Skip to Main Content
Alpha

Help us to improve this service by completing our feedback survey (opens in new tab).

Investec Bank (UK) Ltd v Zulman & Anor

[2010] EWCA Civ 536

Neutral Citation Number: [2010] EWCA Civ 536
Case No: A3/2009/1674

IN THE HIGH COURT OF JUSTICE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

QUEEN’S BENCH DIVISION

COMMERCIAL COURT

THE HONOURABLE MR JUSTICE DAVID STEEL

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 18/05/2010

Before :

PRESIDENT OF THE QUEEN’S BENCH DIVISION

THE RIGHT HONOURABLE LORD JUSTICE LONGMORE
and

THE RIGHT HONOURABLE LORD JUSTICE MOORE-BICK

Between :

INVESTEC BANK (UK) LTD

Appellant

- and -

1) ARNOLD ZULMAN

2) DAVID ZULMAN

Respondents

Mr Paul Downes QC (instructed by McClure Naismith LLP) for the Appellant

Mr Stuart Adair (instructed by Radcliffes Le Brasseur) for the Respondents

Hearing dates : 5th May 2010

Judgment

The Facts

1.

This is a judgment of the court, written by Longmore LJ.

2.

Mr Arnold Zulman and Mr David Zulman, the respondents to this appeal are father and son. The family has a long history in the confectionery business, having run a successful confectionery business in South Africa before moving to the United Kingdom.

3.

Ashbury Confectionary Ltd (“Ashbury”) was incorporated by them on 4th September 1997. It manufactured chocolates and other confectionery at its factory in Corby, Northamptonshire, and sold its products both abroad and to retailers within the United Kingdom. Ashbury’s customers within the United Kingdom included Woolworths, Tesco, Sainsbury, Asda and Duchy. Mr David Zulman was the managing director of Ashbury and Mr Arnold Zulman was a non-executive director and joint chairman. At all material times Mr Arnold Zulman was semi-retired and played no part in the day to day management of Ashbury. He is now in his mid 70’s.

4.

In 2004 Ashbury required finance of approximately £2,000,000 and David Zulman and Mr Gee, Ashbury’s finance director, approached the appellant Bank to see if it would be willing to provide such finance. Following discussions with Leon Blitz and David Renwick, a series of credit applications (each slightly revised) were made to the Bank’s Credit Committee on 18th March 2004, 30th March 2004 and 19th May 2004. Finance totalling £2,500,000 in all was sanctioned by the Credit Committee on 25th May 2004 and Heads of Terms were sent to Ashbury and Mr Arnold Zulman on 27th May 2004. The Heads of Terms expressly provided that they were “subject to contract” and would only be binding on the claimant when incorporated in a final facility letter. The provision of a facility to Ashbury was finally agreed in a facility letter dated 21st July 2004 (“the Facility Letter”).

5.

The Facility Letter provided for the sum of £1,000,000 to be deposited with and charged to the bank. This sum was provided by Mr Arnold Zulman but there was a misunderstanding regarding the terms upon which it was provided. Mr Arnold Zulman had understood that the claimant just wanted to see “the colour of his money” to ensure that he was a serious man of substance. He had not been involved in the negotiations relating to the provision of the facility and did not know that a charge was to be granted over the deposit. Although the Facility Letter provided that the provision of the cash deposit and a charge over that deposit were conditions precedent to the drawing down of the facility, the deposit was not provided until 3 weeks after £2,000,000 of the facility was drawn down and the charge over the deposit was not in fact provided until many months later.

6.

In or about March 2005 a dispute arose with Woolworths, which resulted in Woolworths withholding payment of £670,000 due to Ashbury. As a result of this it was necessary to seek to draw down the further £500,000. Mr David Zulman and Mr Gee entered into discussions with the Bank during which the Bank made it clear that it would require both Mr Arnold and Mr David Zulman to execute a personal guarantee before it would permit this further borrowing. Mr David Zulman said he was unwilling to give a personal guarantee but the Bank insisted that it would not allow any further funds to be drawn down until a personal guarantee from both Mr David and Mr Arnold Zulman was in place. In the event they agreed. The Bank required them both to obtain independent legal advice and the Guarantee was executed by them on 4th May 2005. Clause 3 of the guarantee provided:-

“3. LIMITATION

The Guarantor’s liability shall be limited as follows:

3.1 the Guarantor shall only be liable under this Guarantee to the extent that the Debtor’s liability to the Bank at the time of the making of demand by the Bank under this Guarantee exceeds £2,000,000, all of which is secured by a debenture in favour of the Bank and of which £1,000,000 is further secured by a deposit; and

3.2 the maximum amount of the Guarantor’s liability shall not exceed a principal amount of £500,000 plus interest,

and any costs and expenses relating to enforcement of the Bank’s rights under this Guarantee.”

The Zulmans’ liability as guarantors only therefore arose if the company’s debt exceeded £2 million.

7.

Mr Arnold Zulman came to realise that there was little point in the Bank holding £1,000,000 on deposit against a loan of £2,500,000 and in 2006 he began to discuss with his son applying these monies in part-repayment of Ashbury’s borrowing. They both discussed this with the Bank at a meeting on 8th December 2006 and it was agreed, subject to Credit Committee approval, that the cash deposit of £1,000,000 would be proportionately applied to reduce Ashbury’s borrowing and that the interest charged on that borrowing would be reduced. Credit Committee approval was given on 13th December 2009, but negotiations continued during January 2007 and a further application was made to the Bank’s Credit Committee for approval of the extension of a repayment date. This further approval was provided by 30th January 2007.

8.

A draft variation letter was prepared on 21st December 2006, which reflected the proposed reduction in Ashbury’s borrowing from £2,604,000 to £1,604,000. This was sent to Mr David Zulman on 21st December 2006 and to Mr Gee on 28th December 2006. In early January 2007 someone at the bank appears to have appreciated that an amendment to the Guarantee would be desirable if the level of Ashbury’s borrowing was to be reduced and on 12th January 2007 a draft amended guarantee was prepared. On 24th January 2007 Mr Querido, an officer of the Bank, sent a revised draft variation letter and the draft amended guarantee to Mr David Zulman by e-mail. The draft variation letter stated that clause 3.1 of “the side letter dated 4th May 2005” was to be “null and void”; the draft amended guarantee had a new clause 3.1.

9.

On 1st February 2007 Mr Arnold Zulman authorised the bank (in writing) to apply the £1,000,000 cash deposit in part-repayment of Ashbury’s borrowing. On the same day Mr David Zulman informed Mr Querido of the Bank that there were no objections in principle to the Bank’s proposal (although some matter of detail had to be resolved) and in due course the Variation Letter was signed by Mr David Zulman and Mr Gee, on behalf of Ashbury (pursuant to a resolution of the Board of Directors) on or about 22nd February 2007, to confirm Ashbury’s agreement to the variation of the Facility Letter of 21st July 2004 and its accompanying “side letter dated 4th May 2005”. The draft amended guarantee was however never signed by either of the Zulmans. It is that omission that has given rise to the Bank’s problems in this case.

10.

On 4th January 2008 Ashbury went into administration owing approximately £1,700,000 to the claimant. On 25th March and 8th April 2008 the Bank demanded payment of the sum of £500,000 plus interest from Mr David and Mr Arnold Zulman. Their defence has always been that since Ashbury’s debt was less than £2 million, their guarantees could not be called on.

The Judgment

11.

The trial began on 11th May 2009 and lasted 8 days. In his judgment of 15th July the judge identified the six primary issues as being:-

“(1) Whether, on its true construction, the effect of clause 3.1 is to preclude any liability on the part of the defendants if the indebtedness of Ashbury is less than £2,000,000;

(2) Whether the claimant is entitled to rectification of clause 3.1 of the Guarantee;

(3) Whether, in or around January 2007, the parties concluded an oral agreement that the Guarantee would be varied to disapply clause 3.1;

(4) Whether David Zulman’s initialling of the 31st January Letter was effective to vary the Guarantee;

(5) Whether David Zulman had authority to vary the Guarantee on behalf of David Zulman; and

(6) Whether Arnold and/or David Zulman are estopped from relying on the limitation of their liability contained in clause 3.1 of the Guarantee.”

He answered these questions by saying (1) Yes (2) No (3) No (4) No (5) Not applicable and (6) No.

12.

Permission to appeal has now been granted to the Bank to appeal on a small part of issue (3); the ground was formulated in the proposed Grounds of Appeal in the following terms:-

“4.6 The judge erred in law and/or in procedural fairness in failing to make any finding as to the Bank’s case to the effect that there was an oral agreement between the Bank and the defendants reached on 1st February 2007 that clause 3.1 of the Guarantee would no longer apply.”

Preliminary Matters

13.

The respondents’ first argument was that the question whether an oral agreement was reached on 1st February was never a pleaded issue. Their second argument was that the judge had in any event made a finding in paras 52 and 53 of his judgment that no binding oral agreement had been made on 8th December “or at some later stage” and that therefore ground 4.6 was wrong as a matter of fact since the judge had made relevant findings. Even if the judge was wrong in his conclusion the appeal should therefore be dismissed.

14.

We reject these preliminary and over-technical arguments. It is fair to say that a specific oral agreement of 1st February 2007 was not a pleaded issue in the sense that what the Bank chose to call the “Second Oral Agreement” was said to have been made on 8th December 2006 or alternatively after that date “but before 1st February 2007”. Nevertheless it was clear from Mr Downes’ cross-examination of Mr David Zulman and his closing submissions that the Bank’s main case in relation to issue 3 was that an oral agreement to provide a guarantee without the clause 3.1 limitation was concluded on the telephone on 1st February 2007 and that the same defences were being run to an agreement made on that date as to any agreement made up to and including that date. Those defences were upheld by the judge in para 53 of his judgment and included the defence that the whole arrangement was “subject to contract” and therefore unenforceable until any relevant document was signed. Mr Adair for the respondents was therefore correct to say that the judge had made the relevant and necessary findings to resolve the issue. The submission, however, that that was the end of the matter and that this court could not decide whether the judge was correct unless an amendment of the Notice of Appeal was made cannot be accepted. Our function is to do justice between the parties.

“Subject to contract”

15.

Mr Paul Downes QC attacked the judge’s conclusion submitting that, although the earlier negotiations for the original Facility Letter and the first amendment and guarantee were indeed subject to contract, the judge was wrong to infer that prime facie negotiations for further amendment were on the same basis. Indeed, said Mr Downes, the right inference from the fact that earlier negotiations were expressly subject to contract and the later ones had no such express provision pointed strongly to an intention that any oral agreement reached should be binding. The parties may well have intended that any agreement reached should be recorded in writing but that did not mean that they did not intend to be bound unless and until the relevant documents were actually signed. The judge was also wrong to say that the bank’s witnesses accepted that the negotiations were subject to contract since both the relevant witnesses explained in re-examination that they thought subject to contract meant no more than that there would be a written record of the agreement.

16.

In our judgment it is important not to over-emphasise the actual phrase “subject to contract”. It is a question, in every case where a written agreement is contemplated, whether the parties intend not to be bound until the relevant document is actually signed or merely intend that the relevant document is to be the record of an agreement made orally and intended to be binding when made. As the editors of Chitty, Contracts 30th ed (2007) para 2-116 put it (albeit in relation to an express rather than (as here) implied stipulation for the execution of a formal document):-

“One possibility is that the agreement is regarded by the parties as incomplete, or as not intended to be legally binding, until the terms of the formal document are agreed and the document is duly executed in accordance with the terms of the preliminary agreement (e.g. by signature). This is generally the position where “solicitors are involved on both sides, formal written agreements are to be produced and arrangements are made for their execution”. The normal inference will then be that “the parties are not bound unless and until both of them sign the agreement”. A second possibility is that such a document is intended only as a solemn record of an already complete and binding agreement.”

17.

The surest guides to the parties’ intentions are usually the terms of the draft documents passing between them. The use of the phrase “subject to contract” is, of course, lawyer’s short-hand intending to indicate an absence of intention to be bound until the relevant document is signed but its absence does not necessarily mean an intention to be bound once oral agreement is reached. In the present case it is necessary to consider the terms of both the draft variation letter and the amended guarantee.

18.

The draft variation letter went through various permutations. It was headed “Facility letter dated 21st July 2004 and side letter dated 4th May 2005 made between” the Bank and Ashbury. Under the heading “Guarantee Amendment” it provided that there was to be a limit of £500,000 and (as we have already pointed out) that clause 3.1 of the side letter dated 4th May 2005 was to be null and void. That at once gives rise to a difficulty since, although the further loan of £500,000 was dealt with by what was called a side letter of 4th May 2005, that document had no clause 3.1. Nevertheless the obvious intention of the “guarantee amendment” was, once £1 million of the loan was paid off, to remove the requirement that there had to be an overall debt of over £2 million before the guarantee could be called on. The reference to the side letter must therefore be taken to be a reference to the original guarantee which did contain a (relevant) clause 3.1. So when Mr David Zulman, after (as we would infer) discussing the matter with his father, told Mr Querido on 1st February that there was no objection in principle (albeit some details remained to be sorted out), there was on that date an acceptance by both Messrs Zulman that the requirement of an indebtedness of over £2 million before their guarantee was called on should no longer apply. The question, however, remains whether that was intended to be binding at once or only when the guarantee (or possibly the variation letter) was signed.

19.

As at 1st February 2007, the variation letter, which was, of course, addressed to Ashbury, had the following relevant provisions as well as that already mentioned:-

“This offer will lapse if this letter is not accepted within 14 days of its date.

Please confirm your acceptance of the variations set out above to the terms and conditions of the Facility Letter by signing and returning to the Bank the enclosed copy of this letter.”

To our mind these clauses indicate that Ashbury was not to be bound until the variation letter was signed, as it in fact was on 22nd February. But only from that date was Ashbury bound and since it was expressly signed on behalf of Ashbury, only Ashbury was bound by its contents.

20.

The relevant terms of the draft guarantee are even more important although they largely followed those of the first guarantee. These were as follows:-

“3. (New) LIMITATION

3.1 The total amount recoverable by the Bank from the Guarantor under clause 2 shall not exceed the sum of £500,000 plus interest, costs and expenses”.

At the end (same as before)

“YOU SHOULD SEEK INDEPENDENT LEGAL ADVICE BEFORE ENTERING INTO THIS GUARANTEE

SOLICITOR’S CERTIFICATE

I confirm that I have explained this document to the signatory(ies)

………………………… (Signature of Solicitor)

………………………… (Name of Solicitor and Firm)

………………………… (Date)”

Just as it is clear that the variation letter had to be signed before the company was bound so it is, in our judgment, clear that the guarantors had to sign the new guarantee before they would be bound. The most telling indication is that it was always contemplated that the Zulmans would obtain legal advice before they signed the guarantee. This would be a pointless provision if the parties intended to be bound by the terms of an earlier oral agreement for the obvious reason that, if the Zulmans’ solicitor advised them against signing, the Zulmans had to be in the position of being able to take that advice.

Conclusion

21.

For these reasons, it seems to us that the judge was correct to hold that Mr Arnold and Mr David Zulman were not to be bound unless they had actually signed the new guarantee document which they never did. Mr Adair had various other arguments e.g. that there was no note or memorandum to satisfy section 4 of the statute of Frauds Act 1677 but in the light of our conclusion in the main issue there is no need to consider them. We would dismiss this appeal.

Mini Judgment

This is a mini judgment of the court written by Lord Justice Longmore following the main hand down.

Order is uncontroversial save as to costs. The issue on costs relates to what has been called the pleading point which we decided against the respondents in the sense that we did not dismiss the appeal on the basis that the appellants’ arguments were not open to them on the pleadings. Since this was hotly contested before the hearing considerable sums of money were expended and there is no doubt that the respondent raised the temperature unnecessarily by wrongly suggesting that Mr Downes misrepresented the pleading position on the course of seeking permission to appeal from Aikens LJ. Having won on this issue, the claimant Bank seeks the costs of this issue and has asked for an oral hearing on the matter.

We are satisfied that there is no need for an oral hearing which would only add yet further to the expense.

We have, however, anxiously considered the written submissions which are persuasively presented but we have in the end decided that the matter is not as clear cut as the appellants would have us believe and that we should not depart from the usual order that the costs of a successful respondent should be paid by the appellants.

The reasoning for this is that the question whether an agreement was made on 1st February 2007 was not a pleaded issue. The pleadings alleged that the relevant agreement was made in January 2007; no application to amend was made or at any rate carried though to a request for a decision. The question had surfaced, however, in the cross-examination of Mr David Zulman and was covered in final speeches. We have decided that although an agreement in principle was reached on 1st February, nothing was intended to be binding until reduced to writing and signed which it never was. It seems to us, therefore, that there was initial fault on the part of the appellants in failing to make their case clear enough for the respondents and the judge to understand it. The merits of the pleading point are thus by no means one way even though the appellants ultimately won upon it. We consider that it was so bound up with the main issue (namely whether the parties intended to be bound on 1st February) that no separate order for costs of that issue should be made. The appellants must pay the respondents costs as assessed in full and make a payment on account of those costs in the sum of £18,000.

Investec Bank (UK) Ltd v Zulman & Anor

[2010] EWCA Civ 536

Download options

Download this judgment as a PDF (153.2 KB)

The original format of the judgment as handed down by the court, for printing and downloading.

Download this judgment as XML

The judgment in machine-readable LegalDocML format for developers, data scientists and researchers.