Capital Bank Cashflow Finance Ltd. v Southall

This is an appeal by Capital Bank Cashflow Finance Ltd. (formerly Kellock Ltd.) (“the Bank”) from a judgment given on 17 December 2003 by Mr David Oliver QC sitting as a deputy judge in the Chancery Division. He thereby dismissed the Bank’s claim against the respondent, Mr Ian Southall, under an undertaking given to the Bank in July 1996 in relation to a company, VSLI Group plc, of which Mr Southall was a director and the majority shareholder. The judgment followed a five day trial in July 2003. The claim was dismissed on the basis that Mr Southall’s undertaking was either (1) conditional on a separate undertaking being executed in identical terms by the company’s finance director and minority shareholder, Mr McCaffrey, whose undertaking proves not to have been in identical terms, or, if not, (2) that all parties’ respective levels of expectation that Mr McCaffrey’s undertaking would be executed in identical terms were such as to make it unjust in equity to hold Mr Southall responsible, in circumstances when Mr McCaffrey’s undertaking was not in identical terms.

The background is that the company approached the Bank for a cashflow finance agreement which was eventually entered into on 3 July 1996. It is unnecessary to set out its detailed terms. Essentially the company was to assign its claims to debts becoming due to it as well as associated rights to the Bank in return for a 75% payment of their face value less commission as and when such debts became payable and balance payments as and when the Bank actually received payments in respect thereof from the relevant customer. Discount and late payment fees were payable in certain events. The company gave warranties by clause 9 as follows:

The negotiations with the Bank were conducted by Mr McCaffrey who had a preliminary meeting in April or May 1996 with Mr Whittaker of the Bank in Bristol. The nature of the facility was explained and Mr Whittaker said (as the judge accepted) that he introduced Mr McCaffrey “in outline” to the sort of documentation that would be required. After a probable second meeting, Mr Whittaker submitted a credit proposal to the Bank’s credit committee which envisaged that there would be security from the company and associated companies and (over and above this) “Personal Undertakings: Ian Southall, Peter J. McCaffrey”. The judge found:

The credit committee evidently approved the proposal. On 18 June 1996 Mr Whittaker was able to write to Mr McCaffrey this letter:

Mr Southall’s document (which was in the Bank’s standard form) contained an undertaking as follows:

The difference between the two undertakings had potential significance for all parties, and has in fact proved significant - at all events for the Bank (cf paragraph 28 below). In late 2000 the company developed a bad debt problem, which prompted the Bank to terminate the agreement and to appoint administrative receivers who took steps to recover outstanding debts. The Bank now has a claim against Mr Southall for unpaid debt under clause 9 (d) totalling some £2.8 million while Mr McCaffrey, not having given any undertaking in respect of performance of clause 9 (d), has not been sued and is not, on the face of it, liable to make any payment to the Bank or (though this might only have arisen in the event of their joint assets exceeding the Bank’s claim) contribution to Mr Southall. This difference only came to Mr Southall’s attention on 8 July 2003, just before trial, when the Bank for the first time disclosed Mr McCaffrey’s undertaking (probably prompted by a request by Mr Southall’s solicitors by letter dated 1 July 2003 to confirm that no such undertakings existed or that, if they did, they be disclosed). Just before such disclosure, Mr Southall’s solicitors had obtained and served a witness statement from Mr McCaffrey, saying that he had no recollection of signing any undertaking and had been told by the Bank that they had no such undertaking on file.

In these circumstances Mr Southall raised as defences at trial: (a) misrepresentation, (b) that it was a condition precedent to his undertaking that Mr McCaffrey should have entered into an undertaking in identical terms in the Bank’s favour, (c) fundamental mistake and/or (as I read paragraph 16A(d) of the amended defence, although this is predicated upon there having been a misrepresentation), (d) estoppel, and finally (e) that the difference between the two undertakings made it inequitable for the Bank to enforce his undertaking against Mr Southall. In the circumstances described in the previous paragraph, permission was only sought and obtained to raise defences (b), (c), (d) and (e) on the first day of trial. This may help explain why not all the case law relevant to them was put before the judge. The judge accepted defence (b) or, if necessary, (e). The Bank now appeals. Mr Southall cross-appeals in respect of misrepresentation. I will start by outlining in greater detail the issues which arise.

The limited ambit of the pleaded defence is important. In the following extract, paragraphs 8 and 11 were part of the original defence, while the remaining paragraphs derive from the amendment allowed on the first day of trial:

The Bank’s witnesses, Mr Whittaker and Mr MacGill, were adamant that they would not have made any representation to the effect that Mr Southall’s undertaking was limited to circumstances in which the company engaged in fraudulent activity. Both Mr Southall and Mr McCaffrey were adamant that such representations had been made. The judge found this:

The judge thus only dealt expressly with the allegations in paragraphs 8 and 11(g) of a representation that the undertakings were (only) directed at the possibility of fraud. Since he confined himself to finding common expectation, he may have felt that nothing in paragraphs 8A and 11(hh) and 11A could justify a finding of any positive misrepresentation. The allegation of such a misrepresentation appears to have been treated at trial as very much a subset of the issue whether it was a condition of the two undertakings that they were in identical terms (or whether equity would grant relief if they were not). That is how it appears in the written notes used by Mr Ellis QC for Mr Southall during his final submissions at trial, which rely on the same facts compendiously in support of the allegations of both a condition and a misrepresentation. It is possible in theory to conceive of a situation where the facts justified a finding of material misrepresentation but were insufficient to justify a conclusion that there was a condition (or that equity should, if it could, intervene). The fact that Mr Southall’s guarantee was not linked by its terms to any other guarantee might be said to militate in support of such a conclusion. But, even then, if there was a clear statement as to the identical nature of the intended or actual guarantees, on which Mr Southall was entitled to rely when executing his undertaking, this could often be analysed as giving rise to a collateral condition of its validity, and such an analysis would also assist to avoid some of the possible problems associated with misrepresentation (e.g. any need for a misrepresentation of current fact). Nevertheless, Mr Ellis submits if necessary that such findings as the judge did make, read together with other uncontrovertible evidence, justify a conclusion that there was a simple representation that the two undertakings presented on 3^rd July 1996 were in identical terms; or, alternatively, that, if they do not justify such a conclusion, then we should consider ordering a new trial in order for the facts to be more fully found.

The judge made the following findings of fact:

He went on:

Meeting the Bank’s submission that the position was different where each surety expected to sign a different document in identical terms, he said:

The judge’s central finding of fact was that all parties to all the documents held the same expectation that the two undertakings would be in identical form. As I have already mentioned, Mr Ellis submits pursuant to the respondent’s notice that the judge should have gone further, to conclude or find that there was a misrepresentation that they were in fact in identical terms. Mr Ellis also invites us to make certain further findings to justify the conclusion that the undertaking was conditional, particularly a finding that

The authority of James Graham, which the judge cited briefly in relation to the position of a joint and several guarantee, contains a valuable analysis, which the judge did not address, of previous authority - particularly as to the basis on which a joint and several contract or deed may be unenforceable where not all the contemplated guarantors have signed. Further there are at least two subsequent English authorities dealing with the position of separate securities which were and are binding on the judge and on us, but to which the judge was unfortunately not referred although they are discussed, together with James Graham, in Rowlatt on Principal and Surety (5^th Ed.) (1999). These authorities are Byblos Bank Sal v Al-Khudhairy [1987] BCLC 232 and TCB Ltd.v Gray [1988] 1 AER 108. In none of these cases, however, was there (or could there on the face of it have been) any allegation of misrepresentation. Leaving aside for the moment, therefore, the possibility of misrepresentation, the reasoning in all three authorities establishes that the relevant question is whether Mr Southall’s agreement to execute and his execution of his undertaking was, expressly or impliedly, conditional upon Mr McCaffrey executing an undertaking in identical terms. That, as indicated in the headnote to TCB Ltd. v Gray, depends upon a proper analysis of the contractual relationship between the Bank and Mr Southall.

The judge accepted a proposition that equity may relieve in circumstances wider than those where the common law can assist, although he introduced the proposition initially by saying that “it appears” or “seems” to exist. He relied on the extract from a judgment of the Court of Appeal in New South Wales in the case of Bleyer quoted in paragraph 12 above. But the reasoning in James Graham, Byblos and TCB does not in my opinion leave room in the present case for any wider equitable relief. It is true that the 19^th century cases referred to in James Graham make considerable reference to the position in equity. But both O’Connor LJ and Browne-Wilkinson LJ in James Graham explained the establishment of an equitable doctrine in Evans v Brembridge (1856) 25 LJCh 334 (CA) as referable to a pleading problem in common law which might have led to the signing surety being held liable at law (see pp 88G-H and 94D-E). I add only that it seems at one stage to have been, or to have thought to be, the law that, in the case of a joint and several deed (as distinct from an ordinary contract), execution by any one party bound him or her, even if other anticipated parties did not sign: see e.g. Lady Naas v Westminster Bank Ltd. [1940] AC 366 at pp. 375-409. But that principle has (like any pleading difficulty) disappeared: see e.g. James Graham itself, a case of a deed. In James Graham equity’s power to intervene was narrower than the common law’s, because equity only operates on the conscience of a plaintiff and on the facts in James Graham the plaintiff had no knowledge or notice that one of the surety’s signatures was a forgery: see per Browne-Wilkinson LJ at pp. 93G-94D. Mr Ellis argued that, although it is now recognised that the law can intervene whenever one surety’s signature is expressly or impliedly conditional on another’s signature (cf Byblos and TCB), equity retains still wider power to intervene “in circumstances affecting the conscience” of a claimant. But this stands the reasoning in James Graham, Byblos and TCB on its head. If the circumstances amount to no more than the expectation which was found insufficient in Byblos and TCB to make the other surety’s signature a condition, where is the equity to be found? The Bank is, absent any condition as to liability, entitled (whether deliberately or by inadvertence or mistake) to take another guarantee in different terms, and it cannot be said to be inequitable to do so. In summary, there is, in a case like the present, no wider discretion in equity based on mere expectation, not amounting to a term or condition. In so far as the New South Wales courts may have held that there is, that does not represent English law.

There is, with respect to the judge, also a relevant distinction between the position where a single document is on its face intended to be signed by more than one person undertaking liability as a guarantor or indemnifier and the position where different documents are prepared, each to be signed separately by a single guarantor or indemnifier. This distinction is also recognised in Rowlatt where the text after referring to Byblos states at p.118:

The judge in his findings of fact found that all parties expected that the undertakings would be in identical terms. A common expectation without more is not sufficient to provide a defence. Byblos is instructive. The credit facility there granted by the Bank to a company was to be secured by two separate guarantees (in the event, one for £1 million the other for £1.3 million). The March 1984 letter offering the facility had stated:

Counsels’ skeleton on behalf of Mr Southall invokes the surrounding circumstances in support of a conclusion that there was a term making the execution by Mr McCaffrey of an identical undertaking a condition of Mr Southall’s execution of his undertaking. The skeleton refers to these facts:

However no suggestion that it was obvious that Mr Southall would have refused to sign was put to the Bank’s witnesses. Mr Ellis submits that the judge found, or alternatively should have found, more than a mere expectation. Particular reliance is in this connection placed on the Bank’s letter dated 18 June 1996, accepted by Mr McCaffrey on behalf of the company, and the joint signing meeting of 3 July 1996. But the letter merely set out the Bank’s requirements. It was in principle no different from the letter of March 1984 (cf paragraph 18 above) which was considered in the judgment in Byblos at p.240c-d. I do not consider that the letter involved any necessary promise or representation about the terms of the undertakings, still less that they would necessarily be identical. The joint signing meeting gave effect to this letter in so far as the Bank pursued its requirement for and obtained signatures to two separate undertakings. I do not see any basis for concluding from the simultaneous nature of the signing ceremony that the Bank thereby promised or represented that the two undertakings were necessarily identical, still less that it must have realised that Mr Southall and or Mr McCaffrey required this to be so. I note that in TCB the guarantee was executed in the context of what was effectively a single transaction, even though the guarantee happened to be executed the day before the debenture because the guarantor was about to travel to Switzerland.

Mr Ellis referred us to paragraph 21 in the judge’s judgment where the judge was setting the background before moving to controversial matters. The first sentence of paragraph 21 echoes a similar sentence in each of the first witness statements of Mr Southall and Mr McCaffrey where both were on the face of it asserting that only one undertaking – one document – was produced at the signing meeting as an undertaking which Mr MacGill stated had to be individually signed by both Mr Southall and Mr McCaffrey. The unamended defence at this stage also only referred to a personal undertaking to be signed by Mr Southall (see paragraph 11(c)(d), originally numbered paragraph 6 (c)(d)). Very shortly after preparation of these first witness statements, the Bank disclosed Mr McCaffrey’s separate undertaking. Mr Southall then served a second witness statement saying this:

Mr Ellis says that, despite the way in which the defence and first witness statements were formulated, it was always Mr Southall’s recollection that Mr McCaffrey had signed a separate undertaking. In that case, the defence and first witness statements seemed to me surprisingly silent about this recollection – indeed, as I have said, Mr McCaffrey’s witness statement said that he had no recollection of signing any undertaking and that the Bank had confirmed it had none. But, assuming it always to have been Mr Southall’s recollection that Mr McCaffrey had signed a separate undertaking, the judge in the first sentence of paragraph 21 cannot be read as doing anything more than recite the apparent effect of Mr Southall’s and Mr McCaffrey’s original account. In the last three sentences of paragraph 21, he sets out their ultimate evidence, which uncontroversially accepted that there were two documents. In those sentences the judge leaves the circumstances of the signing of the two documents, which were controversial, until later. In paragraph 27 in the first sentence, the judge accepts Mr Southall’s evidence “in this regard”, in other words to the effect stated in paragraph 26, namely that Mr Southall “expected that the undertaking signed by Mr McCaffrey would be in the same terms, so that their liability would, in effect, be joint and several”. That, as I have said, is the limit of the judge’s finding.

Nor in my opinion could paragraph 5 of Mr Southall’s second witness statement (cf paragraph 21 above) provide the basis for any further finding. Most of paragraph 5 goes to Mr Southall’s subjective state of mind, and to the fact that no-one at the meeting mentioned that there was any difference between the two undertakings. Mr Southall’s further general statement that “all discussion about these documents was on the basis that both documents were identical (other than the person signing or witnessing)” might by itself be taken to be suggesting that there was some unspecified express indication that the two documents were identical. But no such indication was pleaded, and it was not suggested before us that the oral evidence supported any such oral indication.

In his reply Mr Ellis also referred to the last sentence of paragraph 15 of the judgment. This relates to the first meeting in April/May 1996. Mr Ellis seemed to suggest initially that this amounted to a finding that Mr Whittaker had produced the Bank’s standard form of undertaking as the form of undertaking which would be required. No such suggestion was pleaded, and Mr Southall’s and Mr McCaffrey’s evidence at trial was that the first time they saw any documentation at all was on 3 July 1996. Mr Ellis then made clear in his reply that he was not seeking to say that there had been any representation by Mr Whittaker at the meeting in April/May 1996 or that Mr Whittaker produced the standard form of undertaking. However he did seek to rely on Mr Whittaker’s evidence that Mr Whittaker carried the standard form of undertaking in a briefcase with him and, in common with other officers of the Bank, intended that the undertaking should be in its form. Mr Ellis submitted that such matters should be taken into account as part of the “matrix”. However, that cannot be so, if (as was the case) Mr Whittaker said nothing about such intention or about the contents of his brief case and did not produce any such standard form at the meeting in April/May 1996.

The result is that, despite the judge’s sparse treatment of the facts, his essential factual finding stands, and there was and is no basis for a further finding that Mr Southall’s guarantee was subject to, or was only entered into upon or in consideration of, a condition that Mr McCaffrey’s should be or was in identical terms. This was a case of unexpressed common expectation, no more. Consideration of the pleadings and of such of the evidence as we have seen or been told about shows that the matter could not have been put any higher. The judge’s conclusion that such an expectation could and should be formulated or treated as giving rise to a condition of liability cannot be supported. His conclusion ignores the distinction between subjective states of mind and the objective assessment which is required in contract. It also ignores the fact that an expectation, even a shared expectation, is not without more the equivalent of a requirement or condition by the party to whom the document is presented for signature. The judge was wrong in law to conclude that equity could afford relief in such circumstances, where the law could not. It is unfortunate that he was not referred to the relevant authorities in this court.

I must say a brief word about the clause in the undertaking whereby Mr Southall’s obligations were not to be affected “by your releasing any security or other surety’s obligations”. Such a clause was treated as important in TCB: see pp. 112e-h and 115f. But in Evans v Brembridge at first instance Page Wood V-C pointed out the difference between a security that never existed and a security that existed but might be released. He said this:

I return to the allegation of misrepresentation as to the identical nature of the two guarantees, with which the judge did not expressly deal. Mr Ellis invites us to find that the circumstances gave rise to such a misrepresentation, as pleaded in paragraphs 8A, 11(hh) and 11A (cf paragraph 8 and 9 above). However, once one concludes that there was nothing in the pre-agreement negotiations (particularly the meeting of April/May 1996 and the letter of 18^th June 1996) and nothing in the presentation of the two undertakings at the signing meeting of 3^rd July 1996 to give rise to any condition (whether part of or collateral to Mr Southall’s undertaking), I do not consider that there was or is on the facts of this particular case any realistic scope for a conclusion that there was an implied misrepresentation, on which Mr Southall was entitled to rely in his own interests, to the effect that Mr McCaffrey’s undertaking was in identical terms. It follows also that there is no basis for ordering the new trial that Mr Ellis sought as a final resort.

There is also no call to consider the nature or scope of any relief that might have been available in equity, since equity offers no possibility of relief in circumstances wider than those in which the common law could intervene. Nor is there any call to consider Mr Sheldon’s submission that, if there had been a misrepresentation, the court should refuse rescission under s.2(2) of the Misrepresentation Act 1967, and award damages in lieu; and I need not therefore speculate as to how any such damages might have been assessed. I note only that the judge was told that neither Mr Southall nor Mr McCaffrey had or has the means to meet even half the Bank’s large claim. It thus appears that, on the particular facts of this case, even if Mr McCaffrey had been liable in identical terms to Mr Southall as Mr Southall expected, this would not in the events which have actually occurred have reduced Mr Southall’s exposure to the Bank, which is to the full tune of his assets. It might thus have been open to the Bank to observe under s.2(2) that Mr Southall has not in fact suffered any loss in consequence of Mr McCaffrey being fortunate enough not to be under any liability. That is not, of course, to gainsay the fact that in other circumstances Mr Southall might have suffered considerable detriment as a result of Mr McCaffrey not being liable. All this is, however, irrelevant in the absence of any relevant misrepresentation or any basis to apply s.2(2).

The result is that, despite all parties’ common “expectation” that the two undertakings which the Bank required for its own protection would be or were in identical wording, there was no term or condition and no misrepresentation to that effect in Mr Southall’s favour. Mr Southall was and is liable to the Bank, irrespective of the fact that Mr McCaffrey undertook no identical exposure. This appeal must, in my judgment, be allowed accordingly.

I agree

I also agree.