Harvey v Dunbar Assets Plc

The issue in this case is whether, on the construction of a composite joint and several guarantee, one of four intended guarantors who signed the guarantee was liable, in circumstances where one of the other intended guarantors had not signed the instrument.

This is an appeal by the appellant, John Spencer Harvey (“Mr Harvey”) from an order dated 7 September 2012 made by HHJ Kaye QC, sitting as a deputy High Court judge of the Chancery Division. By that order HHJ Kaye QC dismissed Mr Harvey's appeal against an order made by DJ Pescod on 20 March 2012 refusing Mr Harvey's application to set aside a statutory demand dated 16 June 2011 made by the respondent Dunbar Assets Plc (formerly known as Dunbar Bank Plc) (“the Bank”) pursuant to section 268 (1)(a) of the Insolvency Act 1986 ("the 1986 Act").

The statutory demand was founded upon what the Bank claims was Mr Harvey’s liability under a joint and several guarantee dated 10 March 2008 (“the Guarantee”) which was actually signed by Neil Trueman ("Mr Trueman"), John Edward Bradley ("Mr Bradley") and Mr Harvey and which appeared to have been signed by Darren John Lenney (“Mr Lenney”), whereby the liabilities of Vision Development Ashbrooke Limited (“the Company”) to the Bank were purportedly guaranteed. Permission to appeal against the judgment of HHJ Kaye QC was granted by Kitchin LJ at an oral hearing on 1 March 2013.

For the purposes of this appeal the relevant background facts may be summarised as follows. Although not a director or shareholder of the Company, Mr Harvey’s case is that he was persuaded to sign the Guarantee at the request of the Company and of the Bank. The Guarantee was provided as part of a transaction pursuant to which the Bank was to make loan facilities of £3,535,000 available to the Company to enable it to refinance the cost of a development site at 12-14 Gray Road, Ashbrooke, Sunderland (“the Property”) and to finance the costs of completing the development. The terms of the loan facility were set out in a letter from the Bank to the Company dated 29 January 2008 ("the Facility Letter"). Paragraph 5 of the Facility Letter provided that the security for the Company's indebtedness would consist of various items of security, including a joint and several guarantee from the four men in the principal sum of £720,000, plus interest, charges, costs and expenses. That figure had been calculated by taking 20.3% of the total amount of the facility to be made available to the Company.

The development project was not successful and on the 22 March 2011 the Bank demanded repayment from the Company in a sum in excess of £4.8 million. The Company did not meet the demand and on 4 April 2011 the Bank served a written demand upon Mr Harvey and the three other men for payment of the guaranteed sum of £720,000 plus interest.

As I have already said, on 16 June 2011 the Bank served its statutory demand on Mr Harvey. On 7 July 2011 Mr Harvey applied to set aside the statutory demand on the grounds that he disputed liability under the Guarantee. The matter initially came before DJ Hardy on 5 August 2011. It appears that, at that hearing, the principal defence advanced by Mr Harvey was one of promissory estoppel, namely that a representation had been made by the Bank, prior to execution of the Guarantee, to the effect that the Bank had no intention of enforcing it. By a draft judgment circulated on 9 February 2012, DJ Pescod dismissed Mr Harvey’s application to set aside the statutory demand on the grounds that the Bank was estopped from making a demand.

By letter dated 15 March 2012 Mr Harvey's solicitors wrote to DJ Pescod asking him to reconsider his decision in light of the fact that, on 8 March 2012, DJ Stapely, sitting at the Sunderland County Court, had set aside a statutory demand served by the Bank against Mr Lenney, also based on alleged liability under the Guarantee. The ground upon which DJ Stapeley had set aside the statutory demand as against Mr Lenney was that Mr Lenney had alleged in his evidence that he had never signed the Guarantee and that the purported signature appearing on the instrument was in fact a forgery.

DJ Pescod took the view that, in the circumstances, the appropriate course was not to re-hear Mr Harvey's application, but rather to grant permission to appeal his judgment on the basis that the issue relating to the consequences in relation to Mr Harvey’s liability, if Mr Lenney’s signature were indeed a forgery, was not something that had ever been argued before him. Notice of Appeal by Mr Harvey was lodged on 12 April 2012.

His appeal came before HHJ Kaye QC at which the only issue argued on behalf of Mr Harvey was the point that he had never became bound under the terms of the Guarantee, because one of the intended guarantors, namely Mr Lenney, had never signed it. As already stated, HHJ Kaye QC dismissed the appeal, holding that, on the construction of the relevant provisions in the Guarantee, Mr Harvey was liable to pay the Bank notwithstanding the fact that, arguably, the purported signature of Mr Lenney was a forgery.

The factual issue as to whether Mr Lenney’s signature is genuine or is a forgery has yet to be determined in an action between the Bank and Mr Lenney, and indeed the other intended guarantors. It was common ground before us that if, on the correct construction of the Guarantee, Mr Harvey would not be liable under it, in circumstances where Mr Lenney never in fact signed the Guarantee, then the statutory demand should be set aside and the matter should be resolved at a trial of the relevant factual issues.

At the hearing of the appeal, and after having heard full argument, this Court indicated that it would allow the appeal, set aside the statutory demand against Mr Harvey and provide its reasons later. These are my reasons for allowing the appeal.

For the purposes of this appeal it is necessary to set out the material provisions of the Guarantee. The Guarantee was a composite joint and several guarantee expressed to be made between Mr Trueman, Mr Lenney, Mr Harvey and Mr Bradley (defined as "the Guarantor”) of the one part and the Bank of the other part.

Clause 1 of the Guarantee contained a standard form guarantee whereby:

“the Guarantor hereby:

(a)

guarantees the payment or discharge to the Bank and undertakes that it will on first demand in writing made on it pay or discharge to the Bank all monies and liabilities which shall for the time being be due owing or incurred by the Principal Debtor to the Bank …… together also with

(i)

such further sum for interest…. and banking charges; and

(ii)

all costs and expenses recoverable by the Bank from the Principal Debtor; and

(b)

agrees as a primary obligor and not merely as surety to indemnify the Bank on demand by the Bank from and against all losses incurred by the Bank as a result of the Principal Debtor failing to perform any obligation due to the Bank or any such obligation of the Principal Debtor being or becoming void voidable unenforceable or ineffective for any reason whatsoever …"

subject to a proviso that the total amount recoverable under the Guarantee should not exceed £720,000, in addition to interest, charges, costs and expenses.

Clause 2 contained a standard provision relating to costs. In so far as material, the remaining clauses of the Guarantee provided as follows:

"3.

CONTINUING SECURITY

(a)

This deed is to be a continuing security to the Bank notwithstanding any settlement of account or other matter or thing whatsoever and shall extend to cover the ultimate balance due from time to time from the Principal Debtor to the Bank and until payment of such balance the Guarantor shall not be entitled to participate in any security held or money relieved by the Bank on account of such balance or to stand in the Bank’s place in respect of any such security or money.

(b)

This Deed is to be in addition to and is not to prejudice or be prejudiced by any other securities or guarantees (including any guarantees signed by the Guarantor) which the Bank may now or hereafter hold from or on account of the Principal Debtor and is to be binding on the Guarantor as a continuing security notwithstanding any payments from time to time made to the Bank or any settlement of account or disability or incapacity affecting the Guarantor or the death of Guarantor or any other thing whatsoever……..

4 INVALIDITY AND INDULGENCE

(a)

Neither the obligations of the Guarantor herein contained nor the rights powers and remedies conferred in respect of the Guarantor upon the Bank by any agreement this Deed or by law shall be discharged impaired or otherwise affected by:

(i)

the Bankruptcy winding-up administration or dissolution of the Guarantor or the Principal Debtor or any change in the control or ownership of the Guarantor or the Principal Debtor;

(ii)

any obligations of the Guarantor or the Principal Debtor to the Bank being or becoming illegal invalid or unenforceable in any respect or any incapacity or lack of power authority or legal personality of or dissolution or change in the status of the Principal Debtor or any other person;

(iii)

time or other indulgence being granted or agreed to be granted to the Guarantor or the Principal Debtor in respect of its obligations to the Bank;

(iv)

any failure to take or fully to take any security contemplated by or otherwise agreed to be taken in respect of the Principal Debtor’s obligations to the Bank;

(v)

any failure to realise or fully to realise the value of or any release discharge exchange or substitution of any security taken in respect of the obligations of the Guarantor or the Principal Debtor to the Bank or;

(vi)

any other act event or omission which but for this Clause might operate to discharge impair or otherwise affect the security hereby constituted or any of the rights powers or remedies conferred upon the Bank by this Guarantee or by law………

5

RELEASES DISCHARGES ETC

(a)

The Bank is at liberty without thereby affecting its rights under this Deed at any time and from time to time at its absolute discretion to release discharge compound with or otherwise vary or agree to vary the liability under this Deed or to make any other arrangements with any one or more Guarantor and no such release discharge composition variation agreement or arrangement shall prejudice or in any way affect the Bank’s rights and remedies against any other Guarantor.

(b)

The Guarantor waives any right it may have of first requiring the Bank to proceed against or enforce any other rights or security or claim payment from any person before claiming from the Guarantor under this Deed.

…………

15 JOINT AND SEVERAL LIABILITY

(a)

Where this Deed is signed by more than one party the liability of each of them under this Deed to the Bank shall be joint and several and every agreement and undertaking on their part shall be construed accordingly.

(b)

The liability under this Deed of the Guarantor and each of them if more than one shall not be avoided or invalidated by reason of any guarantee or any charge by and [sic] co-surety being invalid or unenforceable.

16.

INTERPRETATION

In this deed:

(a)

words importing the singular are to import the plural and vice versa;

………

(e)

the expression “the Guarantor” shall mean and include every person liable under this Deed (including all partners in a firm and included persons deriving title under the Guarantor) or any one or more of them and his/their executors and administrators and (in addition) the committee receiver or other person lawfully acting on behalf of every such person but no personal liability shall attach to any duly authorised agent or attorney signing as such; …."

The issue before this court can be shortly stated in the following terms: whether, on the construction of the Guarantee, a single composite guarantee which envisages the signature of all four intended guarantors, whose liability is expressed to be joint and several, the liability of an intended guarantor who has signed the instrument is conditional upon the due execution of the Guarantee by all the other intended guarantors.

Mr David Schmitz, who appeared on behalf of Mr Harvey, submitted in summary as follows:

Mr Peter Arden QC and Mr Joseph Curl appeared on behalf of the Bank. In summary their submissions were as follows:

HHJ Kaye QC based his conclusion on the wording of clause 4(a)(iv). He appeared to reject the Bank's argument based on clause 15.

At paragraphs 45 to 49 of his judgment, he said:

“45.

Therefore clause 4(a)(iv) providing that that they should not be discharged or that the obligations of the guarantor, that is their obligations collectively and also of each guarantor, should not be discharged by any failure to take any security contemplated by Vision's obligations to the Bank [sic]. On the facts it is not disputed that the security contemplated by or agreed to be taken in respect of Vision's obligations to the Bank was a guarantee jointly and severally from each of the four signatories. The failure to take the security from one of the signatories does not therefore discharge, impair or otherwise affect the others. Just as in the Henry Butcher case, the words are apt enough in my judgment to exclude the Southgate-Sands point that it was contemplated that there would be no contract unless all four signed. The provisions in clause 4(a)(iv) plainly excluded such a possibility as was recognised by each of the parties signing the guarantee who did so subscribing to that provision.

46.

That would be sufficient to dispose of this matter, but out of respect to Mr Rodger's [Counsel for Mr Harvey] extremely ingenious and well put argument, he submits that clause 15 adds nothing but merely provides, he submits, the liability of the co-sureties is joint and several. He submits that the term “[any] guarantee ... or any charge” in clause 15(b) again is a reference to something other than the guarantee itself. He says that this is so obvious from (1) the distinction drawn between references to the Deed on the one hand and to any guarantee or charge on the other and (2) the primary reference to the liability of the guarantor which is of course a reference to all four co-sureties.

47.

Clause 15, I repeat particularly clause 15(b), provides that the liability under this Deed and [sic] the guarantor and each of them if more than one shall not be avoided or invalidated by reason of any guarantee or any charge by any co-surety being invalid or unenforceable.

48.

I am less persuaded by this point so far as Mr Curl is concerned than I am by clause 4(a)(iv). As I pointed out during Mr Rodger's argument it does tend to pre-suppose that a guarantee is signed, but I do see that when one looks at clause 15 in light of the interpretation clause in clause 16 the liability under this Deed of the guarantor that must mean viewed for these purposes from Mr Harvey's point of view, is not to be avoided or invalidated by reason of any guarantee being invalid or unenforceable. For these purposes one has to look at the point of view of any guarantee given by Mr Lenney. The guarantee proposed to be given by Mr Lenney is unenforceable but it was never given and for my part I am not at the end of the day persuaded that clause 15 helps Mr Curl out in quite the same way as clause 4.

49.

For these purposes one has to assume that there was no guarantee at all in existence signed by Mr Lenney. In such event how, one asks, could the clause then refer to a guarantee being invalid or unenforceable when he never signed anything? In that event there was simply no guarantee. At the end of the day I prefer to say the matter is resolved in my judgment by clause 4(a)(iv) and it is that clause particularly in the context of the guarantee construed as a whole which is plainly in very wide terms and intended to preserve the Bank's rights in any number of circumstances against the sureties both individually and collectively is apposite to provide what has been described as the Henry Butcher effect. It means at the end of the day that Mr Harvey, and no doubt to his regret, remains liable in my judgment to the Bank notwithstanding it should turn out to be the position that Mr Lenney never in fact signed the guarantee.”

Rowlatt on Principal and Surety, 6^th Edition (2011) states the position in the following terms:

"3.

Guarantee showing intended co-surety

On similar principles a surety is not bound if the instrument when signed by him is drawn in a form showing himself and another or others as intended joint and several guarantors and any intended surety does not sign. (Footnote: ¹) It is immaterial by whom the instrument was prepared (Footnote: ²) or whether the surety omitted was solvent or not. (Footnote: ³) In such cases the creditor must show that the surety consented to dispense with the execution of the document by the other or others. (Footnote: ⁴)

Evans v Bremridge (1855) 2 Kay. & J. 174: on appeal (1856) 8 De G.M. & G. 100; Hansard vLethbridge (1892) 8 T.L.R. 346; Fitzgerald v McCowan (1898) 2 Ir. R. 1; National Provincial Bankv Brackenbury (1906) 22 T.L.R. 797; James Graham & Co (Timber) Ltd v Southgate Sands [1986] Q.B. 80. See also Capital Bank Cashflow Finance Ltd v Southall [2004] EWCA Civ 817 where these authorities were considered and it was confirmed that equity could intervene where one surety’s signature was impliedly or expressly conditional on another’s.

²Hansard v Lethbridge (1892) 8 T.L.R. 346.

³Fitzgerald v McCowan (1898) 2 Ir. R. 1.

⁴Hansard v Lethbridge (1892) 8 T.L.R. 346. This decision in the Court of Appeal settled the law, see however Cumberlege v Henry Lawson (1857) 1 C.B. N.S. 709; Coyte v Elphick (1874) 22 W.R. 541 AT 543 AND 544. The rule may operate harshly upon the creditor where the joinder of the other surety was a matter really insisted upon by him and afterwards waived and was never in fact made a point of by the surety who signed first. See Traill v Gibbons (1861) 2 F. & F. 358; Horne v Ramsdale (1842) 9 M. & W. 329."

The current 31st edition (2012) of Chitty on Contracts, Volume II states the position to be as follows:

“Conditional Guarantees

44-073

A guarantee may, on its true construction, be conditional.³⁶³ So, for example, where a person executed a guarantee on the faith of a representation that it would also be executed by another person as co-surety, the liability of the former was held to be conditional on the execution of the guarantee by the latter.³⁶⁴ Similarly, if a loan is guaranteed and the loan is expressed to be secured, the guarantee may be conditional on the existence of the security. So in Greer v Kettle where a person guaranteed a loan which was expressed to be secured by a charge on certain shares, and the shares had not been validly issued, it was held that the surety was not liable.³⁶⁵ In order to establish such a condition, the guarantor must show that the giving of some other valid security formed part of the contract of guarantee: it must have been brought home to and accepted by the lender.³⁶⁶A guarantee which shows on its face that it was intended to be a joint guarantee, executed by several parties, is not binding on a party who has properly signed it, if it transpires that the signatures of other intended guarantors have been forged, and it is immaterial that the other party is unaware of the forgery.³⁶⁷ While a guarantee may also be held to be conditional on the execution of a second guarantee on identical terms contained in a different document, the fact that the documents formed part of some larger transaction is not by itself sufficient.³⁶⁸…. [Emphasis added.]

363. English law does not recognise any wider relief in equity based on a mere expectation on the part of a guarantor that a further guarantee will be executed by a third person: Capital Bank Cashflow Finance Ltd v Southall [2004] EWCA Civ 817, [2004] 2 All E.R. (Comm) 675 at [16], discussing Bleyer v NevilleJefferson Advertising Pty Ltd Unreported 1987 NSW.

364. Evans v Bremridge (1855) 25 L.J.Ch. 102, 334; but the position is otherwise if another person fails to execute a guarantee for a different liability for there would then be no right to contribution (see below, para.44-133) and the surety who has executed would not be prejudiced: Coope v Twynham (1823) 1 T. & R. 426.

365. [1938] A.C. 156.

366. Byblos Bank SAL v Al-Khudhairy [1987] B.C.L.C. 232; Gray v TCB Ltd [1988] F.L.R. 116. cf. Barclays Bank Plc v Quincecare (1988) reported [1992] 4 All E.R. 363.

367. James Graham & Co (Timber) Ltd v Southgate Sands [1985] 2 All E.R. 344.

368. Capital Bank Cashflow Finance Ltd v Southall [2004] EWCA Civ 817, [2004] 2 All E.R. (Comm) 675 at [17].”

In my judgment, an analysis of the relevant authorities (as confirmed in the above cited passages from Rowlatt and Chitty) shows that, whether a signatory to a guarantee has assumed liability under the document, in circumstances where other contemplated security has not been obtained, is essentially one of construction of the relevant guarantee against its admissible factual matrix. The authorities do not establish some absolute rule, or enshrined principle, of suretyship that, in all circumstances, if an intended surety does not sign, the other intended sureties are not bound. It all depends on the construction of the guarantee. The principle of suretyship, which is engaged, is that a surety is entitled to contribution from every co-surety and to the benefit of every security held by the creditor in respect of the debt. If the surety is to be deprived of that right, the guarantee must so provide.

But the authorities do clearly demonstrate that, if the form of the document, on its face, shows that it is intended to be a joint composite guarantee, contained in a single document, which assumes that it will be signed by all the sureties named as such in the document, then, certainly as a starting point in the construction exercise, the guarantee will be regarded as subject to the condition that the signatures of all sureties are necessary for its validity, and that liability as a guarantor will only be imposed on any individual signatory if all the named sureties do indeed sign; see e.g. Evans v Bremridge; Hansard v Lethbridge; Graham (James) and Co (Timber) Ltd v Southgate Sands; Capital Cashflow Finance Ltd v Southall supra.

As Mance LJ (as he then was) explained in Capital Cashflow Finance Ltd v Southall at paragraph 17:

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

"The position is very different where the form of the guarantee expressly shows that it is intended to be the guarantee of more than one party and one of the intended sureties does not sign."

The distinction follows the nature of the relevant document. Where a single document is prepared for signature by several persons, the document on its face points to a conclusion that the signatures of all are essential to its validity. Where separate documents are prepared, each for separate signature by a separate individual, the contrary applies. Of course there are cases where an individual document is, according to its express terms or impliedly when construed in the light of its express terms and all the surrounding circumstances, conditional upon the signature of another document: see e.g. Greer v Kettle. But it is not by itself sufficient that the documents are all part of some larger transaction, as was the case in Byblos and TCB as well as in the present case. That would beg the question whether all the documents which were part of that larger transaction were conditional upon each other – and that cannot be assumed in the case of separate documents sought from separate people. Further, even if the signature of all such documents by their intended signatories is regarded as important by the parties seeking the same, it cannot be assumed without more that each intended signatory also regards the other's signature as critical, let alone that he regards it as critical that the other is signing an identical document.” [Emphasis added.]

In the present case the Guarantee was clearly a single composite document, prepared for signature by several persons as joint and several guarantors, and in which all four intended guarantors were together defined as "the Guarantor". That, at first sight, as authorities such as Evans v Bremridge, James Graham & Co (Timber) Ltd v Southgate Sands and the comments of Mance LJ in Capital Cashflow Finance Ltd v Southall show, points to the likely conclusion that the signatures of all four were an essential precondition to the liability of each individual guarantor who signed the document.

However, that is only the starting point. The next stage is to construe the Guarantee as a whole, as part of one unitary exercise, against the admissible factual matrix, to ascertain whether any of its express or implied terms operated to exclude or disapply that prima facie result. It was common ground that it was open to the parties to agree that the absence of one or more signatures of the intended guarantors should not bring about the result that those who did sign were not bound.

But at that stage counsel diverged in their approach. Mr Schmitz contended that any such "exclusion" had to be explicit, clear, and unambiguous and expressly brought to the notice of the particular guarantor who signed the instrument to exclude what he referred to as a "specific rule"; he also contended that the Guarantees should be construed contra proferentem. Mr Arden, on the other hand, submitted that there were no such requirements and all that was necessary was an application of the normal principles of construction to determine the terms of the Guarantee as a whole.

It is clear that the well-known modern principles of construction, as set out in cases such as Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 (PC) and Rainy Sky S.A. v Kookmin Bank [2011] UKSC 50, [2011]]1 WLR 2900, do indeed apply to contracts of guarantee just as they do to other contracts; see e.g. Static Control Components (Europe) Ltd v Egan [2004] 2 Ll Rep 429 at [19] per Holman J and at [37] per Arden LJ; and Prudential Assurance Company Ltd v Ayres [2008] EWCA Civ 52. Indeed Rainy Sky S.A. v Kookmin Bank itself was a case which related to an advance payment bond, a form of refund guarantee. Lord Clarke JSC (with whom the other Justices agreed) said at [14] and [21]:

“14.

For the most part, the correct approach to construction of the Bonds, as in the case of any contract, was not in dispute. The principles have been discussed in many cases, notably of course, as Lord Neuberger MR said in Pink Floyd Music Ltd v EMI Records Ltd[2010] EWCA Civ 1429; [2011] 1 WLR 770 at para 17, by Lord Hoffmann in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, passim, in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912F-913G and in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, paras 21-26. I agree with Lord Neuberger (also at para 17) that those cases show that the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. As Lord Hoffmann made clear in the first of the principles he summarised in the Investors Compensation Scheme case at page 912H, the relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract…..

21.

The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other”

There is some discussion in Rowlatt op.cit at [4-01] and Chitty op.cit. at [44-061 to [44-066] as to the extent to which, in the light of these modern cases on construction, what might be referred to as the traditional approach to interpretation of guarantees (viz. that contracts of guarantee must be strictly construed in favour of the surety, that no liability is to be imposed on him which is not clearly and distinctly covered by the contract and that, if any one or more of the normal incidents of suretyship are to be excluded, the creditor must do so in clear and unambiguous language), still applies.

For example, on the one hand, there is the dictum in 2004 of Holman J in Static Control Components (Europe) Ltd v Egan supra at [19] (with which Arden LJ apparently agreed) that

“it may be that the concept that a guarantee should be “strictly construed” now adds nothing”

to the modern approach to interpretation. On the other hand, in Liberty Mutual Insurance Company (UK) Ltd. v HSBC Bank Plc [2002] EWCA Civ 691, a case involving a guarantee, this Court took the view that the modern approach was not inconsistent with a maxim of construction which required clear words to exclude or limit prevailing rules. Thus at [49]–[59] Rix LJ (with whom Judge LJ (as he then was) and Arden LJ agreed) said:

“49.

Construction. It was also common ground that the normal incidents of rights of subrogation may be excluded or varied by contract. Mr Moss submits that clear words are needed to exclude or limit the rights otherwise assured by law. He cites in support of that submission Trafalgar House Construction (Regions) Ltd v. General Surety & Guarantee Co Ltd [1996] AC 199 at 208C per Lord Jauncey of Tullichettle (with whose speech their other Lordships agreed) where he said –

“There is no doubt that in a contract of guarantee parties may, if so minded, exclude any one or more of the normal incidents of suretyship. However, if they choose to do so clear and unambiguous language must be used to displace the normal legal consequences of the contract…”

50.

Mr Sumption disputed the need for clear words: but in truth, the point is a general and well recognised one. Lord Jauncey was speaking in the specific context of contracts of guarantee, but the same point has been classically made by Lord Diplock in the context of rights of set-off in Gilbert Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd [1974] AC 689 at 717H.

51.

Mr Sumption also submitted that rights of subrogation may be excluded by implication, let alone express language clear and unequivocal or otherwise. I would allow that such implication is always possible, for where the implication is, as it must be, necessary, it is not to be denied. Mr Sumption’s sole example of such an implication is Morris v. Ford Motor Co Ltd [1973] QB 792 ……….

53.

In my judgment this is an unhelpful authority for Mr Sumption’s purposes. In truth it does not proceed so much by construing the contract as by reaching a conclusion based on the equity of the situation, where the alternative conclusion was described as unjust or unacceptable and unrealistic. ……In the present case, however, it is common ground that subject to contrary agreement equity requires Liberty, to the extent of any surety bond discharged by payment, to be entitled to share rateably in the bank’s fixed charge. There is nothing in the general context of the relations between the parties (subject of course to the issue of construction) to support the bank’s claim for preference in the exercise of its fixed charge over Liberty’s claim to share rateably in it, and the sole question is what the disputed clause means.

54.

Reference has been made to modern cases on construction such as Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] AC 749 especially per Lord Steyn at 964E/H, Investors Compensation SchemeLtdv. West Bromwich Building Society [1998] 1 WLR 896 especially per Lord Hoffmann at 912H/913E, and Bank of Credit and Commerce International SA v. Ali[2001] 2 WLR 735 especially at para 8 per Lord Bingham of Cornhill. The principles are well known. Against the background of the admissible matrix of facts known to or at least reasonably available to the parties, the meaning sought is that which the language in question would convey to the reasonable man. In that context the language used is to be given its natural and ordinary meaning, unless the reasonable man would conclude that something has gone wrong in expressing the parties’ intentions.

55.It was not suggested, however, that in the case of the present subrogation issue anything had gone wrong along the lines of the mistake in ICS v. West Bromwich. ……

56.

It was suggested nevertheless that such modern authority is hostile to a maxim of construction requiring “clear words” in certain contexts if the prevailing rule is to be excluded or limited, such as Lord Jauncey’s statement in the context of contracts of guarantee and Lord Diplock’s statement in the context of set-off. I do not agree. It is true that modern authority (and I have in mind cases other than those referred to above) has moved away from technical or hostile attitudes to exclusion clauses. Even so, situations where “clear words” are required remain. A central example is the exclusion of negligence: see Ailsa Craig Fishing Co Ltd v. Malvern Fishing Co Ltd[1983] 1 WLR 964. This is because the reasonable man does not expect the parties to intend to exclude negligence unless the contract clearly says so. So also the reasonable man does not expect fundamental principles of law, equity and justice, such as rights of set-off or of subrogation to be excluded unless the contract clearly says so. A recent application of Lord Diplock’s requirement of clear words in relation to remedies for breach of contract can be found in Stocznia Gdanska SA v. Latvian Shipping Co[1998] 1 WLR 574 at 585C per Lord Goff. Even in BCCI v. Ali itself Lord Bingham expressed himself in similar terms in the context of the problem of construction relevant to that case (I do not say to this), when he said (at para 10):

“But a long and in my view salutary line of authority shows that, in the absence of clear language, the court will be very slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware.”

57.

As the Vice-Chancellor said in this case (at para 15 of his judgment) –

“The nature of the right and the circumstances in which it arises are such that an intention to exclude, reduce or postpone it is not lightly to be attributed to the parties.”

58.

…….

59.

(1) I agree with the Vice-Chancellor that clear words (or the necessity of supplying those words by implication) are required if rights of subrogation are to be removed."

In this context, Mr Arden also referred us to a helpful analysis of the two strands of authority contained in paragraphs 55 to 61 of the judgment of Beatson J (as he then was) in Meretz Fire and Marine Insurance Co Ltd v Jan de Nul NV [2011] 1 CLC 48 (affirmed by the Court of Appeal, but without discussion of this point, at [2012] 1 All E.R. (Comm) 182). Beatson J’s judgment was given before the decision of the Supreme Court in Rainy Sky S.A. v Kookmin Bank.

For the purposes of deciding this case, I do not consider that it is necessary for this Court to resolve what may be differences in approach in the authorities, in possibly different situations, to the interpretation of guarantees. That is because I have reached the conclusion, that, applying the modern approach to construction, without recourse to historic tenets which are unfavourable to the creditor, there is no express (or implied) provision in the Guarantee which displaces the prima facie position which arises from the fact that, in the present case all four intended guarantors were intended to sign one composite joint and several guarantee. However I should say that, in my view, this is not a case where an intended guarantor is being deprived of “any one or more of the normal incidents of suretyship” or where “fundamental principles of law, equity and justice, such as rights of set-off or of subrogation" are being excluded. Nor in my view would a clause, which excluded the normal consequence arising from a deed in this form, namely that a surety is not bound if an intended co-surety does not sign the guarantee, be of such a nature that it would have to be expressly and specifically drawn to the attention of each guarantor before he signed, as Mr Schmitz suggested.

As I have already said, the starting point of the unitary construction exercise is that the Guarantee is clearly a single composite document, prepared for signature by several persons as a joint and several guarantee, which, at least at first sight, points to the likely conclusion that the signatures of all four were an essential precondition to the liability of each individual guarantor. One then has to look at the relevant terms of the instrument, to see whether there are provisions displacing that prima facie conclusion.

I start with the definition of the term "the Guarantor". It is defined in clause 16 (e) as meaning "every person liable under this Deed". This wording presupposes that the particular person in question is indeed "liable under this Deed". But the issue in the present case is whether Mr Harvey ever became liable under the Guarantee or, put another way, ever came within the definition of "the Guarantor". That is an anterior question to the question whether such (existing) liability has been discharged, affected or impaired. As Lord Russell of Killowen explained in Greer v Kettle at 165:

“It is not a case, as Bennett J. seems to have treated it, of seeking to imply a condition, the implication of which is alleged to be inconsistent with other provisions in the document. In other words, as Romer L.J. said, it is not a case of Parent Trust being released from a contractual engagement. It is a case of an attempt to impose upon them a liability which they have never undertaken. The only debt, the repayment of which by the principal debtor they undertook to guarantee, was a debt secured by a charge on the 275,000 shares in Iron Industries, Ld., and a debt so secured never in fact existed. The language of Knight Bruce L.J. in Evans v. Bremridge (1) may well be applied to the present litigants. In that case it was sought to make a surety liable who became a surety on the footing that a co-surety would join in the covenant with him. The co-surety had not done so, and the surety was held to be under no liability. As the Lord Justice truly said: "The defendants seek to charge the plaintiff with a contract, into which he did not enter."”

In paragraph 44 of his judgment, HHJ Kaye QC took the view that, in order to give the expression "every person liable under this Deed" business efficacy, it was necessary to read that phrase as "every person potentially liable under this Deed". I disagree. I see no commercial or other justification for reading the expression in that wider way. The Bank's argument that a signatory was bound, even if a co-signatory did not sign, was no more consistent with business commonsense than Mr Harvey's argument that he was only intended to be liable under the Guarantee in the event that the three other intended guarantors in fact signed. Apart from the point that the concept of a person "potentially liable" is itself inherently unclear, if the Bank had wanted to ensure that the definition extended, for example, to a person who had contractually agreed to sign the Guarantee, but had not yet done so, or to a person who had actually signed the Guarantee, but conditions precedent to his liability had not been satisfied, then this could have been (and should have been) expressly stated. An example of one method of including a wider category of persons, other than those who are actually liable under the instrument, is the use of the word "signatory", in the Bank of Scotland v Henry Butcher & Co wording and in the current Lloyds Bank wording.

Likewise, the Bank's argument, based on the "Invalidity and indulgence" provisions of clause 4(a), also requires one to accept that, notwithstanding the use in the introductory words of that clause of the defined term "the Guarantor", the clause is not only addressing the circumstances in which a Guarantor (i.e. a person already bound) will, despite the normal rules of suretyship, not be discharged from an existing liability or have an existing liability "impaired or otherwise affected", but is also dealing with the circumstances in which the conditions precedent to an intended guarantor's liability will be deemed to be satisfied, so as to render him liable under the Guarantee and to make him a "Guarantor". But the latter contractual scenario is a very different one from the former. In my judgment there is nothing in the wording of clause 4(a) that supports the analysis that the clause is addressing the latter scenario - i.e. defining the circumstances in which an intended guarantor will become bound and have liability imposed upon him.

Moreover, even leaving aside the effect conveyed by use of the term "the Guarantor", the introductory words in clause 4(a), as emphasised below:

"Neither the obligations of the Guarantor herein contained nor the rights powers and remedies conferred in respect of the Guarantor upon the Bank by ….. this Deed ….shall be discharged impaired or otherwise affected by…"

do not, when given their natural and ordinary meaning, suggest that the clause is addressing the antecedent issue as to whether a signatory had ever actually become subject to the obligations contained in the Guarantee in the first place. On the contrary, the words "obligations… herein contained" and "discharged impaired or otherwise affected by" suggest that the function of clause 4(a) is to prevent subsisting obligations of a Guarantor under the deed from being in any way discharged or affected by the events set out in the following sub-clauses of clause 4(a). In other words the clause is addressing future events, affecting a subsisting guarantee, not addressing the question of the initial validity of the instrument

Nor can the Bank derive any assistance for its construction from the wording of sub-clauses 4(a)(i) to (iii) or (v) to (vi). Thus for example sub-clause 4(a)(ii) is based on the premise that a co-"Guarantor" (as defined) has existing obligations under the deed which then "become" invalid or unenforceable; but Mr Lenney (on the hypothesis that his signature was a forgery) never had any obligations under the Guarantee at all.

Mr Arden's argument placed great weight on the provisions of sub-clause 4(a)(iv). Indeed this was the basis upon which HHJ Kaye QC concluded that Mr Harvey was bound. However I do not think that this provision is sufficient to enable one to conclude that, on its true construction, the Guarantee displaced the prima facie conclusion, derived from its composite joint and several form, and single definition of "the Guarantor", that the signatures of all four were an essential precondition to the liability of each intended individual guarantor. Of course, as Mr Arden submitted, the Facility Letter and the Bank both clearly contemplated that one of the items of security to be provided would be a guarantee, signed by all four men. Indeed the Facility Letter comprised an agreement to that effect. And there was, on any basis (on the assumed hypothesis), a failure to obtain a guarantee from Mr Lenney. But the wording of sub-clause 4(a)(iv) is not, in my judgment, sufficient to require one to read the introductory words of clause 4(a), contrary to their natural meaning (as described above), as defining the situation in which a person will become bound as a Guarantor in the first place, or, put another way, as having the effect that a signatory to the deed will become liable notwithstanding that one of the other four intended guarantors does not sign. The function of clause 4(a) is to address what is to happen, or, more accurately, what is not to happen, upon the occurrence of any of the events described in sub-clauses 4(a)(i) to (iv), once a person has become liable under the Guarantee, and is therefore a "Guarantor". It is not purporting to address, define or limit the circumstances in which a person will become bound to the Guarantee or the condition precedent to a signatory's liability thereunder.

Nor do I consider that the Bank can obtain any assistance to support its construction from the provisions of clause 5 relating to releases and discharges. The clause enabled the Bank, at its absolute discretion, to release, discharge or make any other arrangements with any one or more "Guarantor" and provided that no such release or discharge etc should prejudice or in any way affect the Bank's rights and remedies against "any other Guarantor". Apart from the fact that Mr Lenney was never a "Guarantor" and the definition predicated that "any other Guarantor" had existing liability under the Guarantee, as the authorities demonstrate, the mere fact that a creditor can, pursuant to the powers conferred by such a clause, deprive an existing surety of his contribution rights against a co-surety, is not determinative of the question whether liability was ever imposed on a signatory in the first place. Thus in Capital Cashflow Finance Ltd v Southall Mance LJ said at [26]:

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

"I do not think…that the two cases are precisely similar, because the surety may speculate on the probability or improbability of a deed of release being given, and may be willing to take the chance of the creditor diminishing his security by afterwards discharging one of his sureties."

And in Greer v Kettle where a guarantee was in terms conditional on the existence of other security for the payment of the debt, it was held that the lender could not derive assistance from the concluding words of the guarantee which purported to provide that the guarantor's liability should not be affected by various events including any dealing with other security. See also Keith Murphy at pp. 343-4. Mr Sheldon QC for the Bank accepted that the provision could not be a defining factor, but submitted that it was a strong indicator. Mr Ellis accepted that it was a factor, but submitted that it was not even an indication of a prima facie position. To my mind there is force in Page Wood V-C's dictum and, although the provision is a factor pointing in the same direction, it does no more than confirm a conclusion at which I would anyway arrive.

For similar reasons the Bank can derive no assistance from the wording of clause 15(b), as the judge himself held in paragraph 49 of his judgment. Again the clause assumes a situation where:

Accordingly I conclude that there is nothing in the wording of the various provisions of the Guarantee, construed as a whole, which displaces the prima facie position that, given the form of the instrument, the liability of each intended guarantor was conditional upon the due execution of the Guarantee by all the other intended guarantors.

In my judgment, this is not a case where there is any room for application of the contra proferentem rule, since this is not a case where there is any ambiguity in what the Guarantee does in fact provide.

In my judgment the Guarantee, on its true construction, was subject to a condition that it would be signed by all the other intended guarantors named as such in the deed, and, accordingly, liability as a "Guarantor" was only imposed on an individual signatory to the document in circumstances where all the named individuals did indeed sign the Guarantee. That conclusion is based on: (i) the form of the Guarantee itself, which is a single composite instrument, which seeks to impose joint and several liability on four individuals together defined as "the Guarantor" and which envisages that it will be signed by all four individuals; and (ii) that nothing in the wording of the provisions of the Guarantee excludes that result. Accordingly, on the assumed hypothesis that Mr Lenney’s signature was forged, Mr Harvey would not be liable under the Guarantee.

I would therefore set aside the Bank's statutory demand as against Mr Harvey and allow his appeal.

I agree.

I also agree.