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You are here: BAILII >> Databases >> United Kingdom Supreme Court >> Lloyds TSB Foundation for Scotland v Lloyds Banking Group Plc (Scotland) [2013] UKSC 3 (23 January 2013) URL: https://www.bailii.org/uk/cases/UKSC/2013/3.html Cite as: [2013] WLR(D) 19, [2013] 2 All ER 103, [2013] 1 WLR 366, 2013 GWD 4-111, [2013] WLR (D) 19, [2013] UKSC 3, 2013 SC (UKSC) 169, 2013 SCLR 569 |
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Hilary Term
[2013
]
UKSC 3
On appeal from: [2011] CSIH 87: [2011] CSOH 105
JUDGMENT
Lloyds TSB Foundation for Scotland (Respondent) v Lloyds Banking Group Plc (Appellant) (Scotland)
before
Lord Hope, Deputy President
Lord Mance
Lord Clarke
Lord Reed
Lord Carnwath
JUDGMENT GIVEN ON
23 January
2013
Heard on 27 and 28 November 2012
Appellant Helen Davies QC Jonathan Barne (Instructed by Group Legal, Lloyds Banking Group plc) |
Respondent Richard Keen QC Jane Munro (Instructed by Simpson and Marwick) |
LORD MANCE (with whom Lord Reed and Lord Carnwath agree)
Introduction
"in relation to any Accounting Reference Period …. respectively the 'group profit before taxation' and the 'group loss before taxation' (as the case may be) shown in the Audited Accounts for such period adjusted to exclude therefrom any amounts attributable to minority interests and any profits or losses arising on the sale or termination of an operation, such adjustment to be determined by the Auditors on such basis as they shall consider reasonable, which determination shall be conclusive and binding on the parties hereto".
The words "and any profits or losses arising on the sale or termination of an operation" were added to the 1986 Deed by the amendments mutually agreed in 1993, and were maintained in the replacement Deed mutually agreed and executed in February 1997. Clause 1 further defined "Audited Accounts" as meaning, in relation to any Accounting Reference Period, "the audited accounts of the Company and its subsidiaries for that period".
"we acquired the business at half book value in anticipation of the likely losses resulting from their troubled asset portfolios".
The legal and accounting context
"Every profit and loss account of a company shall show the amount of the company's profit or loss on ordinary activities before taxation".
Schedule 4, para 12 read:
"12 The amount of any item shall be determined on prudent basis, and in particular -
(a) only profits realised at the balance sheet date shall be included in the profit and loss account; and
(b) all liabilities and losses which have arisen or are likely to arise in respect of the financial year to which the accounts relate or previous financial year shall be taken into account …."
Paragraph 91 of Schedule 4 of the Companies Act 1985 provided:
"Realised profits
91 Without prejudice to—
(a) the construction of any other expression (where appropriate) by reference to accepted accounting principles or practice, or
(b) any specific provision for the treatment of profits of any description as realised,
it is hereby declared for the avoidance of doubt that references in this Schedule to realised profits, in relation to a company's accounts, are to such profits of the company as fall to be treated as realised profits for the purposes of those accounts in accordance with principles generally accepted with respect to the determination for accounting purposes of realised profits at the time when those accounts are prepared."
The like principles applied to group accounts: section 230(1) of the 1985 Act. Their function was to "combine the information contained in the separate balance sheets and profit and loss accounts of the holding company and of the subsidiaries dealt with by the consolidated accounts but with such adjustments (if any) as the directors of the holding company think necessary": Schedule 4, paragraph 61.
"The effect of the amendment was to restore the position in relation to profits or losses arising on the sale or termination of an operation to that which existed prior to the adoption of FRS3
."
The Deed was therefore understood by the parties in 1993 to focus on the line showing "profit [or loss] on ordinary activities". When the parties realised that exceptional items consisting of "profits or losses arising on the sale or termination of an operation" were required to be included in "ordinary activities" they agreed the 1993 amendment to make clear that they were not to count towards the "group profit before taxation" to which the Deed referred.
"is recognised immediately in the consolidated income statement, notwithstanding that it reflects an unrealised gain. It is unrealised at the date of acquisition since the related net assets of the acquired entity, which give rise to the negative goodwill, have not been realised through use or sale (hence they are unrealised)".
It is as a result of this development in the legal and accounting position, unforeseen and unforeseeable in 1986, 1993 and 1997, that the present issue arises.
The factual background
Analysis of the opposing cases
"The time has long passed when agreements, even those under seal, isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations There is no need to appeal here to any modern, anti-literal, tendencies for Lord Blackburn's well-known judgment in River Wear Commissioners v Adamson (1877) App Cas 743, 763 provides ample warrant for liberal approach. We must, as he said, inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view".
Construing the words "actually paid" in Charter Reinsurance Co Ltd v Fagan [1997] AC 313, Lord Mustill stated that, in cases not involving a specialist vocabulary, "the inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used" (p 384C-D) and that he had:
"initially thought that the meaning of the words ['actually paid'] was quite clear, and that the complexities and mysteries of this specialist market had hidden the obvious solution, and had led the courts below to abjure the simple and right answer and to force on the words meaning which they could not possibly bear" (p 384F-G).
But he went on (p 384G-H):
"This is, however, an occasion when a first impression and a simple answer no longer seem the best, for I recognise now that the focus of the argument is too narrow. The words must be set in the landscape of the instrument as whole".
Consequences of the opposing cases
Conclusion
LORD HOPE (with whom Lord Reed and Lord Carnwath agree)
"how the relations of two parties should be equitably readjusted by the Court when the one has been unintentionally enriched at the expense of the other."
He made it clear at pp 4-5 that in his opinion the principle of frustration was capable of being expanded in the future into other areas. In James B Fraser & Co Ltd v Denny, Mott & Dickson Ltd 1944 SC (HL) 35, 41, [1944] AC 265, 272, Lord Macmillan (who was counsel for the unsuccessful shipbuilding company in Cantiere San Rocco) said that the doctrine of frustration was so inherently just as inevitably to find a place in any civilised system of law:
"The manner in which it has developed in order to meet the problems arising from the disturbances of business due to world wars is a tribute to the progressive adaptability of the common law."
In Muir v McIntyre (1887) 14 R 470 it was held that a tenant was not bound to pay the full rent where, due to no fault of his own, almost the whole of the accommodation on the farm was destroyed by a fire. Lord Shand at p 473 said that the principle on which the tenant was entitled to an abatement of his rent was "founded on the highest equity".
LORD CLARKE
"… no-one suggests that that the lease cannot or should not apply in the changed circumstances. We have to promote the purposes and values which are expressed or implicit in the wording, and to reach an interpretation which applies the wording to the changed circumstances in the manner most consistent with them."
I agree that that is a sensible approach both to that problem and to the problem we have here. I note that in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 Lord Clyde said, at para 79:
"Generally people will say what they mean. Generally if they intend their agreement to cover the unknown or the unforeseeable, they will make it clear that their intention is to extend the agreement to cover such cases."