Destiny 1 Ltd v Lloyds TSB Bank Plc

The appellant, Destiny 1 Ltd (“Destiny”), is a private company owned and controlled by Mr. Shaheen Khalid. It was incorporated on 1^st August 2007 for the purpose of carrying out a new business enterprise that he was about to undertake. The respondent, Lloyds TSB Bank Plc (“the Bank”), is a well-known High Street bank.

Mr. Khalid carries on business as a shopkeeper in Peterborough. In 2002 he opened a general convenience store in premises at 109-111 Belsize Avenue under a Costcutter franchise and rapidly built up a thriving business. In order to finance the enterprise he obtained a loan from HSBC Bank secured on the premises which comprised a shop at street level and flats above. By mid-2006 his total liability to HSBC stood at about £230,000.

In September 2006 Mr. Khalid identified an opportunity to open a second store in premises that had previously been used as a nursery school situated in Park Farm Crescent, Peterborough. The venture took some time to organise, in part because permission for a change of use was required, but by the early part of 2008 he was in a position to go ahead. Permission for a change of use was granted on 26^th February 2008.

In the meantime Mr. Khalid had struck up a relationship with the Bank’s Business Relationship Manager, Mr. Christopher Fitzwilliam. It seems that Mr. Fitzwilliam was interested in acquiring Mr. Khalid as a customer and suggested that in due course he should transfer the whole of his existing business from HSBC to the Bank. Mr. Fitzwilliam suggested that as a first step Mr. Khalid should open a personal account with the Bank with an overdraft facility of up to £10,000 and Mr. Khalid did so.

Through his Costcutter business Mr. Khalid had become aware of Nisa-Today’s (Holdings) Ltd (“Nisa”), a company which supplies goods to various retail outlets, including Costcutter stores. He decided that when starting up his new business it would be better for him to him enter into a direct trading relationship with Nisa, so he took steps to open an account with Nisa on behalf of Destiny to supply goods to the new store. In March 2008 Nisa made it clear that as a new customer it would be necessary for Destiny to provide security for its account and suggested that the company should provide it with a debenture for that purpose. Having discussed matters with his solicitor, Mr. Khalid did not wish to take that course, because he thought that it might make it more difficult for him to raise further money for Destiny in the future, should that become necessary. He therefore approached the Bank to see if it would be willing to issue a guarantee in favour of Nisa instead.

In March 2008 Mr. Khalid discussed his financial requirements generally with Mr. Fitzwilliam, but nothing concrete was agreed at that stage. In June 2008 Mr. Fitzwilliam was replaced by Mr. Tim Knighton, who suggested that another employee of the Bank, Mr. Jonathan Wright, should handle the matter and from then on all negotiations took place between Mr. Khalid and Mr. Wright.

There were three main aspects to the business under discussion: the issue of a guarantee for £30,000 by the Bank to Nisa, the opening of an additional overdraft facility to Destiny to provide additional finance for the new business, and the refinancing of the HSBC debt. Mr. Khalid’s obligations and those of Destiny were to be secured by a debenture granted in favour of the Bank by Destiny, a personal guarantee of Mr. Khalid and charges over various properties owned by him, including the premises at 109-111 Belsize Avenue. From Mr. Khalid’s point of view the issue of the guarantee was the most pressing, because until that was done Destiny could not obtain supplies from Nisa to begin trading, but the refinancing of the HSBC debt was of more interest to the Bank, since that represented the greater exposure and was where it could expect to make a profit. In the event, although Destiny provided the Bank with the necessary debenture and Mr. Khalid executed a personal guarantee, the Bank decided not to go ahead with the refinancing of the HSBC debt and the whole transaction collapsed.

In March 2009 Destiny started proceedings against the Bank claiming damages for breach of contract. In its amended particulars of claim it alleged that in the course of a brief exchange of correspondence in September 208 the Bank had entered into a binding agreement to issue a guarantee to Nisa and that the failure to do so had prevented it from opening the new business, thereby causing it a substantial loss.

The case was tried by His Honour Judge Seymour Q.C. He held that no binding agreement had been reached between Destiny and the Bank, because the negotiations between the parties had proceeded on the basis that agreement would have to be reached on all matters under discussion, including the refinancing of the HSBC debt, before anyone was bound. In other words, he held that the parties were discussing a package of financial arrangements involving Mr. Khalid, Destiny and the Bank which stood or fell together and that until everything had been agreed and the whole of the security put in place, either side was free to pull out. He also held that even if the Bank was in breach of contract, it had not caused the loss in respect of which Destiny sought to recover. Destiny now appeals against the judge’s decision.

It will be seen from that brief summary of how the matter has come before the court that the dispute turns on the nature of the discussions between the parties and the communications passing between them. It is therefore necessary to examine their exchanges in a little detail. The judge found that Mr. Khalid first met Mr. Wright in about the middle of June 2008 and that following their meeting Mr. Wright completed a standard form used by the Bank entitled ‘Application for Advance’ which set out his understanding of what Mr. Khalid wanted. From the way in which he filled in the form it is clear that Mr. Wright regarded both Mr. Khalid and Destiny as clients for that purpose. He noted that Mr. Khalid was looking for ways to move his banking away from HSBC because he was dissatisfied with the service he was receiving and his requirements were recorded as being the refinancing of the HSBC loan and the existing overdrafts totalling £240,000. Destiny’s requirements were recorded as an overdraft for £10,000 and a guarantee for £30,000 in favour of Nisa. The security offered took the form of charges on two properties owned by Mr. Khalid, his personal guarantee for £40,000 and a debenture over the assets of Destiny. I think there can be little doubt that at that stage of the discussions the Bank understood Mr. Khalid to be making an application for an integrated set of facilities supported by the various forms of security to which the application referred.

Soon afterwards the Bank approached Nisa to explore the provision of a guarantee. On 10^th July 2008 Mr. Wright wrote to Nisa confirming that he had authority to take the matter forward and that his legal team were considering the terms of Nisa’s standard form of guarantee. On 17^th July 2008 Mr. Khalid executed a personal guarantee in favour of the Bank. His signature was witnessed by Mr. Wright and he was debited with the arrangement fee of £115. Attention then turned to valuing the properties for the purposes of taking charges over them. The valuation of the existing shop and flats at 109-111 Belsize Avenue was somewhat lower than had been expected and so Mr. Khalid offered to provide a charge on a third property he owned.

The next meeting between Mr. Khalid and Mr. Wright took place on 15^th August 2008. The evidence in relation to it was not altogether satisfactory, because Mr. Khalid gave conflicting accounts about whether there had been any such meeting and, if there had, what had taken place in the course of it. The judge found him to be an unsatisfactory witness generally and preferred the evidence of Mr. Wright. As a result he found that a meeting had taken place between them on that date, in the course of which Mr. Wright had given Mr. Khalid a document described as an “Offer Letter”. That letter, which was addressed to Mr. Khalid and was erroneously dated 10^th October 2007, contained confirmation that the Bank was willing to provide financial support, subject to the satisfaction of certain terms and conditions. It set out details of the loan, including the refinancing of the HSBC debt, the provision to Destiny of an overdraft of facility of £10,000 and the issue of a guarantee to Nisa for £30,000. It then set out details of the security that was to be provided. Finally, it identified further information that the Bank required, including existing loan statements from HSBC, 3-month business statements from HSBC and details of the structure under which Destiny intended to operate a pharmacy within the new store at Park Farm Crescent. A debenture over the assets of Destiny was signed by Mr. Khalid on behalf of the company a few days later and was immediately registered by the Bank.

On 11^th September 2008 Julie Fox of the Bank’s Bonds Indemnities and Guarantees Unit in Birmingham wrote to Mr. Khalid advising him that the Bank agreed to provide a guarantee to Nisa provided he was willing to agree to a number of conditions. They included provisions relating to the authentication of claims under the guarantee and provisions relating to the termination of the Bank’s liability and release of the guarantee. Mr. Khalid was invited to indicate his agreement by signing and returning the letter. With undisguised reluctance the judge found that he had done so, but only because an admission to that effect had been made in the Bank’s defence.

The so-called “Fox letter” lies at the heart of Destiny’s case. Mr. Khalid contended that his acceptance of that letter on its behalf gave rise to an agreement between Destiny and the Bank under which the Bank became legally bound to issue a guarantee to Nisa. The Bank argued, however, that the letter was concerned only with obtaining the agreement of Mr. Khalid and Destiny to the terms on which a guarantee would be issued if all the other elements of the financing package were agreed. Since the negotiations for refinancing the HSBC debt did not come to fruition, it never became bound to issue the guarantee.

It is trite law that where negotiations are carried on, as these were, by a series of oral and written exchanges over a period of time it is necessary to view them as a whole when deciding whether the parties have reached agreement and, if so, on what terms. Failure to do so is liable to lead to a conclusion that does not accord with the intention of the parties. In the present case it is also necessary to bear firmly in mind that the law decides whether a contract has come into existence by looking objectively at what each party said to the other, not at their subjective intentions or understandings. Communications, whether oral or written, are to be understood in the way that a reasonable person in the position of the recipient would have understood them. The essential question for decision in this case is whether the parties contemplated that the Bank might enter into an obligation to Destiny to issue a guarantee in favour of Nisa regardless of whether it was able to reach agreement with Mr. Khalid on the refinancing of the HSBC debt.

The judge dealt with that question in paragraphs 63 and 64 of his judgment. He said:

“63.

The case of Destiny in this action depended critically upon the isolation from a chain of correspondence and continuing discussion of a single letter dealing only with one aspect (the consequences of Lloyds entering into the Lloyds Guarantee on Nisa’s standard form of guarantee) of one part (the possibility of Lloyds entering into such guarantee) of the Package of transactions under discussion, which included the refinancing of Mr. Khalid’s loans from HSBC and the unsecured overdraft on the Lloyds’ account in relation to the Costcutter Business, the provision of overdraft facilities by Lloyds to Destiny, and the giving of security to Lloyds in the form of legal charges over real property, the Khalid Guarantee and the Debenture. It is, I think, clear, that what was under consideration was the whole Package, and that, at the time, neither Lloyds nor Mr. Khalid had any thought that component parts of the Package being discussed might be agreed in separate contracts.

64.

I am satisfied on the evidence that the parties did not intend to enter into a contract simply in relation to the Lloyds Guarantee. Thus the contract upon which Destiny relied was not made out and this action fails”.

In my view the judge was right to come to that conclusion. It is clear that throughout their discussions the parties were seeking to reach agreement on a package of arrangements under which the Bank would provide financial support to both Mr. Khalid and Destiny secured by charges on three properties, a debenture over the company’s assets and a personal guarantee from Mr. Khalid himself. There was never any attempt to reach an agreement with Destiny separate from that which was being negotiated with Mr. Khalid; the two were inextricably linked. That is clear from the way in which the negotiations were conducted. It is reinforced by the fact that if the proposed arrangements had been put into effect as the parties intended, any liability on the part of Destiny to reimburse the Bank in respect of a payment under the Nisa guarantee would have been secured by Mr. Khalid’s guarantee, which would in turn have been secured by the charges on the properties which also underpinned the refinancing of the HSBC debt.

Unfortunately, the Bank did not finally agree to refinance the HSBC debt, which was on any view the most substantial element of the transaction. Mr. Khalid understandably sought to rely on the fact that the guarantee and debenture had by that time both been executed, thereby suggesting that an agreement of some kind had been reached and that the Bank had entered into an obligation to Destiny. However, viewing those matters in the context of the exchanges between the parties as a whole, I am unable to accept that that was the case. They were no more than steps taken towards the completion of the arrangements and, although no express statement to that effect was made, both must be regarded as having been executed in escrow pending agreement on the refinancing of the HSBC debt.

The judge considered that his conclusion was reinforced by the fact that Destiny gave no consideration for any promise on the part of the Bank in the Fox letter to issue a guarantee in favour of Nisa. For my own part I do not find it helpful to approach the matter in that way. The question of consideration does not arise unless and until the court is satisfied that parties have reached agreement in terms that were intended to be legally binding. In such circumstances a want of consideration, if established, will no doubt prevent a contract from coming into existence, but the problem rarely arises in a commercial context because gratuitous promises are not the stuff of which business is made. In the present case there was nothing to prevent the Bank from entering into a contract to issue a guarantee to Nisa in consideration of Destiny’s providing a debenture and procuring a personal guarantee in favour of the Bank from Mr. Khalid, regardless of whether it was able to reach a separate agreement with him for the refinancing of the HSBC debt. The difficulty for Destiny, however, is that the evidence does not support the conclusion that an agreement of that kind was ever contemplated or entered into. Certainly the Fox letter and Mr. Khalid’s acceptance of its terms, when placed in the context of the broader negotiations, is not sufficient to do so.

For these reasons I would dismiss the appeal. In those circumstances it is unnecessary to express any view about the claim for damages.

I agree.

I also agree.