Bank of Scotland v Henry Butcher & Co & Ors

This is an appeal from a decision of Mr Michel Kallipetis QC sitting as a Deputy Judge of the High Court in the Chancery Division on 21 May 2001. His judgment contains a long, careful and detailed statement of the facts and a lucid analysis of the arguments deployed before him by Mr Antony Zacaroli, who appeared before the judge, as he appeared before us, on behalf of the claimant, the Governor and Company of the Bank of Scotland (“the bank”), and Mr Brian Hurst, who appeared before the judge, as before us, on behalf of the defendants, Henry Butcher & Co (“HB&Co”) and four of the thirteen partners in HB&Co, Mr Colin Morley, Mr Nicholas Schofield, Mr Harriman and Mr Derry.

The judgment of the learned judge is reported: Bank of Scotland v Henry Butcher & Co [2001] 2 All ER (Comm) 691. All the facts thus being readily accessible to anyone who is curious to study them in more detail I can be brief in summarising the essential background to this appeal.

In December 1994 the bank granted a customer, Mr David Hopkins, an overdraft for working capital purposes. By September 1995 the overdraft limit on Mr Hopkins’s account had been increased to £50,000 and he entered into negotiations with HB&Co with a view to a possible joint venture. A consultancy agreement was drawn up by which it was agreed that HB&Co would receive a share of the profits on mutual business deals with Mr Hopkins, in return for which HB&Co would guarantee the overdraft on Mr Hopkins’s account up to the level of £200,000.

The guarantee, dated 1 December 1995, was signed by Mr Morley, Mr Schofield, Mr Harriman and Mr Derry. It was expressed to be given by HB&Co and Mr Morley, Mr Schofield, Mr Harriman and Mr Derry “the individual Partners of the said Firm as Partners and as individuals” and was expressed to have been “executed and delivered as a deed”. Following its execution the guarantee was altered in one respect, that alteration being initialled only by Mr Harriman and Mr Derry, and not by either Mr Morley or Mr Schofield.

The consultancy agreement was executed on 5 December 1995 by Mr Schofield “as a deed for and on behalf of” HB&Co. Mr Schofield wrote the same day to Mr Hopkins saying amongst other things:

The consultancy agreement was expressed as providing for “the provision to [Mr] Hopkins by [HB&Co] of consultancy services” – defined as meaning “the provision of valuation and surveying advice on plant and machinery and other equipment” and “advice on auctioning plant and machinery” – “in relation to [the business of surveyors, providing valuations and administrative services to the corporate recovery and financial sector carried on by Mr Hopkins] during the term of this Agreement”. Clause 2 of the agreement provided that “[Mr] Hopkins hereby engages [HB&Co] to act as consultants to [Mr] Hopkins and [HB&Co] agree to accept such engagement upon the terms of this Agreement”. Clause 3 provided that the agreement should be deemed to have commenced on 5 December 1995 and, subject to earlier termination in certain specified circumstances, should continue for a period of three years. Clause 8 provided that the partners in HB&Co “shall jointly and severally enter into a guarantee with [the bank] in a form acceptable to [HB&Co]” to guarantee the indebtedness to the bank of Mr Hopkins up to a maximum of £200,000”.

It is to be noted that clause 14(c) of HB&Co’s partnership deed dated 28 March 1977 provided that “No partner shall without the consent of the other partners … give any guarantee on behalf of the partnership”.

Mr Hopkins failed to fulfil commitments made to the bank for the reduction of the overdraft. The bank called in the overdraft and commenced proceedings for recovery of the outstanding borrowings plus interest under the guarantee. The defendants sought to defend the proceedings on the basis that neither HB&Co nor the individual partners who had signed it were bound by the guarantee. The judge rejected all the defendants’ arguments and gave judgment for the bank.

In paragraph [16] of his judgment the judge identified the seven issues he had to decide. In the event, as I have said, he decided all of them in favour of the bank. The appellants do not challenge his determination in relation to four of the issues. The remaining three, which are the subject of challenge in this court, were correctly identified by the judge as follows:

Is HB&Co bound by the guarantee?

If HB&Co is not bound, are the individual partners who actually signed it nevertheless bound by the guarantee?

Does the alteration of the guarantee after execution invalidate it?

I shall deal with each of these issues in turn. But I make clear at the outset that in relation to every one of these issues (as in relation to the other four issues) the judge, in my judgment, plainly came to the right conclusions. I am tempted to say that agreeing fully, as I do, not merely with the judge’s conclusions but also with his reasoning, I have nothing to add. But one at least of the points raised by Mr Hurst, although devoid of merit, is of some general importance and justifies careful consideration by this court.

The bank’s primary contention was that the partners in HB&Co had in fact given their consent to the execution of the guarantee in such a manner as to satisfy the requirements of clause 14(c) of the partnership deed. The judge, having carefully analysed the evidence, agreed. His conclusion on this part of the case, at paragraph [43] of his judgment, was that:

Those conclusions have been challenged before us by Mr Hurst. I am unpersuaded that there is any substance in his complaints. It seems to me that the judge was entitled to conclude as he did. Be that as it may, however, there is, in my judgment, and in this I fully agree with the learned judge, another and conclusive answer to HB&Co’s case. Accordingly I say no more about this part of Mr Hurst’s case.

As an alternative to actual authority, founded on consent, the bank argued before us, as it had before the judge, that the guarantee was given in the course of the partnership business and, therefore, the signature of the four partners was sufficient to bind HB&Co by virtue of the provisions of section 5 of the Partnership Act 1890. The judge agreed with the bank. So do I.

Section 5 of the Act provides as follows:

I mention at once, in order to get the point out of the way, that before the judge Mr Hurst argued that the proviso applied because, he submitted, the bank knew that the partners who signed the guarantee did not have authority. The judge, having carefully considered the evidence, correctly rejected that argument. HB&Co cannot, in my judgment, rely upon the proviso.

Mr Hurst referred us to four authorities for the proposition that a partner, at least in a professional partnership, does not have implied or ostensible authority to give a guarantee: Duncan v Lowndes and Bateman (1813) 3 Camp 478, Sandilands v Marsh (1819) 2 B & Ald 673, Hasleham v Young (1844) 5 QB 833 and Brettel v Williams (1849) 4 Ex 623.

Thus in Duncan v Lowndes, a case involving Liverpool merchants, Lord Ellenborough CJ said that:

In Hasleham v Young and Young, a case of a guarantee given by an attorney, Patteson J, with whom both Lord Denman CJ and Wightman J agreed, said:

Both those authorities were followed in Brettel v Williams.

Now this is all very well but as is pointed out in Blackett-Ord on Partnership (ed 1997) p 358, old decisions are to be regarded with caution today when they lay down that it is not within the ordinary authority of a partner to give a guarantee. Indeed I note that the author refers in a footnote to United Bank of Kuwait Ltd v Hammoud [1988] 1 WLR 1051 – a case to which we were not referred – as doubting the usefulness today of cases such as Hasleham v Young and Young. So indeed it does, for at p 1063E Staughton LJ (with whom Lord Donaldson of Lymington MR agreed at p 1065A) said this:

As appears elsewhere from the report, Hasleham v Young and Young was one of the cases to which the court had been referred.

Recognising that we have not heard full argument on the point, I have nonetheless to say that I entirely agree with the views expressed both by Staughton LJ and by Mr Blackett-Ord. And in just the same way as Staughton LJ counselled caution in relying upon the elderly authorities referred to in Halsbury’s Laws I would counsel caution in relying upon the elderly authorities mentioned in the notes to section 5 of the Partnership Act 1890 in Halsbury’s Statutes (ed 4 – 2001 reissue), vol 32, p 901, to which Mr Hurst also directed our attention.

I need say no more on the point because in the final analysis the argument before us, as before the judge, proceeded on a narrower front. Here the crucial case is Sandilands v Marsh to which I now turn.

Sandilands v Marsh was a hearing before the Court of King’s Bench to shew cause on a rule nisi for a non-suit following a trial at nisi prius before Abbott CJ and a jury. The defendant Marsh had been in partnership with Creed as Navy agents. The firm of Marsh and Creed had been the Navy agents to Howden, whose executors, Sandilands and others, brought the claim. Creed contracted with Howden to purchase an annuity for him and agreed that the firm would guarantee the annuity. Marsh had no knowledge of the guarantee.

The evidence (see p 675) was that “it was no part of the ordinary business of Navy agents to deal in annuities.” It was argued that the guarantee given by Creed could not bind Marsh. Abbott CJ overruled this objection and:

In essence the argument on the application to shew cause was as to whether Abbott CJ had been correct to overrule the objection and to direct the jury as he did. The rule nisi was discharged, the court (Abbott CJ and Bayley, Holroyd and Best JJ) unanimously agreeing that Marsh was bound by the guarantee.

I think I should set out the important passages in each of the four judgments. Abbott CJ at p 678 said this:

He continued at pp 678-679:

Bayley J at pp 679-680 put the same point this way:

Holroyd J at p 681 agreed:

Best J at p 682 said:

It is clear that the Court of King’s Bench was much exercised by the commercial implications of a decision the other way. I can well understand why, and I might add that the points have lost none of their force in the almost 200 years that have since elapsed. Abbott CJ began his judgment at p 678 with this observation:

Best J made much the same point at p 682:

Sandilands v Marsh was considered by the Court of Exchequer in Brettel v Williams but distinguished on the facts. The relevant passages are set out in full in paragraphs [44] and [46] of the judgment below and I need not repeat them. It suffices to say that no doubt whatever was cast on the correctness of the earlier decision: see the comment at p 629 by Parke B, giving the judgment of the court. Indeed, Alderson B is reported at p 626 as commenting during the course of argument, when pressed with the earlier decision:

The distinction between the two cases was correctly expressed by the judge at paragraph [47] of his judgment:

I agree also with the judge’s formulation of principle in paragraph [49] of his judgment:

Now given the judge’s findings of fact, and these were not the subject of challenge in the appellants’ notice of appeal, the present case is, in my judgment, indistinguishable from Sandilands v Marsh. For, as the judge correctly said at paragraphs [27]-[28] of his judgment:

Accordingly, if Sandilands v Marsh is still good law the judge was correct to treat it as being, in the final analysis, determinative of the issue in the present case. Mr Hurst submits that the case is no longer good law. I do not agree. Sandilands v Marsh is, in my judgment, still as good law as it ever was.

Sandilands v Marsh and, at least on this point, Brettel v Williams have never been doubted. They have stood unchallenged in successive editions of Lindley on Partnership both before and since the Partnership Act 1890. Sandilands v Marsh is referred to without disapproval both in the current edition of Lindley and by Mr Blackett-Ord in his book: see Lindley & Banks on Partnership (ed 18, 2002) para 12-72 and Blackett-Ord on Partnership p 355.

Mr Hurst submitted, somewhat faintly, that Sandilands v Marsh is not consistent with section 5 of the Act. I do not agree. Nor would Lord Lindley. The last edition of Lindley published before the Act was edited by Lord Lindley himself. He revised the proofs of the next edition, published after the Act. The text dealing with Sandilands v Marsh and Brettel v Williams passed unchanged from the one edition into the next, save for the general observation that section 5 of the Act “is in accordance with” the case law: compare Lindley (ed 5, 1888) at p 138 and Lindley (ed 6, 1893) at p 150.

As Lord Justice Chadwick explained during the course of argument, there is no conflict between Sandilands v Marsh and section 5. The underlying rule recognised in Sandilands v Marsh – that the firm is bound by acts done by a partner for the purpose of partnership business – has been enacted as the first limb of section 5. The importance, in the present context, of the judgments in Sandilands v Marsh is that they make it clear that, where a contract entered into by a partnership for the purpose of its business requires an act to be done, that act (when done) is itself to be regarded as done for the purpose of the partnership business, notwithstanding that (absent the contract) the act would have been outside the usual business of the partnership. I entirely agree with my Lord’s analysis.

Mr Hurst’s real point was that Sandilands v Marsh is not consistent with more recent authorities which, he says, establish that there can be no ratification without full knowledge of all the material facts. In this connection he relied upon the observations of Lord Atkinson in Eastern Construction Co Ltd v National Trust Co Ltd [1914] AC 197 at p 213, of Viscount Dunedin in J C Houghton and Co v Nothard, Lowe and Wills Ltd [1928] AC 1 at p 14 and of Slynn J (as he then was) in London Intercontinental Trust Ltd v Barclays Bank Ltd [1980] 1 LlR 241 at p 250.

Those cases are all far removed from the present type of case – in fact none of them was a partnership case – and none of them addresses the key point in Sandilands v Marsh: namely that once a partnership has treated a particular transaction as part of its business then, whether or not that transaction is part of the regular business of the partnership (or, as section 5 would put it, “business of the kind carried on by the firm”), the transaction becomes, as Holroyd J put it, “part of the partnership business” with the consequence “in point of law”, as Abbott CJ said, that the partnership is bound not merely by the transaction but also by any other liabilities “connected with” (the words used by Abbott CJ) or (the phrase used by Abbott CJ, Bayley J and Holroyd J) entered into with “reference to” or (Alderson B) “part of” or (the judge in the present case) “an integral part of” the transaction. In my judgment none of the cases to which Mr Hurst has referred afford him any assistance. None of them bears on the matter in hand. And none of them throws any doubt on the correctness of the decision in Sandilands v Marsh.

As Lord Justice Chadwick pointed out during the course of argument, and I entirely agree, the relevant question is not, has the partnership ratified the consultancy agreement? The correct question in the light of Sandilands v Marsh is, has the partnership adopted the provision of consultancy services as part of its business? – to which the only possible answer in the light of the judge’s findings of fact in the present case is, Yes.

The judge expressed his conclusion on this part of the case at paragraph [54(6)] of his judgment as follows:

I entirely agree. The guarantee is, as the judge correctly held, binding on HB&Co.

Mr Hurst sought also to take the point that the guarantee had never been delivered as a deed but only, as he would have it, in escrow. Now quite apart from the fact that this is not a point raised in his notice of appeal in relation to this issue – it is raised only in relation to the next issue – there is, I am satisfied, absolutely no merit in the point. I shall deal with it below.

Accordingly I agree with the judge that HB&Co is bound by the guarantee.

In the light of this conclusion it is not necessary to deal with the next issue. But it is right that I do so.

Mr Hurst sought to persuade us, as he had unsuccessfully sought to persuade the judge, that the guarantee is not binding even on the four partners in HB&Co who had executed it. I cannot accept any of Mr Hurst’s arguments.

Mr Hurst first referred us to James Graham and Co (Timber) Ltd v Southgate-Sands [1986] QB 80, and in particular the observations of Browne-Wilkinson LJ at p 94E, as authority for the proposition that, at law, there is no contract of guarantee at all unless all the anticipated parties to the contract in fact become bound. That I entirely accept, but it can avail his clients nothing in the face of clause 17 of the guarantee, which in material part reads as follows:

Nothing could be clearer. Such a clause means what it says and in my judgment is plainly effective to achieve its intended purpose. Mr Hurst was unable to point to any authority supporting his assertion that, notwithstanding clause 17, none of the intended parties was bound unless and until all had signed. I am not surprised. On what possible basis could the law – or equity – refuse to give effect to the plain words of such a provision? I can think of none. Mr Hurst sought to derive comfort from Greer v Kettle [1938] AC 156. It has nothing to do with a provision such as clause 17 and is of no possible assistance to him. There is no merit in Mr Hurst’s argument. The judge was right to reject it and to treat clause 17 as determinative of the issue.

On this aspect of the case Mr Hurst took before us, as he had before the judge, two further points:

First, he submitted that it was a condition precedent of the guarantee signed by the four individual partners that HB&Co would be bound by the guarantee, and that this condition was never fulfilled.

Secondly, he submitted that the guarantee was signed in escrow by the four individual partners, pending the guarantee binding the partnership itself, and, as the guarantee never bound HB&Co, it never came into effect as far as the individuals are concerned.

Without going into great factual detail these submissions were founded in large measure on the following matters:

As the bank knew, the negotiations between HB&Co and Mr Hopkins had been conducted since 1 November 1995 explicitly on the footing that they were “subject to [HB&Co’s] internal procedures”.

The discussions in HB&Co’s executive committee on 6 November 1995 proceeded on the basis that a business plan had to be provided by Mr Hopkins before matters could be finalised. That business plan was noted by the executive committee at its meeting on 27 November 1995 as being still awaited. Only at its meeting on 8 January 1996 did the executive committee record that the business plan had been provided.

The bank had written to Mr Hopkins as early as 9 November 1995 indicating that it needed further information “particularly in relation to partnership signatories”. The bank wrote to HB&Co on 20 November 1995 saying that the bank “will … require written confirmation that the Partners executing the document” – the guarantee – “have the authority to grant such a security and that execution is in accordance with this authority”. The bank’s file note of a meeting on 7 December 1995 between Mr Robertson of the bank and Mr Hopkins noted that “We … await written satisfaction that the Partners of [HB&Co] have authority to grant the security and that execution is in accordance with this authority.” On 8 December 1995 Mr Robertson wrote to HB&Co’s solicitor, Ms Jones, acknowledging receipt of the executed guarantee, referring to the earlier letter of 20 November 1995 and pointing out that “I still await this confirmation”. The point was repeated by Mr Robertson both in a letter to HB&Co’s partnership secretary, Mr Fergusson, dated 14 December 1995 and in his file note of a further meeting with Mr Hopkins on 15 December 1995 which also recorded his understanding that “confirmation should now be in the post”. In the event (and I need not go into details – they are all set out by the judge in his judgment) the bank never received the confirmation it was seeking.

In my judgment these facts cannot, either alone or in combination, assist Mr Hurst.

In relation to the first submission the judge said this in paragraph [61] of his judgment:

Mr Hurst has been quite unable to mount any effective challenge to those findings. I agree with the judge. Mr Hurst’s point is devoid of merit.

Mr Hurst’s next point, as I have said, is that the individual partners who executed the guarantee delivered it in escrow pending the partnership being bound, and that as it never was, the guarantee never came into effect. His argument was summarised by the judge in paragraph [64] of his judgment:

The judge rejected this argument, observing at paragraph [65] of his judgment that “the evidence does not support these contentions.” I entirely agree. Mr Hurst was quite unable to persuade me to the contrary.

Mr Hurst referred us to the well-known summary of the law by Lord Denning MR in Vincent v Premo Enterprises (Voucher Sales) Ltd [1969] 2 QB 606 at pp 619D-620E. The relevant principles are not in dispute. The only question is whether, on the facts, Mr Hurst can make good his case. Quite plainly, in my judgment, he cannot.

I do not propose to go through the facts in detail. They are all set out in the judgment of the learned judge. For present purposes it is enough, in my judgment, to focus on the events of the critical days in November and December 1995:

On 20 November 1995 there was a meeting between Mr Ross of the bank and Mr Hopkins to discuss a cheque which Mr Hopkins had drawn and which had been specially presented by the payee. Mr Ross’s note of the meeting records him as saying to Mr Hopkins that “I would not [be] held to ransom in relation to this cheque which quite simply could not be paid until we physically had possession of the fully executed guarantee”. The same day the bank wrote to HB&Co saying that the bank “will … require written confirmation that the Partners executing the document have the authority to grant such a security and that execution is in accordance with this authority”.

On 28 November 1995 the bank sent the draft guarantee to Mr Fergusson “for completion and return”. The letter continued “The Guarantee should be completed in accordance with the instructions detailed in my letter of 20 November”.

On 1 December 1995 the bank returned one of Mr Hopkins’s cheques unpaid.

Completion of the consultancy agreement took place on 5 December 1995.

On 6 December 1995 HB&Co’s solicitor, Ms Jones, sent a fax to the bank saying “Please find attached copy of the signed Guarantee which has been faxed to us from [HB&Co]” The same day (though we were told that the letter was not in fact posted until the following day), Mr Fergusson, signing himself as ‘Partnership Secretary’ and writing on HB&Co’s headed note paper which thus described him, wrote to the bank saying “I now enclose the completed Guarantee for your kind attention. Please contact me if you have any queries.”

The next day (7 December 1995) Mr Robertson of the bank had a meeting with Mr Hopkins. By then the bank had received the fax from Ms Jones, but not the letter from Mr Fergusson. Mr Robertson told Mr Hopkins that “we would contact him as soon as the completed Guarantee is received at the branch although, in the meantime, it was confirmed again that we would not authorise any further payments from his account until this is in place”.

On 8 December 1995 the bank received Mr Fergusson’s letter and the very same day allowed a number of drawings on Mr Hopkins’s account which had the effect of increasing the overdraft from £57,447.92 to £83,125.54 in a single day. (By 22 December 1995 the overdraft had risen to £143,337.63.) Mr Robertson wrote the same day to Ms Jones saying “I have this morning received the original Guarantee document, duly executed by the above firm”. Ms Jones’s reply, sent the same day, whatever else it did or did not say, did not challenge Mr Robertson’s statement that the guarantee had been “duly executed by the above firm”.

On 14 December 1995 Mr Robertson wrote to Mr Fergusson saying “I write to acknowledge safe receipt of the completed Guarantee document” and referring to the guarantee as being “in place”.

On 8 January 1996 the executive committee noted that the consultancy agreement had been “completed”.

How in the light of these events Mr Hurst can submit that the guarantee was delivered in escrow and subject to some condition is simply beyond me. Mr Fergusson said that it had been “completed”, Ms Jones that it had been “signed”. Mr Robertson made it clear in his response to Ms Jones that he was treating it as “duly executed” and in his response to Mr Fergusson that he was treating it as “completed” and “in place”. Notwithstanding his letters, and the fact that the bank was already acting on the footing that the guarantee was in place – for why else should the bank have allowed Mr Hopkins’s borrowing to increase? – neither Ms Jones nor Mr Fergusson sought in any way to disabuse Mr Robertson. Why should they? His letters set out no more than the plain truth, namely that by sending the completed guarantee to the bank under cover of Mr Fergusson’s letter of 6 December 1995 the partnership was delivering the document as a deed. There was no condition; there never had been. The guarantee was delivered as a deed and not in escrow. Any suggestion to the contrary is little short of absurd.

Referring to what Farwell LJ said in Governors and Guardians of the Foundling Hospital v Crane [1911] 2 KB 367 at p 377, Mr Hurst suggested at one stage in his argument that the question of whether a document was delivered as a deed or in escrow depended on the intentions of the grantor. Now quite apart from the fact that that is not what Farwell LJ said, the submission simply cannot be right in a case such as the one with which we are concerned.

The intention of the grantor may be of the greatest importance – may indeed be determinative – in a case, such as Beesly v Hallwood Estates Ltd [1961] Ch 105 or D’Silva v Lister House Development Ltd [1971] Ch 17, where it is being said that the grantor has delivered a document as a deed even though it has not been sent to the other side at all and indeed has never left his custody. But different considerations must apply where, as in the present case, the executed document is sent to the other party. In my judgment, a person who has executed a document containing on its face, as the guarantee did in the present case, a clear statement that it has been “executed and delivered as a deed”, and who then sends that document to the other party without any expressed indication that the document is being delivered otherwise than as a deed, simply cannot set up some private mental reservation or uncommunicated intention as the basis of a contention that the document was in fact delivered not as the deed it purported to be but merely in escrow.

The judge took the same view in paragraphs [65]-[66] of his judgment:

I agree entirely with the learned judge’s analysis and conclusion.

Finally, Mr Hurst sought to persuade us that the guarantee could be set aside as against the four partners who executed it on the ground of common mistake. He referred in this context to the judgment of Steyn J (as he then was) in Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255. With that authority I have absolutely no quarrel but I do not begin to see how it assists Mr Hurst. There is simply no foundation in fact for such a claim.

The brute fact, as my Lords pointed out during the course of argument, is that faced with clause 17 Mr Hurst’s only possible escape is a claim for rectification. But there is simply no basis for such a claim. Even if the guarantee is not binding on HB&Co, as in fact, in my judgment, it is, it is quite plainly binding on the individuals who executed it.

Mr Hurst’s final submission was that the alteration of the guarantee after its execution invalidates it as against all except the two partners, Mr Harriman and Mr Derry, who initialled the alterations. The judge, in my judgment, was right to reject this argument.

It is important for this purpose to bear in mind the nature of the alteration, as explained by the judge in paragraph [92] of his judgment:

Mr Hurst’s argument is founded on well-known authority of venerable antiquity: Pigot’s Case (1614) 11 Co Rep 26b. That, as the judge recognised, is authority for what is trite law, that any material alteration of a document such as a guarantee undertaken after its execution and without the approval of all the parties to the document renders it void.

But the precise ambit of that doctrine is now to be found in very recent authority in this court: the judgment of Potter LJ (with whom Thorpe and Henry LJJ agreed) in Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd [2000] 1 WLR 1135. Accepting counsel’s analysis of the large number of cases to which the court had been referred, Potter LJ identified two categories of materiality for the purpose of the rule in Pigot’s Case:

The first where there is an alteration which affects the very nature and character of the instrument: see at paras [23]-[24].

The other where the alteration is “potentially prejudicial” to the obligor’s legal rights or obligations: see at paras [25]-[28].

Now the present case plainly does not fall into the first category, so I can concentrate, as did the judge in the court below, on the second category. The judge set out at paragraphs [99]-[100] of his judgment the relevant parts of Potter LJ’s judgment. The key passage is in para [27] where Potter LJ said:

With all respect to Mr Hurst I simply fail to understand how the alteration in the present case can possibly have been either actually or potentially prejudicial to the guarantors. On the contrary, it was plainly for their benefit, for its purpose and effect was to confine the previous scope of the guarantee and to substitute for a guarantee of Mr Hopkins’s general indebtedness his indebtedness on a single account. Mr Hurst’s argument is devoid of merit and must be rejected. On this, as on all the other issues, the judge was plainly right.

It follows that this appeal must be dismissed.

I wish to add something about the bundles that the appellants lodged with the court. A number of matters cry out for comment and censure.

The appellants’ failure to comply with good practice and the specific requirements of relevant Practice Directions verged on the scandalous:

The simple fact is that, properly organised as they should have been, the materials to which we were referred would all have fitted comfortably into two lever arch files – one containing the relevant documents and the other the relevant authorities and other legal materials. In the event we were supplied with seven lever arch files and three additional, smaller, files – five lever arch files of documents and two lever arch files and three additional files of legal materials.

Despite overloading the bundles which they did lodge with a vast mass of superfluous material the appellants omitted from their bundles a number of key documents and important authorities. These omissions had to be made good by the bank, which helpfully provided a most useful bundle of documents and a bundle of supplementary authorities.

There were significant failures by the appellants to comply with Practice Direction (Court of Appeal: Citation of Authority) [1995] 1 WLR 1096, a complete failure to comply with Practice Direction (Citation of Authorities) [2001] 1 WLR 1001 and almost total disregard of the requirements of paragraphs 5.6(7), 5.8 and 15.11 of the Practice Direction supplementing CPR Part 52.

The appellants’ sloppy and casual approach to the preparation of the bundles was exemplified by the fact, commented on by Lord Justice Chadwick during argument, that only three of the ten bundles we were supplied with were numbered, that they (for inexplicable reasons) were numbered 5, 7 and 8, and that there were no bundles numbered 1 – 4, 6, 9 or 10.

No purpose would be served by going through all the deficiencies in the bundles in laborious detail. But I should add some further observations:

The appellant lodged four bundles of documents contained in lever arch files. It is striking that:

These bundles did not include copies of either the partnership deed, the consultancy agreement or the guarantee – these had to be supplied to us by the bank in a separate bundle which also contained, conveniently extracted from the bundles which the appellants had prepared, the small body of key correspondence and other documentation covering the period from 1 November 1995 to 25 January 1996.

The only documents contained in the appellants’ four bundles to which we were referred during the hearing of the appeal were, in the first bundle, the notice of appeal and, in the second bundle, the judgment of the learned judge and a mere handful of pages from the transcripts of evidence. We were not taken to anything in the third and fourth bundles.

The documents to which we were referred would, as I have already said, all have fitted comfortably into one small lever arch file.

The appellants supplied us with a bundle containing no fewer than thirty-four authorities and a second bundle which, calling itself the core bundle of authorities, contained further copies of twelve of these authorities. I draw attention to the following features of these bundles:

In some cases inappropriate reports had been used. Confining my comments to those authorities to which in the event we were actually referred, two cases reported in the Appeal Cases were provided to us in the form of All England Reports and one case in a nominate report reprinted in the English Reports was supplied to us in the form of another report reprinted in the All England Law Reports Reprint. These deficiencies necessitated the preparation of further bundles by both the appellants and the bank containing the full reports as printed in the Law Reports or the English Reports. To some this may appear needless pedantry on my part but it is not. The All England Reprint report that the appellants provided of Brettel v Williams did not contain the important interlocutory observations of Alderson B which I have mentioned above. For the full report of Brettel v Williams in the English Reports we were dependent on the bundle of authorities helpfully supplied by the respondent.

Two of the most important authorities – Sandilands v Marsh and Raiffeisen – for some reason had not been included in any of the appellants’ bundles of authorities. Again, we were dependent on the bundle supplied by the respondent.

We were referred to only thirteen of all these authorities. Of those thirteen only five were in the core bundle, thus rendering that bundle in large measure redundant.

The authorities, statutes and extracts from textbooks to which we were referred would, as I have said, all have fitted comfortable into a single lever arch file. In the event they filled two lever arch files and three additional smaller files.

The regrettable fact is that the court has been hampered in its handling of this appeal by the unwieldy and disorganised state of the bundles lodged by the appellants. This case is a striking example of the kind of bad practice which shows why the various Practice Directions I have referred to are needed and why they require to be complied with.

The claim in these proceedings is bought by the Governor and Company of the Bank of Scotland to enforce a written guarantee dated 1 December 1995. The guarantee is expressed to be given by “I/we Messrs Henry Butcher & Co. and we, Colin John Morley, Nicholas Dryden Schofield, Peter John Harriman and Christopher John Cameron Derry the individual Partners of the said Firm, as Partners and as Individuals, International Property & Plant Consultants … ” described, collectively, as “the Guarantor”. The document is expressed to be “Executed and Delivered as a Deed” by each of the four named individuals; and to be “Signed on behalf of Messrs Henry Butcher & Co. by Colin John Morley who has also signed as an individual”.

The defendants named in the writ are “Henry Butcher & Co (A Firm)” and the four individual signatories to the guarantee. RSC Order 81, now incorporated in schedule 1 to the Civil Procedure Rules 1998, provides that any two or more persons alleged to be liable as partners in respect of a cause of action and carrying on business within the jurisdiction may be sued in the name of the firm of which they were partners at the time when the cause of action accrued. In the circumstances that demand under the guarantee was made on 8 January 1997, the effect of the rule is that the proceedings are brought against the four named individuals and such other persons as were partners in the firm on that date. It has not been suggested that any of those sued were not also partners in the firm on 1 December 1995; alternatively, are not liable as if they were partners on 1 December 1995.

Clause 17 of the guarantee is in these terms, so far as material:

In the light of that clause, and having regard to the fact that the guarantee was expressed to be given “as Partners and as Individuals”, it seems to me unarguable that the four named individuals are not liable under the guarantee; whether or not the other persons who were partners in the firm on 1 December 1995 are also liable. I agree that the appeal against the judge’s conclusion on that point must fail.

The real question on this appeal is whether those who were partners in the firm on 8 January 1997 (and who, as I have said, were – or have been treated as if they were – partners on 1 December 1995) are liable under a guarantee which they did not execute. In my view, the answer to that question is found in the provisions of clause 5 of the Partnership Act 1890; as those provisions are to be applied to the circumstances in which the guarantee was executed by Mr Morley on behalf of the firm.

Section 5 of the Partnership Act 1890 is in these terms:

It can be seen that the section comprises two distinct limbs. The first limb may be said to define the circumstances in which a partner has implied authority to bind the firm; the second to define the circumstances in which there will be ostensible authority.

The inquiry under the first limb of section 5 of the 1890 Act is whether the act of one partner, say partner A, is done for the purpose of the business of the partnership. If it is, then, in doing that act, A is the agent of the firm and the other partners are bound by A’s act. There is no need, in such a case, for the person seeking to rely on the act to invoke the second limb.

The hypothesis which underlies the second limb of section 5 is that A’s act is not, in fact, done for the purpose of the partnership business – so that the first limb is not in point. The inquiry under the second limb – in a case where it is necessary to invoke that limb – is whether A’s act is an “act for carrying on in the usual way business of the kind carried on by the firm”. That requires consideration of two elements: (i) what business is “business of the kind carried on by the firm”; and (ii) is A’s act “an act for carrying on in the usual way” that business. Where those two elements are present, the person with whom A is dealing is entitled to treat the act as done for the purpose of the business of the partnership unless he knows that A has in fact no authority, or does not know or believe A to be a partner. In effect, A has ostensible authority to bind the firm in relation to acts which appear to be for the purpose of the business of the partnership because they are acts which could be done in the carrying on in the usual way of business of the kind carried on by the firm.

The first inquiry, therefore, is whether the guarantee dated 1 December 1995 was given for the purpose of the business of the partnership. It is, I think, of significance that the firm described its business as that of “International Property & Plant Consultants”. That appears in the guarantee of 1 December 1995; and, perhaps more pertinently, on the firm’s letter-head. It is also important to have in mind that, as the bank knew, the guarantee was given pursuant to an obligation in a consultancy agreement into which the firm proposed to enter; that is to say, the agreement dated 5 December 1995 by which the firm undertook to provide consultancy services to the bank’s debtor, Mr David Hopkins. The bank had no reason to think that the consultancy agreement was not within the “business of the partnership” or “business of the kind carried on by the firm”. And, in any event, the firm made the provision of consultancy services under the agreement part of its business by adopting the consultancy agreement. As the judge pointed out, at paragraphs [27] and [28] of his judgment ([2001] All ER 691, 700e-g), it was not in dispute that the consultancy agreement was fully effective and binding on the firm.

The judge held at paragraph [49] of his judgment (ibid, 706a) that, where a guarantee entered into by one partner was an integral part of a contract into which the partnership had entered in the course of its business, the giving of the guarantee was itself partnership business notwithstanding that its full terms might not have been known to and approved by all the partners. He derived that proposition from an analysis of two early nineteenth century cases – Sandilands v Marsh (1819) 2 B & Ald 673 and Brettel v Williams (1849) 4 Exch 623. In my view the judge was correct to hold as he did.

The relevant passages in the judgments of the Court of King’s Bench on the hearing to show cause in Sandilands v Marsh have been set out by Mr Justice Munby. It is unnecessary for me to rehearse them. They affirm the rule – later enacted as the first limb of section 5 of the Partnership Act 1890 – that the act of one partner, made with reference to business transacted by the firm, will bind all the partners. They recognise, as the counterpart to that rule, that one partner cannot bind the others in a matter which is unconnected with, or outside, the business of the partnership. Neither of those propositions are in doubt. The importance of those passages in the present context lies in the observation, in the judgment of Chief Justice Abbott, that “ … if that whole transaction [for the purchase of an annuity] was known to him, the guarantee, which is connected with it, becomes, in point of law, an assurance made by one partner with reference to business transacted by both”. And there are observations in the judgments of Mr Justice Bayley and of Mr Justice Holroyd to the same effect. As the former put it: “ … the business … is transacted by the house. If so, it must have been transacted on the terms stated”; and, in the words of Mr Justice Holroyd, “whatever engagements Creed might make with reference to [the purchase of the annuity] would bind Marsh; for, by [Marsh’s] knowledge of [the purchase of the annuity] being found … it becomes for this purpose part of the partnership business, as much as any transaction in the ordinary course of dealing.”

Relating those observations to the facts in the present case, it is clear that the guarantee must be treated as given in connection with, by reference to or for the purpose of, partnership business. That follows from the terms of the consultancy agreement. The guarantee was given, under the terms of the consultancy agreement, in order to support the business (carried on by Mr Hopkins) in relation to which Henry Butcher & Co were to provide consultancy services under that agreement. The facts fall squarely within the first limb of section 5 of the Partnership Act 1890. It is on that ground that I would dismiss the appeal against the judge’s conclusion that the other partners were bound by the guarantee signed by Mr Morley on behalf of the firm.

If that is a correct analysis it is unnecessary to decide whether the bank could have invoked the second limb of section 5 of the 1890 Act, had it been necessary to do so. It could not have been suggested in the present case – and it has not been suggested – that the bank did not believe Mr Morley to be a partner of the firm on 1 December 1995. His name was the first in the list of partners set out in the firm’s letter-head. Nor could it have been suggested that the bank knew that Mr Morley had no authority to act for the firm in signing the guarantee. Although clause 14(c) of the partnership deed then governing relations between the partners provided, in terms, that no partner should without the consent of the other partners give any guarantee on behalf of the partnership, the bank was not told of that limitation on a partner’s authority. Indeed, the bank was told by the solicitors acting for the firm in the transaction that the partnership deed was “silent on the execution of documents and therefore adds nothing further to the general law.” The relevant question – if the consultancy agreement had not itself provided for the guarantee to be given – would have been whether the giving of a guarantee was an act “for the carrying on in the usual way” the business of providing consultancy services. That is a point on which, as it seems to me, evidence would have been required.

Mr Justice Munby has set out in some detail the respects in which the appellants’ failure to comply with relevant practice directions has made the task of the court in hearing this appeal significantly more onerous than it need have been. I endorse the observations which he has made. The practice directions set out requirements calculated to assist the court to deal efficiently and expeditiously with the numerous appeals which come before it. The court is entitled to expect that solicitors – and, in particular, solicitors instructed by substantial clients in a commercial dispute – will make some effort to inform themselves of its requirements in relation to the preparation of the bundles to be used at the hearing of an appeal and to comply with those requirements. The bundles prepared by the appellants’ solicitors in the present case give no reason to think that any attempt was made to do so.

I agree that the appeal should be dismissed for the reasons given by Chadwick LJ and Munby J.

I also endorse the comments upon the way that the bundles were prepared and placed before us. However I must express my appreciation for the assistance given to the Court by Mr Hurst who in the best tradition of the bar appeared pro bono and was not responsible for the bundles.