England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM NORWICH COUNTY COURT
(His Honour Peter Dedman)

		Royal Courts of Justice Strand London WC2 Monday, 5th November 2001

Monday, 5th November 2001

1. LORD JUSTICE PETER GIBSON: Laws LJ will give the first judgment.
2. LORD JUSTICE LAWS: This is a defendant's appeal with permission granted by Keene LJ on 9th March 2001 against a decision of His Honour Judge Dedman by which, on 10th October 2000, he gave judgment for the claimant in the sum of £42,105.26 together with interest and costs.
3. The relevant facts are as follows. The respondent, the claimant in the action, and the two appellants, who were to become the defendants, established in 1983 a company by the name Deanbond Ltd to carry on a haulage business. All three were directors. In 1986 each of the directors and their wives gave personal guarantees to Lloyds Bank Plc as security for the advancement of further loans to the company by the bank. In addition they all charged their homes as security for the fulfilment of the guarantee.
4. By 1993 it seems that disputes had arisen between the directors. There was a proposal to the effect that the respondent should be made redundant, as it is put. He was, of course, not merely an employee but also a director of the company. There is a dispute, as the learned judge below noted, as to the reasons for this proposal, but it is not necessary to go into that. At length, an agreement was arrived at which was reduced to writing on 8th November 1993. The document made on that day is in the form of a letter on the company's headed paper, addressed to the respondent and written, certainly signed, by the first defendant and the appellant, Leonard Elston. After referring to a director's meeting of 15th September 1993, the letter stated so far as relevant:

"Following that Meeting, and having discussed the matter with the Company's Solicitors, it was agreed that a motion should be tabled at the Directors Meeting held on Thursday, 4 November, to outline the redundancy package to be offered to you.

As requested, the terms of that offer were as follows.

1.That you would be made redundant as of 31 January 1994, a redundancy package of £4,500 having been agreed."

5. There is then some detail as to the implementation of that package.

"2.That your retirement as a Director of the Company would become immediately effective but that having given you three months notice of your redundancy, the Company would continue to pay you your present monthly salary i.e. £1325 per month for the months of November, December 1993 and January 1994.

3.The present Directors Term Loan in your name in the sum of £10,000, if not able to be repaid by the Company as at the date of your redundancy in view of the present Cash Flow position of the Company, would continue to be serviced at an agreed rate to enable you to service the amount borrowed from your Building Society from when" [it must be "from which"] "the Loan Funds had been originally taken.

4.The guarantee given by you and charge made on your personal home to Lloyds Bank plc, 13 Cornhill, IPSWICH, would be released as at the date of your redundancy provided the Bank were prepared to make this position possible and as explained at the Meeting, the Company were presently in the process of working towards this end.

5.You would continue to have the use of the present Company Car that you drive until the date of the redundancy at which time the car would be returned to the Company unless it formed part of the redundancy package to be agreed."

6. The respondent accepted these terms and left at once.
7. The company was compulsorily wound up in August 1995. On 5th December 1996 Lloyds Bank obtained judgment against the respondent and his wife for some £88,000 odd and possession of their home in Wymondham. Possession was recovered and the bank obtained £42,105.26 net in respect of the property on 12th June 1997. The judge below was to observe that it appeared that the two defendants negotiated with Lloyds so as to obtain a reduction in their personal liability upon their guarantees, such that each paid £25,000 only to Lloyds, and the security they had given was not then enforced against them.
8. Thereafter these proceeding were issued by the respondent against his fellow directors in the Norwich County Court. The agreement reduced to writing on 8th November 1993 was pleaded as a contract between the respondent the appellants, and an implied term was alleged in these terms:

"5.It was an implied term of the said offer that the Defendants would use their best endeavours to secure the release of the Legal Charge and Guarantee that the Plaintiff (and his wife) had executed if necessary by providing alternative substitute security.

6.The Plaintiff accepted the said offer and retired as a director of the Company and ceased to be employed by it. In the premises, there was a concluded agreement, inter alia, between the Plaintiff and the Defendants as pleaded above."

9. Then the respondent alleged a breach of the implied term as follows:

"7.In breach of the implied term pleaded above, the Defendants failed to take any or any reasonable steps to secure the release by the Bank of the Legal Charge and Guarantee that the Plaintiff (and his wife) had given in respect of the Company's indebtedness."

10. The respondent claimed to recover against the appellants as damages what he had lost to Lloyds Bank, alternatively to recover from them as co-sureties a contribution so as to reflect the fact that he had paid to the bank more than his one-third share of the sureties' liabilities.
11. The trial judge acceded to the respondent's principal case and, as I have said, gave judgment against the appellants for £42,105.25, together with interest.
12. A number of points are taken in the grounds of appeal, but there are two principal submissions:

(1) The judge was wrong to hold, as he did, that the November 1993 contract "was an agreement between the co-directors and co-sureties themselves and did not purport to be, and was not, an agreement between Mr Marsden and the company". It is said that the contract was between the respondents and the company only.

(2) The judge was wrong to accept the respondent's submission as to the existence and nature of the implied term.

13. This is what the judge said:

"If the Defendants were right that the only relevant term was that contained in Clause 4 of the letter, could the Defendants simply sit back and do nothing as if as the Bank was bound to do in common sense and commensurate with its duty to its own shareholders, namely to refuse to release the Claimant from his guarantee unless alternative security was provided? Any other interpretation in my view would be nonsensical."

14. Then he says:

"Assuming I am right and there was such an implied term, did the Defendants do anything to comply with it?"

15. It is plain that the learned judge was accepting an implied term of the nature pleaded in paragraph 5 of the particulars of claim.
16. The appellants' case is that the November 1993 contract was entered into exclusively between the respondent and the company. That had not been pleaded in the defence: indeed the defence effectively failed to plead any positive case at all and, as is acknowledged in the appellants' skeleton argument, would not have complied with the Civil Procedure Rules had they been in force at the time. However, the judge considered this point, albeit it to reject it. It seems to me that we should consider it too. We are told that although not pleaded, the contention as to the parties to the contract was referred to at a case management conference on 17th May 2000.
17. It seems clear at the least that the company was a party to the contract. The letter of 8th November 1993 was on the company's headed paper: more important the contract imposed obligations on the company, such as the continued payment of the respondent's salary (paragraph 2), servicing his director's loan account (paragraph 3) and permitting the respondent's continued use of his company car (paragraph 5). The whole subject matter of the contract was the respondent's "redundancy package", as it was called, and that was necessarily a matter arising between him and the company.
18. Were the appellants also parties to the contract? The letter, as it itself records, followed, as I have said, a directors' meeting of 15 September 1993. The respondent's proposed redundancy was discussed at that meeting. The agreement, which was reduced to writing by the letter, was actually made at a meeting on 4th November 1993, attended both by the respondent and the appellants. That meeting followed an earlier meeting on 28th October 1993 between the company accountant and the first appellant and representatives of the bank where the question of the respondent's release from the security he had given was discussed. But the bank declined to agree to such a course being taken because the collateral, that is the security given only by the appellants, was otherwise insufficient. That emerges from the statement of the first appellant, Mr Elston, (page 106 in the bundle). It is clear that the judge accepted the thrust of this evidence.
19. It seems to me, not without some little hesitation, that the judge was entitled to find that these discussions were held on the appellants' part on their own behalf as co-sureties whether or not they were also held by them as agents for the company. In those circumstances the way was open to a holding by the judge that the appellants were parties to the contract.
20. It is to be noted that paragraph 4 of the defence is in these terms:

"In or about early 1994 the defendants attempted to negotiate the release of the plaintiff from his obligations to Lloyds Bank plc, but Lloyds Bank plc declined so to release the plaintiff."

21. That is an allegation, of course, of personal activity on the part of the appellant. Moreover, as Longmore LJ observed in the course of argument, there was every good reason why the appellants should be party to clause 4 of the contract since, if they were not and the company had succeeded in procuring the respondent's release from his charge, the appellants being strangers to that procurement, then the appellants might have been in a position to claim that they were discharged from their own liabilities to the bank by virtue of the guarantee having been varied. I would proceed, therefore, on the footing that the appellants, along with the company, were parties to the contract reduced to writing by the letter of 8th November.
22. The next question must be whether the contract contained the implied term contended for. I repeat numbered paragraph 4 in the letter for convenience:

"The guarantee given by you and charge made on your personal home to Lloyds Bank plc, 13 Cornhill, IPSWICH, would be released as at the date of your redundancy provided the Bank were prepared to make this position possible and as explained at the Meeting, the Company were presently in the process of working towards this end."

23. Thus the express term that the security would be released at the date of the respondent's redundancy was made subject to an express proviso as to the bank's preparedness to make that possible. I am content to accept, for my part, that there falls to be implied a term to the effect that the appellants and the company would use their best endeavours to procure the respondent's release, otherwise paragraph 4 of the contract looks like nothing more than a pious hope directed to the bank's goodwill. However, the implied term pleaded in paragraph 5 of the particulars of claim and accepted by the judge seems to me to involve a self-contradiction. A requirement to provide additional security is not, as it seems to me, consistent with a requirement to use best endeavours to procure the respondent's release, since the former amounts to an undertaking in any event to procure such release; and that necessarily travels beyond best endeavours. Nor, indeed, is the implication of such an undertaking consistent with the express proviso in paragraph 4:

"Provided the bank were prepared to make this position possible."

24. Both that proviso and a term requiring the appellants to use best endeavours contemplate that the result hoped for might not be achieved. But an undertaking to provide additional security, even if only as a last resort, is in effect an assurance that the result hoped for will be achieved.
25. Mr Yell in the course of argument this morning sought to disavow the proposition that the implied term relied on by him and found by the judge amounted to the provision of an absolute undertaking or indemnity in relation to the respondent's security. But it seems to me that his pleading asserts just such an undertaking. Just such an undertaking was accepted by the judge. In my judgment an undertaking of that kind cannot be implied into paragraph 4 of the contract upon ordinary principles of the agreement's business efficacy. It goes beyond what is necessary to attach sensible meaning to paragraph 4; and it is an obligation of a different nature from the limited or qualified obligation which, on any view, is being dealt with in paragraph 4.
26. The judge for his part seems to have considered that the provision of alternative security was, in truth, the only way by which the respondent's release might be obtained: so that was what the contract required if it required anything. But I think it helpful to have the chronology in mind. It would be the best part of two years after the agreement before the company was to go into liquidation. The respondent's redundancy, under other terms of the November letter, would become effective some three months after the agreement in question. While it must have looked on 28th October 1993 as if the bank had shut the door on the possibility of releasing the respondent, there may have been apparent possibilities at that time, for example by improvements to the company's position or a reduction in its indebtedness, so that a state of affairs might have been achieved in which the bank would be prepared to release the respondent short of the provision of alternative substitute security by the appellants. That, I think, might have been so even if, as has been submitted to us by Mr Yell, the defendants were determined in 1993 that the company should be expanded. For all one knows, the bank might have been persuaded that the company's prospects would improve if the respondent's services were disposed of.
27. In those circumstances it seems to me the judge was not entitled to conclude that the only possible mode of performance for clause 4, as it was drawn, would be by provision of alternative security by the appellants. Even if that proposition possesses very considerable force on the facts, it remains the case, as it seems to me, that the implied term pleaded is simply not consistent with the express terms of clause 4.
28. I should add that I have considered, out of respect for Mr Yell's submissions, whether a case might perhaps be made in the claimant's favour upon the footing that there was only an implied term to use best endeavours falling short of an implied undertaking to provide substitute security, and there was before the judge evidence to show breach of such a limited implied term and damage flowing from it.
29. Mr Yell advanced certain propositions which he said might lead to the inference that damage flowed from the breach of such an implied term. He referred to the period of time between the agreement and the company's liquidation; the fact that the defendants were liable to pay no more than £25,000 each in respect of their liability; the fact that Mr Donaghue, the company accountant, had never provided any security and might have done so. He referred also to the company's expansion.
30. I am not able to see how these circumstances taken together are capable of proving that a breach of a best endeavours undertaking on the facts here led to loss suffered by the claimant. Nor would I be inclined to accept that there was compelling evidence that such a limited best endeavours undertaking was in fact breached by the appellants. There is some material (see in particular page 25) to show that efforts may have been continued to persuade the bank to take a different view of the respondent's security after 4th or 5th November 1993, and there is the statement in paragraph 4 of the letter itself:

"The company were presently in the process of working towards this end."

31. But however that may be, for the reasons I have given, it does not seem to me that the rights and wrongs of such a limited implied term really form a proper or legitimate part of this litigation. Accordingly, I would conclude that the judge was wrong to imply the terms he did and I would set aside the order he made for payment of £42,105.26 together with interest and costs. However that is by no means the end of the case. The respondent describes his secondary case as his claim to contribution. As I have said, each of the defendants was able to close his liability to the bank by agreement to the effect that the bank would take from him no more than £25,000 in settlement. The appellants say there was evidence, in the form of a statement from their solicitor, Mr Moroney, which the judge declined to admit because it was adduced too late, that before a meeting in January 1996 the bank had indicated that it would accept £75,000 in full and final settlement of all three sureties' liabilities, thus £25,000 each. The two appellants agreed but the respondent did not. Then it is said that on 17th March 1997 the bank's solicitors offered to accept £28,000 plus interest and costs from the respondent in settlement of his liability, but again he declined to accept. It was submitted to the judge below that the general principles of equity should be applied to the respondent's claim for contribution, which is, as I have made clear, in the alternative to his main case. The result of that, it was said, would be that the judge should hold that the respondent ought to have subscribed to the £75,000 compromise and that, having failed to do so, he should now be debarred from claiming contribution, a claim which by definition would not have arisen if he had agreed to the compromise.
32. The judge considered there was precious little evidence of such a compromise having been offered, and I have referred to his exclusion of Mr Moroney's statement. But, in any event, he took the view that the respondent was not to be deprived of his right of contribution by any such appeal to equity, and, had he not been in favour of the respondent on his principal ground, then he would have given judgment for him upon the contribution claim. Were that eventuality to arise it was agreed, as I understand it, as a matter of calculation that under this head the respondent should recover some £8,251.49 together with interest of £2,106.28 to 3rd October 2000. The appellants asserted in the skeleton that the judge should have held that the respondent's loss flowed from his failure to accept the settlement terms offered. But it is now effectively conceded by Mr Lindquist that if his appeal on the principal ground relating to the implied term is good, still he has no answer to the appellants' claim for contribution.
33. It seems to me that concession is plainly right. Quite apart from the fact that Mr Moroney's statement was excluded by the judge, and that was a case management decision not sensibly challengeable here, the position is that the right of contribution between co-debtors arises by operation of law. It is not a claim for damages. No question of mitigation of loss or anything of the kind arises. Accordingly, the rights and wrongs of the bank's offer to settle for £75,000, or in the respondent's sole case later for £28,000, is simply neither here nor there as far as the contribution claim is concerned.
34. In all these circumstances, I would allow the appeal and set aside the order made, but I would substitute a judgment and order that the respondent recover contribution in the sum of £8,251.49 together with appropriate interest.
35. LORD JUSTICE LONGMORE: I agree. Mr Yell made a valiant attempt to show that even if the best endeavours undertaking was only a best endeavours undertaking to procure the bank to release the charge rather than a best endeavours undertaking to provide alternative security, there was, nevertheless, a claim which sounded in substantial damages. But it is clear that even if there was a breach of that best endeavours undertaking, the claimant has not suffered any substantial damages because the bank made it clear at all material times that they would not release their charge on the claimant's home. So there cannot, in my view, be any claim for substantial damages on the basis merely that there was a breach of an undertaking to use best endeavours to procure the bank to release the charge.
36. The claimant does not however go away empty handed, because it is now accepted, as my Lord has said, that the alternative claim to contribution against the defendants as co-sureties should succeed.
37. LORD JUSTICE PETER GIBSON: I agree with both judgments. So the order proposed by Lord Justice Laws will be made.
Order: Appeal allowed. We set aside the costs order of £42,105.26 plus interest and substitute claimant's costs of £8,251.49 with interest of £2,734.56. We think the appellant should obtain an award of costs but that there should be a reduction to take account of the failure of the secondary case which was persisted in right until this appeal hearing. We therefore order that the respondents pay 75% of the appellant's costs of the appeal. Legal aid assessment of the respondent's costs.