Lloyds TSB Bank Plc v Hayward

In this action the appellant, Lloyd’s TSB Bank Plc (“the bank”), made claims under three guarantees given by the respondent, Mr Hayward. Those claims, which initially amounted to a total of £650,000 plus interest, came to trial before Rimer J. In the course of the trial the bank limited its claims to £400,000 plus interest. The bank succeeded and Rimer J gave judgment in its favour on 22 March 2002. Mr Hayward appealed to this court. The appeal, which was heard by Dame Elizabeth Butler-Sloss P and Thorpe and Jonathan Parker LJJ, succeeded, the principal judgment being given by Jonathan Parker LJ. On 12 December 2002 the court ordered a new trial. The trial took place over six days in June 2004 and on 23 July 2004 Evans-Lombe J (“the judge”) gave judgment for Mr Hayward and dismissed the bank’s claims. The judge refused permission to appeal but on 12 November 2004 Chadwick LJ granted permission to appeal on two specific issues and directed that any renewed application for permission to appeal on the remaining issues should be determined by the court hearing the appeal, with the appeal to follow if permission was granted. The bank did renew its application on the remaining issues and we accordingly heard argument on all the issues, including issues raised by a respondent’s notice.

The order for a retrial made by this court on 12 December 2002 was

The underlying facts have now been summarised three times, by Rimer J, by Jonathan Parker LJ and by the judge. I shall not therefore set them out again in detail here, except so far as necessary to resolve the issues before us. The relevant background facts are those which led up to the meeting. Mr Hayward was a director and the principal shareholder of the club. At some stage he became chairman. He had made loans to the club and entered into three guarantees to guarantee the club’s indebtedness to the bank. The guarantees, which were in similar but not identical form, were dated 24 October 1991, 23 June 1992 and 20 October 1992 and were limited to £500,000, £100,000 and £50,000 respectively.

Clause 8 of the first guarantee provided:

The issue before the judge was whether Mr Hayward was released from his guarantee by what has been referred to as the rule in Holme v Brunskill(1877) 3 QBD 494. It is not in dispute that the judge correctly stated the rule in this way. A guarantor is released from liability under a guarantee given to a creditor where, after the giving of the guarantee, the creditor and the principal debtor have entered into an agreement which has the effect of altering the contractual position between them to the disadvantage of the guarantor, without his prior consent. It is common ground that the authorities show that potential disadvantage to the guarantor is sufficient.

It was common ground at the trial that, if the rights of the club and the bank were solely to be determined by the terms of a written facility letter dated 23 September 1994 and if the rights of the bank against Mr Hayward were to be determined by the terms of the guarantees, including clause 8 or its equivalent, Mr Hayward would not be released from his guarantees by the rule in Holme v Brunskill.

It was also common ground that in order to be released from his guarantees Mr Hayward would have to show the following:

that it was orally agreed between the bank and the club at the meeting that, if Mr Gardiner’s guarantee was called on to pay the instalment of £250,000 due on or before 30 June 1996, the club’s failure to repay that instalment would not be or would not be treated as an event of default under the facility letter and that the terms of the facility letter were in that regard replaced;

that the terms of clause 8 (or its equivalent) of the guarantees were varied, as between the bank and Mr Hayward, by the terms of what became known as the Hayward side letter so as to reinstate the rule in Holme v Brunskill; and

that the bank and the club entered into an agreement which brought the rule into operation.

The judge held that Mr Hayward had discharged the burden of proof in each of those three respects. The bank challenges the first two conclusions. It does not challenge the third because it accepts that it reached an agreement with the club on the terms of what became known as the Gardiner side letter, dated 3 October 1994, to which I will return below.

As the judge observed in paragraph 9 of his judgment, it was accepted that Mr Hayward’s management of the club as its chairman had resulted in an improvement of its overall financial position in the years succeeding 1991. However, its financial position remained precarious and in 1992 Mr Ken Gardiner became a director and later finance director. By the end of 1993 a move was afoot, led by Mr Gardiner, for him to replace Mr Hayward as chairman. Mr Gardiner and his supporters became known as the consortium. The consortium included Mr Willis, who was or became vice-chairman of the club. Mr Gardiner had access to legal advice and the club was advised by its solicitor, Mr Alan Griffiths. Mr Hayward was advised by Mr Neil Meldrum of Coles Miller.

In September 1993 the banking relationship between the bank and the club was transferred from the retail to the commercial side of the bank. Mr Thomas was the head of the bank’s corporate recovery department and Mr Coombs was his assistant. Mr Burrage was the commercial manager. The bank was advised by its solicitors Osborne Clarke.

In early 1994 there was a good deal of discussion between the bank, the club, the consortium and Mr Hayward as to the terms of a possible refinancing package which the judge described in paragraph 12 and following of his judgment.

On 1 August Mr Burrage wrote to Mr Gardiner on behalf of the bank setting out proposed terms for the bank’s continued support for the club. That letter included the following:

As Mr Boswood correctly observed in the course of the argument, each of those concerned had different interests to protect. The bank wanted to protect its exposure as far as possible, while wishing to continue providing financial assistance to the club if it could. The club wanted to negotiate the best financial arrangement that it could in order to keep going. Mr Gardiner had the interests of the club at heart but also wanted to protect his personal position if he were to provide a guarantee to the bank. Mr Hayward wanted to reduce his exposure to the bank, to make the best deal that he could with regard to his shares in the club and to maximise his prospects of recovering the loans he had made to the club.

It had earlier been agreed in principle that the bank would increase its total support to £2.3 million. It can be seen from the letter of 1 August that essential features of the scheme at that time included capital repayments of £250,000 on 30 June 1995 and annually thereafter, a new guarantee of £250,000 to be provided by consortium members to be released after the second loan repayment by the club in June 1996 and the reduction of Mr Hayward’s guarantees of £650,000 at a rate of one to one in line with the reduction in the bank debt.

The judge said in paragraph 16 of his judgment that it was accepted that Mr Hayward did not play a substantial part in the club’s negotiations with the bank and that such part as he did play was directed to the recovery of his loans to the club and the reduction of his liability under his guarantees. I should set out the relevant terms of a letter dated 12 August which Mr Thomas wrote to Mr Hayward. I do so because it is plain from his evidence that Mr Hayward had the terms of this letter very much in mind during the meeting.

The letter read:

There are some curiosities about the letter. I refer to only two. The first is that paragraph 2 might seem to suggest that the new guarantors were to provide two guarantees, each for £250,000. It is however common ground that it was not agreed either in the facility letter dated 23 September (referred to below), or in the oral agreement which the judge held to have been made at the meeting or otherwise at any stage before the terms of the Gardiner side letter were agreed that Mr Gardiner or any other member of the consortium would provide more than a single guarantee for £250,000.

The second curiosity is the way that something seems to have been omitted after the reference to “the new guarantors”. However, it seems to me that the letter naturally means that Mr Hayward’s guarantees would only be called upon if both the club and the new guarantors failed to meet the annual repayments due on 30 June 1996 and 30 June 1997. Thus Mr Hayward was given to understand that his guarantees would not be called upon until the club had failed to meet the instalments and the new guarantor or guarantors had failed to pay under his or their guarantees.

As the judge explained in paragraphs 18 and 19 of his judgment, the negotiations then broke down with the result that on 9 September the bank made a formal demand on the club and on 12 September made a formal demand on the guarantors including Mr Hayward. The total amount demanded including interest and charges was £2,282,652.35.

Notwithstanding the demands, negotiations continued and on 19 September Mr Willis sent a fax to Mr Thomas on behalf of the club “to set out an offer from the Club to the Bank to allow trading to continue”. The letter made it clear that Mr Gardiner was willing to offer a collateral backed guarantee for £250,000. In paragraph 23 of his judgment the judge described the position immediately before the meeting thus:

The judge first described the meeting in paragraphs 24 to 27 of his judgment. The meeting took place at the club’s premises and lasted from about 11 o’clock in the morning until about 10.30 in the evening. It was attended by Mr Thomas and Mr Coombs for the bank, by Mr Gardiner, Mr Willis and three others for the club, by the club’s solicitor Mr Griffiths and by Mr Hayward and his solicitor Mr Meldrum, although Mr Meldrum did not join the meeting until some time between 5 and 6 o’clock in the afternoon, by which time the facility letter had been signed on behalf of the bank and the club. Although Mr Hayward was still nominally chairman, the negotiations were conducted on behalf of the club by Mr Gardiner as acting chairman. Mr Hayward did not play a part in the negotiations on behalf of the club. His concern at the meeting was essentially to protect his own interests.

A draft of the facility letter, which had been the subject of negotiation in the period running up to the meeting, was brought to the meeting by the bank. Its detailed terms were very little discussed during the meeting. By the facility letter the bank agreed to provide a further facility to the club which would largely have the effect of converting the club’s overdraft into a term loan but would also provide some further funds for the club. The facility was in the sum of £2,350,000. It contained a number of conditions precedent before the loan could be drawn down. One was the execution of “the New Guarantee”, which was to be given by Mr Gardiner and, as defined in the appendix to the facility letter, was

The reference to Tranche A was to the provisions of clause 5 of the facility letter under which the total facility of £2.35 million was to be divided into two tranches, tranche A of £1.85 million and tranche B of £500,000. It is not necessary to set out the terms of the facility letter in any detail but clause 7.1 provided:

It is not I think in dispute that, on the true construction of the facility letter as executed, failure by the club to pay the sum of £250,000 on 30 June 1996, or indeed the further sum of £250,000 on 30 June 1997, would constitute an event of default which would entitle the bank to call in the whole loan and to make a claim against the guarantors, including both Mr Gardiner and Mr Hayward. Thus, if the club failed to pay any part of the sum of £250,000 on or before 30 June 1996, the bank would be entitled to demand payment under Mr Hayward’s guarantees, subject only to a pound for pound reduction if monies were recovered under Mr Gardiner’s guarantee.

At the trial it was common ground between the bank and Mr Hayward that by the end of the meeting the agreement between the various parties was not wholly contained in the written agreements between them. It was Mr Hayward’s case that by the end of the meeting it had been orally agreed between the bank and the club that the club would not be regarded as being in default for the purposes of clause 14 of the facility letter if payment of the first instalment of £250,000 due on 30 June 1996 was achieved by the bank by realisation of Mr Gardiner’s guarantee and, in particular, its cash backing. The bank denied that any such agreement had been reached but also, by contrast, said that it had been agreed that, if a call was made under Mr Gardiner’s guarantee in respect of the first payment due on 30 June 1996, that guarantee would need to be enhanced or another executed to secure the second repayment of £250,000 due on 30 June 1997.

The judge rejected the bank’s case that any such agreement was reached. He did so for the reasons given in sub-paragraphs (1) to (5) of paragraph 43 of his judgment, which are set out in detail over five and a half pages of transcript. The bank does not seek to challenge that part of the judge’s decision in this appeal. Its appeal is directed to the judge’s conclusion that the parties reached the oral agreement alleged by Mr Hayward.

Having so held, the judge then considered the next step in Mr Hayward’s argument. The club failed to pay the first instalment of £250,000 (or any part of it) on or before 30 June 1996. On 2 July it made a demand on the club for the whole amount of the loan, namely £2.35 million plus interest, and on the next day it made demands on Mr Hayward, Mr Gardiner and Mr Willis under their guarantees. It was not in dispute that the effect of the agreement which the judge held to have been made was that the bank was not entitled to call in the whole loan or make a demand under Mr Hayward’s guarantee until the club failed to pay the instalment which would be due on 30 June 1997. Mr Hayward was thus in a more favourable position than he would have been if the terms of the facility letter had remained unaltered by the oral agreement. That is so even though, as Mr Boswood observed in argument, there may have been other events of default upon which the bank might have relied under clause 14 of the facility letter, such as the club’s inability to pay its debts.

The next step in Mr Hayward’s argument was that the effect of the Hayward side letter (which I consider further below) was to disapply clause 8 of the first guarantee and the equivalent provisions in the other guarantees. The judge so held.

Finally, the judge held that the effect of the Gardiner side letter dated 3 October 1994 (to which I also return below) was that the club and the bank agreed that, if the bank called on Mr Gardiner’s guarantee either in whole or in part in respect of the instalment of £250,000 due on 30 June 1996, the club would procure the provision of a further guarantee to replace it in order to secure the payment of the instalment due on 30 June 1997. He further held that failure to provide such a guarantee would be an event of default entitling the bank to call in the whole loan and thus trigger Mr Hayward’s liability under his guarantees and that it followed that Mr Hayward was put in a potentially worse position than he was in under the agreement, including the oral agreement, reached at the meeting. It further followed that Mr Hayward was discharged from his liability under the guarantee by the rule in Holme v Brunskill.

Chadwick LJ gave the bank permission to appeal on two issues. The first was whether the bank was bound by the oral agreement which the judge found to have been made at the meeting and the second was whether the judge correctly construed the Hayward side letter. The issues upon which Chadwick LJ refused permission to appeal essentially challenge the central conclusion of the judge that any oral agreement was made at the meeting. It is convenient to consider first the question whether the judge was wrong to conclude that any such oral agreement was reached. In doing so, I will also consider the question whether the bank was bound by any such agreement, which is the substance of the question raised by the first issue upon which permission to appeal was granted.

Mr Boswood advanced a number of powerful arguments in support of the conclusion that no oral agreement was reached and I would grant permission to appeal on that question. In considering whether the appeal should be allowed it is, however, important to have in mind the restricted role of an appellate court on an appeal of this kind. The assessment of evidence, especially oral evidence, is essentially a matter for the trial judge and it is only in rare circumstances that this court will interfere with a judgment made after a trial at which the judge has heard oral evidence from a number of witnesses whose credibility is in issue: see eg Assicurazioni Generali SpA v Arab Insurance Group BSC [2003] 1 WLR 577.

This is a good example of such a case. When this court considered the appeal from the decision of Rimer J, the reason why it allowed the appeal was that the judge had not made a finding on the question when a particular note made by Mr Thomas (“the Thomas note”) had been made. As Jonathan Parker LJ observed in paragraph 65 of his judgment, had the judge found that the Thomas note was prepared after the meeting, that must at the very least have provided a significant degree of corroboration of Mr Hayward’s evidence, and thrown a corresponding degree of doubt on the reliability of the recollection of Mr Thomas and Mr Coombs. The court then specifically considered whether it would be appropriate for it to attempt to resolve the question when the Thomas note was written or whether a new trial should be ordered. Jonathan Parker LJ put it thus in paragraph 67:

Butler-Sloss P and Thorpe LJ agreed with that conclusion and with Jonathan Parker LJ’s reasoning, notwithstanding the fact that, as Thorpe LJ put it at paragraph 78, by the date of a retrial the events under investigation would probably be “nine years stale” and, in so far as the judge was reliant on the documents, he would be in no better position than this court to decide the probabilities. See also per Butler-Sloss P at paragraphs 82 to 85. In the result all three members of the court concluded that the just course was to order a retrial at which the trial judge would assess all the evidence, including the oral evidence of Mr Hayward and Mr Thomas, and perhaps others.

Mr Boswood’s submissions on behalf of the bank are collected in the bank’s skeleton argument under these headings: the necessity for clear and compelling evidence, the legal effect of statements made by the bank to Mr Hayward, the recollection of Mr Meldrum, the contemporary notes, commercial sense and the Thomas note. I shall consider those topics, albeit not in the same order.

Mr Boswood, who did not appear before the judge, submits that the judge and the parties seem to have lost sight of the parol evidence rule stated in Goss v Lord Nugent (1833) 5 B&Ad 58 at 64 that

I agree with that proposition. Unsurprisingly this point was not put in this way before the judge because both the bank and the club were saying that a binding oral agreement had been reached during the meeting, notwithstanding the fact that the facility letter was signed in the course of it. The fact that the bank does not challenge the judge’s rejection of the oral agreement it was asserting enables it to make the forensic points now taken on its behalf. However, in my opinion it does not provide any basis for allowing the appeal. It is to my mind clear from the judgment that the judge was well aware of the fact that the facility letter was signed and that the burden was on Mr Hayward to establish the oral agreement which he said was made before the meeting came to an end. There is no reason to think that the judge was not well aware of the general principles relied upon by Mr Boswood.

The role of Mr Hayward is closely related to the last point. This was not a simple negotiation between just two parties, the club and the bank. It involved others, including crucially Mr Hayward and Mr Gardiner. Mr Gardiner had two hats which he was wearing at the same time, that of acting chairman of the club and that of guarantor. Indeed during the meeting he left for a time in order to obtain independent advice as to his personal position. Mr Hayward also had two hats, although he was not wearing his club hat during the meeting. He was there to protect his position as shareholder and guarantor and, if possible, his position as lender to the club.

Mr Boswood submits that nothing said to Mr Hayward could have varied the contract between the bank and the club. However, that is in my opinion to look at the position too narrowly. There were discussions between the various parties, notably Mr Hayward, Mr Gardiner, the club and the bank. It is true that the facility letter was signed part way through the meeting but its precise terms were not discussed in detail and the meeting continued thereafter for some hours. The bank’s representatives remained and, as I read the judgment, the judge treated the agreements reached by the end of the meeting as agreements between all four participants.

As Mr Berry observed in the course of the argument, the judge made it clear in several parts of his judgment that he was considering whether the bank and the club had made a further binding agreement before the end of the meeting. In paragraph 1 he set out the issue which this court ordered to be retried (quoted above). In paragraph 36 he set out terms of reference which had been agreed before Lightman J on 11 November 2003 should stand as agreed terms of reference for the retrial. They included:

He considered what he described as three contemporaneous or near contemporaneous file notes of the meeting in paragraphs 38 to 41, the evidence relating to question (b) including in particular that of Mr Thomas and Mr Coombs from the bank in paragraph 43, the evidence of Mr Hayward in paragraphs 47 and 48 and the evidence and submissions relied upon by the bank between paragraphs 49 and 57. The judge placed particular reliance upon the Thomas note and in paragraph 59 expressed his conclusion that he could accept Mr Hayward’s account of the meeting. He made it clear in paragraph 61 that he had held that that agreement altered the terms of the facility letter.

I am not persuaded that he was wrong so to hold. Although Mr Hayward was not representing the club at the meeting, all four parties, namely the bank, the club, Mr Gardiner and Mr Hayward were closely interested in both the agreement between the bank and the club and the terms of the guarantees given by Mr Gardiner and Mr Hayward to the bank. The terms of the facility letter and of the guarantees, although made by different parties, were closely related and in a real sense bound up together. As I read the judge’s conclusions when viewed in their context, the judge regarded the discussions as involving all four parties and the agreement asserted by Mr Hayward, which the judge held to have been made out, as being both between the bank and Mr Hayward and between the bank and the club. He was in my opinion entitled to reach that conclusion.

Indeed, any other view would be much too narrow and would not reflect the commercial realities. The judge was entitled to hold that a final binding agreement between the parties was not finalised until the end of the meeting. For these reasons I would not uphold the bank’s appeal on the first ground upon which permission to appeal was granted.

It is in this connection that the topics identified by Mr Boswood arise, namely the recollection of Mr Meldrum, the contemporary notes, commercial sense and the Thomas note. In short Mr Boswood submits that there are a series of factors which lead to the conclusion that the judge was wrong to accept Mr Hayward’s evidence. They include the following, which is not an exhaustive list of every point he made.

Mr Hayward initially raised a plethora of defences which did not include the point upon which he succeeded at the trial. Mr Meldrum’s note of the meeting contains no reference to the alleged agreement and he has no recollection of it. He was present during the part of the meeting during which the agreement was said to have been made and he accepted in evidence that, if he had thought that an important variation was being made to the facility letter he would have noted it at the time, which he did not. None of the contemporary notes of the meeting supports the agreement, which is in any event inconsistent with the events which immediately succeeded the meeting, including the Gardiner side letter. The agreement makes no commercial sense and the terms of the Thomas note do not justify upholding Mr Hayward’s case.

There is undoubted force in some of those considerations. The difficulty from the bank’s point of view is, however, that to which I have already referred. The judge heard the oral evidence both of Mr Hayward and of Mr Thomas and Mr Coombs and preferred that of Mr Hayward. He did so after a careful analysis of the relevant documents and after considering the probabilities. I am not sure what conclusion I would have reached if I had been the trial judge, but I was not. I did not therefore have the advantage of hearing the evidence. I recognise of course that that advantage can be overstated, that the relevant events took place a long time ago and that we can analyse the documents as well as the judge. However, the assessment of different types of evidence is essentially a matter for the trial judge and, in order to succeed on appeal, the bank must persuade us that the assessment made by the judge was wrong. For my part, I am not persuaded that his assessment was wrong.

As indicated above, in paragraph 43 of his judgment the judge gave his detailed reasons for rejecting the bank’s positive case that it was agreed that, if a call was made under Mr Gardiner’s guarantee in respect of the first payment, that guarantee would need to be enhanced or another executed to secure the second payment of £250,000. That involved a detailed consideration of the evidence of Mr Thomas and Mr Coombs. The judge rejected their evidence that such an agreement was made. He held that it was not supported by the contemporaneous or near contemporaneous notes but, importantly, he placed particular reliance on the Thomas note.

This was the note made by Mr Thomas which (as explained above) led to this court ordering the retrial. It was in these terms:

At the time of the trial before Rimer J, and indeed of the first appeal, there was no firm or clear evidence as to when the note had been made. By the time of the retrial the bank had obtained the opinion of a handwriting expert and, in the light of that opinion, it was common ground that the note was made either on 3 October 1994 or soon thereafter. Although Mr Thomas had no recollection of writing the note, he gave an explanation of it in his statement prepared for the retrial, which the judge set out in paragraph 43(5) of his judgment. The judge rejected that explanation. He held that the note was internally consistent and amounted to a ‘what if’ review of the position in the light of the facility arrangements between the bank and the club as they stood at the conclusion of the meeting. He added:

The judge further held that that analysis of the note was consistent with subsequent events. In my opinion his analysis of the note is convincing. Moreover, I agree with him that the analysis is important, not only because it throws doubt on the reliability of the evidence of Mr Thomas in connection with the issue whether the bank’s alleged oral agreement had been established, but also because it gives support for the oral agreement alleged by Mr Hayward. After considering the detailed submissions advanced on behalf of the bank, which included most (if not all) of those now advanced by Mr Boswood, the judge made it clear in paragraph 59 of his judgment that the Thomas note played an important part in his acceptance of Mr Hayward’s evidence in this regard and in his reaching a different conclusion from that reached by Rimer J. He did so in these terms:

The judge was, in my judgment, entitled to treat the Thomas note as a strong pointer to the conclusion that Mr Hayward’s evidence should be accepted. The note seems to me to suggest that the bank thought that if the guarantor, that is Mr Gardiner, paid £250,000 in respect of the instalment due on 30 June 1996, the bank would either require “£250k new guarantees to avoid demand in year 3” or, if new guarantees were not forthcoming, the “Club needs to find £250k by 30/6/97 to avoid default Demand made 1/7/97”. The clear implication of, if not express statement in, that last phrase is that, in the absence of new guarantees, which the note seems to recognise had not been agreed, the bank could not make a default demand if the club found £250,000 by 30 June 1997. That interpretation of the note is consistent with Mr Hayward’s case that it was agreed that, in the event of the club’s failure to pay the instalment due on 30 June 1996 but Mr Gardiner paid under his guarantee, the bank would not (at any rate other things being equal) call in the loan unless and until the club failed to pay the next instalment due on 30 June 1997.

The judge had regard to countervailing submissions made on behalf of the bank. For example he referred to the evidence of Mr Meldrum. Mr Boswood points to the fact that in paragraph 43(3) the judge relied upon the fact that Mr Meldrum did not note an agreement of the kind asserted by the bank as an indication of the fact that no such agreement was made and asks why the judge did not point to the same absence of a note as an indication of the fact that no agreement of the kind asserted by Mr Hayward was made. That submission undoubtedly has some forensic force, although (as Mr Boswood recognises) the judge did describe the absence of a note as a weakness in Mr Hayward’s case. Mr Meldrum’s evidence was that various ‘what if’ examples were discussed. He did not, however, make a note of any of that part of the discussion. Although I recognize the force of the point that Mr Meldrum said that he would have noted any agreement that had been made, that was, as I see it, but one factor for the judge to take into account.

I accept the submission that the other contemporary notes do not support Mr Hayward’s case in that they do not mention an agreement of the kind upon which he relied. The judge recognised that fact in paragraph 50 of his judgment. They were a bank file note prepared from rough notes which were not retained, as explained in paragraphs 38 and 39 of the judgment, the note made by Mr Meldrum referred to in paragraph 40 and a club note stated to be minutes of a board meeting referred to in paragraph 41. It is also right to say that, with the possible exception of the bank’s note, the notes do not positively contradict the existence of such an agreement but, more importantly, they have to be read in the light of the Thomas note.

As to the bank’s note, which was prepared by Mr Thomas and Mr Coombs, the judge said that, in the light of Mr Thomas’ evidence in his witness statement and in cross-examination, he did not accept that the relevant sentences in the note were necessarily to be read as a record of what was actually agreed at the meeting, as opposed to what would need to be done in the future: see eg paragraphs 38, 43(4) and 53 of the judgment. Mr Boswood submits that, having so held in the context of the bank’s positive case, the judge failed to appreciate that the note was inconsistent with Mr Hayward’s case. The relevant part of the note read:

As put in the bank’s skeleton argument, Mr Boswood submits that on the judge’s findings, having solemnly agreed at a meeting that if Mr Gardiner’s guarantee was called in year two no further guarantee would be required in year three, Mr Thomas and Mr Coombs recorded precisely the opposite (albeit as something to be done in the future) in their file note. He submits that there could be no justification for a finding of such duplicitous conduct. However, for my part I do not think that that is an appropriate characterisation of the position on the judge’s findings. It does not seem to me to be correct that the judge was finding that Mr Thomas and Mr Coombs solemnly agreed at a meeting that if Mr Gardiner’s guarantee was called in year two, no further guarantee would be required in year three. Mr Hayward’s case was that it was agreed that, if Mr Gardiner’s guarantee was called upon in respect of the repayment due on 30 June 1996, the club’s failure to pay would not be or be treated as an event of default. It was not that there was any express collateral oral agreement that no further guarantee was required.

Less significantly perhaps by comparison with the Thomas note, the judge referred in paragraph 51 to an internal minute of 12 March 1996, recording a meeting between Mr Gardiner and Mr Randall, Mr Thomas’ successor’s assistant, to discuss the Club’s financial situation, in which this passage appears:

Some reliance is placed upon a letter written by Mr Thomas to Mr Gardiner on 26 September, which was the first working day after the meeting, and both to Mr Gardiner’s response and to the Gardiner side letter. The sequence of events, which is considered in some detail by the judge in paragraphs 27 to 31 of his judgment, was as follows. On 26 September Mr Thomas wrote to Mr Gardiner about his proposed guarantee, which had been promised at the meeting. In paragraph 2(b) of the letter Mr Thomas drew attention to the club’s commitment to repay a minimum of £250,000 per annum in the year to 30 June 1996 and in the year to 30 June 1997 and added:

Mr Boswood submits that, if the parties had indeed reached an agreement of the kind asserted by Mr Hayward and found by the judge, it is astonishing that Mr Gardiner did not reply that he had not agreed to provide a further guarantee and, moreover, that there could be no question of his doing so because the bank and the club had agreed that if his guarantee was called in in respect of the repayment due on 30 June 1996, the club would not be in default but would have until 30 June 1997 to make the next repayment of £250,000. There is again undoubted forensic force in this point but it seems hardly likely that it was lost on counsel for the bank at the trial or on the judge.

It is not easy to evaluate because Mr Gardiner was not called to give evidence at the trial. In paragraph 54 of his judgment the judge noted the bank’s reliance on the fact that Mr Hayward did not call Mr Griffiths or Mr Gardiner to give oral evidence at the trial but said that the bank could also have called them and that neither was naturally Mr Hayward’s witness. Mr Boswood criticises that approach but it seems to me that the failure of either Mr Hayward or the bank to call them is essentially a neutral factor.

In these circumstances it seems to me to be largely a matter of speculation why Mr Gardiner did not mention the agreement. One possibility is, of course, that no such agreement was reached, as Mr Boswood submits. Another is that, wearing his club hat, Mr Gardiner was anxious to ensure that relations with the bank remained good and he wanted to meet its requests, so far as he could, provided that his own exposure was not excessive. What in fact happened was that Mr Griffiths replied on 30 September to the letter written to Mr Gardiner on 26 September. Mr Griffiths’ letter asserted that Mr Gardiner said that the passage from the earlier letter quoted above was incorrect and that it should have read:

That letter was received on 3 October and on the same day Mr Thomas faxed to Mr Griffiths a draft replacement letter to be written to Mr Gardiner and countersigned by him in which paragraph 2(b) omitted any reference to re-instatement of Mr Gardiner’s guarantee but added as sub-paragraphs (c) and (d):

The judge noted that the bank’s copy of this draft letter has a handwritten note by Mr Thomas “for discussion/agreement with Ken”. The judge recorded in paragraph 31 that what then happened was this. On 6 October Mr Griffiths wrote to Aldridge and Brownlee, who were solicitors from whom separate advice was being sought by Mr Gardiner on the guarantee he was being asked to sign, enclosing a copy of the draft letter “confirming terms of the guarantee”. Their response dated 17 October contained a postscript recording the fact that on 21 October Mr Gardiner signed the guarantee and also countersigned a copy of the draft letter dated the 3 October. The guarantee is in the bank’s standard “all monies” form but with a proviso limiting liability to £250,000. It is the counter-signed letter dated 3 October which has been called the Gardiner side letter.

It is not, as I understand it, in dispute in this appeal that the Gardiner side letter evidenced an agreement both between the bank and Mr Gardiner and between the bank and the club. In any event it plainly did. In this regard I agree with the judge’s conclusion to that effect in paragraph 60 of his judgment. On that footing, it on any view amounted to a variation of the facility letter, first because it imposed a further obligation on the club to provide security, namely new guarantees to replace that of Mr Gardiner if his guarantee should be called on in whole or in part in respect of the repayment due on 30 June 1996 and, secondly because it introduced a new event of default if the club should not procure the provision of such further security.

It is submitted on behalf of the bank that, if there was indeed an agreement that failure to pay by the club on or before 30 June 1996 was not to be an event of default, it is surprising (to put it no higher) that no-one complained about the terms of the Gardiner side letter. There is I think some force in this point, although the judge said this about it in paragraph 54 of his judgment:

These are all relevant considerations to weigh in the balance. Although there is force in Mr Boswood’s submissions, they only go so far. One view of the side letter seems to me to be that it affords at least some support for Mr Hayward’s case because of the express provision that failure to provide a further guarantee was expressed to be an event of default. It may be that the bank thought that it should include an express provision to that effect because it might have been thought that, absent such a provision, the effect of the oral agreement found by the judge would have prevented the bank from calling in the loan before the club failed to pay the instalment due on 30 June 1997. It is difficult to know what was thought.

The case is to some extent bedevilled by the fact that, on the judge’s findings of fact in paragraph 43(2) of his judgment, when Mr Thomas and Mr Coombs were at the meeting they erroneously thought that the facility letter provided for a guarantee of up to £500,000 in respect of the two years. After setting out some of the evidence of Mr Thomas and Mr Coombs the judge said this:

The whole of this discussion seems to me to underline the point I have already stressed as to the role of the trial judge. He had to consider the oral evidence in the context of a number of documents not all pointing in the same direction. Notwithstanding the strength of the points made by Mr Boswood, it seems to me to be very difficult, if not impossible, for this court to say that the conclusion reached by the judge was wrong. The reason which Chadwick LJ gave for refusing permission to appeal on this part of the case was that the bank seeks to challenge, directly, findings of fact made by the judge after seeing the witnesses. That is correct. Moreover, it is plain that the judge formed an unfavourable view of the reliability of Mr Thomas and Mr Coombs as witnesses. It is almost impossible for this court to hold that he was wrong to do so.

Finally I should add that I am not persuaded that the agreement alleged by Mr Hayward made no commercial sense. The bank was receiving a guarantee from Mr Gardiner backed by cash which it did not have before. It wanted to assist the local football club and thus wanted to assist an orderly handover between Mr Hayward and Mr Gardiner and was willing to reduce Mr Hayward’s guarantee on a pound for pound basis. The arrangement held by the judge to have been made seems to me to be consistent with the letter of 12 August 1994 quoted above and to make sense in the context of ongoing support to the club. Although it can be said, as Rimer J said in paragraph 68 of his judgment, that the agreement “deprived the bank of a material slice of the legal rights conferred on it by clause 7.1 and 14 of the written agreement”, it is not easy to see why Mr Gardiner should have agreed to provide a guarantee in the sum of £250,000 in the knowledge that if it was called upon the bank would nevertheless be entitled to call in the whole loan at the same time. It seems to me to have been a sensible commercial arrangement from the point of view of all parties for the bank to acquire a cash backed guarantee from Mr Gardiner on the basis that, even if that guarantee was called upon the club would have until 30 June 1997 to provide a further £250,000 and (other things being equal) to be able to continue trading at least until 30 June 1997. After all, the bank would have received the sum of £250,000 due on 30 June 1996, albeit from Mr Gardiner and not from the club.

I am conscious that I have not focused on every point discussed in argument but for the reasons I have given I am not persuaded that the judge was wrong to accept Mr Hayward’s evidence that an oral agreement was reached before the end of the meeting which had the effect of altering the terms of the facility letter. I would therefore dismiss the appeal on the oral agreement point and on the first ground on which permission to appeal was given.

I have already set out the terms of the Gardiner side letter, which altered the terms of the facility letter. As stated earlier, Mr Hayward’s case is that the effect of that letter was to entitle him to rely upon the rule in Holme v Brunskill. However, before he could succeed on that point he had to displace clause 8 (or its equivalent) of the guarantees.

The provenance of the Hayward side letter was the discussion during the meeting. As the judge put it in paragraph 32 of his judgment, it was of concern to Mr Meldrum and Mr Hayward that once Mr Hayward relinquished his control of the club, the club and the bank might renegotiate the financial arrangements between them which would adversely affect the rate at which Mr Hayward’s liability under his guarantees to the bank would be diminished. It was with that in mind that at the meeting Mr Meldrum negotiated with Mr Thomas a form of side letter signed by the Bank and addressed to Mr Hayward to protect Mr Hayward in this regard.

After the meeting there was correspondence between Mr Thomas for the bank and Mr Meldrum for Mr Hayward and on 28 September Mr Meldrum sent to Mr Alan Griffiths a copy of the signed share sale agreement and guarantee and a copy of the form of side letter which he said he understood had been agreed between the club and Mr Hayward. It appears that the final form of the letter was agreed before 3 October. It is dated September, is the letter known as the Hayward side letter and reads as follows:-

It is not, so far as I am aware, in dispute that the agreement between the bank and Mr Hayward contained in or evidenced by the Hayward side letter was made before the agreement between the bank and the club contained in or evidenced by the Gardiner side letter. It is common ground that on 3 October Mr Thomas wrote to Mr Hayward summarising the position between the bank and Mr Hayward and saying in the penultimate paragraph:

As I see it, Mr Boswood correctly submits that it is a question of construction of the Hayward side letter, and indeed the Gardiner side letter and the letter just quoted, whether the contract contained in or evidenced by the Gardiner side letter was a renegotiation of the loan arrangements within the meaning of the Hayward side letter.

I agree with Mr Boswood that Mr Hayward had to show:

that there was a “renegotiation of the loan arrangements between the Club and the Bank as set out in the Facility Letter”;

that the renegotiation resulted in an “alteration to the guarantee repayment schedule set out in the Facility Letter”; and

that that alteration was or was potentially to Mr Hayward’s detriment.

Mr Boswood submits that there was, on Mr Hayward’s case (and thus on the findings of the judge), no renegotiation of the loan arrangements between the club and the bank as set out in the facility letter, but rather a renegotiation of what was orally agreed at the meeting. I would not, however, accept that submission because it seems to me to give much too narrow and literal a construction to the words of the Hayward side letter. Like the terms of any contract, the particular provision under scrutiny must be construed in the context of the agreement as a whole, which in turn must be considered against its surrounding circumstances or relevant background or matrix.

On the footing that the parties reached an agreement at the meeting which had the effect of varying the terms of the written facility letter, it would make no commercial sense to conclude that the renegotiation referred to in the Hayward side letter referred not to a renegotiation of the terms finally agreed at the end of the meeting but only to a renegotiation of the written terms agreed earlier. The purpose of the side letter was to protect Mr Hayward and ensure that the loan arrangements between the bank and the club should not be altered without his consent. That purpose would be frustrated if the protection the letter afforded him was only in respect of some of the terms agreed between the parties. The judge held that the oral agreement was made between the bank and the club and that it was more favourable to Mr Hayward than the agreement in its written form. In these circumstances it was plainly of considerable importance to Mr Hayward that he should be protected against any change in the overall contractual position between the bank and the club without his consent.

In these circumstances the expression “loan arrangements between the Club and the Bank as set out in the Facility Letter” naturally means the loan arrangements as set out in the letter as varied by the oral agreement. If the officious bystander had been asked whether the parties could have intended the new agreement to relate only to the unvaried terms of the facility letter he would have testily have said “of course not”.

That view seems to me to be consistent with the letter of 3 October from the bank to Mr Hayward quoted above. The reference to “any renegotiation of the loan arrangements between the Bank and the Club” naturally refers to any renegotiation of all the terms of the loan arrangements and not simply those in the written facility letter.

The view is also consistent with the conclusion in paragraph 78 of the judgment of Jonathan Parker LJ on the appeal to this court from the decision of Rimer J. It seemed to me to be right to consider this point again independently of the view previously expressed by the court but, having done so, I respectfully agree with it.

It follows that I would hold that there was a relevant renegotiation of the loan arrangements.

Mr Boswood submits that the reference to the guarantee repayment schedule must be a reference to the timing of the repayments to be made by the club as set out in clause 7.1 of the facility letter. He submits that that is made clear by statements in two documents. The first is paragraph 4 of Mr Meldrum’s note of the meeting, which reads in relevant part as follows:

The problem with the Meldrum note from the point of view of the bank seems to me to be demonstrated by the parts I have italicised. The first part shows that the purpose of the Hayward side letter was to protect Mr Hayward if the bank and the club should “renegotiate the borrowing in any manner the renegotiation of which might have an adverse effect on the programme of repayment” by Mr Hayward. It seems to me that in the note Mr Meldrum had in mind a renegotiation of any of the terms of the borrowing and not just of the terms in the written facility letter. That conclusion is reinforced by the words “as set out in the Facility Letter … or otherwise” in the draft set out in the note.

I note in passing that the note reinforces the conclusion expressed earlier that discussions continued between the club and the bank after Mr Meldrum arrived at the meeting.

The second statement is in the bank note of the meeting and is as follows:

The reference in Mr Meldrum’s note to the programme of repayment by Mr Hayward and the reference in the second document to Mr Hayward’s payments and to the guarantee reduction programme are references to Mr Hayward’s liabilities under his guarantees. I do not think that either document supports the view that the reference in the Hayward side letter to “the guarantee repayment schedule set out in the Facility Letter” is a reference only to the repayment schedule in clause 7.1 of the facility letter.

That is essentially for the reasons already given and expressed by Jonathan Parker LJ in his earlier judgment. It made no sense for the parties to limit the protection given to Mr Hayward to a renegotiation of the written terms of clause 7.1. As Jonathan Parker LJ put it, by the time of the side letters and (I would add) on the judge’s findings of fact, all parties knew that the terms of repayment in the facility letter had been varied so that payment by Mr Gardiner under the terms of his guarantee in respect of the repayment due on 30 June 1996 would avoid the club’s failure to pay that instalment amounting to or being treated as an event of default entitling the bank to call in the whole loan, while at the same time reducing Mr Hayward’s exposure under his guarantees by £250,000.

There is no “guarantee repayment schedule” referred to as such in the facility letter. To my mind the expression is naturally wide enough to include the contractual arrangements between the bank, the club and Mr Hayward reached at the meeting whereby in the circumstances just described (other things being equal) the bank would not treat non-payment by the club as an event of default unless or until it failed to pay the next instalment due on 30 June 1997 and would not make a claim on Mr Hayward’s guarantees (now reduced to a total of £400,000) until then.

On that basis the question is whether the Gardiner side letter resulted in an alteration in the contractual arrangements made between the bank and the club at the meeting. The answer is plainly yes because its effect was to change the position just described. Under it the club was bound to procure the provision of a new guarantee and failure to do so was expressed to be an event of default. Such an event of default was a new event of default and one which would entitle the bank to call in the loan and trigger Mr Hayward’s liability under his guarantees long before 30 June 1997.

The remaining question is whether the alteration to which I have just referred would be to the detriment or potential detriment of Mr Hayward. It would in my opinion plainly be to his potential detriment for the reasons just given. It would potentially provide the bank with a further event of default on which it could rely and expose him to the real risk of his guarantees being called on nearly a year earlier than might otherwise have been the case. That is to my mind so even though there might have been other events of default upon which the bank could in principle rely. It appears to me that the express provision in the Gardiner side letter gave express notice to the club that the bank would or might rely upon this new event of default. The only purpose of expressly providing for such an event of default can have been to enable the bank to rely upon it. The bank’s right to do so was potentially detrimental to Mr Hayward.

The judge reached the same conclusions. In my opinion he was entitled to do so. Although there was some debate at the hearing of the appeal as to the circumstances in which the terms of the Gardiner side letter were agreed without being shown to Mr Meldrum or Mr Hayward, it is not necessary to discuss those circumstances here because it is not suggested that Mr Hayward was asked to or did consent to its terms. The effect of the Hayward side letter was in effect to vary clause 8 (or its equivalent) of the guarantees and to reinstate the rule in Holme v Brunskill. By the terms of the Hayward side letter the bank was not entitled to enter into the Gardiner side letter without Mr Hayward’s consent. Yet it did so. The effect of doing so was to alter the terms of the loan arrangements between the bank as creditor and the club as principal debtor to the potential detriment or disadvantage of Mr Hayward as guarantor. It follows that Mr Hayward was released from his liabilities under the guarantees by reason of the rule in Holme v Brunskill. It follows that I would dismiss the appeal on the second ground upon which permission to appeal was originally granted.

For these reasons I would dismiss the appeal and uphold the decision of the judge, essentially for the reasons he gave.

I agree.

I also agree.