England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice 7 Rolls Building, Fetter Lane London, EC4A 1NL
		28/02/2014

The Hon. Mr Justice Popplewell:

Introduction

1. This is the Claimant's application for summary judgment on issues of the construction of an agreement by which the Claimant ("the Bank") made a loan of US$ 486,000 by payment into an account in the name of Dewey & LeBoeuf LLP, a US law firm of which the Defendant, Mr Landgraf, was at the time a partner ("the Firm"). The Bank claims that the loan was to Mr Landgraf to enable him to make his capital contribution to the Firm, and that Mr Landgraf is the borrower liable for repayment of the loan and interest. Mr Landgraf contends that he undertook no obligation to repay the loan; or alternatively that his obligation was that of a guarantor of the liability to the Bank of the Firm as primary obligor, and that such liability as a guarantor has been discharged by forbearance or agreement between the Bank and the Firm and/or due to non disclosure.
2. The contractual documents which fall to be construed comprise:

(1) A letter dated 10 May 2010 addressed by the Bank to Mr Landgraf and signed by him on 13 May 2010 (the "Loan Agreement");

(2) A letter of instruction signed by Mr Landgraf on 13 May 2010 addressed to the Firm ("the Instruction"); and

(3) A letter of undertaking addressed to the Bank signed on behalf of the Firm ("the Undertaking")

3. The issues of construction upon which summary judgement is sought arise from paragraphs 9 and 10 of the defence which are in the following terms:

"9. The Defendant avers that the Loan Agreement was in reality and/or should be treated as an agreement for a loan between the Firm and the Bank, in respect of which the Defendant has no liability. This is supported by the application form, the terms of the Loan Agreement and the Undertaking, as well as the manner in which the Loan was administered in practice, as pleaded elsewhere herein. The Defendant accordingly seeks a declaration to this effect, as pleaded below.

10. Further, or alternatively if, contrary to paragraph 9 above the Defendant had an obligation under the Loan Agreement, on a true construction, the express terms of the Loan Agreement and the Undertaking, read in the context of the BCLP and the surrounding circumstances, constituted the Firm as primary debtor and the Defendant as guarantor. If, contrary to the contention at paragraph 9 above, the Defendant is not entitled to such a declaration, paragraphs 11-31 below proceed on the basis that the Defendant is guarantor and not primary debtor."

4. These are not the only issues in the case. There is a further defence advanced, namely that the terms of the Loan Agreement were unfair under paragraph 140A(1)(a) of the Consumer Credit Act 1974. There is also a counterclaim alleging breach of a duty of care owed by the Bank to advise Mr Landgraf of various specific matters which affected the financial health of the Firm, and alleging implied misrepresentations that the contemplated borrowing was prudent. Irrespective of the construction issues for which summary judgment is sought, those further issues will fall to be determined, after disclosure, at a trial which has been fixed for 5 days commencing on 1 December 2014.
5. This led Mr Brisby QC on behalf of Mr Landgraf to submit that the present application should not have been made, and should not be heard, because it would provide no saving in time or costs, and the argument could as well be advanced and addressed at the trial. He relied upon the well known passage in the speech of Lord Templeman in Williams and Humbert Limited v W and H Trademarks (Jersey) Limited [1986] AC 368 at 435H-436A that:

"…if an application to strike out involves a prolonged and serious argument the judge should, as a general rule, decline to proceed with the argument unless he not only harbours doubts about the soundness of the pleading but, in addition, is satisfied that striking out will obviate the necessity for a trial or will substantially reduce the burden of preparing for trial or the burden of the trial itself";

and on that of Lord Mackay of Clashfern to similar effect:

"…..if on an application to strike out it appears that a prolonged and serious argument will be necessary there must at the least, be a serious risk that the court time, effort and expense devoted to it will be lost since the pleading in question may not be struck out and the whole matter will require to be considered anew at the trial. This consideration, as well as the context in which Ord. 18, r. 19 occurs and the authorities upon it, justifies a general rule that the judge should decline to proceed with the argument unless he not only considers it likely that he may reach the conclusion that the pleading should be struck out, but also is satisfied that striking out will obviate the necessity for a trial or will so substantially cut down or simplify the trial as to make the risk of proceeding with the hearing sufficiently worth while."

6. He also relied on the remarks of Lord Hope in Three Rivers District Council v Bank of England (No3) [2001] 2 All ER 513 at [107] that "…..if one part of the claim is to go to trial it would be unreasonable to divide the history up and strike out other parts of it".
7. In my view these dicta are not apposite to the circumstances of the present case. The argument is not prolonged or complex; it took only about two hours. The overriding objective requires the court to deal with cases as expeditiously and efficiently as possible. The Bank's submission on the substance of the application is that the issue of construction is a short point which can be determined on the face of the contractual documents and the court has all the evidence necessary to do so. If the Bank be right in that submission, the court should grasp the nettle and decide those issues now, even if it were the case that that would not result in any overall saving in timing and cost because the argument would be dealt with now instead of at the trial. Unless there were any positive disadvantage or prejudice, as for example in the expenditure of increased time and costs, which is not suggested on behalf of the Defendant, the Bank is entitled to have its position vindicated at the earliest reasonable opportunity if it be the case that this aspect of the defence is hopeless. It appears that if the summary judgment issue were resolved in the Bank's favour there may be some overall saving of time and expense in the proceedings: the allegation in paragraph 10 of the defence that Mr Landgraf's obligations are those of a guarantor, gives rise to a number of factual issues as to whether such obligations have been discharged by reference to the conduct of the Bank vis a vis the Firm, not all of which arise in relation to the Consumer Credit Act defence or the counterclaim. It is also relevant to take into account that if it be the case that the defences advanced in paragraph 9 and 10 are hopeless and bound to fail, it may promote settlement for the parties to know now that that is the position. There is a further consideration. There are outstanding claims against some 50 former partners of the Firm, amounting in total to a little over US$15 million, which arise on the same contractual documentation. Whilst it is accepted that a decision in this case will not give rise to an issue estoppel, and that if there are relevant factual circumstances relating to Mr Landgraf which differ from those which apply to other former partners a decision on construction in this case will not necessarily give definitive guidance, nevertheless a decision of this court at an early stage may help to inform and resolve those other disputes.
8. For all these reasons it is in my view appropriate to determine the summary judgment application which has been made, and accordingly I heard argument on it.

Factual Background

9. From 1987 to 2007, Mr Landgraf was a partner in the U.S. law firm LeBoeuf, Lamb, Greene & MacRae ("LeBoeuf"). He specialised in legislative and regulatory policy. He worked in the Washington DC office.
10. Mr Landgraf's evidence is that while he was a partner in LeBoeuf, he had made, and maintained, a capital contribution to the firm, in accordance with the firm's constitution, of around 33% of his annual target compensation. This capital contribution had been funded by withholding the relevant sums from the distributable income received by the partners of the firm.
11. Dewey Ballentine LLP ("Dewey") was another well-known U.S. law firm. Although it was well-regarded, by around 2007 Dewey was in dire financial straights according to an article in the New Yorker dated 14 October 2013. The Bank was (at least one of) Dewey's bankers and Mr Landgraf submits that it is legitimately to be inferred that the Bank knew of the firm's financial troubles.
12. On 1 October 2007, following negotiations between the chairman of LeBoeuf, Mr Davis, and the head of Dewey, Mr Pierce, LeBoeuf and Dewey merged to form the Firm. Mr Landgraf's evidence is that at the time of the merger his capital account position was in line with the Firm's constitution, and he was not required to make any further contribution to the Firm.
13. During the years 2008-2011, the Firm persistently failed to meet its target income and Mr Landgraf's income was reduced accordingly, as were other partners' incomes. Mr Landgraf's evidence is that his own capital account was at all times maintained at (or near) the requisite percentage of his target compensation; and that he was therefore not obliged to make any contribution to it, whether pursuant to the Firm's Partnership Agreement or otherwise.
14. The evidence put forward on behalf of Mr Landgraf raises a serious issue that by 2008, and continuing into 2010, the Firm was in serious financial difficulty and had significant levels of indebtedness to its bankers and other creditors, although this was not apparent to him at the time.
15. In May 2010, Mr Landgraf was approached by the Firm's management, consisting of Mr Davis, Mr DiCarmine, Mr Sanders and Mr Canellas and was told about the Barclays Capital Loan Program ("BCLP"). Mr Landgraf's evidence is that he was consistently and repeatedly told by the Firm's management that:

(1) the BCLP was a mechanism through which the Firm could finance the shortfall in its distributable income by the substitution of bank debt in the capital account; and

(2) the burden of repaying the capital and interest of any loans extended pursuant to the BCLP was that of the Firm (or at any rate, primarily the Firm), and not of its individual partners.

16. Mr Landgraf's evidence is that he relied on these assurances as reflecting the true position.
17. On or around 5 May 2010, Mr Landgraf was sent an application form for the BCLP by Mr Canellas. Mr Landgraf signed this form, as instructed, and returned it to Mr Canellas through the Firm's internal mail service. On or around 13 May 2010, Mr Landgraf received in Washington DC, through the firm's internal mail service, the contractual documents. Mr Landgraf signed the Loan Agreement and the Instruction. He returned them by internal mail to the Firm's head office in New York.

The Contractual Documents

18. The Loan agreement was addressed to Mr Landgraf at the New York head office address of the Firm. It provided as follows:

"Dear Mr Landgraf

We are pleased to advise you that Barclays Bank PLC (the "Bank") has agreed to provide a Loan (the "Loan" which expression, where the context so admits, means the outstanding amount thereof for the time being) of US$486.000.00 (Four hundred and eighty six thousand US dollars to Lester Charles Landgraf (the "Borrower") subject to the following terms and conditions.

The Schedules attached hereto form part of the terms and conditions of this letter.

1. Purpose

The Loan is to be used to assist the Borrower with a partnership capital subscription to Dewey & LeBoeuf LLP (the "Firm").

2. Offer Period

This offer will be available to the Borrower for acceptance for a period of two calendar months from the date of this letter, after which date the offer will lapse. Acceptance will be signified by completion of the formalities in clause 13.

3. Drawdown

3.1 Following completion of the matters detailed in clause 8 and the acceptance formalities detailed in clause 13, the Loan will be available for drawing in a single amount within three calendar months of the date of this letter (at which date the Bank's commitment to provide the Loan shall lapse).

3.2 The Borrower agrees that any amount drawn will be credited to an account in the name of the Firm.

….

5. Repayment

(a) Subject to Clause 5 (b) and Clause 5 (c), the Loan shall be repaid in full no later than the second anniversary of drawdown (the "Repayment Date").

(b) Shortly before the first anniversary of the acceptance of this offer and annually thereafter: (i) the Borrower shall be deemed to request that the Repayment Date be extended by a year, unless the Borrower notifies the Bank in writing otherwise, and (ii) the Bank shall, at its absolute discretion, either extend the Repayment Date by a year or notify the Borrower in writing of any decision not so to extend.

(c) In the event of: (a) the Borrower ceasing to practice as a partner with the Firm including by reason of the death of the Borrower: and (b) the provisions of Article X of the Firm's Partnership Agreement preventing immediate repayment of the Borrower's partnership capital, the Loan shall become due and payable at the times and in such amounts as the Borrowers capital account is repaid in accordance with the Firm's Partnership Agreement (as in effect at date of this Agreement) and in any event no later than the date falling 120 months after the date upon which the Borrower ceases to practice as a partner with the Firm.

…..

7. Agency

By its acceptance of this letter, the Borrower appoints as its agent, and grants power of attorney to, Frank Canellas from time to time of the Firm (the "Agent") to sign all documents and do all acts on the Borrower's behalf in connection with drawing the Loan, paying interest on the Loan and repaying the Loan.

8. Collateral

The Loan will be collateralised by the Borrower executing the letter of instruction that forms Schedule A, (the "Instruction Letter") and the Firm executing the undertaking that forms Schedule B, (the 'Undertaking")

9. Undertakings

The Borrower undertakes that whilst any part of the Loan is outstanding:

a. The Borrower will inform the Bank, promptly on becoming aware of it, of (i) any breach by the Borrower in the performance of any terms or conditions of this agreement or (ii) the occurrence of any of the circumstances referred to in clause 101.

…..

10. Events of Default

10.1 In the event of:

a. The failure by the Borrower, or the Agent, to make any repayment of principal, or payment of interest or other monies, in respect of the Loan on its due date unless the Borrower demonstrates that the failure to pay is solely due to a technical or administrative failure and the relevant amount is duly paid within 3 business days after the due date; or

b. a breach in the performance of any other term or condition of the Loan; or

c. the presentation of a bankruptcy petition against, or the application for an order in respect of, or the insolvency, or the mental disorder, of the Borrower and in any such event such process is not discharged, stayed, withdrawn or vacated before the 30th day after receipt by the Borrower of such process; or

d. the Borrower entering into a composition with the Borrower's creditors: or

e. a distress, execution or other legal process being levied against any of the assets of the Borrower, either jointly or alone and in any such event such process is not discharged, stayed, withdrawn or vacated before the 30th day after receipt by the Borrower of such process; or

f. any indebtedness in excess of US$25,000 of the Borrower becoming immediately due and payable, or capable of being declared so due and payable, prior to its stated maturity, by reason of default on the part of any person; or

g. the Borrower failing to discharge any indebtedness in excess of US$25,000 on its due date; or

h. the balance standing to the credit of the Borrower's capital account with the Firm reducing to a sum below the amount of the Loan; or

i. the statement made in paragraph (ix) of the Undertaking being untrue in any respect; or

j in the event of any indebtedness of the Firm in excess of US$250,000 becoming immediately due and payable, or capable of being declared so due and payable, prior to its stated maturity, by reason of default on the part of any person

then the Bank may, at any time while any such event continues unremedied or unwaived, serve written notice on the Borrower declaring that the Bank's commitment to advance the Loan or any balance thereof shall cease and/or demand repayment of the whole amount of the outstanding Loan and all accrued interest and other amounts owing hereunder will become repayable forthwith on demand in writing made by the Bank at any time and/or place the Loan on demand.

……

10.4 The Borrower shall indemnify the Bank on demand against any loss, liability, cost or expense that the Bank may reasonably sustain or incur as a consequence of making such demand or as a consequence of non-performance by the Borrower of any obligation under this letter."

19. The Loan agreement also provided that it was governed by English law and had an entire agreement clause.
20. The Instruction Letter provided :

"To: Dewey & LeBoeuf LLP (the "Firm")

FAO: Frank Canellas

Dear Sirs,

I confirm that have applied to Barclays Bank PLC (the "Bank") to borrow for the purpose of injecting capital into the Firm and that I may in future make further such applications.

In order for the Bank to authorise such borrowings the Bank requires that the Firm issue a Letter of Undertaking under which, inter alia, the Firm will undertake to pay any funds withdrawn at anytime (and from time to time) on or after the date hereof from my partnership capital account with the Firm (the "Capital Account") directly to the Bank for application in or towards repayment of such borrowings to the extent necessary to repay such borrowings and to ensure that the outstanding balance of such borrowings shall not at any time exceed the balance of the Capital Account.

I hereby request the Firm to issue the Letter of Undertaking in such form as may be required by the Bank and agreed by the Firm, and I confirm that I instruct the Firm irrevocably (unless the Bank should consent in writing to the cancellation of such instruction) to apply any funds withdrawn from time to time from the Capital Account in payment directly to the Bank to the extent required by the terms of such Letter of Undertaking.

I submit to the jurisdiction of the courts of England. This Letter shall be governed by the laws of England"

21. The Undertaking was signed by a partner on behalf of the Firm and addressed to the Bank. It provided as follows:

"We confirm that on receipt of any amount provided by Barclays Bank PLC (the "Bank") to the Partner by means of a partnership capital subscription (each a "Loan") pursuant to a partnership capital subscription loan facility letter from the Bank to the Partner (the "Facility Letter"), such amount will be placed to the credit of the Partner's partnership capital account (the "Capital Account") in the Firm's books.

…..

In connection with each Loan:

i. we confirm that under the partnership agreement between all the partners in the firm (the "Partnership Agreement"), the sums standing to the credit of the Partner's Capital Account with the Firm shall be repayable within 3 years (subject to Article X of the Partnership Agreement) following the Partner ceasing to be a partner in the Firm, whether by reason of death, retirement or otherwise;

ii. provided that the Instruction Letter remains in force, we irrevocably undertake that upon the earliest of: (a) the Partner ceasing to be a Partner in the firm, (b) the occurrence of any event of default under the Facility Letter, and (c) the making or docketing of judgment in England or New York against the Partner in respect of amounts due under the Facility Letter, we will apply the balance of the Partner's Capital Account in satisfying (so far as is possible) any indebtedness remaining outstanding under the Loan with the Bank, before paying any residue to the Partner or to the Partner's legal personal representatives; ……"

Subsequent events

22. Pursuant to the Loan Agreement the Bank transferred US$ 486,000 to the account in the name of the Firm.
23. Mr Landgraf's evidence is that he played no part in administration of the loan and had no subsequent contact with the Bank in relation thereto, just as he had had no direct contact with the Bank during the process of execution of the contractual documents or prior to it. He personally made no payments of capital or interest. The Bank's evidence is that under the BCLP, the interest payments were serviced by the Firm and were expected to be deducted from partners' income. Mr Landgraf's evidence is that he does not recall interest payments ever having been deducted in his case. It is common ground that following the execution of the contractual documents all statements of account and other documents involving the loan were sent to the Firm and not to Mr Landgraf. The Bank says that it reasonably believed that the Firm passed these documents on to Mr Landgraf, although Mr Landgraf's evidence is that this did not happen.
24. On 28 May 2011 the Firm filed for Chapter 11 bankruptcy relief. That resulted in Events of Default under the Loan Agreement, including the non-payment of interest due for the period 15 March to 14 June 2012 (para 10.1(a) of the Loan Agreement) and indebtedness of the Firm in excess of US$ 250,000 becoming immediately due and payable by reason of default (para 10.1(j) of the Loan Agreement).
25. On 18 December 2012 the Bank made demand on Mr Landgraf pursuant to paragraph 10.1 of the Loan Agreement. No payment was made and the Bank commenced these proceedings on 18 January 2013.

The Law

26. The principles to be applied on applications for summary judgment are well established. In respect of defendant's applications, they were summarised by Lewison J, as he then was, in Easyair Ltd v Opal Telecom Limited [2009] EWHC 339 (Ch), in a formulation approved in a number of subsequent cases at appellate level, including AC Ward & Sons v Catlin (Five) Limited [2009] EWCA Civ 1098 and Mellor v Partridge [2013] EWCA Civ 477. In FG Wilson Engineering Limited v Holt [2012] EWHC 2477 (Comm), I adapted them for claimants' applications. The principles are:

(1) The court must consider whether the defendant has a "realistic" as opposed to a "fanciful" prospect of success: Swain v Hillman [2001] 2 All ER 91;

(2) A "realistic" defence is one that carries some degree of conviction. This means a defence that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8];

(3) In reaching its conclusion the court must not conduct a "mini-trial": Swain v Hillman;

(4) This does not mean that the court must take at face value and without analysis everything that a defendant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10];

(5) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550;

(6) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63;

(7) On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it. The reason is quite simple: if the respondent's case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant's case is bad in law, the sooner that is determined, the better. If it is possible to show by evidence that although material in the form of documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful, prospect of success. However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725.

27. The principles applicable to the exercise of construction of contractual documents are also well established by decisions at the highest level including Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896, Chartbrook v Persimmon Homes Limited [2009] 1 AC 1101 and Rainy Sky v Kookman Bank [2011] 1 WLR 2900. In particular the court must consider the language used and ascertain what a reasonable person having all the background knowledge which was reasonably available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. The content of such background knowledge is what is commonly referred to as the factual matrix. It is not necessary to find some ambiguity in the language before having regard to the factual matrix and a consideration of the factual matrix may indicate that the meaning which the parties would reasonably be taken to have intended could be given effect despite the fact that it was not, according to conventional usage, an "available" meaning of the words or syntax which they had actually used: per Lord Hoffman in Chartbrook at [37].
28. In Investing Bank Channel Islands Limited v The Retail Group PLC [2009] EWHC 476 (Ch) Sales J remarked that:

"in interpreting a contract, regard may be had to the content of the parties' negotiations to establish 'the genesis and object' of a provision. This seems to me to be a relevant part of the factual matrix, since if the parties in the course of their negotiations are agreed on a general objective which is to be achieved by inclusion of a provision in their contract, that objective would naturally inform the way in which a reasonable person in the position of the parties would approach the task of interpreting the provision in question."

Discussion

29. On behalf of the Bank, Mr Philipps QC submitted that the language used in the contractual documents could not be clearer. Mr Landgraf undertook the obligation to repay the loan as the primary obligor, and any payment by the Firm to the Bank by way of repayment was simply as collateral for the primary obligation of Mr Landgraf. It was a secondary security entitlement, effected by what was in law an assignment by Mr Landgraf to the Bank of the debt owed by the Firm to Mr Landgraf represented by his credit balance on his partner's capital account. Mr Philipps QC supported this analysis by reliance in particular on the following language in the Loan Agreement:

(1) The Loan Agreement is addressed to Mr Landgraf personally and is signed by him in a personal capacity.

(2) The opening paragraph defines Mr Landgraf as the Borrower and provides that the loan is to be provided to him.

(3) Clause 1 identifies that the purpose of the loan as being to enable Mr Landgraf then to pay the money to the Firm by way of a partnership capital subscription by him.

(4) Clause 2 identifies that acceptance of the letter is to be signified by completion of the formalities in clause 13 which dictate, amongst other things, that Mr Landgraf's signing of the copy of the letter will amount to an acceptance by Mr Landgraf of the loan.

(5) Clause 7 provides that Mr Canellas is to act on Mr Landgraf's behalf in relation to repaying the loan.

(6) Paragraph 8 refers to the Undertaking given by the Firm as collateral, that is to say a secondary and security obligation.

(7) Clause 9(a) imposes an obligation on Mr Landgraf to inform the Bank on becoming aware of any breach by him in the performance of any terms or conditions of the agreement.

(8) Clause 10.1(a) makes it an Event of Default for Mr Landgraf to fail to make any repayment of principal or interest.

(9) Clause 10.1 provides that when there is an Event of Default, the Bank may demand repayment of the whole amount of the outstanding loan by serving a written notice on Mr Landgraf.

(10) Clause 10.4 imposes on Mr Landgraf an obligation to indemnify the Bank against the consequences of making such a demand or as a consequence of non-performance by Mr Landgraf of any of the obligations under the Loan Agreement.

30. Mr Philipps QC points to supporting language in the other two contractual documents. In the Instruction Letter Mr Landgraf confirms that it is he who has applied to the Bank to borrow and that it is for the purpose of his injecting capital into the Firm. The Undertaking, which although not signed by Mr Landgraf forms part of the contractual documents with which he was provided and against which the Loan Agreement falls to be construed, confirms in its opening paragraph that the amount drawn down under the loan will be provided to the Partner, i.e. Mr Landgraf and that it will be by means of a partnership capital subscription. Paragraph (ii) identifies that the partners' capital loan account balance is to be used to discharge any indebtedness under the loan.
31. These points are very powerful as a matter of textual and syntactical analysis of the documents. As a matter of first impression the meaning of the words seems clearly to favour the Bank's construction.
32. However, this impression is informed by taking as the starting point the premise that the purpose of the loan was that for which the BCLP documentation was designed, namely to enable partners to fulfil their obligations under the Partnership Deed to inject capital into the firm. That is the purpose pleaded in the Particulars of Claim at paragraphs 3, 5 and 9, and averred in Mr Clayton's witness statement on behalf of the Bank at paragraphs 8, 10 and 12. That is the purpose stated in clause 1 of the Loan Agreement and again in the Instruction Letter and Undertaking. However, in Mr Landgraf's case, that premise is in dispute. Mr Landgraf has explained that he did not require a loan in order to meet any obligation to subscribe capital to the Firm, because his capital contribution to the Firm was fully subscribed in accordance with the Firm's Partnership Agreement. The Bank has asserted that its knowledge of the purpose of the loan was limited to the terms of the Loan Agreement itself. It has also suggested that it thought that the loan was required by Mr Landgraf to finance an increased contribution occasioned by an increase in his remuneration. However, it is not fanciful to think that, with the benefit of disclosure, the position at trial may well be that Mr Landgraf can show that all concerned, including the Bank, knew that the true purpose of the loan was to provide the Firm with the liquidity which it required to meet its day-to-day liabilities, not to enable him to make a capital contribution to the Firm under the provisions of the Partnership Agreement. The evidence adduced on behalf of Mr Landgraf of the closeness of the relationship between the Bank and the Firm, and the Bank's actual or probable knowledge of the Firm's financial position, raises a real issue as to whether the Bank knew that the true purpose of this particular loan was not for a capital contribution required to be made by Mr Landgraf, but simply to finance the Firm's general indebtedness, including indebtedness to the Bank. It is a possible inference that the BCLP was being used in order to enable the Firm to obtain further capital in circumstances where such funding could not be given by the Bank directly to the Firm under the lending criteria of the Bank.
33. If this were established at trial, it would put the contractual documents in a completely different light. The loan would be one which the Bank knew was not intended to have as its purpose any benefit to Mr Landgraf (save indirectly as one of the partners of the Firm having an interest in its financial wellbeing). It would involve the Bank using documents drafted in a standard form for one purpose being used on this specific occasion for a significantly differently purpose. It would directly undermine the professed purpose of the loan, expressed in the Particulars of Claim and expressed in the Loan Agreement itself. It might justify the characterisation by Mr Brisby QC that the documents were a device, dressing up or sham in the sense used by the House of Lords in A.G. Securities v Vaughan & others [1990] 1 AC 417.
34. Also relevant is Mr Landgraf's evidence that he was consistently and repeatedly told by the Firm's management that the BCLP was merely a mechanism through which the Firm could finance the shortfall in its distributable income and that the burden of repaying the capital and interest of any loans would be that of the Firm or at any rate primarily that of the Firm and not of its individual partners. In its Reply, the Bank does not admit that any such representations were made by the Firm's management, but denies that any such representations were made with the actual or ostensible authority of the Bank. Mr Brisby QC contended that this gave rise to an issue of agency as to whether such representations if made were made with the Bank's actual or apparent authority. He submitted, and I accept, that the evidence of the circumstances in which the loan was requested, including the closeness of the relationship between the Firm and the Bank, and the lack of any direct involvement between Mr Landgraf and the Bank (or inquiry by the Bank into Mr Landgraf's creditworthiness) gives rise to a triable issue that Bank delegated to the Firm, and in particular to Mr Canellas and the other members of the Firm's senior management, the job of negotiating Mr Landgraf's agreement to the arrangements on behalf of the Bank, and procuring the execution of the contractual documents on behalf of the Bank; and that this made them the agents of the Bank for that limited purpose. That would arguably be sufficient to bring the Firm's knowledge of the true purpose of the Agreement within the relevant factual matrix, even if that was not something of which the Bank was aware. In the face of an objection that no such actual or apparent authority had been pleaded, Mr Brisby QC produced a revised draft pleading in the course of the hearing which made such an allegation. If such agency were established, the representations by the members of the Firm might also support an estoppel by which the Bank was bound.
35. Moreover, the evidence is such that it is at least arguable that the Bank knew enough about the Capital Accounts of the various partners of Dewey and of the financial circumstances of Dewey and the Firm, that it knew at the date of the Loan Agreement that the Firm was already indebted to the Bank in a sum of well over US$ 250,000, resulting in an immediate event of default being triggered under Clause 10.1(j) of the Loan Agreement in a way that was either immediately due and payable or capable of being declared due and payable by reason of the Firm's default. Although this could not amount to factual matrix, because it was not known to Mr Landgraf at the time of the transaction, it is evidence that the Bank did not intend to enforce Clause 10.1(j) of the Loan Agreement or (ii) of the Undertaking in accordance with their terms, and accordingly is capable of supporting the submission that the terms of the contractual documents were to some extent a sham.
36. Extrinsic evidence is admissible to prove the true nature of the agreement or the legal relationship of the parties, even though this may vary or add to the written instrument: see Chitty on Contracts at para 12-113. It is open to a court to conclude that the terms of the document do not represent the true intention of the parties, and to ignore particular terms if the parties can be shown not to have intended them to take effect in accordance with their terms (see Mutual Loan Fund Association v Sudlow (1858) 5 C.B. (N.S.) 450 and A.G. Securities v Vaughan. Accordingly if it were established at trial that true purpose of the contractual documents intended by both parties was to lend money to the Firm for its general benefit, not to enable Mr Landgraf to fulfil capital subscription requirements, it would be open to the court to construe the documents to give effect to this intention and if necessary ignore language which seemed incompatible.
37. Mr Philipps QC submitted that Mr Brisby QC had failed to articulate how the language of the contractual documentation could conceivably be construed or manipulated to bear the meaning contended for in paragraphs 9 or 10 of the Defence. This was not a wholly fair criticism. Paragraphs 7 and 8 of the Defence identified features of the contractual documentation which were said to support the interpretation relied upon by Mr Landgraf, and Mr Brisby QC's submissions involved the proposition that, insofar as the apparent sense of the language did not reflect what the parties truly intended to achieve, as apparent from the admissible factual matrix evidence, it could be ignored. In the course of oral submission, he placed particular reliance on Clause 7 of the Loan Agreement which provided that Mr Canellas of the Firm was to do all acts in connection with repaying the Loan.
38. In the course of his oral reply submissions, Mr Philipps QC also submitted that it would not be open to Mr Landgraf to rely on evidence that the true purpose of the Agreement was other than for him to provide a capital subscription to the partnership because such purpose was recited in Clause 1 of the Loan Agreement and the Agreement was signed as a Deed, giving rise to an estoppel by deed. This point was not developed, and is not suitable for summary determination on this application. If the recital was not intended by either party to reflect the true nature of the transaction, questions of rectification might arise.
39. I should record that Mr Brisby QC also argued that the fact that after the execution of the contractual documents the loan was administered without any involvement on the part of Mr Landgraf lent further support to his construction. Whilst subsequent conduct is not normally admissible as an aid to construction, in A.G. Securities v Vaughan & others both Lord Oliver at 469C and Lord Jauncey at 476G made clear that subsequent events may be looked at as a guide to whether the express terms of the agreement in truth represented the true intention of the parties. But in this case the conduct of the parties in the way the loan was administered is a neutral consideration. It is equally consistent with each side's case as to the true nature of the transaction.

Conclusion

40. In this case it is not fanciful to suppose that with the benefit of disclosure and cross-examination at trial, the impression which arises on first reading of the contractual documents would appear in a very different light, and that the Defendant might establish that his obligations are those identified in paragraph 9, alternatively paragraph 10 of the Defence when seen against the background of the particular circumstances in which the contractual documents were signed and the factual matrix as to the true purpose of the transaction. Accordingly, the application will be dismissed.