Colonial Finance (UK) Ltd v KSC Trading Ltd

Lord Justice Tuckey: This is the Judgment of the Court

1. This is an appeal from a judgment of Judge Overend, sitting as a Deputy High Court Judge, on preliminary issues arising in claims by administrators on behalf of Kingsway Scotland Ltd. and its associated company KSC Trading Limited against Colonial Finance (UK) Limited. Colonial appeal the judge’s construction of a letter of 1 st September 2000 by which it agreed to continue to finance the Kingsway companies’ business after they went into administration.

2. The Kingsway companies were furniture retailers carrying on business from about twenty stores. Under master agreements made in 1998 Colonial authorised Kingsway to enter into customer credit sale agreements on its behalf. Colonial were to pay Kingsway the price of the goods sold (less any deposit) on notification of delivery, in return for Kingsway’s indemnity against any claim which the customer might make.

3. When the Kingsway companies went into administration in August 2000 Colonial terminated the master agreements. This ended Kingsway’s authority to enter into further credit sale agreements but did not affect either party’s accrued rights. At that time Kingsway had received orders which still had to be delivered to a value of about £3.5m. These customers had entered into credit sale agreements with Colonial and had paid deposits to Kingsway of about £300,000. The administrators determined that the order book had value and arranged for another company to fulfil the outstanding orders on behalf of the Kingsway companies. But Colonial apparently said that it was not prepared to finance these transactions although, as its liability to do so had accrued before the master agreements had been determined, this stance was probably not legally justified. However, following discussions between the administrators and Colonial, Mr Blaber of Colonial wrote to the Kingsway companies on 1 st September 2000 saying: I am pleased to inform you that Colonial … herewith withdraws its notification of termination subject to the agreement that Colonial … will retain an aggregate sum of £75,000 in order to satisfy any future claims by Kingsway … customers … against Colonial …. The sum of £75,000 will be the aggregate value of agreements submitted by [the] Kingsway [companies] Said sum will be paid at the discretion of Colonial … as such liabilities are eliminated. The administrators accepted these terms by letter of 6 th September.

4. At the time this agreement was made it was not intended that the Kingsway companies would accept any new business. The outstanding orders would simply be processed and paid for over the following months. In the first few months Colonial paid Kingsway the balances, in excess of £75,000, of the amounts due for the processed sales less amounts due under the indemnity. In other words they satisfied the claims which had been made out of the monies due to Kingsway and retained £75,000 against future claims. The last outstanding order was delivered on 15 th March 2001, but by then, following a meeting on 21 st February at which Colonial decided they would no longer do business with Kingsway, the Kingsway companies were alleging they were owed substantially more than £75,000.

5. These proceedings ensued. A host of issues of detail were raised by the pleadings and the case was set down for a five day hearing. At Judge Overend’s suggestion counsel agreed that he should first try two preliminary issues, one of which was the interpretation of the letter of 1 st September 2000. Kingsways’ case was that the £75,000 fell to be reduced by the amount of each claim after 1 st September. Colonial’s case was that the retention did not fall to be reduced at all and could be retained in full until all potential claims were time-barred, i.e. until 15 th March 2007.

6. At first sight the judge does not appear to have accepted either side’s case. What he said was:

20. … It seems to me that the appropriate approach is indeed to have regard to the factual matrix, in particular the matters which were before the parties at the time. Considering the matter in that way, I conclude that what was contemplated by the parties was a running float of £75,000, which would be retained to cover future claims. A running float is one which operates while the parties are in business and while that was the state of affairs, the float would stay at £75,000 and the retention fund would not be called on (in other words, would not be reduced in whole or in part) until the business had ceased. At that point in time there would be no further deliveries giving rise to future claims after the cessation of the business. In my judgment, what the parties clearly contemplated was that once the business had ceased, then the reduction of the retention fund would then take place as each customer’s claim was quantified and met.

21. The situation which has now arisen is that the business has ceased and in my judgment, claims covered by the 1 st September 2000 letter made by customers against Colonial, now fall to be deducted from the retention of £75,000. The term in the letter refers to “future claims”. That means any claims by customers that had not been made as at 1 st September 2000. Once those claims have been met in accordance with that construction out of the £75,000 retention fund, any balance left over (if any) will have to be retained until six years from the last delivery of goods, and the claimants, in my judgment, are entitled to whatever relief they think is appropriate consistent with that conclusion.

7. We said “at first sight” because it appears from para. 20 that what the judge is saying is that the retention only fell to be reduced by claims made after the business had ceased. But from para. 21 and what he said after delivering judgment the judge made it clear that the retention was to be reduced by all claims made after the 1 st September. In other words he accepted Kingsway’s case. If that is so, it is difficult to see the relevance of the date upon which the business had ceased other than in cash flow terms which do not appear to have been in the judge’s mind. For if the £75,000 fell to be reduced by the amount of all claims since 1 st September the net result is the same whether the reduction is made claim by claim from 1 st September or in one go at the date when the business ceased which was taken to be 21 st February 2001.

8. The confusion is compounded by the order drawn up by counsel following the hearing. The determination on the preliminary issue is stated to be: The agreement in writing dated 6 th September … entitled the defendant to retain £75,000 as a non-reducing reserve against claims arising from customers of the claimants (or either of them) until 21 st February 2001 and thereafter as a reducing reserve against such claims.

9. The parties were left to agree the money consequences of the judge’s determination. Colonial. calculated that it had met claims totalling £40,729.17 since 1 st September 2000. So the order declared that: The defendant must pay the further sum of £34,270.83 to the claimants less such amount as is due pursuant to the … indemnity on or before 15 th March 2007. The money judgment against Colonial reflected the fact that the £40,729.17 should have come out of the £75,000 and therefore not have been withheld from Kingsway.

10. Until the hearing before us Mr Griffiths, counsel for Kingsway, believed that the £40,729.17 related to claims met by Colonial since the 21 st February 2001. So the confusion is further compounded.

11. Colonial’s grounds of appeal complain of the judge taking the 21 st February 2001 as the date from which the retention should reduce. This solution had not been canvassed with the witnesses or counsel and was illogical since Colonial’s need for a retention would become more acute after the parties ceased doing business with one another. But, as we have already said, the effect of the judge’s conclusion was that the retention should reduce from 1 st September 2000 so the February date is a red herring. Mr Emerson, counsel for Colonial, nevertheless complains that the judge’s conclusion was wrong. It could not have been the parties’ intention that the £75,000 would reduce from the 1 st September since at that time there were potential claims from customers for the return of their deposits of four times the amount of the retention.

12. Mr Griffiths supports the judge’s conclusion that the retention was to be reduced from the 21 st February. He relies on the wording of the letter and that the parties could not have intended that Colonial should retain £75,000 up to the very end of the limitation period.

13. We have to make contractual sense of the letter, if it is possible to do so, having regard to the circumstances in which it came to be written. At that time the expectation of the parties was that the outstanding orders would be delivered and substantial sums would become payable by Colonial to Kingsway up to the time when the last delivery was made. During this period there would be no difficulty in setting off Kingsway’s liability under the indemnity for customer claims made after 1 st September. The need for security would only arise when no further payments were due to Kingsway. From that time Colonial would obviously be concerned that the administrators would be unable to satisfy any further claims for indemnity arising from customer claims which could be made at any time up to six years after delivery. Hence the stipulation for a retention. It was “to satisfy future claims” so the expressed intention was that it would be reduced by the amount of such claims, but, in our view, only from the time when no further payments were due to Kingsway; in other words only from the date of last delivery which in the event was 15 th March 2001. The last sentence of the letter gave Colonial a discretion to pay some part of the remaining balance of the retention before the end of the limitation period.

14. Thus it seems to us that as at 15 th March 2001 Colonial were entitled to retain £75,000 against the Kingsway companies’ liability under the indemnity for future customer claims. To enable Colonial to retain £75,000 at that time they were entitled to withhold this amount from the sums payable to Kingsway before the 15 th March. After 15 th March the £75,000 fell to be reduced by customer claims and Colonial were to account for the balance on 15 th March 2007. The parties could not have intended that Kingsway had a liability to top up the retention so that it remained at £75,000 throughout the six year period if Colonial were intending to use the £75,000 to meet such claims.

15. To reflect these conclusions we vary the determination by the judge to read as follows: The agreement evidenced by the letter of 1 st September 2000 entitled the defendant to retain £75,000 as a non-reducing reserve against claims arising from customers of the claimants (or either of them) until 15 th March 2001 and from that date the defendant was and is to use that reserve to meet any such claims.

16. It is not possible for us to work out the financial consequence of this variation. But the declaration and the money judgment (including interest) should be varied to reflect the determination. We hope this can be agreed.

17. To the extent indicated in paras. 15 and 16 this appeal is allowed. Order: Appeal allowed to extent indicated. Financial consequences of the variation to be determined if not agreed. Subject to such variations as a consequence of such determination the order of HHJ Overend is confirmed including the order for costs. No order as to costs of the appeal.