here is insufficient, as between commercial garages, to preclude the proper implication of a term authorising the garage which buys from reselling the goods if that is in fact in the ordinary course of its business and if it is unaware if the selling garage believes otherwise."
27. Implication of authority in this sense is only an aspect of the implication of contractual terms generally. The implication of terms depends of course upon the surrounding facts and circumstances. A term will not be implied to contradict an express provision. In my judgment the Finance Agreement which, in addition to a reservation of title clause contains detailed provisions for assignment to Assetline and a Trust Receipt regime to apply when title is transferred, is inconsistent with the implication of a term of the kind claimed by the Defendant. There is no need to imply such a term to make the structure work.

Mercantile Agent

28. Capital claims that Dimond was a mercantile agent in possession of the Machine with the consent of the Claimants and passed good title to it under Section 2 of the Factors Act 1889.
29. Section 2(1) provides:-

"Where a mercantile agent is, with the consent of the owner, in possession of goods or of the documents of title to goods, any sale, pledge, or other disposition of the goods, made by him when acting in the ordinary course of business of a mercantile agent, shall, subject to the provisions of this Act, be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the person taking under the disposition acts in good faith and has not at the time of the disposition notice that the person making the disposition has not authority to make the same."

30. A "mercantile agent" means "a mercantile agent having in the customary course of his business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods".
31. There are four relevant questions all of which arise at the point between 27^th August 1999 and 2^nd September 1999 when Dimond purported to sell the Machine to Capital. My conclusion on the fourth question makes the first two questions unnecessary for my decision and I address some complex issues only briefly and out of courtesy to the skilled argument of Counsel.

(a) Was Dimond a mercantile agent on the date of sale to Capital? Capital says that the Machine was retained by the supplier Assetline, Dimond had authority to effect a sale of it and was obliged to hold the proceeds of sale on trust for the supplier and to account for these. In determining whether Dimond was a mercantile agent the law looks at the substance of the arrangement. Capital relies on cases cited in paragraphs 7-029 to 7-052 in the sixth edition of Benjamin. ( There are no material changes to the equivalent passages in the seventh edition.) The Claimants contend that there is no evidence that Dimond carried out any business other than selling machines on its own behalf as opposed to being agent for a principal. Further under the Finance Agreement Dimond was agreeing to purchase from Assetline and then sell on as principal. As the debt created on the sale by Dimond was assigned to Assetline it is clear that the parties did not intend that Dimond would sell on behalf of any Claimant.

Benjamin makes it clear that a party may be a mercantile agent even though his general occupation is as an independent dealer in the goods or if he is authorised to act as a mercantile agent on only one occasion. It is a matter of substance. The definition is given broad application as one sees from Lloyds Bank Limited v Bank of America National Trust and Savings Association [1938] 2KB147 where a pledgor to whom shipping documents were released in return for Trust Receipt in order to enable him to sell the goods was held to be a mercantile agent. The Court of Appeal in Lloyds was clear that a person in possession of documents under a trust receipt would be the position of a mercantile agent – as one sees from the Judgment of Sir Wilfred Greene. The implications of that broad view were clear to the Court – see the Judgment of McKinnon LJ. The reasoning which the Court applied to documents applies, as I see it, equally to goods. It follows that if there had been a valid Trust Receipt Dimond would have been a mercantile agent on the relevant date.

(b) Assuming that Dimond was a mercantile agent, was it in possession of the Machine at the date it purported to sell to Capital? The Claimants point out that Dimond purported to sell on 2^nd September but did not obtain possession until the Machine arrived some time between 15^th and 24^th September. Capital responds that Dimond had constructive, not actual, possession, which in law is enough. Capital relies on observations in Mr Ross' witness statement that Dimond would take possession of the Machine under the terms of the standard Trust Receipt. They cite City Fur Manufacturing Company v Freebond (Brokers) London Ltd [1937] 1 All ER 799 in which it was held that "possession" for the purpose of Section 25(1) of the Sale of Goods Act 1893 included possession by another person on behalf of the person whose possession is material. That proposition is however explicit in Section 1(2) of the Factors Act. But the position of Dimond was not like that of its equivalent in City Fur where a third party had possession of goods which could be returned at any time upon the party paying what was due. At the time of the purported sale to Capital no payment under the LC had been made on behalf of FGI and no documents of title sent to it. That did not happen until 9^th September. Before Dimond was to take possession FGI had to clear the Machine through Customs for delivery and give up the Bill of Lading to take possession. The entitlement to possession was that of FGI. Dimond's right to delivery of the Machine could only have arisen under the authority of the Trust Receipt contemplated by the Finance Agreement. But the necessary document was not returned by Dimond when asked to do so. If the contractual structure had taken its course, Dimond would have come into constructive possession but had not done so by 2^nd September. It follows that Dimond was not in possession at the relevant date for the purposes of Section 2. When it did take possession it was as bailee and not mercantile agent. If the sale had taken place after Dimond had taken or acquired the right to take possession of the Machine and the Trust Receipt document had been completed the position would have been different. That is a recognised peril of this form of finance. As it turned out Dimond did not sell the Machine in the ordinary course of business as a mercantile agent.

(c) Did Dimond sell the Machine in the ordinary course of business as a mercantile agent? As Mr Casement puts it, did it act as any other mercantile agent would have done? The short answer on the facts of this case is that this requirement would have been met if the first and second had been.

(d) Did Capital enter into the transaction in good faith and without notice of Dimond's lack of authority? Capital says that it did not know of any limitation on Dimond's authority to effect a sale. Capital submits that there is no evidence that the "stocking Finance Agreement" referred to in Mr Walmsley's letter to Mr Etherington of 31^st August was ever seen by Capital. They also say that if Mr Walmsley and Mr Mitchell are right and Mr Etherington was aware of the Claimant's involvement in general terms this was not sufficient. In any event, Capital submits, Mr Walmsley and Mr Mitchell were unreliable witnesses.

(e) Mr Mills submits correctly that it is for Capital to prove good faith and absence of notice and that the test is an objective one – would the circumstances known to the buyer lead him to conclude, as a reasonable man, that the relevant fact existed ? It is common ground that the principles are correctly stated in Forsyth International (UK) Limited v Silver Shipping Co Limited [1993] 2 Lloyds Rep 268 at 279 – so actual knowledge is irrelevant to the question of notice. FG rely on the letter of the 31^st August 1999 and the evidence available of the meeting. They submit that whether or not Mr Etherington read or passed on the Agreement he could not, without Capital receiving notice, turn a blind eye to its contents. They point out that while criticism is made of the witnesses they have called to give evidence of the meeting in September Capital made no attempt to call those who attended on its behalf.

There is no suggestion of an absence of good faith but I consider that Capital has failed to show that it did not have notice of the rights of FG. There was understandably given the low amounts in issue in this case, no expert evidence about the nature of checks which a company in the position of Capital might have been expected to make. I restrained Counsel from drawing too freely in their submissions on their personal experience of how the industry works. The Commercial Court and its practitioners are however sufficiently familiar with finance industry practice to know in broad terms what is prudent from what is not. There is no reason to believe that the documents referred to in the letter of the 31^st October did not reach Capital and there is some evidence that they did. But this does not matter much. The letter reached Mr Etherington and therefore Capital and it was explicit that a stocking finance agreement was in place. This was obviously a reference to the Finance Agreement. While the expression "stocking finance" rather like that of "trade finance" used by FG has shades of meaning and lacks precision it is in common use and invariably refers to lending tied to an asset. Receipt of this letter must, or certainly should, have put Mr Etherington on notice that Dimond might well lack authority to sell. Furthermore I do not doubt the evidence of Mr Walmsley that Mr Etherington was, at least in general terms, aware of Assetline's interest in the machine. Mr Walmsley's own commercial difficulties and the fact that he had agreed to give evidence as part of a deal with FG do not cause me to doubt the truth of the central thrust of his evidence. Capital was put on enquiry about Dimond's authority to sell and should have investigated before proceeding with the deal. On this ground alone the defence under Section 2 fails.

Section 25 Sale of Goods Act 1979

32. Capital also contends that Dimond was a buyer in possession of the Machine with the consent of the Claimants and therefore passed good title by reason of Section 25 Sale of Goods Act 1979. Section 25(1) provides as follows:-

"Where a person having bought or agreed to buy goods obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person, or by a mercantile agent acting for him, of the goods or documents of title, under any sale, pledge, or other disposition thereof, to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods, has the same effect as if the person making the delivery or transfer were a mercantile agent in possession of goods or documents of title with the consent of the owner …"

The Claimants accept that Dimond had bought or agreed to buy the Machine and that it subsequently obtained possession and did so with Assetline's consent. They make the same submissions about possession as they do under Section 2 and Capital respond by relying on constructive possession. For the reasons I have given I prefer the approach of the Claimants.

33. Under this section the bank has to show that it purchased the Machine in good faith and without notice of Fairfax Gerrard's rights (as opposed to Dimond's lack of authority – the test under Section 2). As I see it there is no relevant distinction in this case between notice of FG's rights and of Dimond's lack of authority. It follows that for the reasons I have given the defence failed on this point.

Basis of Remedy – Conversion

34. In the Particulars of Claim the Claimants allege that Capital converted the Machine from early September 1999 onwards in a variety of respects. There is also a claim for money had and received of £205,440 apparently the total rental instalments made by Carrprint to Capital. As Mr Casement pointed out the Claimants had to make an election and they therefore chose to pursue the remedy in conversion. Although the Claimants developed the basis of their right to claim damages for conversion at some length it did not seem to me that the Defendants seriously questioned the approach should their defences on liability fail. Conversion involves the exercise of some right or dominion over the goods of another. Capital exercised that right as soon as they hired the Machine to Carrprint. It follows that there will be damages for conversion to the extent that these are made out.
35. The usual measure of damages for conversion is the market value of the goods at the date of conversion. Market value generally means the cost of buying a replacement not what a sale would have yielded. Where the question is not straightforward the Court turns to the guidance contained in Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5) [2002] 2 AC 883 and in particular to the speech of Lord Nicholls. At paragraphs 63 to 70. Lord Nicholls emphasises that the aim of the law in this area, despite the proprietary base for the tort is to provide a just remedy. While the normal measure is the general rule this is because it represents the amount of the basic loss suffered by a Claimant owner. However "depending on the circumstances some other measure, yielding a higher or lower amount, may be appropriate. The plaintiff may have suffered additional damage consequential on the loss of his goods. Or the goods may have been returned." In discussing "true loss" Lord Nicholls reviews the traditional two fold inquiry: whether the wrongful conduct causally contributed to the loss and, if it did, the extent of the loss for which the Defendant ought to be held liable. In the course of that discussion he observes that "when the outcome of the second inquiry is not obvious, it is of crucial importance to identify the purpose of the relevant cause of action and the nature and scope of the Defendant's obligation in the particular circumstances".
36. The Claimants seek £175,000 the price for which the Machine was sold to Capital. The Defendants put forward alternatives including £152,200, the price paid by Capital to Dimond, or the sterling equivalent of the US$ 140,000 paid to the manufacturer in China.
37. Capital also submits that from the damages should be deducted £61,250 a deposit paid by Carrprint and received by FGl and anything received by recovery against the assets of Dimond or under the personal guarantees of the directors. It does not appear that FG received anything through these routes. There was disagreement whether the £61,250 was or was not appropriated to this transaction as opposed to other deals involving FG and Dimond. On the documents drawn to my attention by Mr Casement it seems clear that the deposit was appropriated by G to this debt and Dimond notified of this (see for example the fax to Mr Rudge of 19^th November 1999). I do not consider that the deposit should be deducted from damages for conversion. The proceeds of sale of the Machine would have been available to reduce any indebtedness of Dimond to FG. So the fact that the deposit reduced indebtedness on this particular transaction is irrelevant. The Claimant could have realised its value, as Capital could have anticipated, against any available indebtedness of Dimond.
38. FG claim that their overall losses on this contract are several hundred thousand pounds but much of this appears to be notional charges accruing since the date of the conversion. FG also point out that they were owed sums from Dimond on other transactions when that company ceased to trade. From the correspondence these sums appear to amount in total to just over £300,000 in December 1999 but to just over £200,000 in November 2000. The Machine, being owned by Assetline, could have been realised and the proceeds applied to reduce all or any of this indebtedness.
39. An additional feature of the figures is the spreadsheet I have already mentioned dated 14^th October 1999 prepared by Assetline for its account with Dimond. This shows an "exposure" of £109,257.94 reduced by the deposit of £61,250 to a net exposure of £48,007.04. The Defendants urged at trial that this net figure was the appropriate sum in damages.
40. When considering what the parties in submission describe as "loss" I am concerned with that caused by the conversion and not with how much the Claimants lost because Dimond, unsurprisingly, went under. The loss caused to the Claimants by the conversion is unlikely to be the sale price of £175,000 which Carrprint, existing users for Dimond machines, were willing to pay for something manufactured and adapted to their precise needs. Similarly I am not persuaded that the cost price to Dimond is appropriate when in the real world the loss to the Claimant is what they would have been able to get for the Machine but for the conversion. Similarly there seems no logic in the suggested figure of £152,200, the price paid by Capital because this is simply the £175,000 reduced to take account of the deposit and a subsidy of £5,300. The parties have understandably not adduced expert evidence of value but as a result I am then left to " do the best I can".
41. Bringing all these considerations together I fix damages at £132,500. This discounts from £175,000 by £42,500 to reflect the realities of realising the value of a very particular machine delivered for one customer bearing the Dimond brand name. The figure is also towards the mid point between the estimated sterling conversion of the purchase price in China £87,227.41 and the £175,000. I add that although there is some evidence of £175,000 being a "bargain", this is not consistent with the price paid by Dimond, only about half that amount.
42. Mr Casement cited Hall v Barclay [1937] 3 All ER 620 a case where the Court of Appeal held that a Claimant recovering damages for conversion was entitled to the market price but, where there was none, the cost of replacement. In the course of his Judgment Greer LJ said "where you are dealing with goods which can be readily bought in the market, a man whose rights have been interfered with is never entitled to more than what he would have to pay to buy a similar article in the market. That rule has been enacted on over and over again …". But for the decision of the House of Lords in Kuwait I would have followed this guidance and ordered a figure closer to the price paid for the Machine to the manufacturer in China. A more flexible approach does it seems to me enable of the Court to do better justice because of course, in the real world the last thing that FG would have wanted would have been an additional machine to sell in the market. What it lost was the opportunity to sell the Machine in the market and the value of what this would have produced. In the real world, had FG retained title and this had been established sooner some deal would have been done with the other parties involved.

Conclusion

43. There will accordingly be Judgment for the Claimants for £132,500. I assume that there is no issue about which Claimant should receive the damages. If there is I will resolve it when handing down judgment. I shall be grateful if, at least 48 hours before the handing down of this Judgment, Counsel will let me have notes with corrections to this draft of the usual kind and details of what if anything further they seek and why. The Court is grateful to Counsel and Solicitors for the quality and preparation of this case which has saved time and money for both sides.

GH007363A/MVF