Case No: A3/2014/3795
Neutral Citation Number: [2015] EWCA Civ 1188
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN’S BENCH DIVISION
BRISTOL DISTRICT REGISTRY
His Honour Judge Havelock-Allan QC
9BS40280
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 26/11/2015

Before:

LORD JUSTICE LAWS
LORD JUSTICE KITCHIN
and
LORD JUSTICE CHRISTOPHER CLARKE

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Between:

	W H Smith Travel Holdings Ltd	Claimant/
Respondent 	
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	Twentieth Century Fox Home Entertainment Ltd	Defendant/
Appellant	

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Matthew Collings QC (instructed by Wiggin LLP) for the Appellant
Stephen Cogley QC and Koye Akoni (instructed by TLT LLP) for the Respondent

Hearing date: 6 October 2015
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Judgment
Lord Justice Kitchin: 
Introduction
1.	This is an appeal against an order made by His Honour Judge Havelock-Allan QC on 20 November 2014 in the Bristol District Registry of the High Court giving judgment for the claimant (“W H Smith”) in the sum of  £1,215,000 on its claim against 20th Century Fox Home Entertainment Ltd (“Fox”).  The central question to which this appeal gives rise is whether transactions between the parties in the course of a trading relationship were recorded in a running account.  The judge held that they were not.  Upon this appeal Fox contends that he fell into error on this issue and consequently fell into further error in his approach to the burden of proof. It also argues that the judge ought to have found that it had discharged whatever burden lay upon it. Accordingly, it continues, he should have dismissed the claim. 
Background
2.	From 1999 to 2006 Fox supplied to W H Smith film products for retail sale in its stores.  The judge described the nature of this trading relationship at the outset of his judgment and the following summary is taken in large part and with gratitude from that description.
3.	The agreement governing the trading relationship was reduced to writing in an agreement dated 17 July 2002 and called the Vendor Buying Agreement (the “VBA”).  In 2005 and for the last four months of the relationship, the VBA was superseded by another written agreement but in all material respects the terms of this later agreement were the same as those of the VBA and I need say no more about it.  
4.	The relationship was complicated by a number of factors.  First, the films were supplied on a sale or return basis and on a very significant scale.  Over the period of the relationship Fox rendered invoices to W H Smith claiming sums amounting in total to around £170 million and a large number of films were returned. 
5.	Secondly, the price of these films varied from film to film; new releases were generally priced higher than older films; various film formats were priced differently; there were time limited and other promotional discounts, some of which overlapped; the parties priced returns in different ways; and separate sums were payable to W H Smith for marketing and advertising.
6.	Thirdly, W H Smith and Fox both ran ledgers but they ran them in different ways.  If W H Smith did not accept an invoice from Fox, either in whole or in part, its practice was to send a debit note to Fox for the disputed amount.  If a debit note was not agreed or settled within thirty days, W H Smith would enter it on its ledger (the “Purchase Ledger”) as a deduction from the amount due to Fox.  For its part, Fox would deal with any concession made to W H Smith by issuing a credit note in W H Smith’s favour.  W H Smith did not accept credit notes as contractual accounting documents, however.  As a result, Fox did not send its credit notes to W H Smith but used them only as an internal accounting tool in its ledger (the “Accounts Receivables Ledger” or “AR Ledger”).  As the judge noted, this had the consequence that there was no early matching of Fox credit notes to the W H Smith debit notes to which they related.  Indeed, it seems the ledgers were run almost independently of each other.
7.	Fourthly, Fox outsourced its book keeping activities.  Between 1999 and November 2004, that is to say, for most of the relationship, this work was undertaken by a company called Deluxe Media Services (“Deluxe”).  From November 2004 it was taken over by Vengroff Williams & Associates (“VWA”), later renamed Capgemini.  The process operated by Deluxe was described by the judge in these terms:
“4.	Unfortunately Deluxe operated a “wholesale matching process” or system of “bulk clear downs” whereby, instead of matching deductions by Smith to the Fox invoice and Fox credit note to which the deduction related, Fox invoices and credit notes and Smith debit notes, were accumulated and matched arithmetically in large sums.  The result was that Fox credit notes were used to cancel Smith debit notes relating to Fox invoices issued much earlier in point of time and with which the credit note had no connection.  By the time VWA inherited the Fox account, it was impossible individually to match credit notes and debit notes to the original Fox invoice so as to ascertain whether a net sum, and if so what net sum, was due to Fox in respect of any particular invoice or series of invoices and to reconcile that indebtedness to the sums paid by Smith.”
8.	When the trading relationship came to an end in April 2006 each party asserted that it was owed a substantial balancing payment by the other.  However, by the start of the trial and in the circumstances to which I must come, the position had been greatly simplified and the only outstanding dispute was a claim by W H Smith for £1,276,000 from Fox.  Fox’s position was that no further money was due.  It accepted that the sum claimed by W H Smith comprised £882,000 which was shown as a credit in W H Smith’s favour in its books and records and that the balance was made up of various other sums due to W H Smith, but it maintained that, by the date of the trial, all of these sums had been taken into account and properly off-set or that the appropriate balancing payments had been made.
9.	The judge concluded that, save for a sum of £61,000, W H Smith had established its claim.  As I have said, he rejected the submission made by Fox that the transactions were recorded in a running account but nevertheless recognised that the legal burden of proving its claim lay on W H Smith.  However, he considered that the admitted existence of Fox credit notes to the value of the sum claimed which had not been the subject of an agreed off-set meant that the evidential burden lay on Fox to establish that the credit notes had already been exhausted and had no further value. That it had failed to do.
10.	Fox now appeals on two grounds.  It contends that the judge fell into error in the way that he approached the burden of proof.  It argues that he ought to have found that the account between the parties was a running account and that the burden of proving the claim rested on W H Smith throughout.  It also contends that, in so far as the burden of proof did at any time lie on it, the judge ought to have found that this burden had been discharged in light of the documents it had disclosed and the evidence adduced at trial.  
The proceedings, trial and judgment
11.	As I have mentioned, at the end of the relationship, the parties’ respective ledgers revealed very different positions.  Fox maintained that its AR Ledger showed a balance due from W H Smith of £1,228,000 but importantly, this was after a number of adjustments in W H Smith’s favour.  W H Smith claimed that its Purchase Ledger showed a balance due from Fox of £882,000.
12.	In an attempt to ascertain the true trading position, W H Smith then undertook a series of three audits, the first and second covering the period from 2002 to 2004 and the third, the period from 2004 to 2006.  In March 2009 and before the completion of these three audits, W H Smith began these proceedings.  Its particulars of claim referred to the trading relationship between the parties and related that a running account was maintained between them against which payments were made from time to time.  It acknowledged that the record of the account maintained by Fox suggested that it owed Fox the sum of £1,228,000 but it maintained that this record was not accurate and that adjustments needed to be made to it to reflect the true position.  Investigations were, it said, continuing but on the information at that time available, Fox owed to it about £1,292,000.  In its defence, Fox admitted that it maintained a record of the account and that it showed £1,228,000 as due and owing by W H Smith, but it also acknowledged that adjustments needed to be made in respect of various audit and other matters.  
13.	Over the months that followed, Fox accepted that its AR Ledger should be further adjusted to produce a net balance of about £95,000 in favour of W H Smith and so an order was made that Fox should pay this sum. However, W H Smith claimed that it was still owed the sum of £882,000 and, additionally, sums shown to be due and owing by the audits. It now claimed a total sum of £1,276,000. 
14.	In September 2012 the parties agreed a list of issues.  Specifically, they recorded their agreement that the Fox AR Ledger required adjustment resulting in the net balance payable to W H Smith of the £95,000 to which I have referred. As for the matters in dispute, they recorded their agreement that the £882,000 and the other components of the £1,276,000 claimed by W H Smith were sums in relation to which credit notes had been issued and identified the issue between them as being whether W H Smith had already had the benefit of these notes.  Specifically, it was Fox’s position that they had all been taken into account in calculating the final AR Ledger balance. 
15.	In December 2012, instructions were sent to a single joint expert, Ms Eileen Emmanuel of KPMG, and in March 2013 she was directed by the court to confine the scope of her report to the various elements of W H Smith’s claim.  Ms Emmanuel eventually produced three reports, the first of which was dated 20 May 2013.  In that first report Ms Emmanuel began by observing that the parties were agreed that W H Smith was at one time entitled to the sums in issue but disagreed as to whether W H Smith had already received the benefit of those sums through the application of Fox credit notes.  She continued:
“2.1	Part of the methodology [I have applied] included an exercise to follow credit notes (or a sample thereof) raised by Fox through to its ledger.  Based on the results of this exercise, I am able to accept Fox’s assertions that credits in relation to the disputed items were raised and booked to its ledger.”
16.	But this was subject to the important qualification which followed:
“2.2	However, the presence of credit notes on a supplier’s ledger does not, by itself, automatically mean that the customer has received the benefit of those credit notes.  The impact of the credit notes on the customer has to be ascertained.”
17.	Ms Emmanuel then explained that it was Fox’s position that debts due from W H Smith or outstanding balances on the ledger had been off-set by and up to the value of the credit notes.  As to this, Ms Emmanuel continued:
“3.3	However, in order for the benefit of the credit notes to be received by way of off-set against a debt or an outstanding balance on the ledger, the existence of that debt or outstanding balance has to be agreed between supplier and customer. 
3.4	The disagreement between WHS and Fox over the existence of the debt or outstanding balance owed by WHS (against which the [disputed] amounts … could be off-set and the benefits thereof derived by WHS) is the crux of the dispute between the parties and arises because of inconsistencies in the position reflected by their respective ledgers.”
18.	It was Ms Emmanuel’s overall conclusion that:
“… the majority of items in dispute will not be capable of resolution without a full reconciliation of the parties’ ledgers.”
19.	Following delivery of her first report, Ms Emmanuel sought further information from the parties and met them to consider whether it was feasible to produce a full reconciliation of their ledgers.  She concluded it was not.  The parties therefore agreed to try two alternatives: first, to liaise over and attempt to resolve their differences, and second, for Fox to analyse its AR Ledger and try to match its credit notes against debit notes or receivables from W H Smith and in that way to prove that the off-set had taken place properly, a process referred to as “roll back”.  Unfortunately, both proved impossible.
20.	Ms Emmanuel concluded that only two options remained.  One was to persist with roll back using a different set of data.  The other, which she recommended, was to try to match the debit notes recorded in W H Smith’s Purchase Ledger with the credit notes recorded in Fox’s AR Ledger.  Eventually and after the provision of yet further information, Ms Emmanuel concluded in her third report that neither of these further options was viable.  The stage was therefore set for trial.
The trial
21.	It was agreed between the parties that, without prejudice to the burden of proof, Fox should open the trial and call its evidence first. In very broad terms, Fox contended that the issue of whether W H Smith had already received the financial benefit of all the Fox credit notes could only be determined at a fairly high level of abstraction.  The critical question was, it said, which side should bear the detriment arising from the inability of the parties to conduct the roll back exercise.  It maintained that there was indeed a running account and the case was, in truth, about a single balance due one way or the other on that account.  W H Smith was, in effect, claiming a debt and so the burden lay upon it to prove the debt was due and owing.  It was not for Fox to prove that there were receivables against which the credits had been properly off-set.  Further, the balance in the AR Ledger represented true receivables.  Moreover, credit notes were only ever issued by Fox as a set-off against a debt due to Fox in an equal or greater amount.  It was therefore a logical impossibility that the account between the parties should end up with a balance of credit notes in favour of W H Smith which had not been off-set against receivables.
22.	W H Smith’s case was, as the judge noted, almost diametrically opposite.  It argued that this was not a case in which there was a single running account but that it was rather a case in which both parties ran their own ledgers.  Moreover, the notion of a running account was simply not compatible with the nature of the trading relationship between the parties.  The starting point was that W H Smith had credits of £1,276,000.  The critical question was, therefore, whether there were debts owed by W H Smith to Fox, stemming originally from Fox’s invoices to W H Smith and booked as receivables in Fox’s AR Ledger, against which these credits had been properly off-set.  The debts underpinning the receivables had to be proved and the burden of doing that lay on Fox.  Further, the discharge of that burden by Fox was complicated by the way Fox ran its AR Ledger and what happened before 2005 when it was administered by Deluxe.  During that period, credit notes issued by Fox in respect of recent transactions were appropriated, without the consent or agreement of W H Smith, to secure payment of Fox invoices for earlier transactions. This process of mismatching gave rise to what was said to be a net receivable figure of £517,000 which VWA inherited at the end of 2004.  The receivables figure which Fox claimed its AR Ledger showed was therefore very much in dispute.
23.	Ms Emmanuel was not called to give evidence and neither party attempted any further reconciliation of the figures. However, the judge heard evidence from two witnesses of fact on each side as to the manner in which the parties’ respective ledgers were kept.  The first witness called by Fox was Mr Coyle.  He was Fox’s Credit Manager from the time that VWA assumed control of Fox’s AR Ledger from Deluxe until just before the trading relationship between Fox and W H Smith came to an end. He was also the immediate line manager of Mr Garten who was responsible for the day to day administration of the ledger.  The second witness called by Fox was Ms Radhakrishnan, an accountant, who joined Fox as Finance Director in January 2008 and from that point became familiar with the AR Ledger. She was also involved in the negotiations with W H Smith about the dispute.
24.	For its part, W H Smith called its counterparts of Mr Coyle and Mr Garten.  Mr Goble, the first witness, was W H Smith’s Financial Accounting Controller.  He was the immediate line manager of Mr Crowhurst, W H Smith’s Accounts Payable Manager and its second witness.  Both witnesses held their respective positions with W H Smith throughout the period of its trading relationship with Fox. 
The judgment
25.	The judge began by considering Fox’s submission that the AR Ledger contained a running account and that it was not open to W H Smith to suggest otherwise.  The judge rejected this submission. He held that the claim was not framed as a claim to recover the balance of an account. Further the account between the parties was not a true running account because the transactions it contained included sales of goods and the provision of marketing and promotional services which gave rise to independent mutual obligations capable of being quantified and set-off, as happened from time to time when VWA took it over.  
26.	This was not decisive of the outcome, however.  As the judge explained, even if W H Smith’s claim was properly characterised as a claim for the balance due on a running account, it did not necessarily mean that the evidential burden of proof rested on W H Smith throughout.  He put it this way at [50]-[51]:
“50.	Smith undoubtedly bears a persuasive burden to make good its claim to payment.  But Mr Cogley is right that the initial evidential hurdle is overcome by the admitted existence of Fox credit notes to the value of the debt claimed which have not been the subject of an agreed off-set in the course of the account and which cannot be readily shown to have already been off-set.
51.	Fox asserts in response that the credit notes have already been exhausted and have no further value.  There is a persuasive and evidential burden on Fox to prove that assertion, especially since it was the foundation of a counterclaim for a balance payable to Fox in the early stages of the action.”
27.	The judge then turned to the evidence.  Mr Coyle, Fox’s first witness, explained that, when VWA took over the management of the account, it found unreconciled items amounting to £517,000.  Despite the efforts of the VWA team, it proved impossible to roll this figure back or otherwise ascertain the basis for it.  Further and as the judge noted, Mr Coyle accepted that where, as here, the process of matching credit notes to the corresponding debit notes was not faithfully carried out, there was a risk of ending up with credit notes relating to debts which had earlier been cleared by other credit notes or, alternatively, with debit notes to which the corresponding credits had already been utilised.
28.	Fox’s next witness, Ms Radhakrishnan, agreed that Fox had to show that the credit notes on which W H Smith relied had been exhausted by being off-set against receivables, and she accepted that it was not possible to identify what those receivables were.  However, she maintained that the figure of £1,228,000 to which I have referred was a “hard general ledger figure” which represented true receivables.  
29.	The judge was not persuaded by Ms Radhakrishnan’s evidence and considered that her confidence was undermined by three factors.  The first was the evidence of Mr Crowhurst, on behalf of W H Smith, in the course of which he gave examples of instances where, in the process of reconciliation, the AR Ledger had been shown to be wrong.  The judge found Mr Crowhurst to be a convincing witness because he was more familiar with how the accounts had been run during the period of the parties’ relationship than either Mr Coyle or Ms Radhakrishnan.  The second factor was the integrity of the figure of £517,000.  This was, as I have said, a derived figure and the product of Deluxe’s management of the AR Ledger.  Here it was significant that Mr Coyle had accepted that mismatching could leave a residue of outstanding credits which had not been off-set.  The third factor was the way in which the supposedly hard general ledger figure had been extinguished during the course of the run up to trial, not by off-set of the credit notes on which W H Smith relied but by concessions made by Fox that the receivables figure needed further adjustment.
30.	The judge also addressed Fox’s contention that a balance of unspent credit notes was a logical impossibility because a credit note could only ever have been issued against a particular debt due on a Fox invoice and could not have exceeded the amount of that invoice.  The judge was not impressed by this argument because it ignored the circumstances in which W H Smith’s debit notes came to be issued.  As he went on to explain, debit notes might be issued in the case of stock returned after payment in full of the original invoice.  Plainly, a credit note issued in these circumstances would not cancel out a debt outstanding on the transaction.  It would simply represent an acknowledgement that a refund was due.
31.	For all of these reasons the judge found himself unable to accept that Fox’s accounting was as robust as Ms Radhakrishnan suggested and he did not accept that Fox had established that it ever had receivables against which the credit notes had been properly off-set.  Accordingly, and subject to the £61,000, W H Smith was entitled to judgment on its claim.
The appeal
32.	Mr Mathew Collings QC, who appeared on this appeal on behalf of Fox, as he did below, contended that the reasoning of the judge betrayed a clear misunderstanding about the nature of W H Smith’s pleaded case. He submitted that the particulars of claim were framed as a claim for the balance due on a running account. Moreover, he continued, the judge’s finding that the AR Ledger did not contain a true running account was wrong in law and contrary to the evidence. Had the judge approached the matter correctly, he would have found that the ledger did indeed contain a running account and that W H Smith’s claim was in truth a claim for the balance due on that account. It followed that the legal and evidential burden of proving that the sum claimed was payable rested on W H Smith throughout and the judge ought so to have held.
33.	The parties were agreed that in a case where the transactions between two parties are recorded in a running account, those transactions are not treated separately for accounting purposes. As Millett J, as he then was, explained in In re Charge Card Services Ltd [1987] 1 Ch 150 at 174, in such a case there are not mutual but independent obligations capable of being quantified and set off against each other but rather reciprocal obligations giving rise to credits and debits in a single running account, so giving rise to a single liability to pay the ultimate balance found due upon taking the account.
34.	Transactions between two parties may be recorded in a running account in a great variety of relationships but it is a characteristic of them all that the parties have expressly or impliedly agreed that the monetary outcome of each transaction shall not be settled separately. In Rolls Razor Ltd v Cox  [1967] 1 QB 552, a case in which a salesman claimed to be entitled to the statutory set-off provided by s.31 of the Bankruptcy Act 1914 in respect of moneys owed to him by an insolvent company on the basis that there had been mutual dealings between them within the meaning of the section, Winn LJ put it this way at 574E-575D:
“What dealings are “mutual” within the meaning of the section appears to me to be determined by the intention of the parties to those dealings, expressed to each other or to be inferred from the character of the dealings.  Thus, the relationship of banker and customer upon a current account implies from its very nature an intention on the part of both parties that debits and credits arising between them shall be brought into a running account upon which, by reason of the customary method of keeping such account, there will at any given moment be an outstanding debit or credit balance.  Similarly, producers of such commodities as fruit and vegetables, who market them through selling agents in, for example, Covent Garden, normally, if not necessarily, deal with those selling agents upon a running account in which credits in their favour will arise in respect of proceeds of sales received by the agents, with related debits for commissions and sale expenses incurred by the agents in disposing of the goods or making allowances for quality deficiencies.  These are only examples which could be almost indefinitely multiplied by taking into consideration such other relationships as those of a landlord and his rent collectors, or transactions of collection of outstanding debts.  The common and essential characteristic of all such dealings, which I regard as the type of mutual dealings contemplated by the section, although many others less comprehensive and of shorter continuity would also be included, is that by the intention of the parties expressed or implied, they each extend to the other credit in respect of individual sums of money until such time as such sums are brought into account and in the account set off against other sums, in totality, in respect of which the other party has given credit; to be contrasted are dealings of a kind which may occur either in isolation or within the complex of a continuous run of dealings, which are themselves mutual, of such a kind that it is clear from their character that the parties intend that the monetary outcome of them shall be separately settled between the parties and not treated as a mere item on one side or the other of a running account.”
35.	Much the same point emerges from the decision of the Australian High Court in Airservices Australia v Ferrier and Anor (1996) 185 CLR 483. Here the Civil Aviation Authority provided air navigation services to an airline company until the commencement of its winding up. The liquidators then applied to recover substantial sums paid by the company to the Authority during the immediately preceding six-month period on the basis that these payments had the effect of giving the Authority a preference over other creditors. It was held by a majority (Dawson, Gaudron and McHugh JJ, Brennan CJ and Toohey J dissenting) that none but the last of the payments could be regarded as a preference. It was a case of a creditor supplying services to an undercapitalised debtor which promised to pay its debt and pay new debts as they fell due, but which got further and further behind. It was an example of the common situation of a debtor with a running account whose debit balance at the end of a trading period was greater than it was at the beginning, notwithstanding the making of large payments during that period. In the course of their judgment, Dawson, Gaudron and McHugh JJ explained the nature of a running account in these terms at 505-506: 
“Since the decision of this Court in Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110, the term “running account” has achieved almost talismanic significance in determining when the ultimate, rather than the immediate and isolated, effect of a payment is to be examined for the purpose of a determination under s 122 of the Bankruptcy Act.  However, the significance of a running account lies in the inferences that can be drawn from the facts that answer the description of a “running account” rather than the label itself.  A running account between traders is merely another name for an active account running from day to day as opposed to an account where further debits are not contemplated. The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded.  Ordinarily, a payment, although often matching an earlier debit, is credited against the balance owing in the account.  Thus, a running account is contrasted with an account where the expectation is that the next entry will be a credit entry that will close the account by recording the payment of the debt or by transferring the debt to the Bad or Doubtful Debt A/c.
If the record of the dealings of the parties fits the description of a “running account”, that record will usually provide a solid ground for concluding that they conducted their dealings on the basis that they had a continuing business relationship and that goods or services would be provided and paid for on the credit terms ordinarily applicable in the creditor’s business.  When that is so, a court will usually be able to conclude that the parties mutually assumed that from a business point of view each particular payment was connected with the subsequent provision of goods or services in that account.  Sometimes, however, the transactions recorded in the account may be so sporadic that a court cannot conclude that there was the requisite connection between a payment and the future supply of goods even though the account was kept “in the ordinary form of a running account in which debits and credits are recorded chronologically and in which payments are not shown as attributable to any particular deliveries but are brought generally into credit” Re Weiss [1970] Arg LR 654 at 659.  Thus, it is not the label “running account” but the conclusion that the payments in the account were connected with the future supply of goods or services that is relevant, because it is that connection which indicates a continuing relationship of debtor and creditor.  It is this conclusion which makes it necessary to consider the ultimate and not the immediate effect of individual payments cf Rees (1964) 111 CLR 210 at 221-223, per Kitto J.” 
(footnote (72) omitted)
36.	I should also say a little more about the decision in Charge Card Services, for this was another authority upon which Mr Collings heavily relied. In this case a company operated a charge card scheme under which it issued charge cards to individuals who could then use them to buy petrol and the like from any garage which was a member of the scheme. The company would normally reimburse the garage before it received payment from the cardholder and so, in order to finance its activities, it factored its receivables. This was effected by an invoice discounting agreement between the company and a factor pursuant to which all debts owing from card holders were assigned to the factor. The factor was required to pay to the company the balance of each receivable it had purchased subject to certain rights of debit and retention, including a right of retention in respect of various discounting and administration charges. The agreement also contained standard conditions which required the factor to maintain a current account and to pay to the company the balance due on the account from time to time, less the sums which it was permitted to retain as security for amounts prospectively chargeable to the company as debits to the account. 
37.	Upon the company going into liquidation, the question arose as to whether the right of retention conferred on the factor by the standard conditions amounted to security for the factor’s prospective rights of set off and in consequence constituted a charge on the book debts which was void against the liquidator for want of registration under s.95 of the Companies Act 1948; alternatively whether the right of retention amounted to a contractual right of set off which extended to liabilities of the company which were  still contingent at the date of the resolution to wind up, and so went further than was permitted by s.31 of the Bankruptcy Act 1914 and was void as an attempt to contract out of the statutory rules of distribution on a winding up.
38.	So far as the right of retention was concerned with discounting and administration charges, the answer was, thought Millett J, short and clear and it lay in the proper characterisation of the obligation to pay provided for in the agreement, as he explained at 174-175:
“In my judgment, and leaving aside for the moment the possible claim under clause 10, the short answer to these submissions is that the Commercial Credit’s right of retention under standard condition 3B(iii) in respect of any amount prospectively chargeable to the company as a debit to the current account is a matter not of set off but of account.  In Halesowen Presswork & Assemblies Ltd. v National Westminster Bank Ltd. [1971] 1 Q.B., Buckley L.J. said, at p. 46:
“Where the relationship of the banker and customer is a single relationship such as I have already mentioned, albeit embodied in a number of accounts, the situation is not, in my judgment, a situation of lien at all.  A  lien postulates property of the debtor in the possession or under the control of the creditor.  Nor is it a set-off situation, which postulates mutual but independent obligations between the two parties.  It is an accounting situation, in which the existence and amount of one party’s liability to the other can only be ascertained by discovering the ultimate balance of their mutual dealings.”
Counsel for the company put forward a sophisticated analysis of the various provisions of the agreement to show that, despite the wording of clause 4, the discounting charge was not integral to the ascertainment of  the purchase price but, like the administration charge, a true contra item.  In my judgment, however, the crucial factor is not the definition of the purchase price, but the extent of Commercial Credit’s obligation to pay.  This is to be found in clause 6, and it is an obligation to pay, not the purchase price, which is merely a credit in the current account, but the balance shown on the current account subject to the right of retention.  The right of retention thus constitutes a contractual limitation on the company’s right to require payment of the balance on the current account.  It is an essential safeguard against overpayment since, except at the end of the month when the discounting and administration charges are debited, and in the unlikely event of there being no bad debts at all, the balance on the current account can never represent the true amount owing by Commercial Credit.  The sum payable by clause 6, therefore, is in effect a provisional payment only and represents the best estimate that can be made at the time of the true state of account between the parties.
In my judgment, this is not a case of set off at all, for there are no mutual but independent obligations capable of being quantified and set off against each other.  There are reciprocal obligations giving rise to credits and debits in a single running account, a single liability to pay the ultimate balance found due on taking the account, and provisions for retention and provisional payment in the meantime.
If this analysis is correct, it also provides an answer to the company’s claim that the right of retention in standard condition 3B(iii) constitutes a registrable charge, for there is no relevant property capable of forming the subject matter of the charge.  The only asset which the company could charge is its chose in action, i.e. the right to sue Commercial Credit for the sum due under the agreement, but this already contains within it the liability to suffer a retention.  Counsel for the company naturally stressed the fact that the right of retention is expressed to be by way of security, but that is of no avail if, as I hold, it secures Commercial Credit, not against default by the company in the performance of its obligations, but against overpayment by itself.”
39.	I turn then to consider the application of these principles in the context of the present case. Mr Collings submitted that the accounting relationship between the parties had all the hallmarks of a running account.  The relationship had subsisted over many years; the scale of trade was very large and involved a vast number of individual transactions, each with a relatively small value; goods were bought and paid for on credit terms; the record of these transactions was maintained by Fox in its AR Ledger; W H Smith would, from time to time, pay the outstanding sums said to be due and owing; and it was impossible to treat any individual payment independently of what followed. Accordingly, said Mr Collings, the relationship did not involve a series of individual obligations capable of being quantified and set off one against another. There was instead a single running account generating a single liability to pay the ultimate balance. 
40.	Attractively though these submissions were presented, I find myself unable to accept them. I recognise and accept certain factual matters upon which Mr Collings focused. For example, it is indisputable that the parties carried on business on a very large scale over many years. I accept too that the value of the individual items sold and supplied by Fox to W H Smith was relatively small but that their cumulative value was very substantial, amounting as it did to around £170 million. But these are only a few of the features which characterised the relationship between the parties and I do not accept that, in and of themselves, they drive the conclusion that the AR ledger contained a running account. It must be remembered that both parties ran a ledger and that they did so largely for their own accounting purposes. As I have explained, W H Smith ran the Purchase Ledger in which it entered debit notes which it had sent to Fox in respect of disputed invoices. For its part, Fox would consider the debit notes and, if it agreed them, issue a credit note in favour of W H Smith. But these were never accepted by W H Smith as contractual accounting documents. Accordingly, the two ledgers were, to a very significant extent, run independently. Certainly there was no evidence to suggest that W H Smith ever accepted that the AR Ledger represented a running account of its indebtedness.
41.	It is also important to have regard to the terms of the VBA and to W H Smith’s conditions of purchase. The VBA recorded the parties’ agreement in respect of returns that: “WH Smith shall deduct the cost of any products which are returned by WH Smith from the next payment due to the Seller. Where the return of goods puts a supplier into a debit position, and we are unable to deduct the balance from the payment due, we will require settlement within 14 days of the debit note date”. Further, in relation to invoices and payment, it specified that “Any amounts owed to WH Smith on the Purchase Ledger must be settled within 14 days by BACS”; that “WH Smith raise debit notes for claims and do not accept credit notes. Debit notes will be deducted from the next payment due after the debit note date”; and (in respect of the services provided by W H Smith) that “WH Smith requires BACS/cheque payment for all Sales invoices. Overdue invoices will be deducted from next payments”. In my judgment these terms are not consistent with the notion that the AR Ledger contained a running account between the parties.  There was no agreement that W H Smith would generally extend credit in respect of sums due until they could be brought into the account. To the contrary, if the return of goods put Fox into a debit position and W H Smith was unable to deduct the balance from the payment due, it required settlement within 14 days. Similarly, it required settlement of invoices in respect of the services it provided.
42.	A similar picture emerges from W H Smith’s standard conditions of purchase. These provided in relevant part:
“5.	Terms of payment
5.1	The Seller shall be entitled to invoice WH Smith on or at any time after delivery of the Goods or performance of the Services, as the case may be, and each invoice shall quote the number of the Order.
5.2	Unless otherwise stated in the WH Smith Vendor Buying Agreement, WH Smith shall pay the Price of the Goods and the Services within 90 days after the end of the month of receipt by WH Smith of a proper invoice or, if later, after acceptance of the Goods or Services in question by WH Smith.
5.3	WH Smith shall be entitled to set off against the Price any sums owed to WH Smith by the Seller or their clients.
5.4	Any sums which are not paid by WH Smith by the due date and which are not in dispute shall thereafter attract interest on a daily basis at a rate of 4% per annum above the base lending rate for the time being of Barclays plc.
5.5	WH Smith shall deduct the cost of any products which are returned by WH Smith from the next payment due to the Seller.  Where the return of goods puts a supplier into a debit position, and WH Smith is unable to deduct the balance from a payment due, WH Smith will require settlement of the debit note by the seller within 14 days of the debit note date.”
43.	Here one sees provision for invoicing after delivery of goods; time for payment set by reference to receipt of invoice or acceptance of goods, whichever is the later; an entitlement to set off sums owed to W H Smith by Fox or its clients; provision for interest on late payments; an entitlement to deduct the cost of any goods returned by W H Smith from the next payment due to Fox; and, in the event the return of goods put Fox into a debit position and W H Smith was unable to deduct the balance from a payment due, an entitlement to require settlement of the debit note within 14 days. In my judgment these terms are again inconsistent with the notion that the AR Ledger contained a running account.  
44.	I believe the judge was therefore right to conclude that the account in the AR Ledger was not a true running  account in the sense contended for by Fox. Far from being an arrangement to which the parties had agreed, it is clear from the terms to which I have referred that the parties made express provision for the payment of goods and services and appropriate deductions by reference to individual supplies. This was not a case in which the existence and extent of the liability of one party to the other could only be ascertained by discovering the ultimate balance of their mutual dealings. Nor, it seems to me, was the judge precluded from so finding by the way W H Smith’s case had been pleaded and was presented to him. I recognise that W H Smith did refer in its particulars of claim to the state of the running account, but I do not understand it to have been referring to a true running account, and it was not accepted by Fox in any event. Moreover, and perhaps most importantly, the parties’ respective positions were perfectly clear by the time of the trial and Fox has never suggested it has ever been misled or disadvantaged by the way that W H Smith’s case was pleaded in this respect.
45.	I would therefore reject the submission that the judge fell into error in failing to find that the AR Ledger contained a running account. This central plank of Fox’s case having fallen away, I must now consider the effect this has on the burden of proof and whether the judge fell into error in approaching this matter as he did.
46.	In my judgment there can be no doubt that the legal burden of proof and, at least at the outset, the evidential burden of proof in this case lay on W H Smith as the party asserting the affirmative case that Fox owed to it the sum of £1,276,000. However, the case had an unusual feature in that, by the time of the trial, the joint expert, Ms Emmanuel, had established and the parties were in agreement that this sum represented valid credits and that it was, therefore, a sum which was, at least at one time, due and payable by Fox to W H Smith. As Ms Emmanuel said in her first report at 1.3: “common to all the [disputed items] … is the fact that the parties are agreed that WHS is entitled to these amounts but disagree on whether WHS has already received the benefit of these amounts through the application of credit notes issued by Fox”.
47.	Ms Emmanuel went on to say that she was able to accept Fox’s assertions that credits in relation to the disputed items were raised and booked to its ledger. But, as she explained, this did not mean that W H Smith had received the benefit of those credits. There had to be debts or outstanding balances against which they could be off-set, and these had to be agreed between Fox and W H Smith. W H Smith had no record of any such debts or outstanding balances, for its ledger showed the moneys claimed were due and payable. Fox, on the other hand, maintained that there were such outstanding debts and balances and that the credits had been properly off-set against them, and it sought to find support for this contention in the AR Ledger. 
48.	In summary, there was no dispute as to the validity and value of the credit notes. The issue was whether W H Smith owed debts to Fox, arising from Fox’s invoices to W H Smith and booked as receivables in the AR Ledger, against which the credit notes had been properly off-set. Those debts were not agreed and W H Smith had no record of them. So they had to be proved and it seems to me that Fox, as the party asserting that it had properly off-set the credits, was the party upon whom the evidential burden of proof lay. I would therefore reject the submission that the judge erred in the way he approached the burden of proof and in reaching the conclusion to which he came on this issue. 
49.	Mr Collings also submitted that the judge failed to attach any or any proper weight to the AR Ledger. This was, he argued, a proper business record and admissible as evidence. Moreover, he continued, the judge’s reasons for doubting the reliability of the ledger were deeply flawed. 
50.	It will be recalled that Ms Radhakrishnan, Fox’s Finance Director, gave evidence about the AR Ledger and explained that in her opinion the relevant receivables figure was a hard ledger figure which represented true receivables. However, so the judge went on, her evidence was undermined by three factors. Mr Collings originally challenged the judge’s reasoning in relation to each of these factors but at the hearing of the appeal confined his submissions to the third. The judge described it in these terms at [62]:
“The third factor which undermines Ms Radhakrishnan’s confidence in the receivables figure on the Fox AR Ledger is the way in which that figure has been extinguished in the course of Phase 1, not by off-set of the credit notes on which Smith relies but by concession made by Fox that the receivables figure needed further adjustment.  Whilst Fox’s AR Ledger recorded that approximately £1,228,000 was due from Smith in April 2006 after deducting Smith’s figure of £882,000, the admission made in paragraph 9 of Fox’s Amended Defence and Counterclaim that further adjustments amounting to £931,000 needed to be made in Smith’s favour contradicts any argument that the debt of £1,228,000 cancels out some or all of the balance of Smith’s claim since none of the items comprised within the £931,000 has been shown to be referable to any of the credit notes relied on by Smith.”
51.	Mr Collings submitted that this reasoning reveals that the judge misunderstood the claim and what the parties were arguing about. Specifically, he continued, the judge appears to have thought that Fox was suggesting that “the debt of £1,228,000 cancelled out some or all of the balance of W H Smith’s claim” when in fact the £1,228,000  represented the balance after the whole of W H Smith’s claim had been off-set. That is why the £1,228,000 was available to meet the subsequent adjustments in W H Smith’s favour which were all agreed.   
52.	I agree that the judge fell into error here if and in so far as he failed to appreciate that the figure of £1,228,000 represented the balance in the AR Ledger after the whole of the W H Smith’s claim had been off-set. It clearly did. However, there can, in my judgment, be no doubt that the judge fully understood the key issue, namely whether, at the end of the parties’ relationship, there were outstanding receivables against which the credits, to which the parties were agreed that W H Smith was entitled, could be off-set. This was spelled out clearly in those parts of the reports of Ms Emmanuel to which I have referred and which the judge himself cited. Moreover, the central point made by the judge at [62] is that the reliability of the AR Ledger was undermined by the fact that the receivables figure in the ledger was gradually eroded as Fox made one concession after another as the investigations and audits proceeded. That point remains an entirely valid one.
53.	It must also be remembered that this was only one of the factors which left the judge unpersuaded by Ms Radhakrishnan’s evidence that the figure of £1,228,000 was a hard general ledger figure. The first was the evidence of Mr Crowhurst, which the judge found persuasive. As I have explained, he gave examples of instances where, in the process of reconciliation, the AR ledger had been shown to be wrong. The second was the unreliability of the figure of £517,000 which was said to represent the balance of outstanding receivables at the end of the period of the management of the ledger by Deluxe. Furthermore, these particular factors must be seen in light of the overarching point that Fox was unable to match the credit notes against debit notes or other receivables from W H Smith.
54.	 In the result, Fox could not and cannot now demonstrate that the credit notes to which it accepted W H Smith was entitled were properly off-set. I would therefore reject the submission that any error the judge may have made materially undermines the final conclusion to which he came.
55.	I would dismiss this appeal.
Lord Justice Christopher Clarke:
56.	I agree.
Lord Justice Laws:
57.	I also agree.