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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> McKeand v Dorian [2000] ScotCS 108 (20 April 2000)
URL: http://www.bailii.org/scot/cases/ScotCS/2000/108.html
Cite as: [2000] ScotCS 108

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OUTER HOUSE, COURT OF SESSION

 

 

 

 

 

 

 

 

 

 

 

 

OPINION OF LORD NIMMO SMITH

in the cause

JOSEPH McKEAND

Pursuer;

against

HAROLD DAVID DORIAN

Defender:

 

________________

 

 

Pursuer: Glennie, Q.C., Stewart; Maclay Murray & Spens

Defender: Batchelor, Q.C.; Aitken Nairn, W.S.

 

20 April 2000

[1] The pursuer concludes for payment to him by the defender of 71,000 with interest at the rate of 15% a year compounded monthly from 27 August 1993 until payment. The defender, who resides in South Africa, is subject to the jurisdiction of this court because he owns heritable property in Scotland. The sum sued for is allegedly due by the defender under a Deed of Covenant ("the Deed of Covenant") entered into by him and William Robert Ruffler ("Mr Ruffler") on 27 August 1993. Mr Ruffler assigned to the pursuer his whole right, title and interest in the Deed of Covenant by Deed of Assignment ("the Deed of Assignment") between him and the pursuer made on 21 February 1996 and intimated to the defender on 23 September 1996, and the pursuer sues as such assignee. I shall say a little more about the Deed of Assignment in due course. The Deed of Covenant contains a provision that it is to be construed in accordance with and be governed by the law of England and Wales. The parties have both made averments in their pleadings and have led expert evidence about English law as the proper law of the Deed of Covenant. It will be necessary for me to decide on the evidence how the issues between the parties would probably be decided under English law, which I must treat as a matter of fact. The issues between the parties relate principally to the construction and enforceability of the Deed of Covenant under English law. It was common ground between the expert witnesses that under English law regard should be had to the factual matrix in which a document such as the Deed of Covenant was executed in order to determine its meaning and effect. Another way of putting the question might be to say that what I have to decide is what decision an English commercial court would probably reach on the issues in dispute between the parties by the application of English law to the other facts in the case, as I hold them to be proved. I shall discuss the approach to the question of construction more fully later on, but at this stage I shall discuss the history of events which took place prior to and on 27 August 1993.

[2] Lordsvale Leisure Limited ("Lordsvale") was incorporated in England on 27 May 1982 under the provisions of the Companies Acts as a company limited by shares. Its name until 1990 was Ansell and Barber Electronics Limited. Its principal activity was that of manufacturers and distributors of amusement machines, such as are found in amusement arcades. Its original directors and shareholders were Michael Ansell ("Mr Ansell") and Andrew Barber. In about 1989 Lordsvale's position was such that a decision was taken to approach Mr Ruffler for financial assistance. He is a prominent financier, operating in the field of amusement arcades and similar places of entertainment. He acquired 50% of the issued shares in Lordsvale for about 90,000 and guaranteed its bank overdraft. He also became a director, and associates of his became members and directors at the same time. There is no need for me to go into this in more detail or to describe the subsequent changes among the members and directors of Lordsvale until 1993. Mr Ruffler resigned as a director on 28 April 1993, and thereafter and in particular on 27 August 1993 Mr Ansell was the sole director. On the latter date the members of the company were Mr Ansell and Mr Ruffler, who each held 50% of the issued shares. Lordsvale ceased to trade in about June 1993 and went into members' voluntary liquidation in about October 1993.

[3] During a period from about 1990 Lordsvale supplied amusement machines to a South African company, H.D. Import and Export Enterprises (Pty) Limited ("H.D."). At the material time the defender was the sole director of H.D., and he and his wife, from whom he was in the process of being divorced, were its members. The defender appears to have regarded H.D.'s business as effectively his own, at least to the extent of its being in his personal interest that its debts should be paid. The exact nature of the dealings between Lordsvale and H.D. was not clearly established by the evidence, but it was not in dispute that by 1993 a balance of 71,000 was due and resting owing by H.D. to Lordsvale in respect of goods shipped by Lordsvale in late 1992. The defender appears to have regarded this debt as one for which he had personal responsibility. Over a period of several months from early 1993 he came under increasing pressure to settle the debt: as he put it, Mr Ansell was "on his back". He tried in vain to raise money from various sources, including a Scottish company of which the pursuer was a director. One possibility he considered was to give security by way of mortgage over a vessel owned by him, the "Fairest Cape". Court proceedings were threatened by lawyers in Johannesburg acting for Lordsvale, who in a letter to the defender as managing director of H.D. dated 21 July 1993 wrote, under reference to a written acknowledgement of indebtedness having been given by the defender in his personal and unqualified capacity, that a summons would be issued against H.D. and the defender in a joint and several capacity. Eventually, in the face of the threatened legal action, the defender approached Mr Ruffler for financial assistance until January 1994, when he expected to be in funds.

[4] From the defender's point of view, Mr Ruffler was a suitable person to approach for financial assistance because of his reputation as a financier. From Mr Ruffler's point of view the approach provided an opportunity to recover the balance of his investment in Lordsvale. As I have said, Lordsvale ceased trading in about June 1993. Mr Ruffler had been looking for ways of recovering his investment in the company. In early 1993 some of his shares were bought back for 19,000, leaving a balance of 71,000 from the original investment of 90,000 which he was interested in recovering. The debt of 71,000 which was owed by H.D. was the major debt still due to Lordsvale. If this debt was "assigned" by Lordsvale to Mr Ruffler, this would provide a means of recovering the balance. Negotiations took place between Mr Ruffler and the defender, which culminated in the defender's flying to the United Kingdom on 27 August 1993. He went to Mr Ruffler's office in London. There four documents were signed: a facility letter (a draft of which had been sent to the defender on 19 July 1993); a mortgage over the "Fairest Cape"; the Deed of Covenant; and a letter bearing to be signed by Mr Ruffler on behalf of Lordsvale which I shall call "the waiver letter".

[5] The relevant provisions of these documents are as follows. The facility letter stated that further to recent discussions Mr Ruffler ("the Lender") confirmed the terms, subject to contract, upon which the undermentioned facility would be made available to the defender ("the Borrower"). The amount of the facility was stated to be 71,000 ("the Advance"). The purpose was stated to be:

"To repay the outstanding debt owed by H.D. Enterprises to Lordsvale Leisure Ltd which debt as at the 16th June 1993 amounts to 71,000.00 for equipment supplied under Invoice Nos. 4499 and 4445."

The period was stated to be until 16 January 1994, the interest charged to be 15% per annum, repayment of capital to be in part or full payment "providing it is made within the period stipulated above", the security a mortgage in favour of Mr Ruffler over the "Fairest Cape", and the date of first repayment:

"To be at the discretion of the Borrower but in any event all interest and capital to be repaid by the 16th of January 1994."

Among other conditions was one in these terms:

"It is agreed that on the signing of the Mortgage a letter will be obtained from Lordsvale Leisure Limited confirming that the debt has been repaid in full."

The facility letter was signed by Mr Ruffler. Below his signature appeared that of the defender, with words confirming that he accepted all the terms and conditions contained in it.

[6] The mortgage, which was in the prescribed form C206 and was signed by the defender, provided inter alia that the defender, as mortgagor, in consideration of 71,000 "this day lent to me" by Mr Ruffler as mortgagee "do hereby for myself and for my heirs covenant with the mortgagee firstly that I or my heirs executors or administrators will pay to the mortgagee the said sum of 71,000.00 together with interest thereon at the rate of 15 per cent per annum on the 16th day of January next", with provision for the payment of interest on the principal sum or such part thereof as might for the time being remain unpaid thereafter; "and for better securing to the mortgagee the repayment in the manner aforesaid of the principal sum and interest I hereby mortgage to the mortgagee 64 shares" in the "Fairest Cape".

[7] The Deed of Covenant, which was executed as a Deed by both the defender and Mr Ruffler, included in its preamble the following recitals:

"(2) The Borrower [i.e. the defender] has requested the Mortgagee [i.e. Mr Ruffler] to lend and the Mortgagee has agreed pursuant to a loan agreement dated Twenty Seven August 1993 ("the Loan Agreement") [i.e. the facility letter] to lend the principal sum specified in the Third Schedule ("the Principal Sum") on the terms and conditions contained in the Loan Agreement and in this deed

(3) This deed is supplemental to a first priority mortgage over the Ship [i.e. the "Fairest Cape"] and of even date with this deed ("the Mortgage")"

Clause 1 of the Deed of Covenant provided inter alia:

"1. Repayment of loan and interest. The Borrower covenants and agrees with the Mortgagee:

1.1 To repay to the Mortgagee.... the Principal Sum by the instalments and at the times specified in the Third Schedule

1.2 To pay to the Mortgagee interest (in full and without deduction of tax) at the rate chargeable for the time being pursuant to the provisions of paragraph 4 of the Third Schedule"

In terms of the Third Schedule the Principal Sum was stated to be 71,000, the repayment period was stated to be such period commencing on the date of the Deed of Covenant and ending on 16 January 1994 and repayment was to be as stated in the facility letter, provided that the Principal Sum and interest and all other sums pursuant to the mortgage and the Deed of Covenant were paid to the mortgagee by no later than 16 January 1994. In terms of paragraph 4 interest on the debit balance was to be calculated at 15 per cent per annum and to be charged and payable monthly in arrears, the first such calculation to be made at the end of the calendar month after the date of advance of the loan.

[8] Under the facility letter it was agreed that on the signing of the mortgage a letter would be obtained from Lordsvale. The defender insisted that as part of the transaction this letter, which I am calling the waiver letter, should be framed in terms acceptable to him. As first framed by Mr Ruffler it was on Lordsvale's headed paper and addressed to the defender. It stated in typescript:

"It is hereby agreed that Lordsvale Leisure Limited waives the right to any repayment of the amount outstanding by H.D. Enterprises for goods supplied by Lordsvale Leisure Limited under their Invoice Nos. 4499 and 4445."

Mr Ruffler signed it on behalf of Lordsvale. When the defender saw the letter, he did not understand the meaning of the word "waives", and asked Mr Ruffler to clarify what had been written. He said that the letter should say that H.D. did not owe any further money. Mr Ruffler forthwith added in handwriting below his signature the further sentence: "I hereby confirm H.D. enterprises owes no further sums to Lordsvale Leisure Ltd." He then signed the letter again below this sentence. Although there was no clear evidence as to the order in which the other documents were signed, it was only once Mr Ruffler had written and signed the waiver letter in these terms that the defender was prepared to sign the other documents.

[9] The pursuer's case is that the effect of the waiver letter was to release H.D. from the debt owed by it to Lordsvale. I shall discuss this argument in due course, but at this stage I require to consider whether, if this was intended to be the effect of the waiver letter, Mr Ruffler had actual authority to sign it on behalf of Lordsvale. Counsel for the pursuer submitted that it was not necessary to show that the waiver letter was written by Mr Ruffler with authority. He went on to submit, however, that Mr Ruffler did have actual authority to waive the debt on behalf of Lordsvale, and I prefer to deal with the matter on that basis, having regard to the views which I shall be expressing about the meaning and effect of the Deed of Covenant and the waiver letter. This is a question of fact, which can be decided as such without reference to English law. It is necessary for this purpose to return to events prior to 27 August 1993. The relevant evidence is that of Mr Ansell and Mr Ruffler.

[10] Mr Ansell, as the sole director of Lordsvale, was in a position to take all decisions on its behalf. As I have said, he and Mr Ruffler each owned 50% of the shares in the company at the material time. Mr Ansell's evidence was that he suggested that he would buy Mr Ruffler out and that the company would become his and his wife's, and they would restructure it and start again. He had an agreement with Mr Ruffler that he "would have the company back" and Mr Ruffler would not be involved again as a director. Mr Ansell went on to say that they reached an agreement that Mr Ruffler would take an assignment of the debt owed by Lordsvale and the balance in money, in place of his original investment, and he (Mr Ansell) would get Mr Ruffler's shares to make his holding up to 100%. He went to the USA on about 19 August 1993 and left all the affairs of the company in Mr Ruffler's hands, to be taken care of by him. While he was imprecise about the manner in which it was to be achieved, he was clear enough about the overall result to which he had agreed. He said that Mr Ruffler certainly had authority to sign the waiver letter, because he asked him to deal with everything in his absence. He asked him to fax a copy of it to him in the USA, so he was fully aware of what was happening at the time: it was probably faxed to him shortly after 28 August 1993. His understanding was that Mr Ruffler (who had previously received 19,000) would receive 71,000 in exchange for his shares. The money was to be paid to Mr Ruffler as part of the return of his original investment: he had already received part payment from the company, and 71,000 was the balance of his investment.

[11] Mr Ruffler said that he did not particularly wish to enter into the transaction with the defender, but Mr Ansell wanted a clean slate. The transaction, including the waiver letter, was the way of repaying Mr Ruffler's investment in the company. The 71,000 owed by H.D. was the major debt still owed to Lordsvale, and agreement had been reached with Mr Ansell that this sum was to come back to him to repay his investment in the company. The waiver letter was a means to the end of obtaining money from the defender. He said that he was in constant contact with Mr Ansell, and they had agreed that this was what would be done, the debt would be waived by Lordsvale, and Mr Ruffler would get the money from the defender.

[12] Counsel for the defender advanced a number of submissions in support of an argument that Mr Ruffler did not have actual authority to sign on behalf of Lordsvale a letter which would have the effect of releasing H.D. from its debt. One point which he made was that Mr Ansell accepted in cross-examination that he would not have authorised any act which would have infringed the provisions of the Insolvency Act 1986 or by which Mr Ruffler would have gained at the expense of creditors of the company. Objection was, however, taken to this line of cross-examination on the ground that there was no record for it, and I allowed it to proceed solely with a view to testing Mr Ansell's understanding of the transaction. The point was not taken up in the other evidence, particularly that of the expert witnesses (nor could it have been, in the absence of a record for it) so, as I see it, I must assume that there was no lawful impediment to Mr Ruffler's recovering his investment in Lordsvale by means of this transaction, and therefore no reason in law why Mr Ansell should not authorise him to waive the debt on behalf of the company. The remaining points made by counsel for the defender were directed to the unlikelihood of Mr Ansell's agreeing to the transaction, and to subsequent indications that the debt owed by H.D. to Lordsvale was regarded as being still outstanding after August 1993. I do not regard it as unlikely that Mr Ansell would have agreed to the transaction. Of the two, Mr Ruffler appeared to me to be the more astute and persistent businessman, and I can see no reason to doubt that Mr Ansell would have been persuaded by him that the "assignment" of the debt to Mr Ruffler, and the associated waiver of it by Lordsvale, was the best means of ending Mr Ruffler's involvement with the company and enabling Mr Ansell to resume control of it, which was his ambition at the material time. There are some indications that after Lordsvale went into liquidation Mr Ansell made, or associated himself with the making of, statements to the effect that the debt was still owed by H.D. to the company, but at best for the defender these go to the question of his credibility. Mr Ansell appeared to me to be a truthful witness, and having regard to the consistency in their evidence I am prepared to accept as credible the account given by both him and Mr Ruffler to the effect that the latter did have actual authority to sign the waiver letter as part of the transaction; that is to say, I accept that Mr Ruffler had actual authority to sign a letter the effect of which would be to release H.D. from its debt to Lordsvale.

[13] No money changed hands at the time of the transaction or pursuant to it. In particular, Mr Ruffler did not make any payment then or thereafter to the defender or to Lordsvale. Since then, the defender has made no payment to Mr Ruffler, nor has H.D. or the defender made any payment to the liquidator of Lordsvale.

[14] There was some evidence about dealings between the defender, the pursuer, the pursuer's father and the liquidator of Lordsvale, in the course of which doubts were expressed as to whether or not the debt of 71,000 was still outstanding by H.D. to Lordsvale. The upshot, however, was that the liquidator accepted by letter dated 24 October 1997 that the debt was not still outstanding. I do not regard this evidence as relevant for the purpose of construing the documents signed on 27 August 1993. It is sufficient to refer to James Miller & Partners Limited v Whitworth Street Estates (Manchester) Limited [1970] A.C. 583 per Lord Reid at p.603:

"[I]t is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made."

[14A] As I have said, the proper law of the Deed of Covenant is English law. Evidence about English law was given by two expert witnesses. The expert for the pursuer was Catharine Otton-Goulder, since 1983 a practising barrister with an extensive commercial practice. The expert for the defender was Ewan McKendrick, Professor of English Law at University College, London, who has had a distinguished career as an academic since 1984 and has been since 1998 a barrister. He is one of the editors of the 28th Edition (1999) of Chitty on Contracts. While they were both impressive witnesses, and indeed were agreed on a number of matters, I found that where they parted company Miss Otton-Goulder appeared to me to give the more convincing reasons for the views which she expressed. While this was largely because the pursuer's case was inherently more meritorious than that of the defender, in addition, Miss Otton-Goulder's experience of advocacy and recognition of the need to relate the law to the facts, by contrast with Professor McKendrick's more academic approach, was better suited to enabling me to decide what view of the case an English commercial court would probably have reached.

[15] I turn at this point to consider the meaning and effect, on a proper construction, of the Deed of Covenant. I should record that, contrary to the position adopted in the defender's pleadings, it was conceded before me that the Deed of Covenant complies with the requirements of a deed in terms of section 1 of the Law of Property (Miscellaneous Provisions) Act 1989. Under English law no consideration is required for a deed to be enforceable, and accordingly the Deed of Covenant is enforceable whether or not Mr Ruffler gave consideration for it. This is not to say, however, that the Deed of Covenant might not, on a proper construction, provide for the performance by Mr Ruffler of a reciprocal obligation as consideration for the defender's entering into it. I shall discuss the concept of "consideration" later on.

[16] The construction of the Deed of Covenant would be a question of law for the English courts, and is therefore a question of fact for me to decide in light of the expert evidence. The expert witnesses were agreed on the approach which the English courts would now adopt to the construction of contractual documents. This can be taken from two decisions of the House of Lords. In Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited [1997] AC 749 Lord Steyn said at p.771:

"In determining the meaning of the language of a commercial contract.... the law... generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language."

Lord Hoffmann said at p.774:

"I propose to begin by examining the way we interpret utterances in everyday life. It is a matter of constant experience that people can convey their meaning unambiguously although they have used the wrong words. We start with an assumption that people will use words and grammar in a conventional way but quite often it becomes obvious that, for one reason or another, they are not doing so and we adjust our interpretation of what they are saying accordingly."

Lord Hoffmann developed his views in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 at pp.912-3, where he said:

"I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having 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.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investment Co. Ltd v Eagle Star Life Assurance Co. Ltd [1977] A.C. 749.

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v Salen Rederierna A.B. [1985] A.C. 191, 201:

'if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.'"

[17] The expert witnesses were agreed that the facility letter, the mortgage and the waiver letter formed part of the factual matrix in which the Deed of Covenant was executed and that as they were part of the same transaction the court would seek to construe them so that they were consistent with each other. They were also agreed that the factual matrix included all surrounding circumstances known to both Mr Ruffler and the defender on 27 August 1993, disregarding what they said in their negotiations and their subjective intentions, and that the Deed of Covenant and other documents should be given a "purposive" or commercial construction so as to reflect their commercial purpose or intention. What is clear is that both Mr Ruffler and the defender regarded the purpose of the transaction as being to relieve the pressure that the defender was under to secure repayment of H.D.'s debt to Lordsvale by providing the means by which H.D. would be released from that debt and in lieu thereof the defender would become indebted to Mr Ruffler in the same amount, payable at a later date. There can be little difficulty with this, viewed objectively, but the question remains whether the language of the documents is consistent with that intention. Although a number of words and phrases were considered in the course of the evidence, the main focus came to be on the use of the word "repay" in clause 1.1 of the Deed of Covenant.

[18] Miss Otton-Goulder expressed the view that the word "repay" in the facility letter and the Deed of Covenant were used in different senses. In the facility letter, the stated purpose was to "repay" the outstanding debt, which, in that context, was to "discharge, release or waive" that debt. In the Deed of Covenant, however, and in the context of the transaction as a whole, her opinion was that by agreeing to "repay" Mr Ruffler, the defender simply agreed to "pay" him the sum in question in exchange for Mr Ruffler's procuring the discharge or release or waiver by Lordsvale of the debt owed to it by H.D.

[19] Professor McKendrick accepted that the words "pay" and "repay" do not require that payment be made in money, but that it can be made in money's worth. He referred to Inland Revenue Commissioners v John Dow Stuart Limited [1950] A.C. 149 per Lord Porter at p.164. This led him to accept that what constitutes payment or repayment must therefore be a question of the construction of the contract, regard being had always to the facts and circumstances of the case and to the context in which the word in question is used. In his opinion, the word "lend" in the Deed of Covenant and "advance" in the facility letter could in principle extend to cover the situation where money is advanced by paying off a debt which was previously owed by the debtor. On the facts of the present case, as he understood them, his view was that the word "repay" in the facility letter, in relation to the debt owed by H.D. to Lordsvale, appeared sufficiently wide to encompass a case in which Mr Ruffler paid 71,000 to Lordsvale, thereby enabling H.D. to "repay" Lordsvale, and then the defender became subject to an obligation under the Deed of Covenant to "repay" Mr Ruffler. In Professor McKendrick's opinion, however, this construction, while possible, did not fit the facts, principally because there was no evidence of any payment by Mr Ruffler to Lordsvale, or of any facts equivalent to payment. This view did not, however, take account of the agreement between Mr Ruffler and Mr Ansell on behalf of Lordsvale that Mr Ruffler would recover the value of his investment in Lordsvale in exchange for his shares, and that the transaction with the defender would provide the necessary financial solution. Thus, as counsel for the pursuer submitted, Mr Ruffler did make a payment by way of set-off: he gave up what Lordsvale owed him for his shares in exchange for taking over the debt owed by H.D. Professor McKendrick, while stating that it was not immediately clear what the facts were, accepted that Mr Ruffler could "repay" the outstanding debt owed by H.D. by setting off his own rights against Lordsvale. Although Professor McKendrick's primary position was that there could be no obligation on the defender to "repay" Mr Ruffler unless Mr Ruffler had made a payment to the defender or to Lordsvale, he accepted that the obligation could arise if Mr Ruffler did something equivalent to payment, which could include set-off.

[20] Looking at the matter as best I can in light of this evidence, and using my own knowledge of the meaning of ordinary words of the English language, I have come to the view that the construction of the word "repay" in its context in the Deed of Covenant and in the factual matrix in which it was executed is that contended for by the pursuer on the basis of Miss Otton-Goulder's evidence. The word "repay" is not confined in its range of possible meanings to repayment by A to B of something paid (whether to A or C) by B. One of its meanings is to give something in return or recompense for something else. So here I accept that it means to pay the sum of 71,000 to Mr Ruffler in return for Mr Ruffler's procuring H.D.'s release from its debt to Lordsvale. Thus, although the Deed of Covenant is enforceable as a deed without consideration, as a matter of construction the obligation on the defender to make payment to Mr Ruffler only arose if the latter effectively performed the reciprocal obligation of procuring the release of H.D.'s debt to Lordsvale. I accept a number of submissions advanced by counsel for the pursuer in support of this construction. Despite the wording of the facility letter, neither party contemplated that money would be advanced by Mr Ruffler to the defender or H.D., so the literal, or in Professor McKendrick's expression "natural", construction of the first part of the facility letter and of the word "lend" in the Deed of Covenant cannot have been intended by them. Both Mr Ruffler and the defender knew that on 27 August 1993 Mr Ruffler had not paid Lordsvale anything to discharge the debt owed by H.D., so the passage in the facility letter requiring that a letter be obtained from Lordsvale "confirming that the debt has been repaid in full" cannot be taken literally. On the evidence of the defender and Mr Ruffler, and on the true construction of the documents, it is clear that the waiver letter was regarded as sufficient compliance with the obligation in the facility letter to produce a letter in these terms. The waiver letter stated, not that the debt had been repaid, but that it was waived, and the facility letter and other documents require to be read in this light. The terms of the waiver letter are inconsistent with the idea that Mr Ruffler was thereafter to pay 71,000 to Lordsvale to release the debt. The recital in the mortgage that 71,000 had been lent on that day is to be understood as reflecting the agreement or understanding of the parties that Mr Ruffler's procuring of the waiver of the debt was to be treated as, or deemed to be, the advance of the loan by him. From the defender's point of view, Mr Ruffler was doing something of benefit in that he procured H.D.'s release from the debt which it owed to Lordsvale. There is no real difficulty in accepting that as between the parties this was to be regarded as a loan. On the principles of construction I have already discussed, this is an acceptable approach if it is the best or only way of making sense of and giving effect to what the parties did. Professor McKendrick, as I have said, agreed that this was a possible construction in the circumstances, and for these reasons it is the construction which I accept. It allows a consistent interpretation to be given to all the relevant documents, whereas on the construction advanced on behalf of the defender there would be a fundamental inconsistency between the obligation in the mortgage to "pay" the 71,000 on 16 January 1994 and the obligation in the Deed of Covenant to "repay" that sum on that date. I therefore accept that on a true construction of the documents in the relevant factual matrix the defender was prepared to undertake the obligations imposed on him by the Deed of Covenant if Mr Ruffler produced the waiver letter signed on behalf of Lordsvale. Objectively, the parties did not intend that any pay

[21] I turn now to the waiver letter. It was submitted on behalf of the pursuer that it was not necessary for him to show that Lordsvale's waiver of the debt was binding on it in law, but that it would be sufficient if Mr Ruffler had procured successfully a position where Lordsvale would not and did not seek to recover the debt, and that was what in fact subsequently happened. I have some difficulty with this submission because (apart from its not being the pursuer's primary position on record) the intention of the defender and Mr Ruffler on 27 August 1993 was to produce a result which was binding on Lordsvale with immediate effect. The alternative submission for the pursuer was that in any event the waiver letter was binding on Lordsvale, for any of a number of reasons, which I shall now examine.

[22] In considering the meaning and effect of the waiver letter, it is necessary to discuss more fully what is meant by "consideration" in English law. I take the following propositions from the third chapter of Chitty, op. cit. In English law, a promise is not, as a general rule, binding as a contract unless it is made in a deed (for example the Deed of Covenant) or supported by some "consideration". The traditional definition of consideration concentrates on the requirement that "something of value" must be given and accordingly states that consideration is either some detriment to the promisee (in that he may give value) or some benefit to the promisor (in that he may receive value). The rule that "consideration must move from the promisee" means that a person can enforce a promise only if he himself provides consideration for it. Thus if A promises B to pay a sum of money if C will do a certain act, B cannot enforce the promise (unless, of course, he procured, or expressly or impliedly undertook to procure, C to do the act). While consideration must move from the promisee, it need not move to the promisor. It follows that the requirement of consideration may be satisfied where the promisee suffers some detriment at the promisor's request, but confers no corresponding benefit on the promisor. The promisee may provide consideration by conferring a benefit on a third party at the promisor's request, for example by entering into a contract with a third party. The rule that consideration need not move to the promisor equally applies where the consideration consists simply in a benefit conferred by the promisee without loss to himself. Here the requirement is satisfied if a benefit is conferred either on the promisor or on a third party at his request. As counsel for the pursuer put it in argument, it does not matter who benefits, so long as that is what the promisor wants. Miss Otton-Goulder expressed the view that the grant of the Deed of Covenant by the defender was consideration for the promise of the forbearance to sue, or waiver (assuming that this was the effect of the waiver letter) by Lordsvale of its rights. Professor McKendrick agreed with this view, accepting that if Lordsvale gave a promise to H.D. in the form of a waiver, it would be sufficient consideration for this if H.D. procured the conferring of a right on Mr Ruffler. I therefore accept that if consideration was required for any promise contained in the waiver letter then it could be satisfied in this way.

[23] It is then necessary to consider what, on its proper construction, was the legal effect of the waiver letter. The concepts which were principally discussed were waiver by election and promissory estoppel. Mention was also made in the course of Miss Otton-Goulder's evidence of estoppel by convention. Counsel for the defender objected to the line of evidence because there was no foundation for it on record, and although I allowed the line to proceed under reservation it was not pursued in any detail in Miss Otton-Goulder's evidence. Estoppel by convention was not mentioned at all in Professor McKendrick's report and was not taken up in the course of his evidence. Although counsel for the pursuer did not formally abandon the point, it was not one which he felt able to advance at the hearing on evidence. The appropriate course in these circumstances is for me formally to sustain the objection. There is thus no need for me to discuss estoppel by convention, and I shall now concentrate on wavier and promissory estoppel.

[24] Waiver is a word which has two senses in English law, (1) as a form of election or an abandonment of a right which arises by virtue of a party making an election and (2) as a doctrine in equity, better known as equitable estoppel or promissory estoppel. I shall use it, as the expert witnesses did, in the first of these senses, and treat promissory estoppel as a separate concept. As Miss Otton-Goulder explained, the characteristics of waiver are that it is final and not suspensory, no consideration is required and it is not necessary to prove either reliance or detriment. All that is necessary is that there should be an unequivocal representation by one party that he will not assert his strict rights against the other. Reference was made to a series of cases. In W J Alan & Co. Ltd v El Nasr Export and Import Co. [1972] 2 QB 189 Lord Denning, M.R. said at p.213:

"The principle of waiver is simply this: If one party, by his conduct, leads another to believe that the strict rights arising under the contract will not be insisted upon, intending that the other party should act on that belief, and he does act on it, then the first party will not afterwards be allowed to insist on his strict legal rights when it would be inequitable for him to do so."

In Mardorf Peach & Co. Ltd v Attica Sea Carriers Corporation of Liberia [1977] A.C. 850 Lord Wilberforce at p.871 said that waiver of a right to withdraw a vessel from a charterparty by reason of a failure to pay hire when it fell due could be established by evidence, "clear and unequivocal", that a late payment had been accepted as if it were punctual. In Motor Oil Hellas (Corinth) Refineries S.A. v Shipping Corporation of India ("The Kanchenjunga") [1990] 1 LlR 391 Lord Goff at pp.397-9 discussed the concepts of waiver and equitable estoppel. He spoke of waiver as "forbearance from exercising a right or.... an abandonment of a right", in particular "abandonment of a right which arises by virtue of a party making an election". At p.399 he said:

"Election is to be contrasted with equitable estoppel, a principle associated with the leading case of Hughes v Metropolitan Railway Co., (1877) 2 App.Cas. 439. Equitable estoppel occurs where a person, having legal rights against another, unequivocally represents (by words or conduct) that he does not intend to enforce those legal rights; if in such circumstances the other party acts, or desists from acting, in reliance upon that representation, with the effect that it would be inequitable for the representor thereafter to enforce his legal rights inconsistently with his representation, he will to that extent be precluded from doing so.

There is an important similarity between the two principles, election and equitable estoppel, in that each requires an unequivocal representation, perhaps because each may involve a loss, permanent or temporary, of the relevant party's rights. But there are important differences as well. In the context of a contract, the principle of election applies when a state of affairs comes into existence in which one party becomes entitled to exercise a right, and has to choose whether to exercise the right or not. His election has generally to be an informed choice, made with knowledge of the facts giving rise to the right. His election once made is final; it is not dependent upon reliance on it by the other party. On the other hand, equitable estoppel requires an unequivocal representation by one party that he will not insist upon his legal rights against the other party, and such reliance by the representee as will render it inequitable for the representor to go back upon his representation. No question arises of any particular knowledge on the part of the representor, and the estoppel may be suspensory only. Furthermore, the representation itself is different in character in the two cases. The party making his election is communicating his choice whether or not to exercise a right which has become available to him. The party to an equitable estoppel is representing that he will not in future enforce his legal rights. His representation is therefore in the nature of a promise which, though unsupported by consideration, can have legal consequences; hence it is sometimes referred to as promissory estoppel."

Miss Otton-Goulder added to this that while the promisor can resile from his promise on giving reasonable notice and on giving the promisee a reasonable opportunity of resuming his position, the promise becomes final and binding if the promisee cannot resume his position (Halsbury's Laws, Vol.16, para.1071).

[25] Miss Otton-Goulder expressed the opinion that Lordsvale waived the debt owed to it by H.D., in the first sense of waiver. As a matter of law, the waiver did not require consideration; but, in any event, H.D. did provide consideration. It gave to the defender a waiver of its right to sue for the debt owed to it by H.D., and the defender provided consideration by entering into the Deed of Covenant with Mr Ruffler. Moreover, in her opinion, even if there was no enforceable waiver, the letter operated as a promissory estoppel, as being a clear and unequivocal representation that Lordsvale would not sue H.D. for the debt. The defender had altered his position irrevocably by entering into the Deed of Covenant and accordingly it was not open to Lordsvale to resile from it.

[26] Professor McKendrick's principal objection to this approach, which he described as an "insurmountable difficulty", was based on the rule in Foakes v Beer (1884) 9 App Cas 605, that a creditor is not bound by a promise to accept part payment in full settlement of a debt. His opinion was that, given that this is the rule in relation to part payment, it must apply where no payment at all is made by the debtor. Here, there was no consideration provided by H.D. for the promise by Lordsvale to waive the debt and so the promise was not enforceable. Professor McKendrick pointed to recent authority, especially In re Selectmove Limited [1995] 1 WLR 474 at pp.481-3 per Peter Gibson, L.J., to demonstrate that the rule in Foakes v Beer is still recognised by the English courts as a binding decision of the House of Lords. Miss Otton-Goulder, however, said that it was a decision which must be treated with a good deal of caution, because courts had found a number of ways round it. Reliance on it was a very academic way of looking at English law, and in the last century it had been much diminished in importance by the development of other rules, particularly waiver and promissory estoppel. Professor McKendrick accepted in the course of cross-examination that if Lordsvale gave a promise to H.D. in the form of a waiver, it would be sufficient consideration that H.D. procured that the defender conferred a benefit on Mr Ruffler. He also accepted that, standing alone, the letter amounted to a clear and unequivocal representation. So, as I understand it, the expert witnesses were agreed that, as a matter of construction, the letter was capable of constituting a waiver or in any event of forming the basis for a promissory estoppel. Professor McKendrick accepted that, if consideration was given, the letter would be binding on Lordsvale as a waiver of its right to sue H.D. While it appears to me that Miss Otton-Goulder was correct in her view that the letter constituted a waiver of the kind discussed in the case law and accordingly was capable of being binding without consideration, in any event the procurement by H.D. of the defender's entering into the Deed of Covenant with Mr Ruffler amounted to consideration, so that if consideration was required it was given. On a similar analysis, the letter constituted a promissory estoppel, which was binding on Lordsvale in a situation where the defender had entered irrevocably into the Deed of Covenant, and it was thus not open to Lordsvale to resile from it. Professor McKendrick's views were, it seems to me, coloured by his assumption that it was inherently unlikely that Lordsvale would wish to release H.D. from the debt without receiving payment from some source, or that Mr Ruffler would have the necessary authority to bind Lordsvale by signing the letter on its behalf. I have already held that Mr Ansell as the sole director of Lordsvale had decided, rightly or wrongly, that the solution to the problems facing the company lay in Mr Ruffler's taking over the debt owed to it by H.D. in exchange for his shares and thereafter having no further claim against the company, and that he had given to Mr Ruffler sufficient authority inter alia to enable him to sign a letter which would have the effect of releasing H.D. from the debt.

[27] In my opinion therefore the letter was indeed effective as a binding release of the debt owed by H.D. to Lordsvale, and therefore constituted the reciprocal consideration for the obligation undertaken by the defender to make payment of 71,000 to Mr Ruffler. A simple way of putting it, as it appears to me, is that each of the Deed of Covenant and the waiver letter constituted consideration for the other, and since that was in fact provided on the same occasion they became binding on Lordsvale and the defender respectively. In so far as the equitable considerations pointing to this result may be judged with the benefit of hindsight, none of the original debt has been paid to Lordsvale or is demanded by its liquidator, so there is nothing offensive in the idea that the sum in question is now payable to the pursuer as Mr Ruffler's assignee. In my opinion, on the basis of the evidence, if this matter had come before an English commercial court, it would probably have been held that the defender was bound to make payment to the pursuer.

[28] I consider now the position of the pursuer as assignee under the Deed of Assignment. In the defences and pleas-in-law for the defender it is alleged that the Deed of Assignment is void or at least voidable and should be set aside ope exceptionis, but this was not taken up in the evidence or in the submissions of counsel for the defender. There is little that I therefore require to say about the position of the pursuer as assignee. Miss Otton-Goulder's opinion, with which Professor McKendrick did not take issue, was that the Deed of Assignment fulfilled all the requirements of section 136 of the Law of Property Act 1925: it was absolute, in writing under the assignor's hand, and notice was given to the debtor. It was therefore a legal and a statutory assignment. Consideration is not needed for such an assignment. The assignee is in the same position as the assignor: he cannot be in a better, nor a worse, position. Any defence which is available to the debtor in a question with the assignor is available to him in a question with the assignee. Professor McKendrick accepted that if Mr Ruffler had a right of action against the defender under the Deed of Covenant prior to the assignment, to the extent that he had such a right of action he could assign it to the pursuer who would be entitled to recover accordingly. Since I have held that the defender was liable to Mr Ruffler in the principal sum of 71,000, it follows that he is liable to the pursuer to the same extent.

[29] The expert witnesses were agreed that if the defender was bound to pay 71,000 under the Deed of Covenant, then he was also liable as provided therein for payment of interest on that sum at the rate agreed therein, i.e. 15% per annum compounded monthly from 27 August 1993.

[30] In the result therefore I am satisfied that the pursuer has established his entitlement to payment to him by the defender of 71,000 with interest at the rate of 15% per annum compounded monthly from 27 August 1993 until payment. I shall accordingly sustain the pleas-in-law for the pursuer, repel the pleas-in-law for the defender, and grant decree in terms of the first conclusion of the summons.


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