Triodos Bank NV v Dobbs

The main question raised by this appeal is whether and to what extent a guarantee by which it is agreed:-

Introduction

By November 1998 the first phase of the project had been completed and the amount of the outstanding indebtedness to the Bank was about £800,000. The Bank then agreed that they would finance phase two of the project; the Bank then made two further loan agreements on 4th November 1998 agreeing to lend a total of £1,980,000 to the Company. The existing indebtedness continued but it was now covered by these 1998 loan agreements which had raised the borrowing limit to the amount mentioned. Each of these agreements says on its face that it “replaces” the earlier agreements. The period of the loan agreements was described as being until 31st October 1999 and in each case the security was described in the following terms:-

On 10th September 1999, the 1998 loan agreements were themselves, to use the same word, ‘replaced’ by a further loan agreement between the Company and the Bank which has been referred to as “the 1999 facility”. Under this facility the amount of the loan was raised from the £1.98 million permitted by the 1998 loan agreements to a maximum of £2.6 million. Clause 8 of the Facility provided that the Bank should continue to have the benefit of the mortgage over the site granted on 26th April 1996, the floating charge of the same date, the collateral mortgage of the life policy over the life of Mr Dobbs and the personal guarantee given by Mr Dobbs on 26th April 1996. In addition to this security, Mr Dobbs agreed to arrange for himself and his wife to execute a second mortgage over their own house in the Televillage (No. 23) in order to secure Mr Dobbs’ personal liability under the guarantee. On 19th September 1999 Mr and Mrs Dobbs did just that. When in March of 2000 Mr Dobbs and his wife moved to Polperro in Cornwall he granted a first charge on their new home replacing the earlier charge.

Apparently taking the view that the development was not a financial success, the Bank on 7th August 2000 made a formal demand on the Company for the repayment of the Company borrowing. The Bank appointed administrative receivers over the Company’s assets on 20th October. In due course the site was sold for £2,100,000 leaving a shortfall on the indebtedness of £80,622.79. The Bank decided to call on Mr Dobbs to pay under the guarantee he had signed on 26th April 1996. They made a demand on 25th June 2001 and started proceedings in the Bristol Mercantile Court on 31st July 2001. On 26th May 2002 the judge gave summary judgment in their favour declaring:-

The essence of Mr Dobbs’ argument before the judge and before us has been that his guarantee of 26th April 1996 only applied to sums due “under or pursuant” to the loan agreements of 1996 and that once those agreements were replaced by the 1998 agreements and then by the 1999 Facility Agreement, there could be no further liability under the guarantee despite the fact that the guarantee was expressly referred to in the later agreements as being security for these loans.

The Documentation

Triodosbank N.V. has agreed to lend the respective sums of £400,000 and a sum not exceeding £500,000 to Acorn Televillages Limited (Limited company No 2786103), (“the Company”) on the terms and conditions set out in two loan agreements numbered 96/782 and 96/783 (“the Loan Agreement”) (which expression means both loan agreements together or either loan agreement as the context can permit) both dated . . . April 1996.

The Guarantor, as required by the terms of the Loan Agreement, has now agreed to guarantee the liabilities of the Company under the Loan Agreement on the terms hereinafter appearing.”

The two initial 1996 loan agreements (96/782 and 96/783) themselves contained two provisions envisaging that some amendments to the terms of the loan agreements might be made in the future. First, the provision for interest was for 8.5% variable which, however, was not to exceed Royal Bank of Scotland base rate from time to time in force plus a margin of 2.5%. The second sentence of this provision was:-

As a matter of principle there is no reason why the right of the Bank under clause 2.4.1 to agree amendments or variations to the loan agreement without reference to the guarantor should be confined to amendments or variations which are expressly contemplated by the agreement; the clause must mean that anything rightly termed a variation or an amendment is a matter which can be agreed without reference to the guarantor. The question is then whether what is said to be an amendment or variation is correctly so called. To my mind an agreement which truly “replaces” the original loan agreement would not rightly be called an amendment or variation to the original agreement, since it will be a new agreement. This will be particularly true in the context of a guarantee which obliges the guarantor to pay sums falling due “under or pursuant to” a particular loan agreement. Once that loan agreement has been replaced by a second and different agreement, sums due under that new and different agreement cannot be sums due “under or pursuant to” an earlier agreement. For this purpose it does not matter whether the old agreement is discharged in the sense of the loan being fully repaid and a new agreement then made (in the technical sense of there being a novation) or whether there is a replacement agreement which is, for the future, treated as governing the parties’ relationships. The new governing agreement is not the agreement “under or pursuant to” which there falls due the money which the guarantor has guaranteed to pay.

The reason why it is necessary, in the present case, to be moderately precise about all this is because the two 1998 loan agreements mirror the two 1996 loan agreements. The reason why there were two loan agreements in 1996 is that the purpose of the smaller loan of £400,000 (Agreement No 96/782) was stated to be to:-

It seems to me, therefore, (technical though this may be) that the first of the 1998 agreements, even though it is said to “replace” its 1996 predecessor, is no more than an amendment to or variation of it, since the rescheduling was envisaged in it. The second 1998 agreement is, by contrast, considerably more than a mere amendment or variation of the corresponding 1996 agreement: not only does it “replace” the earlier agreement but it triples the sum lent and provides that it is for a considerably extended building contract. That is not a contract which, in my view, Mr Dobbs agreed to guarantee.

This conclusion is not, however, critical to the resolution of this appeal because there is yet a third (1999) agreement and the vital question for the court is whether the Company’s liability under this further agreement is something which Mr Dobbs has guaranteed. This agreement is called a “Facility Agreement”, is dated 10th September 1999 and describes the amount to be lent, under the head of Maximum Commitment, as:-

The new Facility Agreement was, therefore, considerably more than an amendment or variation of either the original loan agreements of 1996 or, indeed, the later loan agreements of 1998. It must be a question whether clause 2.4.1 of the guarantee contemplates more than one amendment or variation as being permissible. Even if a replacement of the 1996 contracts by later similar loan agreements can be regarded as an amendment or variation within that clause, a further replacement might be said not to be within the clause. But, on any view of the matter, a replacement on terms so different from the original agreement in the way I have attempted to set out in the previous paragraph cannot be an “amendment or variation” of the initial contract.

Authority

We were referred to British Motor Trust Co Ltd v Hyams(1934) 50 TLR 230 in which a Mr Lord acquired two motor coaches under two hire-purchase agreements from the claimants and persuaded his mother-in-law to guarantee his obligations by a contract indorsed on the agreements in the following terms:-

I would not wish to doubt the correctness of this decision on its facts but I would make two observations. First it is important to distinguish between a true variation of an existing obligation and the entering of what is in fact a different obligation even though it may purport to be no more than a variation. In that sense it is perfectly possible (and, indeed, right) to put a “limit to the power to vary”. Secondly the proviso to the guarantee ensured that in any event Mr Lord’s mother-in-law was never going to be liable for more than whatever she would have been liable for under the guarantee in its unamended form. This is an even tighter proviso than a monetary limit such as that provided for in Mr Dobbs’ guarantee. The tightness of the proviso would, no doubt, be one justification for giving a wide construction to the variation provision and enabling the new arrangement to be regarded as a variation of the old one.

The first of the above observations derives some support from Samuels Finance Group Plc v Beechmanor Ltd and others (1993) P&CR 282 where Lloyd LJ said after setting out the first of the above citations of Branson J in Hyams:-

Neither of the above authorities referred to the requirement that any variation (even if there is advance agreement to a variation of the underlying loan agreement) must be within the “purview” of the agreement, but the passage in Rowlatt remains in the 5th edition (1999) para. 4-72 and, in my view, this requirement is still law.

In the light of all these authorities, the question that has to be answered is whether the new 1999 Facility is an amendment or variation of the original loan agreement which is within the purview of that original loan agreement. The fact that the intermediate 1998 agreements were “replacements” of the 1996 agreements is not conclusive of that matter since a replacement could be contemplated by a original agreement (as the 1998 rescheduling was) or a replacement might be so similar to the original agreement that it can truly be said to be a variation of it, as in the British Motor case. In this case, however, the 1999 facility was substantially different from the original two loan agreements and even if it could be said to be, on one view, a variation or amendment of those original 1996 agreements, it is certainly not a variation or amendment within the purview of the 1996 agreements.

The judge came to a contrary conclusion influenced by Mr Levy’s submissions that the essence of the facility and, indeed, the essence of the 1998 agreements was a “rescheduling of the loan” (see 25C of the transcript and the judge’s later adoption of the term at 43F). In my judgment it was considerably more than that and, for that reason, I regret I cannot agree with him. Mr Dobbs has effectively been held liable as if his guarantee were an “all monies” guarantee of all sums due from the Company (albeit with a limit), but that is not what he agreed.

That means it is necessary to consider the second way in which the Bank puts its case which is that, by agreeing that the guarantee should continue to stand as a security for the 1998 loans and, then, the 1999 facility, Mr Dobbs is estopped by convention from contending that the guarantee does not, on its true construction, extend to the 1999 facility or (to put the matter slightly differently) is estopped from asserting that the Company’s indebtedness under the 1999 facility is not an indebtedness pursuant to the 1996 agreements, as varied.

Estoppel by Convention

As to this, even if one takes it as clear that the Bank did so assume, Mr Dobbs’ evidence is to the contrary. He accepts in paragraph 13 of his witness statement of 4th March 2002 that he thought he remained liable under the guarantee but he goes on to say in paragraph 14:-

Mr Dobbs is there saying in express terms that he did not himself believe (or assume) that his guarantee applied to the 1999 facility. For judgment to be given on the basis of an estoppel by convention, the court would have to disbelieve this assertion and find that Mr Dobbs did, in fact, assume that the guarantee applied to the 1999 facility and thus that the Company’s indebtedness under that facility was an indebtedness under or pursuant to the 1996 agreement. It may very well be that he did so assume but it is not appropriate to make such a finding in summary proceedings when he himself says the precise opposite.

The judge approached (43E-F) Mr Dobbs’ evidence with caution and then made his own objective assessment, which led him to the conclusion that Mr Dobbs thought the guarantee was a continuing security for the Company’s borrowing after it had been rescheduled in 1998 and 1999. Quite apart from the fact that the 1998 agreements and the 1999 facility were much more than a mere rescheduling of early borrowing, it was with respect not right to make an objective assessment of the evidence without a trial if Mr Dobbs’ assertion as to his state of mind was not to be believed.

It may be useful to say that I agree with the judge that the estoppel is not being relied on by the Bank as a cause of action and that Mr Dobbs cannot rely on the Statute of Frauds. To that extent Mr Dobbs’ defences rightly failed for the reasons given by the judge.

For the reasons I have given, however, I cannot agree with the judge’s disposition of the matter in his judgment of 26th March 2002. I would set aside the declaration which he made and leave the Bank to proceed to trial on the question of estoppel by convention if they are so minded.

I agree.

The first question for the judge was whether, as a matter of construction, the obligations of Acorn Televillages Ltd (“the Company”) under the loan agreement dated 10 September 1999 (“the 1999 facility”) were obligations for which Mr Dobbs was liable under the guarantee which he had executed on 26 April 1996. The judge answered that question in the affirmative. I agree with Lord Justice Longmore that the judge was wrong to reach that conclusion.

The question turns on whether, as a matter of construction, the obligations of the Company under the 1999 facility were in respect of “monies and liabilities . . . which . . . may at any time hereafter . . . be due, owing or incurred by the Company to the Bank under or pursuant to the Loan Agreement” (clause 2.1 of the 1996 guarantee) in circumstances in which (i) the Loan Agreement (in that context) means one or other (or both) of the two loan agreements numbered 96/782 and 96/783, (ii) the guarantee itself provided (at clause 2.4.1) that the Bank might, at any time and without reference to the guarantor, “agree to any amendment, variation, waiver or release in respect of an obligation of the Company under the Loan Agreement” and (iii) each of the two 1996 loan agreements contained an express provision (at condition 9) that the loan might be repaid in part at any time and that (if so) “Subsequent repayments will be rescheduled under a new loan agreement between the Bank and the Borrower”.

As Lord Justice Longmore has explained, the two 1996 loan agreements were “replaced” by new loan agreements made on 4 November 1998. Agreement 96/782 was replaced by an agreement numbered 98/1056; and agreement 96/783 was replaced by an agreement numbered 98/1057. The first of those new agreements (98/1056) was expressed to be made for the purpose of “rescheduling existing borrowing under agreement No 96/782 . . .”; and it was for an amount (£380,000) which represented the balance of the loan (£400,000) which had been the subject of agreement 96/782. The second of those new agreements (98/1057), on the other hand, was expressed to be made not only for the purpose of rescheduling existing borrowing under agreement 96/783 (£500,000) but also for what, as Lord Justice Longmore has explained, was the second stage of the development project (“the renovation of farm buildings and conversion to workspace together with the construction of 21 energy efficient homes at the site known as Upper House Farm . . .”) and was for an amount (£1,600,000) which was substantially greater than the existing borrowing under agreement 96/783.

I agree that the Company’s obligations under the first of the new loan agreements made in November 1998 (98/1056) were obligations within the scope of the 1996 guarantee. That is because agreement 98/1056 – although “a new loan agreement” - can properly be regarded as an agreement which was made in order to reschedule “subsequent repayments” under agreement 96/782 following repayment in part of the loan made under that earlier agreement. The 1998 agreement falls squarely within condition 9 of the 1996 agreement. The 1998 agreement is plainly a variation or amendment “in respect of an obligation of the Company under the Loan Agreement” for the purposes of clause 2.4.1 of the 1996 guarantee; and, on a true construction of the 1996 guarantee, the obligations under agreement 98/1056 are properly to be regarded as obligations “under or pursuant to” agreement 96/782 for the purposes of clause 2.1.

I agree, also, that the Company’s obligations under the second of the new loan agreements made in November 1998 (98/1057) were not obligations within the scope of the 1996 guarantee. Agreement 98/1057 goes well beyond a rescheduling of the outstanding indebtedness under agreement 96/983. It was made for a purpose (phase 2 of the development) which went beyond the purpose of the original loan; and it was for an amount which included substantial “new money” (£1,100,000) in excess of the original loan (£500,000). It is, to my mind, impossible to regard agreement 98/1057 as an agreement of the nature contemplated by condition 9 of the earlier loan agreement; and it is impossible to regard agreement 98/1057 as an agreement which does no more than amend or vary “an obligation of the Company under [agreement 96/783]” for the purposes of clause 2.4.1 of the 1996 guarantee.

It is important to keep in mind that the underlying obligation of the guarantor under the 1996 guarantee – clause 2.1 – is in respect of monies and liabilities due, owing or incurred by the Company “under or pursuant to” the 1996 loan agreements. It is important to keep in mind, also, that the guarantor is not to be taken to have agreed that his liability under the guarantee would be increased or made more onerous by a subsequent agreement made between the lender and the borrower (to which he is not party) unless there are clear words in the guarantee which show that he did agree to be bound to a more onerous obligation in the future imposed without further reference to him. In the present case, clause 2.4.1 of the 1996 guarantee, read with clause 2.1, exposed the guarantor to the risk that his liability in respect of obligations of the Company under the 1996 agreement might be made more onerous by an amendment or variation of those obligations. Clause 2.4.1 did not expose him to the risk of liability in respect of additional obligations of the Company which were not properly to be regarded as an amendment or variation of existing obligations.

Although it may be said that agreement 98/1057 does amend or vary an obligation of the Company under agreement 96/783 – in so far as the later agreement reschedules repayment of the debt under the earlier agreement - the 1998 agreement imposes additional obligations which cannot be seen as an amendment or variation of any obligation in the 1996 agreement. In particular it imposes obligations to repay new monies lent for a different purpose. It cannot be said that the obligations of the Company under agreement 98/1057 (taken together) are no more than an amendment or variation of the obligations in agreement 96/783. Liability as guarantor in respect of the obligations of the Company under agreement 98/1057 is substantially more onerous than liability as guarantor of the obligations under agreement 96/783. It is no answer to say that the guarantor’s liability under the 1996 guarantee is limited to £50,000. The risk that the guarantor will be called upon to pay £50,000 – in circumstances where the loan is secured by fixed and floating charges over the borrower’s assets (including the development site) – is substantially greater if the loan is £1.6 million than if the loan is £500,000.

It follows that, upon a true analysis, the position immediately before the 1998 agreements were replaced by the 1999 facility was that Mr Dobbs had remained liable on his 1996 guarantee in respect of the Company’s obligations under agreement 98/1056; but that he was not liable as guarantor in respect of the Company’s obligations under agreement 98/1057. The question then, as Lord Justice Longmore has pointed out, is whether the Company’s obligations under the 1999 facility can be treated as obligations “under or pursuant to” agreement 96/782 – accepting, for this purpose, that the obligations under agreement 98/1056 were themselves properly to be regarded as obligations under or pursuant to the earlier agreement.

The answer, in my view, is plainly “No”. It is difficult to regard the 1999 facility as the rescheduling of debt due under agreements 96/782 or 98/1056. The facility agreement provides, in terms, for draw-down to be applied to repay the existing indebtedness. But, even if the 1999 facility could be said to vary or amend an existing obligation under the 1996 agreement in that respect, it is beyond argument that the 1999 facility imposes new and different obligations in respect of the “Maximum Commitment” (£2.6 million); obligations which cannot be said to be by way of variation or amendment of any obligation under or pursuant to the 1996 agreement. And there can be no doubt that the obligation of a guarantor in respect of the borrower’s obligations under the 1999 facility agreement would be substantially more onerous that the obligation in respect of agreement 96/782.

That leaves for consideration the second question that was before the judge. Is Mr Dobbs estopped by convention from contending that, upon its true construction, the 1996 guarantee does not have the effect that the Company’s indebtedness under the 1999 facility is within its scope? For the reasons set out by Lord Justice Longmore that was not a question which could be determined on an application for summary judgment. Mr Dobbs’ assertion that he never thought or assumed that his liability as guarantor extended beyond a total indebtedness of £900,000 should not have been dismissed, summarily, as incredible. He was entitled to a trial on that issue.

I agree that the appeal should be allowed; and that this Court should make the order which Lord Justice Longmore has proposed.

Appeal allowed. Declarations made by His Honour Judge Havelock-Allan QC on 26 March 2002 and paragraph 1 of the order of Lewison J made on 19 May 2004 be set aside.

The respondent to pay the appellant’s costs of the appeal and below, to be the subject of detailed assessment if not agreed.

The appellant’s costs to be set-off against the costs which Lewison J ordered the appellant to pay the respondent in paragraph 5 of his order dated 19 May 2004.

There shall be a case management conference on the first open date after 14 days before a Master of the Chancery Division.