England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
His Honour Judge Rich QC
HC05C00377

		Royal Courts of Justice Strand, London, WC2A 2LL
		17/07/2006

Lord Justice Carnwath :

1. This case raises a short issue of construction of a contract. As so often the central issue is who should bear the risk, in circumstances which neither party contemplated at the time of the contract.
2. The background facts are not in dispute. Lexi Holdings plc ("Lexi") was formerly known as Pearl Holdings (Europe) plc. In May 2004, Mr Stainforth applied to Lexi for a short term loan in order to purchase a residential property known as 3 Courtfield Gardens, London. SW5. The purchase price was £3.025m. The property was divided into eight apartments, all of which were tenanted and produced a monthly rental income of £12,350. Lexi offered a two months secured loan of £3.5m at a monthly interest rate of 2% (£70,000). The agreement provided for the rate of interest on default to be increased to 3.5% per month. Lexi had obtained a valuation of the property at £5.6m.
3. On 1^st July 2004, Mr Stainforth executed a legal charge over the property and took the loan which was sufficient to cover the purchase price of the property, the interest of £140,000 for the two month period, which was payable in advance, and all of the other costs associated with the purchase. The principal sum was due for repayment on 1^st September 2004. Mr Stainforth told Lexi that he was having difficulty in re-financing the loan. In August Lexi agreed to extend the loan for 1 month to 1^st October, 2004 on payment of one month's interest in advance.
4. At that time Mr Stainforth asked Lexi if they knew of anyone who might be interested in purchasing the property, indicating that he would be prepared to accept a price of between £3.65m and £3.75m. Lexi's Managing Director, Mr Shaid Luqman, happened to mention the property to another property investor, who expressed interest and indicated that in the light of what he had been told about the original valuation of the property he might be prepared to pay in the region of £4.3m. Lexi told Mr Stainforth that they might have found a purchaser, but they did not divulge either his identity or the price which he might be prepared to pay.
5. On 1^st September, 2004, a written agreement was signed by the parties entitled "Exclusive Sale Agreement". It had been drafted on the same day by Lexi's Commercial Director, Mr Waheed Luqman, without specific legal advice. It is that Agreement which gives rise to the present dispute.
6. The sale to Mr Khan did not proceed because the information received by him threw doubt on the original valuation. On 9^th September Lexi wrote to Mr Stainforth purporting to rescind the Exclusive Sale Agreement. He failed to repay the loan on 1^st October 2004. He put the property into auction on 3^rd November 2004 with a guide price of £3.4m, but the highest bid received was £3.25m and the property was withdrawn from the auction. By that time the outstanding principal sum together with default interest (at 3.5% per month) stood at £3.745m.
7. On the following day, Lexi served a written demand for repayment on Mr Stainforth and on 10^th November appointed an LPA Receiver. On 16^th November 2004 Lexi issued a claim. By way of defence Mr Stainforth asserted that he was "released/discharged from all liability" pursuant to the Exclusive Sale Agreement.

The Agreement

8. The Agreement has at least the appearance of a formal document. It begins with a title page which provides a space for the date and gives the name of the parties and the title "Exclusive Sale Agreement". The substantive part is as follows:

"(1) This Agreement relates to the Property know as 3 Courtfield Gardens, London SW5 0PA and the Sterling Loan Facility Agreement entered into between Pearl and GSS on 18 June 2004 for the loan advance in the sum of £3,500,000 made by Pearl to enable GSS to purchase the subject property.

(2) The loan advance was due for repayment on 1^st September 2004 and GSS has been unable to meet his contractual payment obligation. GSS has however made an interest payment of £70,000 on 27 August 2004.

(3) GSS has advised that his proposed refinancing of the subject property to enable him to discharge liabilities to Pearl has proved unsuccessful and has therefore sought an alternative solution to discharging his liabilities.

(4) GSS has agreed to accept the sum of £150,000 to be paid by Pearl within seven days of the signing by both parties of this Agreement in consideration of his relinquishing all rights he may have to the subject property.

(5) GSS confers sole authority to Pearl in relation to any sale that Pearl may secure to discharge his initial outstanding indebtedness to Pearl which at the date of this Agreement was in the sum of £3,500,000.

(6) GSS further accepts that any and all sums that Pearl may realise from any sale after discharging his initial indebtedness under the terms of the aforementioned Sterling Facility Letter will be for the sole account of Pearl.

(7) GSS confirms that he will not directly or indirectly market the subject property for sale purposes.

(8) GSS authorises Pearl and accepts that Pearl may proceed with the appointment of an LPA Receiver in any sale of the subject property without any event of default as defined in the Sterling Facility Letter having necessarily occurred.

(9) GSS and Pearl acknowledge to each other a mutual duty of good faith.

(10) The Parties will use all reasonable endeavours to ensure confidentiality of this agreement.

(11) A person who is not a party to this agreement may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999.

(12) This Agreement is acknowledged as binding by virtue of its being signed below by Pearl and GSS.

9. The document was signed by Mr Stainforth in person and by Mr Shaid Luqman "For and On Behalf of" Lexi.

The issue

10. The issue in summary, is whether the Agreement, as the judge found, had the effect of discharging Mr Stainforth's liability in return for his "relinquishing all rights" to the subject property, or whether, as Lexi contends, its primary purpose was simply to confer authority on Lexi to sell the property, the discharge of the existing liabilities being dependent on such a sale and limited by the proceeds of the sale. In the former case, the risk of the sale not going ahead, or going ahead at a lower price than that envisaged, would fall on Lexi, in the latter it would fall on Mr Stainforth.
11. The judge accepted that, taken on their own, clauses 5 & 6 were consistent with an agency arrangement, under which Lexi was empowered to sell the property to discharge the debt of £3.5m out of the proceeds. However, he considered that to be displaced by the effect of clause 4. He read the words "relinquishing all rights" as making clear that the defendant was required to transfer to the claimant all his beneficial interests in the property and that, at least by implication, his liability was discharged at the same time.
12. He found support for this view in paragraph 3 which refers to the parties seeking "an alternative solution to discharging his liabilities". The judge read that as indicating that what followed was intended to achieve actual discharge and not merely discharge conditional upon the successful sale. He also referred to the consequences of the alternative construction in circumstances where the sale produced less than the amount of the liability. As to that he said (accepting a submission of Mr Moraes on behalf of Mr Stainforth):-

"If it was intended to provide that in such an event the shortfall should continue to be the defendant's liability, or even more – that if the claimant failed to sell at all, for whatever reason short of bad faith, the defendant should continue to be liable to pay £3.5m capital plus continuing interest with no power of redemption, then it would have been necessary to insert into clause 6 clear words to give an effect to such intention." (para 27)

13. Having reached that view on construction of the contract, he considered the case for rescission by Lexi. That turned on Mr Stainforth's degree of responsibility for the fact that Mr Khan had withdrawn. As I said, Mr Khan had discovered that the original valuation was unreliable. It was based on a list of tenancies of the eight flats producing an annual rent roll of over £300,000, whereas the actual rent roll was less than one half of that. Lexi blamed Mr Stainforth for this. However the judge accepted that before the loan was made the true list of tenancies was known to the claimant, and that they could not therefore rely on that issue as a ground for rescinding the agreement. Accordingly he upheld Mr Stainforth's counterclaim for £150,000 under clause 4. No separate issue arises in respect of that finding.

Discussion

14. Although both Counsel have sought assistance in textual analysis of the various clauses, that to my mind simply underlines the inadequacies of the agreement in general, and its deficiency in dealing with the particular issue in this case. Both parties have problems with such an approach.
15. Mr Moraes faces the problem that there is nothing in the agreement which in terms purports to discharge Mr Stainforth's liabilities with immediate effect. Clause 4, on which the judge principally relied, is concerned not with discharging his liabilities but with relinquishing his rights. The best he can do is to point to what he says must be implicit in clause 5; in effect the words "to discharge" are to be read as meaning "and thereby discharges". Apart from the distortion that this involves, he has the difficulty of explaining why the agreement did not simply say that the rights were being relinquished in return for the discharge of the debt. That would leave Mr Stainforth with no continuing interest in the property and the subsequent paragraphs would have been unnecessary.
16. By contrast Mr Lopian has the difficulty of explaining what is meant by the words "relinquishing all rights" other than what they naturally mean. He has to accept that Mr Stainforth was not agreeing to relinquish all his rights in a property worth some £3.5m or more in return for a payment of £150,000. Accordingly, if those words mean what they say, some additional consideration must have been intended. Mr Lopian's answer, as I understand it, is that "all rights" mean in effect "all surplus rights" (or, as he says, the "equity" in the building), that is the rights to what is left, if anything, once the liability has been discharged.
17. To each of those contentions the other can fairly say that it is not what the agreement says. In such circumstances the Court has to do the best it can on the basis of the intended purpose of the arrangement as understood by both parties, the practical consequences of the alternative contentions, and such other tools as the law makes available in such cases.
18. One of those tools is the so-called "contra proferentem" rule. Lewison, The Interpretation of Contracts (3^rd ed) offers a literal translation of the full Latin version of the rule:

"The words of documents are to be taken strongly against the one who puts forward." (para 7.07)

He notes the ambiguity inherent in the last phrase. However, in the present context detailed discussion is unnecessary. Mr Lopian, while urging that use of this rule should be a matter of last resort, accepts that in this case, if all other points were equally balanced, it would operate against his client, as the person who put forward the document. It is sufficient to refer to Lord Mustill's explanation of the rule in Tam Wing Chuen v Bank of Credit and Commerce Hong Kong Limited [1996] 2BCLC 69, 77 PC:

"…the basis of the contra proferentem in principle is that the person who puts forward the wording of a proposed agreement may be assumed to have looked after his own interests, so that if words leave room for doubt about whether he is intended to have a particular benefit there is reason to suppose that he is not".

19. Putting all these points together, on balance I prefer the judge's view. On Mr Lopian's side is the fact that this is described as an "Exclusive Sale Agreement" and that some of its terms seem consistent with that. Against that, like the judge, I find it very difficult to read paragraph 4 as meaning anything other than that Mr Stainforth was giving up all his rights over the property. This would only make sense if it was intended that all his liabilities should be discharged at the same time. Otherwise, as the judge said, the proposed "alternative solution" was no solution at all. Mr Stainforth would be giving up his right to realise his own asset for an indeterminate period, while facing continuing liability for interest at the default rate, without any correlative obligation on Lexi to do anything. Mr Lopian's answer that Lexi would be under an agent's duty of care and of good faith (expressed in clause 9 of the agreement) is an incomplete answer, given the uncertainty in practice of establishing the limits of that duty when set against the reality of the contractual obligation for default interest.
20. In the end, I think this is one of those rare cases where the contra proferentem rule may assist in the final solution. As we now know, Lexi were in the position of having a potential purchaser, unknown to Mr Stainforth, at £4.3m. The potential attractions of the arrangement were obvious, but they may also have wished to hedge their bets. The inadequacies of the agreement may reflect a non-lawyer's attempt to reconcile those competing objectives. Whether or not that it is the correct explanation, there is no unfairness in holding that, having presented the agreement in that form, they should bear the risk of any resulting ambiguity, if it cannot be resolved by more conventional interpretative tools.
21. For those reasons I would uphold the judge's decision and dismiss the appeal.

Lord Justice Moses:

22. I agree.

Chancellor of the High Court:

23. I also agree.