Barclays Bank Plc v Kufner

This is an application for summary judgment on a claim under a guarantee executed on 13 June 2006. The defendant/guarantor is Mr Alfons Kufner, a citizen of Germany. The guarantee (“the Kel guarantee”) was given by way of security for a loan (“the Kel loan”) made by the claimant (“the Bank”) to an Isle of Man company beneficially owned by Mr Kufner, Kel Maritime Limited (“Kel”). The purpose of the loan was to finance the purchase of the motor yacht “Lifestyle” (“the vessel”) which Mr Kufner intended should be bareboat chartered under the management of a Turkish business associate of Mr Kufner, Mr Mustafa Ontulmus. The loan was made under a loan agreement made between the Bank and Kel (“the Kel loan agreement”) on 26 June 2006. The total advanced under the Kel loan agreement was €3,494,322.00. It was a condition precedent to Kel’s entitlement to drawdown under the Kel loan agreement that a mortgage over the vessel had been duly executed by the borrower notarially attested and legalised in such a form as shall be capable of registration against the vessel in accordance with laws and regulations of the Isle of Man. The sum guaranteed was € 3,540,000.00. The Bank also took a mortgage over the vessel executed by Kel (“the Kel mortgage”).

When the Kel loan agreement was executed the vessel was entered in the Isle of Man Ships Register but shortly thereafter steps were taken to have the vessel registered in Madeira and to have it sold to a Madeira company, Paelten Consultores e Servicos Lda (“Paelten”). On 8 August 2006 Paelten and the Bank executed a loan agreement (“the Paelten loan agreement”) whose purpose was to finance Paelten’s purchase of the vessel from Kel. The Paelten loan agreement was on substantially similar terms to the Kel loan agreement. Thus it was a condition precedent to Paelten’s right to drawdown under the agreement that the Bank have a mortgage of the vessel notarially attested and legalised and in such form as shall be registrable in accordance with the laws and regulations of Madeira. It was also intended that Paelten’s liability should be secured by a guarantee executed by Mr Kufner. On 4 August 2006 Paelten executed a First Priority mortgage over the vessel in favour of the Bank and on 8 August 2006 Mr Kufner executed a guarantee (“the Paelten guarantee”) on the same terms as the Kel guarantee.

On 15 August 2006 the Kel mortgage was discharged and the following day the registration of the vessel with the Isle of Man Registry was closed. These steps were necessary before the vessel and the Paelten mortgage could be registered in Madeira. However, when the Bank attempted to register the Paelten mortgage in Madeira, the Madeira Shipping Registry declined to register it, apparently because the mortgage and/or the bill of sale of the vessel from Kel to Paelten had not been duly notarised. This led to discussions between Mr Kufner and the Bank about amending the documentation. Mr Kufner contends that he did not know that the Paelten mortgage had not been registered until the beginning of November 2006. He says that in mid November 2006 Mr Ontulmus took advantage of the Bank’s failure to have the Paelten mortgage registered by giving instructions that Paelten should not execute an amended mortgage until Mr Kufner had paid him “security” of between €500,000 and €700,000. On 21 November 2006 the vessel was transferred from Paelten to another Madeira company, Mellabond Market Trading Lda (“Mellabond”), whose title was registered in the Madeira Shipping Registry. The stated consideration was €5.4 million payable by post-dated cheques but none of these cheques has been honoured. Mr Kufner maintains that he was not at the time aware of this transfer. He alleges that it was engineered by Mr Ontulmus, whose nominee, a Miss Julia Clas, had been appointed a director of Paelten to facilitate the chartering of the vessel through Mr Ontulmus’s travel agency. On 19 February 2007 the Bank served on the Madeira Shipping Registry a stop order obtained from a Madeira court, but by now the vessel had been transferred off the Madeira Registry. In paragraph 30 of his witness statement, Mr Kufner states he has lost track of the vessel and does not know where it is presently registered.

Kel made only two payments under the Kel loan agreement in September and October 2006, totalling €71,040.01. On 13 April 2007 the Bank issued a notice of default under the Kel loan agreement which resulted in the whole of the outstanding balance becoming payable. On 30 April 2007 the Bank gave notice of demand to Mr Kufner under the Kel guarantee in the sum of €3,540,000, plus interest and costs. The Bank’s position is that the debt owed by Kel under the Kel loan agreement was never discharged because there was no drawdown under the Paelten loan agreement, and it was only upon such a drawdown that the loan to Kel was to be transferred to Paelten, in which event there was to be a deemed repayment of the Kel loan and deemed payment by the Bank to Paelten. Accordingly, there was never any transfer from the Kel account to the Paelten account in the Bank’s books and the Kel loan remains in arrears.

These provide:

Mr Nash QC for Mr Kufner applied for permission to rely on this defence following a comment of mine during the hearing that the idea of a drawdown under the Paelten loan agreement was unreal, so that it seemed arguable that the Kel loan was discharged when the Paelten loan was executed. Mr Kufner needed permission because, until the hearing, he had accepted that in the absence of an estoppel arising from the discharge of the Kel mortgage (Footnote: ¹), the Kel loan had not been discharged. However, having heard Mr Passmore for the Bank on the issue, I decided that the contention that the Kel loan had been discharged was unarguable and so ruled. The idea that there was going to be a drawdown under the Paelten loan agreement is unreal, but bearing in mind the conditions precedent to the right to drawdown, I am satisfied that all parties must have proceeded on the basis that the Kel loan would only be discharged if and when the Bank had a mortgage over the vessel executed by Paelten in a form capable of registration in Madeira, and no such mortgage was ever executed.

It follows that the Kel loan has not been discharged and that unless Mr Kufner has some other defence, he is liable under the Kel guarantee as claimed by the Bank.

B Release of the Kel mortgage by the Bank without procuring a replacement mortgage executed by Paelten registrable in Madeira

This defence is pleaded in paragraphs 32, 36 and 37 of Mr Kufner’s Amended Defence and Counterclaim, which read:

It is to be noted that the pleaded duty is said to be a duty in equity; no implied contractual term or common law duty of care is relied on.

To the extent that the Bank seeks to rely on Clauses 5.1 and 5.3 of the Kel guarantee, Mr Kufner contends that on their true construction these provisions do not assist the Bank and, even if they do, they are not binding on him by reason of regulation 8 (1) of the Unfair Terms in Consumer Contracts Regulations 1999 which provides: “An unfair term in a contract concluded with a consumer by a seller or supplier shall not be binding on the consumer.”

The Bank also submits that Mr Kufner, acting through his German lawyer, Mr Knott, consented to the discharge of the Kel mortgage by an email of 14 August 2006 to a Mr Stewart of Pelagos Yachts Ltd, an Isle of Man corporate services provider. Earlier on 14 August 2006, Mr Stewart had emailed Mr Knott (with a copy to a solicitor acting for the Bank, Ms Lindsay Christie) requesting confirmation that Mr Knott was happy for the Bank’s solicitors to deliver to the Isle of Man Registry the Kel mortgage discharge documentation and a Bill of Sale. In his reply later that day (which was copied to Ms Lindsay), Mr Knott wrote: “Please go ahead. Summer passes by an (sic) my client is not able to earn money with the vessel….”

In reply to this submission, Mr Kufner contends that Mr Knott expressed himself as he did on the understanding that all the documentation required for a loan to be made to Paelten, including the mortgage deed, had been signed and returned to the Bank; that the Bank had advanced or was about to advance the loan to Paelten to settle the Kel loan and mortgage; and that it was a matter of mere formality to complete the registration at the Madeira Registry.

On 11 January 2007 there was a meeting between, inter alios, Mr Kufner, Mr Knott, and a solicitor representing the Bank, Mr Edgar. Mr Kufner alleges that at this meeting, upon being urged to take steps in Madeira to prevent further dealings in the vessel which had been located in Turkey, Mr Edgar said there was no need to worry, the vessel was “on the hook”. Mr Kufner says that he took Mr Edgar to mean by this that the Bank’s solicitors had taken steps to ensure that no further sale or transfer of the vessel could take place without the Bank’s consent. Mr Kufner maintains that in reliance on this statement, he took no steps himself to obtain through Kel or Paelten a stop notice in the Madeira Registry. In fact, the Bank only applied for a stop notice in Madeira on 5 February 2007 and before the court had made the requested order on 19 February 2007, the vessel had been transferred off the Madeira registry. Mr Kufner claims that, as a consequence of Mr Edgar’s negligent misstatement, Kel was prevented from obtaining payment from Mellabond or from Paelten and/or it was prevented from obtaining a re-vesting of ownership of the vessel in Paelten, which would have enabled the Bank to perfect its security under the Paelten mortgage.

Clause 19.1 (a) of the Kel loan agreement provides that all amounts due under the agreement (or any related security agreement) shall be paid “without any form of set-off, cross-claim or condition”. Mr Kufner submits, however, that this clause (“the set-off clause”) is unenforceable because it fails to satisfy the requirement of reasonableness provided for in the Unfair Contract Terms Act 1977 (“UCTA”).

It is well-established law that a creditor owes an equitable duty to a surety not to impair or release any security he holds for the enforcement of the contract with the principal debtor. The creditor owes this duty because the surety is entitled to be subrogated to securities held by the creditor if he honours the guarantee. If the creditor breaches the duty, the surety is released from his liability under the guarantee to the extent that the value of the securities has been impaired as a result of the breach; see Skipton Building v Stott [2001] QB 261.

Bank guarantees invariably contain clauses in favour of the bank excluding or modifying the equitable duty on the bank not to impair or release securities. Clauses 5.1 and 5. 3 in the Kel guarantee are such clauses. Clause 5.3 f undoubtedly entitles the Bank to release the Kel mortgage. It follows, submitted Mr Passmore for the Bank, that Mr Kufner can have no defence founded on the release of the Kel mortgage, even if that release was careless in the manner pleaded by Mr Kufner. Mr Nash contended that this was not so. Citing Canada Steamship Lines Limited v R [1952] AC 192, he argued that clause 5.3 f only excused a deliberate release of security and did not cover the negligent release of a security.

In my judgement, the key question is: Was the Bank subject to the pleaded equitable duty to take care to ensure that it had in its hands a registrable replacement mortgage granted by Paelten before it released the Kel mortgage? In my view it was not. Clause 5.3 f of the Kel guarantee conferred on the Bank the liberty to release the Kel mortgage without taking any steps whatsoever to replace that security with another form of security granted by the new debtor, Paelten. It follows that it cannot have been under a duty to take reasonable care to procure an effective substitute security unless there was a contractual term to this effect, and no such term is relied on.

Thus, if clause 5.3 f is a valid provision, Mr Kufner has no defence to the Bank’s claim based on the Bank’s release of the Kel mortgage without first obtaining a registrable mortgage over the vessel granted by Paelten.

Does clause 5.3 f fall foul of regulation 8 (1) of the Unfair Terms in Consumer Contracts Regulations 1999 (“the Regulations”)? Regulation 4 (1) provides:

“Consumer” is defined in regulation 3 (1) in the following terms:

“Seller or supplier” means:

Founding on the words “seller or a supplier” in regulations 4 (1) and 8 (1), Mr Passmore submitted that the Regulations had no application to a bank guarantee since the bank in such a contract is neither a seller nor a supplier. He further contended that since the Regulations are aimed at unfair terms, they are concerned with a pro-supplier/seller imbalance in a contract capable of being more balanced, i.e. a contract under which benefits flow both ways. In his submission, a bank guarantee is not such a contract; the benefit it confers flows only one way, from the guarantor to the bank. The Regulations can therefore have no application to a guarantee. In support of this further submission, Mr Passmore relied on the judgement of Judge Kershaw QC in Bank of Scotland v Singh (Footnote: ²) QBD, unreported 17 June 2005 (paras 85-90).

In Bayerische Hypothetken v Dietzinger, Case C-45/96, [1998] 1 WLR 1035, the question was whether Council Directive 85/557/EEC to protect the consumer in respect of contracts negotiated away from business premises (“the 1985 Directive”) applied to a bank guarantee given by a natural person who was not acting in the course of a trade or business to secure the overdraft of a third party.

The definition of “consumer” in the 1985 Directive is identical to that in the Directive (“the 1993 Directive”) (Footnote: ³) on which the Regulations are based. That definition reads:

A “trader” is defined as:

Article 1 of the 1993 Directive provides:

In paragraphs 18-19 and 22-23 of its judgement, the ECJ said:

In my judgement the Regulations should be construed in accordance with the approach of the ECJ in Bayerische Hypothetken. I therefore decline to accept Judge Kershaw QC’s analysis in Bank of Scotland v Singh, and take the view that the Regulations apply to a bank guarantee, at least where the guarantor and the principal debtor each entered into their respective contracts as natural persons and were not acting in the course of their trade or profession. Mr Nash argued that for a bank guarantee to fall within the Regulations it was unnecessary that the principal contract should be with a consumer. In his submission, the ECJ’s reasoning in Bayerische Hypothetken is explained by the words “contracts under which a trader supplies goods or services to a consumer” in article 1 of the 1985 Directive. I reject this submission. In my view, regulation 4 (1) of the Regulations is to the equivalent effect of the words in article 1 of the 1985 Directive set out above. Accordingly, I hold that for a guarantee to be covered by the Regulations, both the guarantee and the principal contract to which it is ancilliary must be executed by a “consumer”. Plainly, Kel did not enter into the Kel loan agreement qua consumer. It follows that the Regulations have no application to the Kel guarantee.

Even if it were enough for the Regulations to apply to a guarantee that it had been executed by “a consumer” as well as being ancilliary to a contract of sale or supply, I am quite satisfied that Mr Kufner did not execute the Kel guarantee in such a capacity, but did so for the purposes of his trade or business. Mr Nash contended that the Kel guarantee was part of Mr Kufner’s venture with Mr Ontulmus whereby Mr Ontulmus would manage the chartering of the vessel and this venture was not part of Mr Kufner’s trade, business or profession, but was in the nature of a personal investment for profit using funds generated by his other business activities. He relied on the decision of Longmore J in Standard Bank Limited v Apostolakis [2003] I.L. Pr. 766.

I cannot accept Mr Nash’s submission. It was the intention throughout that the vessel should be owned by a one-ship company which would charter it out under the management of Mr Ontulmus. To this end, Mr Kufner, who had a net worth of € 27 million, procured the acquisition of Kel and Paelten and became the sole beneficial owner of both companies. Throughout, Mr Kufner had the assistance of his lawyer, Mr Knott. Further, in addition to assuming a liability of €3.5 million under the Kel guarantee, Mr Kufner advanced to Kel about €2 million towards the purchase price of the vessel. In my judgement, on these facts, Mr Kufner was acquiring the component parts of a ship chartering business and was acting in a business capacity in doing so. Mr Kufner is therefore not entitled to the protection of the Regulations, even if it is irrelevant that Kel was not acting as a consumer when it executed the Kel loan agreement. I must confess that I reach this conclusion without regret, for I cannot believe that the framers of the Regulations or the 1993 Directive intended that someone with the bargaining power of Mr Kufner and who procures the purchase of the component parts of a business at the cost of several millions of Euros should have the protection afforded by the legislation.

My decision that the Regulations do not apply to the Kel guarantee renders it unnecessary to consider the Bank’s alternative case that Mr Kufner consented to the release of the Kel mortgage without the Bank having at the same time a registrable mortgage over the vessel granted by Paelten. I proceed therefore to consider Mr Kufner’s set-off defences.

The Bank accepts that for the purpose of this summary judgement application, Mr Kufner is entitled to rely on any set-off defence that would be available to Kel, on the basis that he would be in no better position than Kel would be if Kel were to seek to set-off a claim against a claim by the Bank under the Kel loan agreement.

It is common ground that by virtue of sections 13 (1) (b) and/or 13 (1) (c) and 2 (2) of UCTA the set-off clause is unenforceable unless the Bank can show that it is reasonable. The pertinent guidelines in Schedule 2 to UCTA are: (a) the strength of the bargaining positions of the parties relative to each other taking into account alternative means by which the customer’s requirements could have been met; and (c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties). Given that Mr Kufner was an experienced man of business with a net worth of € 27 million, there was no material disparity in the bargaining positions of the parties. Further, Mr Kufner does not assert in his witness statement that he did not know of the existence or the extent of the set-off clause, which is hardly surprising since he had available the services of his lawyer, Mr Knott.

Is the set-off clause substantively unreasonable? Mr Nash submitted that this was an issue that was fact specific and should be decided only after a trial. I disagree. In my judgement, this issue can be fairly decided on the evidence before me. In Skipskredittforeningen v Emperor Navigation [1998] 1 Lloyd’s Rep 66, the claimant sought summary judgement for sums due under a loan agreement that provided, inter alia: “All payments to be made by or on behalf of the Borrowers pursuant to this Agreement … shall be made without (a) set-off….”. The defendant submitted that this clause was unreasonable under UCTA. Mance J rejected this submission holding that the clause was fair and reasonable. In his view “[s]uch a clause in a loan facility like the present is generally familiar, sensible and understandable”. In WRM Group Limited v Wood[1998] CLC 189 Morritt LJ agreed with this reasoning and so, with respect, do I. In my judgement, there is nothing unfair or unreasonable in requiring Kel to pay sums due under the loan agreement without set-off. Neither the set-off clause nor any other clause in the Kel loan agreement bars Kel from making a claim against the Bank, and at the same time, the Bank has a legitimate commercial interest in receiving payment under the loan agreement when the same is due, instead of being kept out of its money whilst a cross-claim is litigated.

Mr Nash submitted that if the set-off clause was enforceable, Mr Kufner should nonetheless be granted a stay of execution. I reject this submission. There is no evidence that either Kel or Mr Kufner would suffer exceptional hardship if Kel had to pay the sums due under the loan agreement in advance of the determination of Kel’s negligent misstatement claim; nor, on the material before me, is there a real risk that if Kel succeeded on its claim, the Bank would not be good for the damages recoverable by Kel.

I accordingly hold that Mr Kufner has no arguable defence based on a claim made by Kel for negligent misstatement.

The heads of loss Mr Kufner alleges he has suffered by reason of the Bank’s alleged negligent misrepresentation are pleaded in paragraphs 41 and 71 of the Amended Defence and Counterclaim. In paragraph 41, Mr Kufner first pleads that if the Bank had not made the alleged misrepresentation: (i) Kel would have obtained a stop order against the vessel and in due course Kel would have obtained payment for the vessel from Paelten or Mellabond; and/or (ii) Mr Kufner would have obtained a re-vesting of ownership of the vessel in Paelten; and/or (iii) the Bank would have been able to perfect its security and then discharge Kel’s alleged indebtedness by a further advance to the owner of the vessel. Next, Mr Kufner pleads that as a consequence of the foregoing: (a) Kel’s alleged indebtedness to the Bank would have been discharged and Mr Kufner would have had no further liability to the Bank; and/or (b) the Bank would have retained security over the vessel in respect of the indebtedness to which Mr Kufner would have been entitled to be subrogated upon payment pursuant to the Kel guarantee; and/or (c) Mr Kufner would have been beneficially entitled to 100% of the value of the vessel upon the re-vesting of ownership in Paelten or 100% of the proceeds of the sale of the vessel by virtue of his beneficial ownership of Paelten, alternatively 50% of the proceeds of sale, by virtue of his beneficial ownership of Kel, in each case net of the sums owed to the Bank.

Mr Passmore submitted that: (i) the loss pleaded in (c) is the loss to Mr Kufner resulting from the loss of the vessel; (ii) in substance, the loss pleaded in (a) and (b) is also the loss of the vessel because any loss suffered by Mr Kufner as guarantor is the amount paid out under the guarantee less the value of any recovery from Paelten for the vessel’s loss; (iii) the loss of the vessel is a loss suffered by Paelten for which Paelten can sue, since any negligent misrepresentation made at the meeting of 11 January 2007 was made to Mr Kufner not only in his capacity as guarantor and in his capacity as a representative of Kel, but also in his capacity as a representative of Paelten; (iv) the loss claimed by Mr Kufner for negligent misstatement is therefore a claim by a beneficial owner of a company to make good a loss which would be made good if the company’s assets were replenished; (v) accordingly, on the authority of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 and Johnson v Gore Wood & Co (a firm) [2001] 2 WLR 72, Mr Kufner was not entitled to recover for the pleaded heads of loss.

In my judgement, Mr Passmore’s submission is well-founded. If the alleged misstatement was made to Mr Kufner in his capacity as a representative of Kel, which on his own case it was, it was plainly also made to Mr Kufner in his capacity as a representative of Paelten as owner of the vessel. Further, the allegation that the misstatement caused the ultimate loss of the vessel, is an allegation of loss suffered by Paelten, its owner; and at all material times Mr Kufner was a 100% or, on the current state of the pleadings, a 50% beneficial owner of Paelten.

In Gore Wood, having reviewed a number of authorities, including Prudential Assurance; Heron International Ltd. and Others v. Lord Grade, Associated Communications Corp. Plc. and Others[1983] BCLC 244; R. P. Howard Ltd. & Richard Alan Witchell v. Woodman Matthews and Co. (a firm)[1983] BCLC 117; George Fischer (Great Britain) Ltd. v. Multi Construction Ltd., Dexion Ltd. (third party)[1995] 1 BCLC 260; Christensen v. Scott[1996] 1 NZLR 273; Barings plc. (in administration) and another v. Coopers & Lybrand (a firm) and others[1997] 1 BCLC 427; Gerber Garment Technology Inc. v. Lectra Systems Ltd. and another [1997] RPC 443; Stein v. Blake and Others [1998] 1 All ER 724; and Watson and Another v. Dutton Forshaw Motor Group Ltd. and others, Court of Appeal, unreported, 22 July 1998, Lord Bingham said:

In Lord Millett’s view, where a company suffers loss caused by the breach of a duty owed both to the company and to the shareholder:

Further on in his judgement, Lord Millett said:

In my judgement, there is no reasonable doubt on the material before the court that the loss claimed by Mr Kufner is loss which would be made good if Paelten enforced its full rights against the party responsible and is merely a reflection of the loss suffered by the company. I reach this conclusion notwithstanding that Mr Kufner recognises the possibility in paragraph 41 of the Amended Defence and Counterclaim that he might own only 50% of the share capital of Paelten. I do so because Mr Kufner has applied to amend his pleading to claim that he was the sole beneficial owner of Paelten at the date of the Paelten loan agreement; and in his witness statement he talks of Mr Ontulmus stating that “he had sold his alleged shares” [italics supplied]. In my opinion, Mr Kufner should be taken at his word. Further, I do not think that a 50% shareholding rather than a 100% shareholding would render Mr Kufner’s alleged loss arguably recoverable. In Humberclyde Finance Group v Hicks [2001] All ER (D) 202 Neuberger J said that if the claimant had owned only a few shares, he would not have struck out the claim for loss of pension rights and would have allowed an amendment for loss suffered qua guarantor. With great respect, given that the rule against reflective loss is based on the policy considerations identified by Lord Millet, I do not myself see why the application of the rule should depend on the number of shares held by the claimant, and certainly not so far as concerns a 50% shareholding.

I therefore hold that Mr Kufner has no defence to the Bank’s claim based on his pleaded cross claim for negligent misrepresentation.

Mr Passmore advanced an alternative argument to the effect that even if the damages sought on the cross claim were not in respect of reflective loss, the claim would still be bound to fail because negligent misstatement is not actionable per se and no actionable damage would have been suffered by Mr Kufner. Mr Kufner will have suffered no actionable damage because he will only be subject to an actual liability under the guarantee if there is no defence to the Bank’s claim, yet he maintains he has a defence.

However, given my conclusion in paragraph 44 above it is not necessary to deal with this argument and I decline to do so. This judgement is over-long as it is.

For the reasons given above: (i) the determination of none of the issues raised on this application requires a trial; and (ii) none of the defences advanced by Mr Kufner has a real prospect of success. The Bank is accordingly entitled to judgement for the sums claimed to be due under the Kel guarantee.