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 THE CHANCERY DIVISION
LEEDS DISTRICT REGISTRY
(His Honour Judge Langan QC)

		Royal Courts of Justice Strand London WC2 Wednesday, 10th July 2002

Wednesday, 10th July 2002

1. LORD JUSTICE PILL: Sir Martin Nourse will give the first judgment.
2. SIR MARTIN NOURSE: The defendants in the action, Jack Loach, Sidney Loach and Sylvia Hayley, appeal against part of an order made on 19th December 2001 by his Honour Judge Langan QC sitting as a judge of the Chancery Division in Leeds. Their appeal raises a short question of construction on the provisions relating to the payment of interest in an equipment lease agreement ("the lease agreement") made between the claimant, Michael Gerson (Leasing) Limited ("Gerson"), and S&J Loach Limited ("SJL") on 21st February 1997. In circumstances to be related, the question was not argued before or decided by the learned judge.
3. The defendants, who are brothers and sister, were directors of SJL, whose business was that of surface dressing contractors and road reconstruction engineers. The lease agreement was part of an arrangement whereby SJL sold plant to Gerson, which, by the lease agreement, leased it back to SJL on the terms therein stated and subject to the conditions set out in schedule 2 thereto. Each of the defendants entered into a written guarantee with Gerson, whereby he or she, in consideration of Gerson entering into the lease agreement, undertook to pay to Gerson on demand such sums of money as might at any time or from time to time have become payable, but be unpaid, by SJL.
4. Before reference is made to the material provisions of the lease agreement it is convenient to explain what happened. SJL paid the monthly rentals in full up to and including November 1997. There was then what the judge described as a patchy history of payments between December 1997 and June 1998. Nothing was paid in respect of July or August 1998. On 25th August 1998 Gerson, by letter to SJL, terminated the lease agreement in accordance with paragraph 9(B)(i) of schedule 2. Three days later, on 28th August, Gerson notified each of the defendants that, unless SJL paid to Gerson the amount of the termination sum, Gerson would be claiming that amount under the respective guarantees.
5. Gerson made formal demands for payment, on 18th October 2000 on SJL, and on the following day, 19th October, on each of the defendants. The demands not having been met, the claim form in the action against the defendants was issued on 27th October 2000. The particulars of claim alleged that as a result of the termination of the leasing agreement a total of £160,667.52 had become due to Gerson, including £64,782.02 in respect of:

"Interest at the rate provided for in the Leasing Agreement (2% per month compounded monthly) for the period 25th August 1998 to the date of issue of proceedings."

6. The particulars of claim did not specify the provision or provisions of the leasing agreement under which the claim for interest was made.
7. The trial took place before Judge Langan on 17th, 18th and 19th December 2001. Gerson was represented by counsel and solicitors, but the defendants appeared in person. Initially, they raised five points by way of defence, but in giving judgment the judge said that three of them had turned out not to be capable of advancing the case of all or any of the defendants. In addition, Mrs Hayley raised the defence of non est factum, a defence which failed at the first hurdle because the judge did not accept her evidence. Finally, the defendants disputed the amount of the credit for the open market value of the plant which had to be given by Gerson pursuant to paragraph 9(C)(iv) of schedule 2. That dispute was also resolved in favour of Gerson. In the result, the judge gave judgment against each of the defendants in the sum claimed (including interest to date) of £203,212.27. His order further provided that interest should accrue on the judgment sum until payment at the rate of 2% per month. He refused the defendants permission to appeal.
8. Mr Eaton Turner, who has appeared for Gerson both here and before Judge Langan, has told us that he referred the judge to the provisions of schedule 2 to the lease agreement on which Gerson relies in support of its claim for interest. But it is clear that the defendants did not question the basis of that claim and that no argument was heard on it. I agree with Lord Justice Aldous, who, in granting permission to appeal on the question of interest, suspected that that was because the defendants had appeared in person and had concentrated their submissions on the issues of valuation and non est factum.
9. The material provisions of the lease agreement are as follows. Clause 1 contains an agreement that Gerson shall let and SJL shall take on lease the equipment specified in schedule 1 on the terms of the lease agreement and subject to the conditions set out in schedule 2. Clause 3 provides that the lease shall be for a "primary period" of three years and six months. Clause 4 provides that Primary Period Rentals, 42 of 5,081.63 each (plus VAT), are payable monthly in arrear starting on 23rd March 1997.
10. I turn to schedule 2. Paragraph 3 is headed "RENT". Subparagraph (D) provides:

"The Lessee shall pay to the Owner in respect of the lease of the Equipment the rentals and all other payments due under this Agreement. The rental payments shall be due and payable on the dates specified in Clause 4. If the Lessee fails to make any payment on its due date any unpaid amount together with any Value Added tax properly payable thereon shall bear interest at the rate of 2 per cent per month compounded monthly after as well as before judgment until payment in full is received by the Owner."

11. So far as material, paragraph 9 headed "DEFAULT" provides as follows:

"(A) If the Lessee commits a repudiatory breach hereof or of any Lease Agreement, the Owner may accept such a breach as a repudiation of this Agreement and, at the option of the Owner any or all other Lease Agreements.

(B) Without prejudice to the generality of paragraph 9(A) above the Owner and the Lessee hereby agree that any of the following events shall constitute a repudiatory breach by the Lessee of this Agreement and each other Lease Agreement:

(i) if the Lessee fails to make any payment payable by it under this Agreement or any other Lease Agreement in full when due or within 7 days of its due date for payment; or

...

(C) Upon acceptance by the Owner of any repudiatory breach by the Lessee as terminating this Agreement and all or any other Lease Agreements the Lessee shall pay to the Owner the following amount ("the Termination Sum"):

(i) all arrears of rental (and any Supplemental Rental as defined in paragraph 11 below) and all other amounts accrued due under the terms of this Agreement;

(ii) all rentals which would have been payable but for such termination during the unexpired term of the Primary Period (including such Supplemental Rental as defined in paragraph 11 below as would have been payable during such unexpired term if the amount of the said Supplemental Rental payable in respect of the Primary Period in which termination occurs remained constant throughout such unexpired term) but discounted to present day value at the Discount Rate specified in Clause 10 of this Agreement to reflect accelerated receipt;

(iii) all costs and expenses incurred by the Owner including repairs and insurance in repossessing or recovering the Equipment or collecting any payments due under this Agreement; and

(iv) an amount equal to interest on all arrears after as well as before judgement at the rate of 2 per cent per month compounded monthly from the date of which any such payment became due until the date of payment thereof BUT less a credit for the open market value of the Equipment at the date of termination compared with its estimated value at the end of the Primary Period as notified by the Owner to the Lessee."

12. The crucial words in the provisions of paragraph 9 are "all arrears" in subparagraph (C)(iv), the question being whether they are apt to include not only the arrears of rental referred to in (C)(i) but also the future rentals referred to in (C)(ii). As I have said, on 25th August 1998 Gerson, by letter to SJL, terminated the lease agreement in accordance with paragraph 9(B)(i). In other words, it accepted SJL's repudiation occasioned by its failure to pay the monthly instalments due on 21st July and 21st August 1998. Attached to the letter was a calculation of the termination sum for which provision is made by paragraph 9(C). That sum was made up of the two unpaid rental instalments, interest on those instalments up to 25th August 1998, the amount of the future instalments payable during the primary period (discounted for early settlement) and VAT on that amount. The formal demand made on 18th October and the particulars of claim included claims for interest on the discounted future instalments and the VAT, as well as on the instalments unpaid on 21st July and 21st August 1998, and it is that which has precipitated the present dispute between the parties. The claim in respect of VAT has now been abandoned by Gerson. For the sake of clarity, I should add that no supplemental rental was ever payable, nor were there any other amounts accrued due as mentioned in paragraph 9(C)(i).
13. In construing the material provisions, I start with paragraph 9 of schedule 2. The apparent intendment of the opening words of paragraph 9(C) is that upon the acceptance by Gerson of a repudiatory breach by SJL a lump sum (defined as the termination sum) will become payable by SJL to Gerson. That sum is to have four components: first, all arrears of rental and all other amounts accrued due under the terms of the lease agreement; second, all rentals which would have been payable but for such termination during the unexpired term of the primary period, i.e. until 21st August 2000, but discounted as provided in paragraph 10; third, all costs and expenses incurred by Gerson in repossessing or recovering the equipment or collecting any payments due under the lease agreement; fourth, an amount equal to interest on "all arrears after as well as before judgment" at the rate specified. There is then a proviso, prefaced by the word "BUT" which requires credit to be given for the open market value of the equipment at the date of termination. Although, as a matter of form, that proviso is applied only to the fourth component, both Mr Eaton Turner and Miss Linklater, who has appeared for the defendants in this court, are agreed, correctly in my view, that in substance it applies to all four components.
14. On that footing, Miss Linklater submits that what paragraph 9(C) provides for is the payment of a once and for all lump sum to be calculated at the termination date by adding A, B, C and D together and then deducting E, each of those five amounts being susceptible to precise assessment at the termination date or shortly afterwards. As to that submission, it is plain that A and B (the first and second components) are capable of being precisely assessed at the termination date, as indeed they were in Gerson's termination letter of 25th August 1998. C (the third component) is in a different category because, as Mr Eaton Turner points out, the costs and expenses incurred in repossessing or recovering the equipment cannot be assessed until after the termination date and the same can be said of E (the credit). In both those cases, however, a precise assessment could reasonably be expected to be made shortly after the termination date, and I do not think that they can be regarded as detracting from the force of Miss Linklater's submission.
15. That leaves D, the fourth and crucial component. What is the meaning of "all arrears" in paragraph 9(C)(iv)? Miss Linklater submits that that expression is confined to the arrears of rental and all other amounts accrued due as mentioned in paragraph 9(C)(i), and that it cannot include the future rentals mentioned in paragraph 9(C)(ii) because payment of them only becomes due on the termination date, at which point they cannot properly be described as arrears. Mr Eaton Turner was disposed to agree with that submission. But he says that the expression is wide enough to include future rentals once they are payable and have not been paid.
16. Had it not been for the inclusion in paragraph 9(C)(iv) of the words "after as well as before judgement", I would have thought it plain that Miss Linklater's submission as to the meaning of "all arrears" was correct, especially since it is in perfect harmony with her anterior submission that what paragraph 9(C) provides for is the payment of a once and for all lump sum. Initially, I was troubled by those words, which tended to suggest that interest was to include interest after the termination date as well as before it, on which footing it would be natural to assume that it would include interest on future rentals once they were payable and had not been paid. But as the argument progressed I became satisfied that Miss Linklater's submission was, after all, correct.
17. Miss Linklater suggested that the words were simply a standard formula for avoiding the merger of a contractual right to interest with any judgment obtained. That certainly is a possible view. Further, it is possible to conceive of a case where the owner obtained summary judgment for unpaid rentals, electing at that stage not to give notice of termination but deciding to do so after further defaults, in which event his right to interest up to the termination date would be protected. Most persuasive of all, to my mind, was Miss Linklater's contention that, whatever the purpose of the words in question, they cannot enlarge on the expression "all arrears", which must be construed to have its natural meaning.
18. For these reasons, I accept Miss Linklater's construction of paragraph 9(C)(iv) and reject Mr Eaton Turner's. That leaves paragraph 3(D) of schedule 2, on which Mr Eaton Turner also strongly relies. I can deal with this provision more briefly. Mr Eaton Turner submits that the payment of the future rentals is a payment "due under this agreement" within the first sentence of paragraph 3(D). He then submits that the third sentence, which provides for the lessee's failure "to make any payment on its due date", provides as much for a failure to pay the future rentals as it does for any other failure to pay, so that the unpaid future rentals bear interest at the rate specified under that provision.
19. The answer to these submissions is in my view simple. Mr Eaton Turner accepts that his submissions, if correct, would result in some overlap between paragraphs 3(D) and 9(C)(iv). But in my view no overlap can have been intended. Paragraph 9 provides a distinct and self-contained regime as to what is to happen on the acceptance by the owner of a repudiatory breach of contract. Paragraph 3(D) cannot be construed as making any inroad into that regime. It is perfectly explicable on the footing that its provisions are to apply while the agreement is subsisting. If, for example, the lessee defaults on payment of a monthly rental and the owner does not elect to treat the default as a repudiation and accept it, paragraph 3(D) entitles him nevertheless to claim interest on it at the specified rate. Paragraph 3(D) has no application to a termination of the agreement under paragraph 9.
20. My conclusion is that Gerson is not entitled to claim interest on the future rentals either under paragraph 3(D) or under paragraph 9(C)(iv). On that footing Mr Eaton Turner has applied for, and has been granted, leave to amend Gerson's particulars of claim so as to claim interest under section 35A of the Supreme Court Act 1981. Clearly, if the submissions now successfully made on behalf of the defendants had been made at the trial and accepted by the judge, he would probably have allowed the amendment at that stage. In any event, it is in my view right for us to allow it now. Moreover, I see no reason why Gerson should not be awarded interest under the statute. I would award it at 6% from the termination date, 25th August 1998, on whatever is the appropriate sum. It may be arguable, though no argument has so far been raised, that the rate should be increased to judgment rate (8 per cent) as from the date of the judgment below (19th December 2001). That point can be dealt with after judgment, as can any dispute as to the amount of the appropriate sum on which interest should be ordered.
21. I would vary the judge's order accordingly, and to that extent I would allow the defendants' appeal.
22. LORD JUSTICE ROBERT WALKER: I agree.
23. LORD JUSTICE PILL: I also agree.
Order: Appeal allowed in part. Order as per draft minute to be prepared by counsel. (Order does not form part of approved judgment)