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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Harvey v Dunbar Assets Plc  EWCA Civ 952 (30 July 2013)
Cite as:  EWCA Civ 952
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ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION
HIS HONOUR JUDGE KAYE QC
Strand, London, WC2A 2LL
B e f o r e :
LADY JUSTICE BLACK
LADY JUSTICE GLOSTER
| JOHN SPENCER HARVEY
|- and -
|DUNBAR ASSETS PLC
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Peter Arden QC and Mr Joseph Curl (instructed by DLA Piper UK LLP) for the Respondent
Crown Copyright ©
Lady Justice Gloster :
The relevant terms of the Guarantee
"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.
"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.
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; …."
Submissions of the parties
The appellant's submissions
i) There was an established principle, as articulated in Graham (James) and Co (Timber) Ltd v Southgate Sands  QB 80, that a guarantee which on its face was to be signed by specific named persons, would not be treated as having been entered into by any one of those persons until all of them had signed. Their consent into entry into the contract was prima facie conditional upon that event occurring.
ii) Accordingly, at law there was no contract at all unless all the anticipated parties to the contract in fact became bound; see per Browne-Wilkinson LJ in James Graham supra at 94e; and per Lord Esher in Hansard v Lethbridge (1892) 8 TLR 346, 347, as cited by O'Connor LJ in James Graham at 89 D.
iii) The tendency of the authorities cited by O'Connor LJ was held by Browne-Wilkinson LJ in James Graham, to support the following exposition of the principle as stated in the then current edition of Chitty on Contracts:"where a surety enters into a deed upon a basis of a representation that it would be executed by another person as co-surety, the liability of the former would be held to be conditional upon the execution of the guarantee by the latter".Mr Schmitz referred to paragraph 44.062 in the 30th edition of Chitty which was to similar effect. (I interpose that paragraph 44-073 in the current 31st edition of Chitty (2012), cited below, is also to similar effect.)
iv) The principle was not one whereby a guarantor was released from his contractual obligations; the position was rather that, in such circumstances, he never undertakes any liability at all; see per Lord Russell of Killowen in Greer v Kettle  AC 156 at 165, an analogous case of a guarantee in which the debt was falsely described as being secured on a particular property.
v) The rights of the intended signatories to "have the signatures of each other" (as stated in Hansard v Lethbridge) was one that could be dispensed with if the signatories consent. Accordingly in each case the issue was whether on the construction of the Guarantee the particular consent has been displaced.
vi) In certain cases the relevant consent could be expressly given by the terms of the guarantee itself. For example in Bank of Scotland v Henry Butcher & and Co  2 All E.R. Comm 557, the only reported example where such consent was given, it was apparent from the following words in the contract that consent had indeed been given:"When this guarantee is executed by more than one person as guarantor, the liability of each of us to the Bank shall be joint and several ….Each of us, if more than one, shall be bound by this Guarantee, even if any person who was intended to execute or to be bound by it may not execute it or may not be so bound."
vii) But in order to displace the James Graham rule, there needed to be an explicit clause; the relevant wording had to be unambiguous and must draw attention to itself in the same way in which any unusual and onerous condition must achieve. The principle expressed by Lord Denning in Spurling v Bradshaw  2 All ER 121, 125 was applicable to the clause in the present case:"Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient."That was clear from cases such as Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd  1 All ER 348, 352 applying Thornton v. Shoe Lane Parking Ltd.  2 QB 163
viii) In the present Guarantee there was no similarly explicit wording as that contained in Bank of Scotland v Henry Butcher. By way of example, the standard term in use by Lloyds Bank was apt to displace the rule. The current Lloyds Bank wording reads"each signatory shall be bound by this Guarantee from the time it is signed by him or her, even if someone else: (a) was supposed to sign this Guarantee but did not do so, even if he or she was named as a signatory…".
ix) The provisions in the Guarantee upon which the Bank relied to support its argument that the principle in James Graham should be displaced, namely clauses 4, 5 and 15, did not on their true construction impose liability on Mr Harvey in circumstances where an intended co-guarantor had not signed.
x) In the alternative, at best such clauses were ambiguous, in which case they should be construed contra proferentem. That was particularly so in circumstances where:a) the Bank did not bring the provisions to Mr Harvey's attention;b) the Bank left it to one of the other intended guarantors to obtain Mr Harvey's signature;c) the other intended guarantors gave Mr Harvey only the signature page to sign; andd) he never saw the relevant terms upon which the Bank now relies.
xi) Accordingly the statutory demand should be set aside because it was based upon a debt which is disputed on bona fide grounds.
The respondent's submissions
i) There was no principle as such that, in the case of a composite guarantee, one guarantor would not be liable in the event that the other named guarantors did not sign the guarantee. In each case it was a question of construction of the guarantee.
ii) In the present case, on the assumption that Mr Lenney did not sign and therefore was not bound by the Guarantee, nonetheless each of the other intended guarantors did sign. Therefore the critical issue is as to the existence, nature and extent of the obligations undertaken by those guarantors in circumstances where one of the intended contracting parties had not signed and therefore was not bound. In order to determine that issue, one had to construe the agreement that the parties had entered into, and, as part of that process, determine what, if any, terms were properly to be implied.
iii) This was the point made by Mance LJ in paragraph 15 of his judgment in Capital Cashflow Finance Ltd v Southall  2 All ER (Comm) 675, where he said:"Leaving aside for the moment, therefore, the possibility of misrepresentation, the reasoning in all three authorities establishes that the relevant question is whether Mr Southall's agreement to execute and his execution of his undertaking was, expressly or impliedly, conditional upon Mr McCaffrey executing an undertaking in identical terms. That, as indicated in the headnote to TCB Ltd v Gray, depends upon a proper analysis of the contractual relationship between the Bank and Mr Southall."The three cases referred to by Mance LJ in this paragraph were all cases in the Court of Appeal. They were: James Graham, Byblos Bank SAL v Al-Khudhairy  2 BCLC 232 and TCB Ltd v Gray  1 All ER 108.
iv) The approach to the construction of a contract of guarantee was the same as that for any other contract: see paragraph 14 of the judgment of Lord Clarke JSC in Rainy Sky S.A. v Kookmin Bank  1 WLR 2900. In particular, as pointed out by Stanley Burnton J in Barclays Bank v Kingston  2 LI Rep 59 (at paragraph 29), one should not approach the construction of a guarantee"with the hostility traditionally shown to exemption clauses".But that was precisely the approach that Mr Harvey invited the Court to adopt in this case.
v) The construction of the guarantee was a unitary exercise as described by Lord Clarke JSC in Rainy Sky at paragraph 21:"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".
vi) Cases such as James Graham, Byblos Bank SAL v Al-Khudhairy and TCB Ltd v Gray showed that the fact that the creditor had not taken other securities stipulated for, or in, the underlying agreement (including a personal guarantee from a third party for instance) was not sufficient to discharge the guarantor from liability.
vii) The Guarantee in the present case did not contain any provision that expressly provided for the liability of each guarantor to be dependent upon the other named intended guarantors becoming liable under the same Guarantee; the fact that the Guarantee was expressed to be a joint and several guarantee simply pointed (but did not inexorably point) to the conclusion that liability was intended to be interdependent.
viii) However whether that conclusion was the right one depended upon the construction of the Guarantee as a whole. When the process of construction on a unitary basis was undertaken, it was plain, as the judge found, that the liability of each guarantor was not dependent upon the liability of all. That could be seen from clauses 4, 5 and 15. In particular, reliance was placed upon Clause 4(a)(iv) which expressly provided that:"(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:………..(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….".In the present case the terms of the Facility Letter expressly envisaged that various different items of security would be taken, including the Guarantee itself. The Facility Letter was part of the factual matrix which the court was entitled to take into account in coming to its conclusion. Sub-clause (iv) was clearly apt to cover the situation that has arisen in the present case.
ix) In those circumstances the judge's decision was correct and the appeal should be dismissed.
The reasoning of HHJ Kaye QC
"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."
Discussion and determination
"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. It is immaterial by whom the instrument was prepared or whether the surety omitted was solvent or not. In such cases the creditor must show that the surety consented to dispense with the execution of the document by the other or others.
Evans v Bremridge (1855) 2 Kay. & J. 174: on appeal (1856) 8 De G.M. & G. 100; Hansard v Lethbridge (1892) 8 T.L.R. 346; Fitzgerald v McCowan (1898) 2 Ir. R. 1; National Provincial Bank v Brackenbury (1906) 22 T.L.R. 797; James Graham & Co (Timber) Ltd v Southgate Sands  Q.B. 80. See also Capital Bank Cashflow Finance Ltd v Southall  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.
2 Hansard v Lethbridge (1892) 8 T.L.R. 346.
3Fitzgerald v McCowan (1898) 2 Ir. R. 1.
4 Hansard 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."
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.366 A 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  EWCA Civ 817,  2 All E.R. (Comm) 675 at , 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.  A.C. 156.
366. Byblos Bank SAL v Al-Khudhairy  B.C.L.C. 232; Gray v TCB Ltd  F.L.R. 116. cf. Barclays Bank Plc v Quincecare (1988) reported  4 All E.R. 363.
367. James Graham & Co (Timber) Ltd v Southgate Sands  2 All E.R. 344.
368. Capital Bank Cashflow Finance Ltd v Southall  EWCA Civ 817,  2 All E.R. (Comm) 675 at ."
"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.]
"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  EWCA Civ 1429;  1 WLR 770 at para 17, by Lord Hoffmann in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd  AC 749, passim, in Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896, 912F-913G and in Chartbrook Ltd v Persimmon Homes Ltd  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"
"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  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 – 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  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  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  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  AC 749 especially per Lord Steyn at 964E/H, Investors Compensation Scheme Ltd v. West Bromwich Building Society  1 WLR 896 especially per Lord Hoffmann at 912H/913E, and Bank of Credit and Commerce International SA v. Ali  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  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  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."
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."
"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.""
"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
"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.
i) Mr Harvey has existing liability under the Guarantee as a Guarantor; and
ii) a guarantee given "by" any co-surety is invalid or unenforceable.
But neither of these predicates is satisfied. No guarantee at all was ever provided "by" Mr Lenney, so it is impossible to see how it could be said that this was a situation where a guarantee was "invalid or unenforceable". And the issue in question is whether Mr Harvey was ever subjected to liability under the Guarantee. So it is difficult to see how this clause can operate to override, or exclude, the condition precedent to which Mr Harvey's liability was prima facie subject as a result of the form of the Guarantee.
Conclusion and disposition
Note 1 Evans v Bremridge (1855) 2 Kay. & J. 174: on appeal (1856) 8 De G.M. & G. 100; Hansard v Lethbridge (1892) 8 T>L>R> 346; Fitzgerald v McCowan (1898) 2 Ir. R. 1; National Provincial Bank v Brackenbury (1906) 22 T.L.R. 797; James Graham & Co (Timber) Ltd v Southgate Sands  Q.B. 80. See also Capital Bank Cashflow Finance Ltd v Southall  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. [Back] Note 2 Hansard v Lethbridge (1892) 8 T.L.R. 346. [Back] Note 3 Fitzgerald v McCowan (1898) 2 Ir. R. 1. [Back] Note 4 Hansard 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. [Back]
Note 1 Evans v Bremridge (1855) 2 Kay. & J. 174: on appeal (1856) 8 De G.M. & G. 100; Hansard v Lethbridge (1892) 8 T>L>R> 346; Fitzgerald v McCowan (1898) 2 Ir. R. 1; National Provincial Bank v Brackenbury (1906) 22 T.L.R. 797; James Graham & Co (Timber) Ltd v Southgate Sands  Q.B. 80. See also Capital Bank Cashflow Finance Ltd v Southall  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. [Back]
Note 2 Hansard v Lethbridge (1892) 8 T.L.R. 346. [Back]
Note 3 Fitzgerald v McCowan (1898) 2 Ir. R. 1. [Back]
Note 4 Hansard 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. [Back]