Lloyds TSB Bank Plc v Hayward

The judgment that I am about to give is the result of a re-hearing consequent on the order of the Court of Appeal in these proceedings made on the 12^th December 2002 that there be a re-trial “of the issue of what was agreed between the Claimant and Bournemouth & Boscombe Athletic Football Club Co Ltd at the meeting on the 23^rd September 1994 and whether there was a subsequent variation of that agreement which had the consequence of discharging the Defendant from his guaranteed liabilities to the Claimant” (see paragraph 2 of the order).

The Claimant, to which I will refer as “the Bank” claims against the Defendant, to whom I will refer as “Mr Hayward”, a former director of the Bournemouth and Boscombe Athletic Football Club Ltd to which I will refer to as “the Club”, £400,000 under three “all money” guarantees given to the Bank in respect of the Club’s liabilities to it. The guarantees are in the Bank’s standard form but are not identical and are dated the 24^th October 1991, 23^rd June 1992 and 20^th October 1992 respectively. They are subject to upper limits of liability of £500,000, £100,000 and £50,000 respectively. Any textual differences between them are immaterial for the purposes of this judgment.

The background facts of the case are set out between paragraphs 1 and 53 of Mr Justice Rimer’s judgment and are summarised in an agreed chronology prepared for the purposes of the hearing before me.

Mr Justice Rimer had two issues to decide. The first issue was whether the Bank was in breach of an agreement, made in 1991, to provide the Club with an overdraft facility of £3.2m: the second issue is whether Mr Hayward was released from liability under his guarantee by the application of the rule in Holme v Brunskill (1877) 3 Q.B.D 495 pursuant to which a guarantor is released from liability under a guarantee given to a creditor where that creditor and the principal debtor have entered into an agreement, subsequent to the giving of the guarantee, which has the effect of altering the contractual position between them, to the disadvantage of the guarantor, without his prior consent. Mr Justice Rimer dealt with the first issue between paragraphs 10 and 29 of his judgment where he found against the defendant. There was no appeal from that finding. It follows, and as the order of the Court of Appeal makes plain, I am only concerned with the second issue.

Notwithstanding that Mr Justice Rimer set out the background facts of the case in great detail, in order to render this judgment intelligible I will repeat them to the extent necessary to set the scene for the issues which I have to decide.

Clause 8 of Mr Hayward’s first guarantee is in the following terms (the other two guarantees contain clauses to similar effect):-

“The Bank may without any consent from me/us and without affecting my/our liability hereunder grant renew vary increase or determine any advances accommodation or facilities given or to be given to the Customer [the Club] or any other person and agree with the Customer or any such person as to the application thereof hold renew modify or release or abstain from taking perfecting or enforcing any security or guarantee or right now or hereafter held for or against the Customer or any other person in respect of any liability hereby secured and grant time or indulgence to or compound with the Customer or any other person and demand or enforce payment for any one or more of us irrespective of whether or not it shall take similar action against the remainder of us and this guarantee shall not be discharged nor shall my/our liability under it be affected by anything which would not have discharged or affected my/our liability if I/we had been a principal debtor to the Bank instead of a guarantor.”

Mr Hayward’s first guarantee had been given after he had acquired a controlling interest in the Club in 1991 at a time when the Club’s financial situation was precarious. The Bank had the benefit of a number of other guarantees of the Club’s indebtedness to the Bank in addition to Mr Hayward’s three guarantees.

A significant contribution to the Club’s income was that which resulted from the sale of players to other Clubs in the football league, usually in higher divisions, and from further payments, referred to as “knock ons”, payable as a result of the future performance of the players so sold. It was a condition of the Bank’s support of the Club that the Bank received half of the proceeds of player sales in reduction of the overall indebtedness to it of the Club.

It is accepted that Mr Hayward’s management of the Club as its chairman resulted in an improvement of its overall financial position in the years succeeding 1991, however, its financial position remained precarious. In 1992 Mr Ken Gardiner became a director of the Club subsequently being appointed finance director.

An internal file note of the Bank dated the 15^th November 1993 records the Club’s directors as having informed the Bank that they were unwilling to inject more cash and, in particular, Mr Hayward was unwilling to do so, and that the arrangement whereby the Bank received 50% of the proceeds of player sales in reduction of the Club’s indebtedness could not continue.

By the end of 1993 a move was afoot, led by Mr Gardiner, to replace Mr Hayward as chairman by himself. Mr Gardiner and his supporters became know as the Consortium. It was understood that on takeover Mr Gardiner and the Consortium would provide further financial support for the Club. Mr Hayward initially resisted his removal.

By letter dated the 10^th May 1994 from the Bank to Mr Hayward, consequent on a meeting on the 28^th April, the Bank offered the Club:-

“An increased level of support, up to £2.3m until the 31^st August 1994 by which time you were to either:-

1)

Re-approach the Bank with your 1994/95 season and beyond funding proposals based on you retaining your controlling interest or, alternatively by introducing other shareholders, directors willing to support the Club on a proper business footing: the 50% player sale and guarantee structure being totally re-negotiable in respect of support beyond the 1^st September 1994.

2)

If however you decide not to continue your involvement then firm proposals will be put forward regarding the sale of your shareholding in the Club, and how you intend honouring your existing guarantee liabilities….”

That offer was accepted in principle and there commenced negotiations between the Bank and the Club to arrive at detailed terms upon which the Bank would continue its financial support of the Club and Mr Hayward would dispose of his controlling interest in the Club to Mr Gardiner, be relieved of his liability to the Bank as the Club’s guarantor and recover the amount of his loans to the Club amounting to some £400,000.

On the 1^st August the Bank wrote to Mr Gardiner setting out in paragraphs numbered 1 –13 proposed terms for the Bank’s continued support for the Club. That letter reads:-

“I write following our meeting today to outline the revised proposed terms of the Bank’s support to the Football Club.

The basis of the deal is as follows:-

1)

The Bank confirms that when Consortium new money of £500,000 is injected into the account we will agree to write off the sum of £500,000. The write off will be effective at the end of year 8.

2)

The sum of £2m will be advanced on a new 8 year term loan at 2% over base rate for year 1 and 2 rising to 3% over base rate thereafter. Capital repayments of £250,000 will commence on the 30^th June 1995 then annually thereafter. A suitable covenant structure will need to be agreed upon.

3)

The loan funds will be used to pay the existing overdraft.

4)

A number 2 loan of £500,000 interest free will be created to complete the revised funding structure.

5)

The existing guarantees detailed below will remain permanently in place until such time as other arrangements are mutually agreed….

6)

A new Guarantee, acceptable to the Bank, will be provided by the Consortium members for £250,000 which will be released after the second loan repayment has been made in June 1996.

7)

Norman Hayward’s guarantee of £650,000 will remain in place, but will reduce at a rate of 1:1 in line with the reduction in the Bank debt.”

There then follow paragraphs 8 – 13 further detailed conditions and the letter concludes:-

“You will appreciate that the Bank has not come easily to the decision to write off £500,000 and in so doing has demonstrated its full commitment to the future of the Football Club. We wish to work closely with the Consortium to ensure a full and speedy return to financial good health. This agreement will need to be more fully documented not least of which with a loan agreement (sic) and this will be prepared in due course.”

That preparation was entrusted to Mr Coombs in consultation with the Bank’s solicitors. Mr Coombs was the assistant to Mr Thomas the head of the Bank’s corporate recovery department for the area. The Bank’s file note for the 2^nd August recorded that the terms of the letter to Mr Gardiner had been accepted by the Consortium and Mr Hayward.

Mr Hayward was advised by Mr Neil Meldrum of Coles Miller solicitors. It is accepted that he did not play a substantial part in the Club’s negotiations with the Bank and that such part as he did play was directed to the recovery of his loans and the reduction of his guarantee liability. How the latter was to be achieved was described in a letter from Mr Thomas to Mr Hayward dated the 12^th August 1994 as follows:-

“Following the negotiations between “the Consortium” and the Bank, you have requested clarification as to how the £250,000 per annum reductions in the proposed loan would affect your own personal guarantee liability.

As I see it the following scenario develops:-

1)

The Club funds £250,000 annual debt reduction from cash flow – failing this

2)

The new guarantors providing guarantees of £250,000 would then be called upon to meet the balance or all of the annual repayment in the first two years.

3)

Your own personal guarantee liability, currently £650,000, would reduce £- for £ in line with the reductions achieved in the loan exposure as outlined in paragraphs 1 and 2 above.

Consequently, the effect of this will be that your own guarantees will become payable only after:-

a)

The Club has failed to meet the annual repayment or, subsequently,

b)

The new guarantors…”

It appears that the negotiations then ground to a halt because of the reluctance of the Consortium to provide guarantees of the Club’s indebtedness to a level sufficient to satisfy the Bank. On the 24^th August Mr Thomas wrote to Mr Hayward (with copies to his co-directors) imposing a deadline of the 9^th September by which time he expected to receive “the Clubs deliverable proposals for future funding”, failing which the Bank would consider the Club in default and would take appropriate action. The response of the Club, through its Vice chairman Mr Willis was that “The Consortium would proceed with the proposed agreement if the Bank removed the request for the guarantee for £250,000… .” In a further letter of the 30^th August from Mr Willis to Mr Thomas, both such letters being faxed, Mr Willis described the sticking point in the negotiations in the following terms:-

“The key issue between us is the condition imposed by the Bank that the first repayments due for the first two years be supported by personal guarantees by directors of the company.”

Mr Thomas’ response in a fax of the same date was that:-

“Negotiations were held with Ken Gardiner late July which culminated in an agreement by all parties fully outlined on 1^st August, on which loan documentation was then drawn up. This agreement at that stage, included £250,000 of guarantees for the first two years loan repayments. It was not imposed, nor is it new… .”

On the 9^th September the Bank made formal demand on the Club, followed, on the 12^th September, by a demand on the guarantors including Mr Hayward. The total amount demanded including interest and charges was £2,282,652.35.

Notwithstanding the demands communications between the Bank and the Club continued. On the 19^th September Mr Willis sent a fax to Mr Thomas saying that he was writing on behalf of the board “to set out an offer from the Club to the Bank to allow trading to continue…” His letter continued:-

“The board plus Peter Hayward, re-examined the proposed loan to be made to the Club which was agreed in principle with the board some weeks ago. At that time the stumbling block was the Bank requirement that a two-year guarantee of £250,000 be put in place to cover repayments. The guarantee issue has been resolved by Ken Gardiner offering a collateral backed guarantee of this amount….

I can confirm that should the Bank be willing to accept this offer, a board meeting will be held on Friday 23^rd September at 10 a.m. where a new chairman will be appointed by the board under the terms of the loan agreement. If the loan agreement is accepted your appointed representative should be available to attend that meeting where the loan agreement can be formally signed… .

The Bank’s copy of this fax, in evidence, shows hand written comments by Mr Thomas under this passage “where is the “new money” commitment? Originally £500k.”

Mr Thomas’ response of the same date having dealt with the immediate problems continues:-

“Additionally the request for what is effectively a two year capital repayments standstill could see all current outstanding transfer receipts utilised for trading by 30^th June 1996 and no debt reduction achieved without recourse, at that point, to the offered Ken Gardiner guarantee. The original proposal saw Bank debt at 30^th June 1996 £2m, you are now suggesting this is increased to £2.25m.

Regrettably past promises of cash, for example the Russell transfer have not materialised and it is not unreasonable, therefore, if existing Guarantors wish to defer any call upon themselves for effectively a minimum of two years then they must be prepared to collateralise their guarantees.”

An internal note of the Bank written by Mr Thomas dated 20^th September and headed “revised proposal” sets out the form of the final arrangement between the parties which the meeting on the 23^rd September was intended to complete and which was ultimately carried into effect. The existing facility would be converted into a fixed loan of £2.35m divided into two tranches, tranche A, of £1.85 m would be repayable over 9 years by instalments of £250,000 per annum. Tranche B of £500,000 would be interest free, and so long as the other terms of the loan agreement were complied with, would be written off in the 8^th year provided that the Club from its own sources had injected an equivalent sum of capital into the Club. There would be an immediate payment in reduction of the indebtedness of £150,000 brought about by two of the other guarantors paying immediately the total amount of their guarantees. Mr Hayward was to sell 4/5ths of his 61% holding of shares in the Club to the Consortium for £80,000 payable as to £40,000 immediately and the balance at a later date. The first instalment of £40,000 was to be retained by the Bank in a blocked account as security for Mr Hayward’s obligations under his guarantees. Those obligations would reduce in the manner already described in the correspondence. There would be no requirement for a repayment in the year to 30^th June 1995. Mr Gardiner would give a guarantee limited to £250,000 to secure the next two annual repayments becoming due on the 30^th June 1996 and 30^th June 1997. In the note the arrangement is expressed to be “subject to £250,000 cash backed guarantee Ken Gardiner”. Mr Gardiner was to back his guarantee by charging a sum of £250,000 held by him in a Jersey Bank account. The sum outstanding from the Club to the Bank at this time was somewhat less than £2.35m and it was understood that the surplus would be available to the Club as working capital. Mr Hayward was unhappy at the reduction of the facility to £2.35m but does not seem to have pressed his objection.

In due course the meeting of the 23^rd September took place at the Club’s premises. It started at 11 o’clock in the morning and continued until late in the evening. It was attended by Mr Thomas and Mr Coombs for the Bank, Mr Hayward and his solicitor Mr Meldrum (who joined the meeting some time between 5 and 6 o’clock in the evening), Mr Gardiner, Mr Geoffrey Hayward, Mr Keep, Mr Willis, Mr Peter Hayward, for the Club and Mr Alan Griffiths the Club’s solicitor. It is accepted that, although Mr Hayward was still nominally the Club’s chairman, its acting chairman, who handled the negotiations on the Club’s behalf, was Mr Gardiner. I will return to what took place at this meeting and to the records that were kept of its proceedings later in this judgment. Suffice it to say at this stage, that the Facility Letter, recording the arrangement between the Bank and the Club substantially in the terms of the 1^st August letter ibid as amended as shown in the 20^th September note, which had been under preparation by Mr Coombs and the Bank’s solicitors and which, subject to minor alterations in the course of the meeting, was in the form in which it was ultimately signed, was before the meeting. Clause 4.1 of the Facility Letter sets out the “conditions precedent” to its taking effect. One of those conditions, at clause (f), was “the New Guarantee duly executed”. Clause 7 of the agreement dealt with repayment and provided at clause 7.1:-

“7.1

Commencing from 30^th September 1995 on the last day of March June September and December (or the next succeeding business day) each year until the Final Repayment Date the Borrower will make quarterly capital repayments of £60,000 to reduce Tranche A. provided that failure to pay any such instalment shall not be an Event of Default if on or before the 30^th June 1996 and in any year ending 30^th June thereafter the Borrower has repaid not less than £250,000 to reduce Tranche A.”

Clause 14 of the Facility Letter dealt with events of default on the occurrence of which the Bank was entitled to recover from the Club all of any outstanding indebtedness. Material to this judgement are events described at (a) default in payment on due date of any sums due and payable to the Bank, (f) presentation of a petition to wind up the Club and (i) inability of the Club to pay its debts within the meaning of section 123 of the Insolvency Act 1986 or otherwise. Clause 16.2 provided that the Facility Letter could only be amended or waived with the written agreement of both parties to it. Definitions of terms used in the Facility Letter were set out in an appendix to it forming part of the agreement. “New Guarantee” is defined at clause 20 of the appendix to mean “the guarantee, in a form and substance acceptable to the Bank, to be given by Kenneth George Gardiner for an aggregate principal sum not exceeding £250,000 this guarantee to provide for its termination on the 30^th June 1997 subject to Tranche A having been reduced to £1.35m on or before that date.”

In the afternoon of the 23^rd September the Facility Letter in its then form was signed on behalf of the Club by Mr Willis the Club’s vice-chairman who left the meeting at approximately 5 p.m. Because some further alterations were made to the Facility Letter later in the day that signature did not constitute the final coming into force of the Facility Letter. However it is accepted that at the conclusion of the meeting all parties regarded the draft Facility Letter in its then form as having been agreed to.

In the course of the meeting Mr Thomas prepared an “action list” of matters to attend to consequent upon it. There are 22 separate items appearing on the list. Item 4 under the heading “New Guarantee KG” included “letter to confirm terms (copy Meldrum…). This referred to a requirement resulting from the meeting, that Mr Thomas write to Mr Gardiner describing to him how his guarantee, which would otherwise be in the Bank’s standard form, would work. Accordingly on the 26^th September Mr Thomas wrote to Mr Gardiner under the heading “£250,000 guarantee in favour of ….[the Club]” as follows:-

“I am writing to confirm the terms of the Guarantee given by you in favour of the Club on 23^rd September 1994.

1)

The guarantee is to be fully supported by collateral, initially £250,000 held on side account with our Jersey Branch…

2)

The Guarantee is given within the terms of the Facility Letter agreed between the Bank and the Club also dated 23^rd September 1994 and is payable in the following circumstances:-

(a)

Default by the Club, prior to 1^st July 1997

(b)

The Club is committed to provide £60,000 per quarter debt reductions commencing 30^th September 1995 so that a minimum of £250,000 per annum in the year to 30^th June 1996 and 30^th June 1997 is achieved. If the Club do not meet this commitment then your guarantee will be called in part, or full to achieve the £250,000 per annum. If any call is made on the guarantee prior to 1^st July 1997 then you will reinstate the guarantee to £250,000 with supporting security, for the remainder of that period.

Providing no default has occurred then the Guarantee will be released on the 1^st July 1997 subject to the Club debt, Tranche (A) being reduced to £1.35m on or before that date.

Any variance to the terms of the Club Facility Letter of the 23^rd September 1994 will render this letter invalid.

Please sign and return the attached copy in acknowledgement.”

Mr Gardiner’s response to this was contained in a letter from Mr Griffiths his solicitor dated the 30^th September and received by the Bank on the 3^rd October marked for the attention of Mr Thomas. It reads:-

“Mr Ken Gardiner has passed to us your letter of the 26^th September 1994 asking that we clarify two points with you:-

Firstly….

Secondly in (sic) clause 2(b) appears to have been incorrectly drawn up and our client says should read as follows

“The Club has committed to provide £60,000 per quarter debt reductions commencing 30^th September 1995 so that a minimum of £250,000 per annum in the year to 30^th June 1996 and 30^th June 1997 is achieved. If the Club do not meet this commitment then your guarantee will be called in in part or in full up to a total of £250,000 being the total sums guaranteed by you under the above guarantee ”.

We should be grateful if you could confirm to us that this amended wording is agreed as it does accurately reflect the agreement between Mr Gardiner and yourselves. The rest of the letter does appear to be in order…”

It will be observed that the new draft omits the provisions of clause 2(b) of the Bank’s 26^th September letter which would have required Mr Gardiner to “re-instate” his guarantee back to securing £250,000 in the event that any demand was made under that guarantee “prior to the 1^st July 1997”.

On the 3^rd October Mr Thomas faxed to Mr Griffiths a replacement letter to be written to Mr Gardiner and countersigned by him in which clause 2(b) omits any reference to re-instatement of Mr Gardiner’s guarantee but adds as clause (c):-

(c)

“It is a condition of continued Bank support that each of the first two years repayments are guaranteed. If, therefore, any call is made, in part or full, prior to the 1^st July 1996 then replacement guarantees in an acceptable form to the Bank, of equivalent level will be put in place to secure the repayment due in the year to 30^th June 1997. If these are not available the facility will be considered in default.

(d)

Your personal liability is limited to £250,000 as outlined in the guarantee document.”

The Bank’s copy of this draft letter has a hand written note by Mr Thomas “for discussion/agreement with Ken.”

On the 6^th October Mr Griffiths wrote to Aldridge and Brownlee, solicitors from whom separate advice was being sought by Mr Gardiner on the guarantee he was being asked to sign, enclosing a copy of the draft letter “confirming terms of the guarantee”. Their response dated the 17^th October contains a postscript recording the fact that on the 21^st October Mr Gardiner signed the guarantee and also countersigned a copy of the draft letter dated the 3^rd October. The guarantee is in the Bank’s standard “all monies” form but with a proviso limiting liability to £250,000. I will refer to the counter-signed letter as “the Gardiner Side Letter.”

It was of concern to Mr Meldrum (and Mr Hayward) that once Mr Hayward had relinquished his control of the Club, the Club and the Bank might renegotiate the financial arrangements between them which would adversely affect the rate at which Mr Hayward’s liability under his guarantees to the Bank would be diminished. With that in mind, at the 23^rd September meeting, Mr Meldrum negotiated with Mr Thomas a form of side letter signed by the Bank and addressed to Mr Hayward which in its final form reads as follows:-

“In the event that [the Club] or [the Bank] should seek to either:

(a)

Renegotiate the loan arrangement between the Club and the Bank as set out in the Facility Letter from the Bank to the directors of the Club and dated the 23^rd September 1994 or

(b)

Enter into any new alternative or other loan arrangements of whatsoever nature.

then and in either case the Club agree that no such arrangement shall be effected without the consent in writing of Norman Hayward where the renegotiation may result in the guarantee repayment schedule set out in the Facility Letter being altered to the detriment of Norman Hayward for the period whilst liability to the Bank in respect of the Club’s facilities may be outstanding provided that in any event Norman Hayward’s consent shall not be necessary where the putting into the effect of any such arrangements would result in an absolute discharge of any liability Norman Hayward may have to the Bank.”

It was intended that this side letter to which I will refer as “the Hayward Side Letter,” should counteract some of the provisions of clause 8 of the Bank’s standard form of guarantee which I have set out earlier in this judgment.

In due course the Bank’s demands to the Club for repayment and under the guarantees of the Club’s indebtedness to the Bank, including Mr Hayward’s guarantees, were revoked by the Bank and Mr Hayward entered into a contract for the sale of 4/5 ^ths of his shareholding in the Club to Mr Gardiner and Messrs Geoffrey and Peter Hayward.

On the 11^th October 1995 the Commissioners of Customs & Excise presented a petition to wind up the Club. Subsequently the Inland Revenue were substituted as petitioners. The petition was dismissed on acceptance of a payment scheme on the 10^th June 1996. On the 25^th July the Customs presented a further petition based on a debt of some £70,000. Meanwhile by the 30^th June 1996 the Club had failed to make any of the promised capital repayments to the Bank. On the 2^nd July the Bank demanded £2.35m from the Club with outstanding interest and on the 3^rd July demanded the sums due under their guarantees from Messrs Hayward (the Defendant), Willis and Gardiner. On the 4^th July Mr Gardiner consented to his £250,000 held in Jersey being taken to settle his guarantee liability. On the 11^th July a meeting took place between Mr Burrage (Mr Thomas successor at Corporate Recovery), Mr Hayward and Mr Meldrum to discuss the Bank’s demand. The Bank’s minute of that meeting does not record the suggestion by Mr Hayward that the demand was premature. However on the 19^th July Mr Meldrum wrote to the Bank on Mr Hayward’s behalf saying that “in the light of the agreements lodged in September 1994 and the guarantees given by other parties to secure the Club’s indebtedness to the Bank, neither your demand nor the accrual of interest referred to therein is recognised.” These proceedings were commenced by the Bank on the 4^th December 1996.

On the 11^th November 2003 Mr Justice Lightman made an order in these proceedings specifying that a document entitled “Terms of Reference” should stand as agreed terms of reference for the hearing of this re-trial. Those terms of reference defined as the first issue with which I have to deal:-

“What (if anything) was agreed between the Bank and the Club at the 23/9/94 meeting in addition to the Facility Letter or which qualified its terms? In particular:

(a)

was it agreed (as Mr Hayward alleges) that if Mr Gardiner’s guarantee was called upon in respect of the first £250,000 repayment the Club would have until the 30/6/97 to make the second payment without being in default?

(b)

was it agreed (as the Bank alleges) that if a call was made under Mr Gardiner’s guarantee in respect of the first payment that guarantee would need to be enhanced or another executed to secure the second repayment of £250,000?.”

Although Mr Berry, who appeared for Mr Hayward initially demurred, it is, as I understand it accepted that whether or not there was an agreement such as described in (a) above is fundamental to the success of Mr Hayward’s defence. Such an agreement would necessarily carry with it the Bank’s acceptance, either, that a failure by the Club to make payment of part or all of the £250,000 becoming due on the 30^th June 1996, so triggering a right of recourse to Mr Gardiner’s guarantee and its supporting security, would not be an event of default making the whole of the balance of the indebtedness of the Club to the Bank due under the provisions of clause 14 of the Facility Letter, or, that in those circumstances the Bank would waive its right to make claims on the Club and on the outstanding guarantees including those of Mr Hayward. If there was no such agreement, the position of Mr Hayward as against the Bank was unaffected, even if an agreement such as that set out in (b) was not made at the 23^rd September meeting, but there was subsequently an agreed variation of the loan arrangements between the Bank and the Club, without notice to Mr Hayward, which imported the terms of the Gardiner’s Side Letter into those arrangements. An event of default would have taken place on the 1^st July 1996 entitling the Bank to call in Mr Hayward’s guarantee.

There are three contemporaneous, or near contemporaneous records, of what took place at the meeting. The first is a Bank file note dated the 23^rd September 1994. That date was a Friday. It was Mr Thomas and Mr Coombs’ evidence that they each took rough notes of the discussions at the meeting which notes were converted into this file note over the weekend. The process would have involved a comparison of their respective rough notes. Those rough notes have been mislaid. It was, however, accepted by Mr Thomas that this file note did not purport to be any sort of accurate record of what was said at the meeting but rather a report, for the Bank’s internal consumption, of what the result of the meeting was. The file note is in some respects inaccurate, in particular, it does not appear to give an accurate description of the effect of the Hayward side letter. However the important passage in the note is the paragraph where it deals with Mr Gardiner’s guarantee which it does in the following terms:-

“A new guarantee for £250,000 has been taken from Ken Gardiner, who sought independent legal advice during the day, supported by cash deposit of £250,000 at Jersey branch, account 0218811. Guarantee remains in force until 30^th June 1997 and underwrites £250,000 per annum repayments due in year 2 and 3. Any call on the guarantee during year 2 will require its enhancement back to £250,000 for continuation in year 3. Cash support may be replaced by alternative collateral acceptable to the Bank.”

At the bottom of the second page of the note is a box headed “summary of our position”. This amounts to a series of calculations of the Bank’s position before and after the agreement reached at the meeting, and at various dates in the future, in order to demonstrate the Bank’s exposure to the Club in consequence. In evidence was the copy of this note which, it is said, was transmitted internally in the Bank, which contains certain handwritten annotations by Mr Thomas, in particular, an annotation to the assessment of risk as at the 1^st July 1996, which appears to reflect the position were there not to be a replacement guarantee in circumstances where the Gardiner guarantee had been called upon in full during the previous year.

The second record is that of Mr Meldrum. It is accepted that Mr Meldrum only arrived at the meeting between 5 and 6 p.m. after Mr Willis had left having appended his signature to the Facility Letter. Mr Meldrum made handwritten notes of what took place at the meeting which he dictated onto tape and had typed up either over the weekend, or on the following Monday. Again Mr Meldrum’s rough notes have not survived. The typed up version, however, is intended as a record of what took place at the meeting from moment to moment. It does not contain any record of an agreement between the Club and the Bank varying the terms of the Facility Letter, such as the Bank alleges, or such as Mr Hayward alleges. While acknowledging that there had been a general discussion about the effect of the provisions of the Facility Letter in a series of alternative future scenarios, including failure by the Club to pay in the year to 30^th June 1996 and consequent realisation of Mr Gardiner’s secured guarantee, Mr Meldrum explained this omission on the ground that the discussion was diffuse and “probably because nothing conclusive was reached”. He said “as I say it was a wide ranging discussion and insofar as things were discussed but no conclusion reached obviously I did not record it.”

The third record is that of the Club and treats the meeting of the 23^rd September as if a meeting of the Club’s board of Directors and records what occurred in the form of board minutes. Those minutes record that “K. Gardiner would give the Bank a £250,000 cash backed guarantee.” The minutes deal with the discussions after the arrival of Mr Meldrum in one sentence as “minor fine tuning of the loan agreement” and also makes no record of any oral variation of the Facility Letter either as suggested by the Bank or Mr Hayward.

Notwithstanding that the result of this case does not, in my view, turn on it, I will deal first with the issue defined by sub-paragraph (b) of the first issue under the Terms of Reference.

I have come to the conclusion that the Bank has failed to establish that in the course of the 23^rd September 1994 meeting there came into existence between the Bank and the Club an agreement, adding to or qualifying the Facility Letter, to the effect that if a call was made under Mr Gardiner’s guarantee in respect of the first payment that guarantee would need to be enhanced or another executed to secure the second repayment of £250,000. I have come to that conclusion for the following reasons:-

I turn to consider the agreement which Mr Hayward alleges resulted from the 23^rd September meeting referred to in paragraph (a) of the Terms of Reference.

As I have already pointed out and as Mr Justice Rimer points out at paragraph 56 of his judgment, in order to succeed in his defence Mr Hayward must establish an agreement by the Bank with the Club so that the Club would not be regarded as being in default for the purposes of clause 14 of the Facility Letter if payment of the first instalment of £250,000 due on the 30^th June 1996 was achieved by the Bank by realisation of Mr Gardiner’s guarantee and, in particular, its cash backing. In the course of closing submissions the Defendant sought to amend the defence so as to plead estoppel by representation against the claim, prompted by some interventions of mine, but I refused permission on the ground that the application was too late and would require the evidence to be reopened.

Mr Hayward’s evidence was that prior to the September 23^rd meeting Mr Gardiner contacted him to inform him that the Bank had offered such an agreement. He describes this at paragraph 42 of his witness statement as follows:-

“42

the discussions with Ken Gardiner and the Bank, however, were revived in early September 1994. Ken Gardiner contacted me on or about the 6^th September 1994 and said that he was still very keen to acquire the Club. He told me that he had been speaking to the Bank. I understood from him that the terms of his discussions were as follows:-

42.1

That the Bank was to give a loan facility of £2.5m;

42.2

That Ken Gardiner would provide £250,000 as a cash guarantee;

42.3

The £250,000 would guarantee the Club’s principal repayments of £250,000 on 30^th June 1996 and 30^th June 1997;

42.2

That if the Club was unable to pay £250,000 or any part of it by 30^th June 1996, Ken’s guarantee would kick in and it would meet the shortfall. The Club then had until 30^th June 1997 to provide the Bank with the next £250,000 principal repayment from the sale of players or new investment;”

Mr Hayward’s account of the relevant part of the 23^rd September meeting starts at paragraph 71 of his witness statement and reads:-

“71

I asked Mr Thomas what would happen if the Club could not pay any of the £250,000 due on June 1996. He confirmed that in the circumstances the Bank would call on the cash deposit of Ken Gardiner of £250,000. He said words to the effect, “you were worried about the same question in early August and I informed you of the Bank’s position on this when you phoned me and you said that you were not satisfied with me telling you over the telephone and insisted that I put it in writing which I did on or about the 12^th August” [letter quoted above]

72

Mr Thomas said that in those circumstances Ken would have to pay his £250,00 cash guarantee in full on the 30^th June 1996. The Bank would then have to rely on the Club selling players during the following year in order to meet the instalment due of the 30^th June 1997 of £250,000. In the event that the £250,000 was not paid by the Club on the 30^th June 1997the Club would be in default and the Bank would be entitled to call on my remaining £400,00 guarantee. Mr Thomas said if the Club had paid both the first and second instalments the Bank would release Ken Gardiner’s £250,000 cash deposit. The payment on 30^th June 1997 would reduce my guarantee to £150,000. We also discussed what would happen in subsequent years. Mr Thomas confirmed that on a further payment being made on30th June 1998 I would be entirely released from my guarantee.

73

I was also concerned that since I was handing over control of the Club by the transfer of the majority of my shares I wanted to ensure that the arrangements between the Club and the Bank were not subsequently changed. Neil Meldrum specifically addressed this issue. It was agreed that any change to the facility agreement would have to have my written consent. I understood that the Club and the Bank were going to write a letter to this effect.

74

My clear understanding of that meeting was that the Bank had Ken Gardiner’s cash guarantee which would stay in place until the 30^th June 1997 for £250,000 only.”

It was Mr Hayward’s evidence that his conversation with Mr Thomas at the 23^rd September meeting was in the presence of Mr Gardiner and at a time after Mr Meldrum had arrived at the meeting. It must be remembered that although it was Mr Gardiner who was leading the negotiations for the Club Mr Hayward remained, at this time, Chairman and majority shareholder.

Mr Lerego for the Bank in his helpful submissions both written and oral pointed out a number of reasons why such an agreement as Mr Hayward alleges could not have been made.

His first objection was that there is no documentary support for the existence of such an agreement. In particular it does not appear, and could, by a simple amendment made in the course of the 23^rd September meeting, have been made to appear in the Facility Letter. As I have already pointed out the same is true of the agreement alleged by the Bank. I have to say that no one present at the meeting of 23^rd September, including their professional advisors, seems to have given the terms of the Facility Letter much detailed examination. Mr Hayward and Mr Meldrum at least have the excuse that Mr Hayward was not a party to the Facility Letter and they were not in any way involved in its preparation. It is, however, certainly a weakness in Mr Hayward’s case that Mr Meldrum, his solicitor, does not record this agreement in his notes of the meeting, or mention any discussion of its subject matter, on the ground that nothing conclusive emerged as a result of the discussions at which he was present. No reference to any such agreement appears in Mr Thomas note of the meeting or the Club’s minutes of it, to which I have already referred.

In support of Mr Hayward’s case however is the passage in Mr Thomas undated note but which, it is accepted, was made on or soon after the 3^rd October, where the writer notes that, in the event of the Club not paying anything by the 30^th June 1996 and obtaining payment from Mr Gardiner’s guarantee, – “Club needs to find £250,00 by 30/6/97 to avoid default.” I have already pointed out the reference to “three years potential breathing space” in the Bank’s internal minute of the 3^rd October and its connection with the handwritten annotations by Mr Thomas on what seems to have been his copy of his note of the 23^rd September meeting on the schedule “summary of our position.”. In another internal minute of the 12^th March 1996, recording a meeting between Mr Gardiner and Mr Randall, Mr Thomas’ successor’s assistant, to discuss the Club’s financial situation at paragraph 4 the following passage appears:-

“4

£275,000 is currently owed to Customs and Revenue. To get the Club through to the start of the next season, Ken believes, including these prefs, a total of £400,000 is needed to cover ongoing expenses. This excludes our loan repayment due at the end of June when Ken seems quite content for us to rely on his guarantee and cash securities.”

That note is certainly consistent with the Bank not treating a recourse to Mr Gardiner’s guarantee as an event of default under clause 14 of the Facility Letter.

Mr Lerego’s next objection is that any conversation at the 23^rd September meeting between Mr Thomas and Mr Hayward, such as Mr Hayward describes, is most unlikely because it was entirely inconsistent with his understanding of what would happen in the event of the Club failing to make payment of £250,000 by the 30^th June 1996, as recorded in his note of that meeting to the relevant part of which I have already referred. As I have already made clear, in the light of Mr Thomas evidence in his witness statement and under cross-examination I do not accept that the relevant sentences in Mr Thomas note are necessarily to be read as a record of what was actually agreed at the meeting as opposed to what would need to be done in the future.

Mr Lerego next points to the absence of protest from Mr Griffiths, Mr Gardiner, Mr Meldrum or Mr Hayward when they became aware of the text of the Gardiner side letter. He says that it was inconsistent with what must have been understood to be the terms upon which the Bank’s facility was being offered, and which were accepted as a result of the 23^rd September meeting, if Mr Hayward’s account is correct. Neither Mr Griffiths nor Mr Gardiner were called to give evidence a criticism which Mr Lerego made of Mr Hayward’s case. But the Bank could also have called them and we know that the relationship between Mr Hayward and the consortium was strained at all material times. Neither was naturally Mr Hayward’s witness. It is common ground that in the autumn of 1994 the Club was badly in need of immediate cash to pay wages. It may well be that the Gardiner side letter, and the supplemental agreement which it may record, was entered into by the Club through Mr Gardiner in order that the Bank’s facilities should not be further delayed. Mr Meldrum’s evidence was that, whereas he received a copy of the Gardiner side letter at least by the 18^th November, he did not pay much attention to it because it did not seem to him directly to concern Mr Hayward. Mr Hayward could not recollect ever seeing a copy of the letter at any material time.

It is then objected by Mr Lerego that Mr Hayward’s account is inconsistent with the terms of the counterclaim in these proceedings which was drafted for him by his former solicitors and counsel which pleads that the arrangement between the Club and the Bank to provide a continuing facility concluded at the meeting of the 23^rd September included a new guarantee “in the amount of the First Repayment, namely £250,000” but “in the event that the First Repayment was met from the collateral [securing the guarantee] a further guarantee and deposit in the sum of £250,000 would be provided by the Consortium to secure the Second Repayment (also £250,000);” the pleading counterclaims against the Bank for loss resulting in their failure to obtain such a replacement guarantee.

However it seems to me that this pleading is not necessarily to be read as a description of the facility agreement as it stood at the end of the 23^rd September meeting. It is entirely clear that the availability of the Holme v Brunskill defence to Mr Hayward was not apparent to those advising him at the time that this defence and counterclaim were being drafted. By that stage it would have become apparent that a further agreement for the provision of the replacement guarantee, inconsistent with, and so varying the terms of the Facility Letter, contained in the Gardiner side letter, had been made and was thought to be available on which to base a counterclaim by Mr Hayward. The same can be said of the defence of Mr Willis which pleaded a similar description of the agreement in answer to a claim by the Bank on his guarantee.

It is certainly true, as Mr Lerego points out, that there is no evidence of a protest by Mr Hayward when the Bank made demand on him under his guarantees on the 3^rd July 1996. There was in evidence a note by Mr Burrage, Mr Thomas’ successor as head of corporate recovery, of a meeting on the 11^th July 1996 with Mr Hayward and Mr Meldrum at which it does not appear that Mr Hayward was taking the point that the Bank had agreed that they would not be in a position to demand repayment from him until default in paying the instalment becoming due on the 30^th July 1997. However it must be borne in mind that by this time a petition to wind up the Club had been presented and it was plainly insolvent. These two facts constituted separate events of default under clause 15 of the Facility Letter which would separately have entitled the Bank to make demand on Mr Hayward.

It is clear as Mr Berry submitted, that in September 1994 for their own commercial reasons, probably associated with the Bank’s image locally, the Bank was keen that the Club should not be forced to close down by their action in enforcing their claims. The arrangement involved the Bank waiving £1/2m of debt on the conclusion of the agreement which sum in the meantime would be interest free. – see the Bank’s letter to Mr Gardiner of the 1^st August quoted above.

In the result I have come to the conclusion that I can accept Mr Hayward’s account of his oral agreement made with Mr Thomas at the meeting on the 23^rd September as a result of which he completed his side of the overall bargain by transferring 4/5^ths of his shares in the Club to the consortium and depositing the first £40,000 of the purchase price with the Bank as security for his obligation under his guarantees, without which the whole arrangement would not have proceeded. In doing so I have departed from the factual conclusion of Mr Justice Rimer at the first trial. As anticipated by the Court of Appeal the primary cause of this difference of result lies in the dating of the previously undated note of Mr Thomas which seems to me, as it seemed to the Court of Appeal, to be inconsistent with the Bank’s evidence of what resulted from the September 23^rd meeting. Mr Hayward said that he could remember and was sure that his description of his exchange with Mr Thomas at the 23^rd September meeting was substantially correct. I can accept that this may well be so even though ten years have passed since the event itself. This was an aspect of the negotiation which very much concerned Mr Hayward and which he specifically raised. His account appears to me to be consistent with the post September 23^rd documents and the events they describe.

In respectful agreement with the Court of Appeal I have no doubt that the Gardiner Side Letter bound the Club to procure the provision of a replacement guarantee in the event that Mr Gardiner’s guarantee was called before the 30^th June 1996. It was certainly intended by the Bank to do so. The subject was evidently raised at the 5^th October board meeting of the Club without comment. Both Mr Hayward and Mr Willis who was present at that meeting brought claims based on the proposition that the Club was bound by its terms. In the first part of this judgment I have concluded that the Gardiner Side Letter was the product of further negotiations between the Bank and Mr Gardiner to fill a perceived lacuna in the Facility Letter see in particular Mr Thomas handwritten comment on the draft letter referred to in para 30 above. It seems to me that all the evidence points to Mr Gardiner having the board’s authority to bind the Club in his negotiations with the Bank, both at the 23^rd September meeting and for the purposes of tidying up the terms of the facility thereafter.

It follows from these factual conclusions that, after the 23^rd September meeting, and without Mr Hayward being consulted and consenting, the terms upon which the Bank’s facility had been agreed at that meeting to be available to the Club were varied by a provision which required the Club to provide a further guarantee in the sum of £250,000 to secure the second repayment instalment of £250,000, due from the Club to the Bank, by the 30^th June 1996 in order to avoid an event of default occurring at that date in circumstances where Mr Gardiner’s guarantee had been previously called and fully discharged by payment. The effect of that variation on Mr Hayward was that, whereas without it his guarantees could not be called before the 30^th June 1997, after the variation they could be called on the 1^st July 1996 if the Club did not comply with the new requirement.

At paragraph 6 of this judgment I have set out an example of the provision appearing in each of Mr Hayward’s guarantees which is designed to exclude the rule in Holme v Brunskill. It is not in issue that the Hayward side letter set out at paragraph 32 above, or the agreement at the 23^rd September meeting it records, was effective to vary the terms of the Facility Letter to import a requirement that Mr Hayward be given notice of any negotiation of the payment terms which might adversely affect him. To this extent therefore the provisions of Mr Hayward’s guarantees to the Bank were varied. In my judgment the rule in Holme v Brunskill applies to Mr Hayward’s guarantees as if the equivalent clauses in each of Mr Hayward’s guarantees had been similarly varied.

In Holme v Brunskill (1877) 3 Q.B.D. 495 at page 505 Lord Justice Cotton described the rule emerging from that case, which remains good law, in these terms:-

“The true rule in my opinion is, that if there is any agreement between the principles with reference to the contract guaranteed, the surety ought to be consulted, and if he has not consented to the alteration, although in cases where it is without enquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, if it is not self evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the court, will not, in an action against the surety, go into an enquiry as to the effect of the alteration, or allow the question whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he is not so consented he will be discharged.”

It follows from my findings that Mr Hayward’s guarantees of the Club’s indebtedness to the Bank were discharged by the effect of the rule before demand was made upon him on the 3^rd July 1996 and that the Bank’s action against him fails.