England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Claim No HC10CO1711 Court 21 7 Rolls Building Fetter Lane London EC4A 1NL
		12 July 2012

1. JUDGE PURLE: In this action the claimant seeks rectification of an agreement embodied in a Tomlin order dated 25 May 2011. The terms are set out in the schedule to that order.
2. The claimant, which I shall call "the bank", had indebtedness due to it from Crowborough Properties Limited ("the company") of, at the time of the settlement, a sum in excess of GBP29 million.
3. Sanjiv Kaushal and Deepak Kaushal ("the individuals"), who are husband and wife, were guarantors of that indebtedness up to GBP25 million.
4. The indebtedness related to the development of land in Slough which was charged to the bank to secure that indebtedness. There were three development sites, two of which have been developed out and the third of which was still to be completed.
5. In the proceedings which were compromised by the Tomlin order, the company and the individuals had argued that the bank reneged upon a commitment to support the development of the third part of the site, and also claimed that LPA receivers, who had been appointed by the bank, were, given the bank's breach of its own obligations, not validly appointed.
6. The bank was of course concerned to ensure, so far as it could, that its security was effective and that the receivers could proceed to the collection of rents and the ultimate sale of the properties secured to them.
7. The company was the developer. However, not all the elements of the three development sites were held in the name of the company. Eight of them were held in the name of one or more of the individuals. That did not, on the face of it, matter, as they had given, as I have said, personal guarantees, and an all monies charge to secure that guaranteed indebtedness.
8. The settlement negotiations had taken place during the trial itself, and was initially started by Mr Hutchings, leading counsel for the individuals and the company, in an informal approach to Mr Walford, who was counsel for the bank.
9. The individuals wished, if possible, to reacquire all of the secured properties at current open market values, and various offers were put forward and considered by both sides based upon that premise.
10. Essentially they did not bear fruit because the bank did not wish to sell at a valuation, but wished to test the market.
11. However, the underlying theme of the negotiations was that the charges were valid and that the bank could, through the receivers, effect a sale in fulfillment of the various proposed terms.
12. Those attempts having come to nothing, another offer was made, this time by the bank, on 21 May, where it is said that a drafting error crept in. Its effect was to limit the personal guarantees to the value of two new additional properties, just disclosed by the individuals, which were to be newly charged. The two new properties were worth relatively little in the context of the overall indebtedness, approximately GBP600,000.
13. The significance of there being a reduction in the amount of the personal guarantees was that the bank would cease to have any security over the development site properties held in the name of the individuals for the previously guaranteed debt. As the proposal came to be developed, the guarantees were to be released in return for a payment of GBP500,000, such payment in turn being secured over the newly charged properties. The unintended effect of that release would be to free the development site properties in the names of the individuals from the bank's charge completely.
14. I am satisfied, having heard evidence from a number of witnesses from the bank, including, most pertinently, Mr Walford, the bank's counsel, that that was indeed a drafting error.
15. Moreover, Mr Hutchings, who was counsel for the company and the individuals, acknowledged that that was an error.
16. It was, however, an error which went unperceived at the time. Mr Walford explained to me that the underlying assumption was or must have been that the properties themselves stood charged as security for the company's indebtedness. This would have been relatively easy to achieve by appropriate drafting. However, they did not stand charged for the company's indebtedness. They stood charged only for the individuals' indebtedness.
17. Therefore, if the personal guarantees were to be released but the company's indebtedness was to remain, the bank would, by releasing the guarantees, also be losing part of its security.
18. That was certainly not the bank's actual intentions, and nor was it understood by Mr Hutchings to have been the bank's intention.
19. Mr Hutchings led the negotiations in respect of the final Tomlin order on behalf of the company and the individuals. Mr Kaushal told me in evidence that his understanding was that the case had been going so badly for the bank that it bottled out of the fight and therefore accepted much softer terms.
20. That, however, did not form part of the reasons for the Tomlin order as negotiated. I have grave doubts whether anyone could have thought that the bank were bottling it, but I also have grave doubts as to the extent to which Mr Kaushal actually understood the fine print of the deal that was being done.
21. He knew that the deal that was being proposed would involve a release of the personal guarantees. He did not, I consider, any more than anyone else, condescend to contemplating the significance of that upon the collateral securities held by the bank.
22. He may well have formed the impression that that was an offer which could potentially get him off the hook, but he certainly did not communicate that to the other side, and I have some doubts whether he communicated that to his own side.
23. I have not heard from anyone on the defendants' side, other than Mr Kaushal. The solicitor who was instrumental in instructing Mr Hutchings was not called. It seems to me that I must assume in those circumstances, or at least I am entitled to infer, that the solicitor would not support the evidence now being put forward by Mr Kaushal.
24. I do not accept that the basis of the deal was that the bank had bottled out of the fight and was seeking to get out at virtually any old price. Nor do I accept that Mr Kaushal perceived the deal in that way.
25. Nonetheless, the deal that was done was the deal that was done, and it was done upon the basis of an unperceived flaw, namely that any release of the guarantees would inevitably release the properties which were secured by the individuals separately to secure that guaranteed liability.
26. The Tomlin order when it came to be made before Mr Justice Roth on 25 May 2011 was explained in very broad outline -- though even then the details were not wholly finalised although the commercial deal had by then been done -- by Mr Walford to Mr Justice Roth.
27. One of the provisions of the schedule required an affidavit confirming that there were no parcels of land within the development sites which were subject to any adverse rights of which the individuals had express notice or which were not fully and effectively charged to Lloyds.
28. Mr Walford explained to Mr Roth that it was important that no ransom strips should subsequently emerge.
29. There already was in one part of the site what was said on the individuals' side to be a ransom strip, held in the name of a company (Cherry Tree Properties (Slough) Limited – "Cherry Tree") owned by their son. The bank were concerned that there should be no more such ransom strips.
30. As it happens, as Mr Trace QC has emphasised to me, if the individuals are right that the order was intended to have the effect upon payment of the sum of GBP500,000 of releasing not only the individuals from their personal guarantees, but the properties owned by them, which hitherto secured that obligation, then the deal as done has necessarily produced a whole series of ransom strips, which no one can, looking at the matter objectively, have thought was intended and which, looked at subjectively, the bank certainly did not intend.
31. I have heard a great deal of evidence from the bank's witnesses as to their subjective intentions, and it is clear that the bank was always concerned to have a clean route towards the sale of the properties secured to them, ie the whole of the development site, though not necessarily the ransom strip held by Cherry Tree.
32. The Tomlin order itself commenced in the non-Tomlin part by declaring that the deeds of appointment of the LPA receivers were valid and had at all times, from the date of the appointment, 19 January 2010, been effective as appointments of the receivers. That was the main point the bank was seeking to establish.
33. There was then judgment against the company for GBP29,771,732. There was no monetary judgment against the individuals. They were dealt with by the Tomlin part of the order.
34. The claims against them were stayed by paragraph 9 of the order on the terms set out in the schedule to that order. That is the Tomlin part.
35. The schedule provides:

"In full and final settlement of all claims against the second and third defendants in the lead action, the parties to the lead action agree as follows"

I pause to say that the second and third defendants in the lead action were the individuals, and the claimant in the lead action was the bank:

"1. The second and third defendants in the lead action ... shall pay to the claimant in the lead action ... 'the settlement sum' being:

"1.1. The sum of GBP100,000 by no later than 4.00 pm on 8 June 2011; and

"1.2. The sum of GBP400,000 by no later than 4.00 pm on 25 October 2011."

36. There was then provision made for the accrual of interest.
37. Paragraph 2 provided:

"As security for payment of the sums referred to in paragraph 1 of this schedule, Mr and Mrs Kaushal will:

"Either execute and deliver legal charges in the bank's standard form over the land within two specified titles ..."

which were then described

"... and will ensure that any occupiers of such properties have executed deeds of postponement of any occupation or other rights they may have."

38. That was described as option 1. I need not consider option 2 because option 1 in the event was the one which the parties proceeded with. The bank could elect between either. In default of election, they were taken to have elected for option 1.
39. Thus new security was being given, not as part of or as an addition to the existing security for the guaranteed debt, but for the payment of GBP500,000 to extract the individuals from their personal guarantees. As Mr Trace QC has pertinently pointed out, that is a very strange thing to do if, under the same deal, the individuals were to get all their properties within the development site back, free of the bank's charge, because then there would be no need for additional security. Though there were no formal valuations before me, Mr Kaushal himself considered that the eight titles in the name of himself and his wife were worth several million pounds.
40. Paragraph 3 of the Tomlin schedule provided:

"Mr and Mrs Kaushal will by 4.00 pm on Friday, 27 May 2011 provide a detailed affidavit:

"1. Of their means, including of any assets held for them beneficially by others, anywhere in the world, providing copy documents, evidencing all assets over GBP5,000 in value; and 2 ..."

41. There is then the declaration on oath as to other ransom strips which I have mentioned, and various other declarations and other information were required under the remaining subparagraphs of paragraph 3.
42. The provision I have read out, 3.1, is, Mr Trace QC says, significant because by the affidavit that was subsequently put in, in accordance with that condition, no mention was made of the land which is part of the development site which surely, he says, would have been mentioned had there been any intention or anticipation that the individuals were getting that land back.
43. The point is a fair one, but ultimately, in my judgment, more neutral than Mr Trace QC would have me accept.
44. The affidavit was due by 27 May 2011. On any footing, the land was then charged to the bank, and upon the basis that, as Mr Trace QC argued, any assets would include charged assets, even if charged to the hilt, it should have been in the affidavit come what may.
45. On the alternative footing, that only net assets were required, which is a possible construction, then on 27 May those assets were charged to the hilt to the bank because, as we shall see, unless and until the GBP500,000 was paid, there was to be no release.
46. Clause 4 of the Tomlin order is at the heart of this dispute. That reads:

"Upon payment of the settlement sum, the bank will release Mr and Mrs Kaushal from their personal guarantees ..."

which are then dated

"... and will, so long as Mr and Mrs Kaushal have, to the reasonable satisfaction of the bank, fully and properly complied with their obligations under clauses 2 and 3 above, release their personal guarantee dated 7 February 2006 ..."

that was for GBP4.4 million

"... by no later than 25 May 2012."

47. The retention until that date of that personal guarantee was plainly there to police the proper performance by the individuals of their other obligations, including disclosure obligations under the schedule, not all of which I have read out.
48. I should say also that clause 3.2, as I mentioned earlier, required the individuals to declare on oath that there were effectively no other ransom strips which were not fully and effectively charged to the bank. At the time when they made that affidavit, that did not require them to disclose the potential ransom strips arising out of the land to be be released as a consequence of the personal guarantees being released, because at that date those parcels of land were fully and effectively charged to Lloyds.
49. I need not read the rest of the terms of the Tomlin order.
50. Mr Trace QC seeks to rectify in the following way. He seeks to add a new clause 2(a) as follows:

"In addition to their obligations set out in paragraph 1 and 2 above, Mr and Mrs Kaushal have tendered and the bank has accepted in satisfaction of their liabilities as guarantors of Crowborough Properties Limited's indebtedness to the bank, the proceeds of sale when realised of the properties identified in the annex to this schedule, and the rental income and other profits from those properties, up to their sale and authorised the receivers to pay such proceeds of sale when realised, and such rental income and other profits in the meantime, to the bank in reduction of Crowborough Properties Limited's indebtedness."

51. Then there is to be added to clause 4 the following sentence:

"Such releases shall not affect the authorisation contained in clause 2(a) above, and the receivers shall remain in office following the releases on the same terms as prior to them."

52. What that amounts to, however worded, is that the bank, instead of having a charge over the individuals' properties to secure their indebtedness, which indirectly was the company's indebtedness, were to have a new charge over the same properties to secure the company's indebtedness, notwithstanding the discharge of the personal guarantees.
53. The bank did not already have a charge over those properties to secure the company's indebtedness. It did, however, assume in the drafting of the Tomlin order that there already was such a charge which would remain in place.
54. This assumption was shared by, in my judgment, Mr Hutchings, who was also party to the drafting, whatever the actual intentions of Mr Kaushal, or of Mrs Kaushal, who played no part in the negotiations at all, were. The objectively ascertainable intention must be that the parties intended the bank to retain such rights as it had.
55. But retaining such rights as it had would not be enough because the rights that it had were over the properties to secure the indebtedness of the individuals. As I have said, what they needed was a charge -- in truth a new charge -- to secure separately the indebtedness of the company over the individuals' properties.
56. As in fact the flaw in the drafting was not perceived, that is not an issue to which anyone ever turned their mind.
57. There was, however, a mistaken common assumption that the existing charges secured company indebtedness, not simply individual indebtedness. That, however, was an erroneous assumption. The question is whether that assumption and the mistake that was made is sufficient to justify rectification.
58. In the opening skeleton argument of the bank, in paragraph 20, the matter is summarised pithily and accurately thus:

"The error in the drafting of the order and schedule was that provision was not included to secure the continuation of the receiverships over the properties and the passing of rental income and proceeds of sale to Lloyds, notwithstanding the release of the personal guarantees."

59. That is accurate as far as it goes, but as I have indicated, the continuation of the receiverships predicated the grant of a further charge. What I have to consider is whether or not there ever was a sufficiently clear intention to grant that further charge which would be necessary for the receiverships to continue.
60. It is implicit in the proposed rectification of the schedule, in paragraph 2(a), that although not expressed as such, what is there being granted is effectively a new charge, because the proceeds of sale are to be paid and paid only in reduction of the company's indebtedness.
61. If oil should suddenly be struck beneath this land and the company was therefore able to raise sufficient money to redeem the charge without having to sell the land, it would be incontestable that the individuals would then be entitled to their property back.
62. That merely highlights that there is an implicit equity of redemption, which requires the creation, as things turn out, of a new charge.
63. The relevant legal principles were fairly put to me by Mr Trace as follows:

"Rectification is a remedy which enables the court to correct the incorrect drafting of a document where that document fails to reflect the true agreement or common continuing intention of the parties to it."

64. He then correctly points out that the true agreement or common continuing intention must be shown by objective evidence, not merely private subjective intentions of the parties, and quotes extensively from the judgment of Denning LJ in Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450 at 461 as follows:

"Rectification is concerned with contracts and documents, not with intentions. In order to get rectification, it is necessary to show that the parties were in complete agreement on the terms of their contract but by an error wrote them down wrongly, and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties, into their intentions, any more than you do in the formation of any other contract. You look at their outward acts, that is what they said or wrote to one another in coming to their agreement, and then compare it with the document which they have signed. If you can predicate with certainty what their contract was, and that it is by a common mistake wrongly expressed in the document, then you rectify the document, but nothing less will suffice."

65. Likewise, in Etablissements Georges et Paul Levy v Adderley Navigation Co Panama, SA (The Olympic Pride) [1980] 2 Lloyd's Rep 67 at 72, Mustill J said:

"The prior transaction may consist either of a concluded agreement or of a continuing common intention. In the latter event, the intention must have been objectively manifested. It is the words and acts of the parties demonstrating their intention, not the inward thoughts of the parties which matter."

66. That was approved by Lord Hoffmann in Chartbrook v Persimmon Homes [2009] 1 AC 1101, and has subsequently been applied by the Court of Appeal in Daventry District Council v Daventry & District Housing Limited [2011] EWCA Civ 1153, though that case is itself a timely reminder of how difficult it can be to apply the objective test in practice and to disentangle it from subjective intentions.
67. I was also referred to HHJ Hodge QC's book, "Rectification: The Modern Law and Practice Governing Claims for Rectification for Mistake" first edition (2010) at 390 and generally at 391ff. The following particular passage was relied upon by Mr Trace QC:

"Whilst the common intention of the parties must be proved, the precise form of words in which that intention is expressed is irrelevant if the substance and in detail the common intention can be ascertained. Provided the parties have turned their minds to a particular matter and were agreed upon it, it is no bar to an order for rectification that there was no specific agreement to the inclusion of the exact words by which the common intention is to be given effect."

68. The next principle that Mr Trace QC accepted was a requirement that the relevant common intention continued up to the point the relevant document was executed.
69. I am satisfied in this case that the mistake that was made continued. What is more difficult is whether there was a common continuing intention that the bank should get anything other than what finally ended up in the Tomlin order.
70. Agreements are commonly entered into upon mistaken and sometimes mistaken shared assumptions. A good example is the Rose v Pim case to which I have already referred. There both parties thought, as every law student now knows, that feveroles and horse beans were the same, but the Court of Appeal reversed the judge who had rectified the contract to make it clear that the reference to "horse beans" was intended to be a reference to "feveroles".
71. That was not, objectively assessed, the agreement which the parties had reached. They had reached a different agreement, albeit on the mistaken assumption that feveroles and horse beans were the same.
72. On the other side of the line is Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71. A number of freehold reversions were sold for next to nothing upon the assumption that there existed, or would exist, long leases in respect of each of those freehold reversions. In fact two of the freehold reversions were lease free.
73. Upon the basis of a finding of fact that the agreement that the parties reached, but which was wrongly recorded, was to sell 39 leasehold premises subject to long leases and not to sell any unencumbered freeholds, the court rectified the agreement by requiring the purchasers to grant long leases, thereby producing the result that the parties should have, but never actually, as a matter of drafting, turned their mind to.
74. In this case Mr Trace QC says that as it was always intended that the bank should have the ability to sell and to secure the continuation of the receiverships over the properties. The rest, he says, is mechanics, and I should rectify the agreement in the way he says.
75. This point has caused me great anxiety. As I have said, as I see this case, what must be shown is a common intention that the bank was to have a separate charge over the individuals' properties to secure the company's debt.
76. That was not something they had already, and it was not something which anyone ever asked for, because the assumption seems to have been that they did in fact have such a charge.
77. No one therefore gave a moment's thought to how the result was to be achieved. It was assumed that the result that the bank now contends for was achieved.
78. Whether or not that might have given rise to some claim for estoppel by convention I need not consider, because Mr Trace QC accepts that such a case is not open to him on the pleadings. It is not, however, in my judgment a mistake which can be characterised as giving rise to a common continuing intention that the bank should be granted a charge over the property which it did not have.
79. On the contrary, the intention at the time this deal was done was that the bank, upon the basis of the erroneous assumption that I have indicated, would release the individuals from their guarantees upon payment of GBP500,000.
80. The charges would of course remain in place unless and until that happened. But the inevitable result of the release of the guarantees, which has now been effected as of February of this year, has been to release the charges as from that date from the bank's control.
81. In my judgment, this case falls on the Rose v Pim side of the line and not on the Swainland Builders side. In Swainland the deal done but wrongly recorded was for the sale of a limited interest out of a freehold which the sellers already had. The common intention was to sell a limited interest out of that greater interest and no more. Here, by contrast, the bank only had a limited charge over the individuals' properties in the first place. There was a mistaken assumption that that charge was wide enough to survive the discharge of the guarantees, but no intention (because of that mistake) to grant a wider charge.
82. I have to say, I reach that conclusion with undisguised unease. It seems to me however that where parties mistake the effect of their contract upon the basis of a common assumption that turns out to be wrong, what they have not done is record their agreement incorrectly; they have made a bad deal. In those circumstances, it seems to me that the rectification claim falls to be dismissed.
83. I should also say that if I am right that what one must show is a common continuing intention to create a new charge, there was simply no objective manifestation of that intention on the evidence, or outward expression of accord, because that is something people just did not give a thought to, assuming instead that a sufficiently wide charge was already in place. Mr Trace QC accepted that an outward expression of accord remains a requirement of the right to rectification, as confirmed by Lord Hoffmann's approval in Chartbrook of the statements of principle expressed by Peter Gibson LJ in Swainland.