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Cite as: [2007] CSOH 208, 2008 GWD 9-168, [2007] ScotCS CSOH_208, 2008 Hous LR 2, 2008 House LR 2

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OUTER HOUSE, COURT OF SESSION

[2007] CSOH 208

CA33/07

OPINION OF LORD REED

in the cause

CREDENTIAL BATH STREET LIMITED

Pursuers;

against

VENTURE INVESTMENT PLACEMENT LTD

Defenders:

________________

Pursuers: Sellar, Q.C., Clark, Q.C.; Harper Macleod

Defenders: Reid, Q.C., J Brown; McClure Naismith

31 December 2007

Introduction

[1] These proceedings are concerned with a guarantee of the tenant's obligations under a commercial lease. The pursuers were at the material time the landlord of the let premises, and the defenders were the guarantor. Put briefly, the pursuers maintain that the defenders are liable under the guarantee to pay the cost of repairs which should have been carried out by the tenant. The defenders deny liability on the basis that the guarantee had expired before any demand was made upon them in accordance with the guarantee. The pursuers in addition seek damages in respect of an alleged breach of an implied term of the guarantee. The guarantee contained a "step in" obligation, under which the guarantor was obliged to accept a new lease, on the same terms as the existing lease, in the event that the tenant was wound up during the period of the guarantee. The pursuers attempted to have the tenant wound up, but did not succeed until after the guarantee had expired. They maintain that the defenders delayed the winding up proceedings, in breach of an implied term.

[2] The question whether the defenders are in breach of any obligation owed to the pursuers depends fundamentally on issues concerning the construction of the guarantee and certain other documents. It is agreed that those issues can be resolved on the basis of the relevant documents and the parties' submissions.

The factual background

[3 ] On 14 June 2001 Credential Charing Cross Ltd ("Charing Cross") as landlord, and Pertemps Callpoint Ltd as tenant, entered into a lease of an office building in Glasgow. The lease was for a period of 25 years, commencing on 15 June 2001, at a rent of £328,320 per annum. It imposed upon the tenant a number of repairing obligations, which are detailed below. Pertemps Callpoint Ltd subsequently assigned the tenant's interest in the lease to their wholly-owned subsidiary Callpoint Europe Ltd ("Callpoint Europe"), in terms of an assignation dated 1 and 4 October 2002. The assignation was expressed as taking effect from the commencement of the lease.

[4 ] Simultaneously with the assignation, Callpoint Europe entered into an agreement (referred to in later documents as "the amortised payment agreements") with Charing Cross, under which they agreed to pay Charing Cross £103,680 per annum over the period of the lease, in reimbursement of the cost of works which Charing Cross had carried out on the premises at their request. The rent under the lease, plus the payments under the amortised payment agreements, totalled £432,000 per annum, payable in quarterly instalments in February, May, August and November. Service charges of about £100,000 per annum were payable in addition.

[5 ] In 2003 the defenders (then named Pertemps Group Ltd) granted a guarantee to Charing Cross relating to the performance by Callpoint Europe of their obligations under the lease and the amortised payment agreements. The defenders were at that time the parent company of Callpoint Ltd (formerly named Pertemps Callpoint Ltd), which (as explained above) was in turn the parent company of Callpoint Europe. All three companies were under common control.

[6 ] The guarantee, dated 14 February and 2 May 2003, contained in clause 3 provisions imposing obligations upon the defenders as guarantor. Those provisions were prefaced by the words:

"In respect of the period from 1 January 2003 to 31 December 2004".

Clause 3.1 applied where the tenant had failed to perform its obligations under the lease or the amortised payment agreements, and required the defenders to perform the obligation in question "on demand". Clause 3.3 applied where certain events occurred, including the winding up of the tenant: if such an event occurred, the landlord was entitled to put an end to the lease and to require the defenders to accept a lease of the premises, on similar terms, for the unexpired period of the original lease, together with an agreement on similar terms to the amortised payment agreements. Clause 3.4 stated:

"The Guarantor shall be deemed to be released from its obligations under these presents on 1 January 2005 save in respect of any antecedent breach of the Guarantee occurring prior to 1 January 2005".

The relevant provisions of the guarantee are set out fully below.

[7 ] Later in 2003 Charing Cross assigned its rights under the lease, the amortised payment agreements and the guarantee to the pursuers, in terms of an assignation dated 7 October 2003. The assignation was expressed as taking effect from 30 September 2003.

[8 ] During 2004 a schedule of dilapidations was prepared on behalf of the pursuers. On 29 March 2004 copies were sent, with a covering letter, to Callpoint Europe, Callpoint Ltd and the defenders. The schedule was subsequently revised. On 30 April 2004 copies of the revised schedule were sent, with a covering letter in identical terms to the letter of 29 March, to Callpoint Europe, Callpoint Ltd and the defenders. No repairs were carried out. In July 2004 the pursuers presented an application for the winding up of Callpoint Europe. The application was opposed by that company. Following procedure which is described below, the application was eventually granted on 7 April 2005. The present proceedings were commenced in 2007.

[9 ] Against that background, the issues which the parties have agreed can be resolved by debate can be summarised as follows:

1. Whether the reference in clause 3.4 of the guarantee to "any antecedent breach of the Guarantee" should be construed as meaning "any antecedent breach by the Tenant for which the Guarantor is liable in terms of the Guarantee", or (expressing the same idea in fewer words) "any antecedent breach of the Lease or of the Amortised Payment Agreements". If so, it is accepted that the pursuers' claim that the tenant was, prior to 1 January 2005, in breach of its repairing obligation under the lease is relevant for inquiry into the facts. If not, it is accepted that the pursuers' claim under the guarantee in respect of the cost of repairs must fail, unless they can demonstrate that a breach of the guarantee occurred prior to 1 January 2005.

2. If the first issue is decided against the pursuers, the issue which then arises is whether the pursuers' averments that a breach of the guarantee occurred prior to 1 January 2005 are relevant for inquiry. That issue turns on the question whether the sending of the schedule of dilapidations to the defenders during 2004 amounted to a "demand" within the meaning of clause 3.1 of the guarantee. If so, it is accepted that the defenders did not comply with the demand. If not, it is accepted that the pursuers' claim under the guarantee in respect of the cost of repairs must fail.

3. Whether it was an implied term of the guarantee that the defenders would not cause Callpoint Europe to oppose any petition for their winding up when they knew or ought reasonably to have known that the opposition was unjustified either in law or in fact. If so, it appears to be accepted that the pursuers' averments that the defenders acted in breach of that implied term are relevant for inquiry. If not, it is accepted that the pursuers' claim for damages must fail.

[10 ] Before considering the arguments in relation to each issue, it is convenient at this point to set out more fully the material terms of the lease and the guarantee.

The lease

[11 ] Under clause 3 of the lease the tenant undertook a number of obligations "throughout the period of this lease". They included a general repairing obligation:

"To repair, maintain and renew:

3.7 At all times throughout the Period of this Lease at the Tenant's expense well and substantially to repair and maintain and when necessary where beyond repair and maintenance, renew, rebuild, and reinstate and generally in all respects keep in good and substantial condition the Premises .....".

There were in addition more specific obligations relating to the repair of plant, equipment and services (clauses 3.5.1 and 3.5.2) and to decoration (clauses 3.8 and 3.9). These were followed by obligations relating to the enforcement of the repairing obligations:

"To permit entry by the Landlord and others:

3.12 To permit the Landlord and its agents at all reasonable times with or without workmen on giving reasonable notice (except in emergency) to the Tenant to enter upon the Premises generally to inspect and examine the same to view the state of repair and condition thereof and to take a schedule of the Landlord's fixtures and of any wants of compliance by the Tenant with its obligations hereunder and to exercise the rights reserved to or conferred upon the Landlord by These Presents .....

To comply with notices to repair:

3.13 Well and substantially to make good all wants of compliance by the Tenant with its obligations hereunder of which notice in writing is given to the Tenant by the Landlord and that within such period which shall be specified in the notice being reasonable but shall not be less than two calendar months after the giving or leaving of such notice (or sooner if requisite in the case of emergency). If the Tenant fails to comply with any such notice it shall be lawful (but not obligatory) for the Landlord (without prejudice to the rights of irritancy hereinafter contained) to enter upon the Premises to make good the same at the cost of the Tenant which cost shall be repaid by the Tenant to the Landlord on demand together with all Solicitors' and Surveyor's charges and other expenses which may be incurred by the Landlord in connection therewith together with interest thereon at the Prescribed Rate in each case from the date of payment by the Landlord".

[12 ] Under clause 5.1, the landlord was entitled to irritate the lease in specified circumstances, including the tenant's falling into arrears with the rent, breaching any other obligation under the lease, becoming apparently insolvent or going into liquidation. Before exercising the right to irritate on the ground of non-payment of rent or other breach of the lease, the landlord was required to allow the tenant a reasonable period to remedy the breach, the period in respect of arrears of rent being 14 days. Before irritating the lease on the ground of the tenant's going into liquidation, the landlord was required to allow the liquidator a period in which to dispose of the lease, provided the liquidator undertook responsibility for the payment of rent and other sums due, and for the performance of the tenant's other obligations, during the period prior to such disposal.

The guarantee

[13 ] The material terms of the guarantee are as follows:

"2. GUARANTEE

2.1 The Landlord has leased the Property to the Tenant by virtue of the Lease and the Amortised Payment Agreements

2.2 The Guarantor has agreed to guarantee the due, punctual and full performance by the Tenant of the whole obligations of the Tenant under the Lease and the Amortised Payment Agreements on the terms and conditions as hereinafter provided

3. TENANT'S AND GUARANTOR'S OBLIGATIONS

In respect of the period from 1 January 2003 to 31 December 2004:

3.1 Whereas the Tenant is obliged at all times during the period of the Lease and the Amortised Payment Agreements to pay the rent and all other sums provided for in the Lease and the Amortised Payment Agreements on the days and in the manner specified and to observe, perform and implement the obligations and conditions contained in the Lease and the Amortised Payment Agreements and on the part of the Tenant to be observed, performed and implemented then if the Tenant shall make any default in the payment of the said rent or any other sum in the manner aforesaid or default in observing and performing the said obligations and conditions or any of them then and in any such case the Guarantor will pay, perform and implement or in any other case make good to the Landlord, on demand, on a full indemnity basis anything whatsoever which ought to be paid or observed or implemented or performed as aforesaid including without prejudice to the generality of the foregoing all interest, charges, losses, damages, costs and expenses due to or sustained by the Landlord through the default of the Tenant in respect of the beforementioned matters.

......

3.3 If the Tenant should go into liquidation or receivership or have an administrator or an administrative receiver appointed and the liquidator or receiver or administrator or administrative receiver as the case may be shall disclaim the Lease or the Amortised Payment Agreements or refuse or fail to perform the obligations of the Tenant thereunder or if the Tenant shall be wound up or cease to exist (or if the Tenant for the time being shall be an individual and shall become bankrupt and the trustee in bankruptcy shall disclaim the Lease or the Amortised Payment Agreements or refuse or fail to perform the obligations of the Tenant thereunder) or if the Landlord irritates the Lease or terminates the Amortised Payment Agreements and if the Landlord shall within three months after such disclaimer, irritancy or other event putting an end to the effect of the Lease or the Amortised Payment Agreements as aforesaid so far as concerns the Tenant by notice in writing require the Guarantor to accept a lease of the leased premises for a period commensurate with the remainder of the term of the Lease and the Amortised Payment Agreements which if there had been no disclaimer or if the Lease and the Amortised Payment Agreements had continued to have effect as aforesaid would have remained of the period thereof then unexpired at the same rent but subject to the review of rent on the same date or dates as provided for in the Lease and the Amortised Payment Agreements and subject to the same obligations and conditions as are provided for and contained in the Lease and the Amortised Payment Agreements including without prejudice to the generality of the foregoing provisions for review of rent to be carried out on the same day or dates as they would be due on in terms of the Lease, the said new lease and the Amortised Payment Agreements and the rights and liabilities thereunder to take effect as from the date of the said disclaimer or of the Lease or the Amortised Payment Agreements ceasing to have effect as aforesaid, then and in such case the Guarantor shall accept such new lease accordingly .....declaring that the acceptance by the Guarantor of a new lease shall under no circumstances be deemed, implied or construed to be a waiver of the rights of the Landlord to enforce its rights against the Guarantor in respect of any liability encumbent on the Guarantor in respect of any matter arising during the period prior to the date of entry under the new lease.

3.4 The Guarantor shall be deemed to be released from its obligations under these presents on 1 January 2005 save in respect of any antecedent breach of the Guarantee occurring prior to 1 January 2005".

The first issue: the construction of clause 3.4

[14 ] The first issue raises a question as to the permissible limits of the construction of contracts. Clause 3.4 provides that the guarantor is released from its obligations under the guarantee on 1 January 2005 "save in respect of any antecedent breach of the Guarantee". It might be thought that the meaning of those words is clear and unambiguous: they have only one tenable construction, and they cannot mean "save in respect of any antecedent breach of the Lease or the Amortised Payment Agreements" or, what amounts to the same thing, "save in respect of any antecedent breach by the Tenant for which the Guarantor is liable under the Guarantee". In those circumstances, it might be thought that there is no legally permissible technique, other than rectification, by which a different meaning can be ascribed to clause 3.4. That would however be a mistaken view.

[15 ] The meaning of a document (or any other utterance) is not the same thing as the meaning of its words. As Lord Nicholls of Birkenhead has written extra-judicially:

"Words used as a medium of communication do not have a 'meaning' of their own. They do not have a 'meaning' independently of the person who utters them or the person who hears them"

("My Kingdom for a Horse: the Meaning of Words" (2005) 121 L.Q.R. 577). The point can be illustrated by the examples used by Lord Hoffmann in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749 at pages 774-775:

"I propose to begin by examining the way we interpret utterances in everyday life. It is a matter of constant experience that people can convey their meaning unambiguously although they have used the wrong words. We start with an assumption that people will use words and grammar in a conventional way but quite often it becomes obvious that, for one reason or another, they are not doing so and we adjust our interpretation of what they are saying accordingly. We do so in order to make sense of their utterance: so that the different parts of the sentence fit together in a coherent way and also to enable the sentence to fit the background of facts which plays an indispensable part in the way we interpret what anyone is saying. No one, for example, has any difficulty in understanding Mrs Malaprop. When she says 'She is as obstinate as an allegory on the banks of the Nile', we reject the conventional or literal meaning of allegory as making nonsense of the sentence and substitute 'alligator' by using our background knowledge of the things likely to be found on the banks of the Nile and choosing one which sounds rather like 'allegory'.

Mrs Malaprop's problem was an imperfect understanding of the conventional meanings of English words. But the reason for the mistake does not really matter. We use the same process of adjustment when people have made mistakes about names or descriptions or days or times because they have forgotten or become mixed up. If one meets an acquaintance and he says 'And how is Mary?' it may be obvious that he is referring to one's wife, even if she is in fact called Jane. One may even, to avoid embarrassment, answer 'Very well, thank you' without drawing attention to his mistake. The message has been unambiguously received and understood.

......

It is of course true that the law is not concerned with the speaker's subjective intentions. But the notion that the law's concern is therefore with the 'meaning of his words' conceals an important ambiguity. The ambiguity lies in a failure to distinguish between the meanings of words and the question of what would be understood as the meaning of a person who uses words. The meaning of words, as they would appear in a dictionary, and the effect of their syntactical arrangement, as it would appear in a grammar, is part of the material which we use to understand a speaker's utterance. But it is only a part; another part is our knowledge of the background against which the utterance was made. It is that background which enables us, not only to choose the intended meaning when a word has more than one dictionary meaning but also, in the ways I have explained, to understand a speaker's meaning, often without ambiguity, when he has used the wrong words."

[16 ] The principles by which contractual documents are construed, as explained by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 W.L.R. 896 at pages 912-913, reflect that approach:

"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

.....

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd.

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Naviera S.A. v Salen Rederierna A.B. [1985] A.C. 191, 201:

'....if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense'".

Following that approach, Lord Hoffmann rejected (at page 914) the view which the Court of Appeal had adopted, under reference to Through the Looking-Glass, that the interpretation adopted at first instance was "not an available meaning of the words":

"Finally, on this part of the case, I must make some comments upon the judgment of the Court of Appeal. Leggatt L.J. said that his construction was 'the natural and ordinary meaning of the words used'. I do not think that the concept of natural and ordinary meaning is very helpful when, on any view, the words have not been used in a natural and ordinary way. In a case like this, the court is inevitably engaged in chosing between competing unnatural meanings. Secondly, Leggatt L.J. said that the judge's construction was not an 'available meaning' of the words. If this means that judges cannot, short of rectification, decide that the parties must have made mistakes of meaning or syntax, I respectfully think he was wrong. The proposition is not, I would suggest, borne out by his citation from Alice Through the Looking-Glass. Alice and Humpty-Dumpty were agreed that the word 'glory' did not mean 'a nice knock-down argument'. Anyone with a dictionary could see that. Humpty-Dumpty's point was that 'a nice knock-down argument' was what he meant by using the word 'glory'. He very fairly acknowledged that Alice, as a reasonable young woman, could not have realised this until he told her, but once he had told her, or if, without being expressly told, she could have inferred it from the background, she would have had no difficulty in understanding what he meant."

[17 ] In the present case, a number of Scottish judgments were cited to me (including City Wall Properties (Scotland) Ltd v Pearl Assurance plc 2004 S.C. 214 and Middlebank Ltd v University of Dundee [2006] CSOH 202) in which, it appeared to be suggested, a different approach had been adopted, generally under reference to the dictum of Lord Mustill in Charter Reinsurance Co Ltd v Fagan [1997] A.C. 313 at page 384 that "the inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used". That dictum might be contrasted with an observation made by Lord Hoffmann in the same case at page 391:

"I think that in some cases the notion of words having a natural meaning is not a very helpful one. Because the meaning of words is so sensitive to syntax and content, the natural meaning of words in one sentence may be quite unnatural in another".

Consistently with that approach, whereas Lord Mustill based his conclusion in that case solely on an analysis of the provisions of the contract, Lord Hoffmann reinforced the same conclusion by reference to such external matters as the history of reinsurance clauses and the regulatory regime for insurers. That contextual approach appears to me to have been followed in the subsequent decisions of the House of Lords. I refer in particular to Mannai Investments, the Investors Compensation Scheme case itself (in which the other members of the majority in the House of Lords concurred in Lord Hoffmann's speech), Bank of Credit and Commerce International SA v Ali [2002] 1 A.C. 251 and Hombourg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 A.C. 715.

[18 ] It is clear from the passages which I have quoted that, as part of the process of construction, the court can ascribe to a document the meaning which it would convey to a reasonable person aware of the context, notwithstanding mistakes in the written expression of the parties' intention: "allegory" may reasonably be understood to mean "alligator", "Mary" may reasonably be understood as referring to Jane, and so forth. It is also clear that the court will not readily construe a document on the basis that there has been a mistake in expression. In the fifth of the principles stated by Lord Hoffmann in the Investors Compensation Scheme case, his Lordship observed that "we do not easily accept that people have made linguistic mistakes, particularly in formal documents", and said that the court might nevertheless conclude that "something must have gone wrong with the language" and therefore refrain from attributing to the parties "an intention which they plainly could not have had" (emphasis added). The high standard set by Lord Diplock, in the dictum which Lord Hoffmann quoted ("flouts business commonsense"), reinforces the point. His Lordship has emphasised the point again in subsequent cases, including BCCI v Ali (at para.39) and Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at para.59:

"The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant. Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other".

[19 ] Although the approach to construction laid down in the Investors Compensation Scheme case represents a significant development in the law, reflecting developments in philosophy associated with Wittgenstein and Austin, there is nothing new about the construction of documents so as, in effect, to correct mistakes in expression. One long-established principle of construction is traditionally expressed in the Latin maxim falsa demonstratio non nocet, which Lord Trayner explained (along with the closely related maxim, falsa demonstratione legatum non perimi, and the tag dummodo constet de persona), in his Latin Maxims, 4^th ed., as follows:

"Dummodo constet de persona - provided it be evident who is the person meant. A legacy is valid, although there may be an error in the name or designation of the legatee, if from the whole deed or circumstances connected with it, it is sufficiently plain who is the person meant ....

Falsa demonstratio non nocet - An erroneous description does not injure. Where the description is merely expository, an error in it will not vitiate, if there be no doubt as to the identity of the person or thing intended to be specified. Thus if a testator left a bequest 'to my nephew William, son of my brother John', and the testator had a nephew William, but his brother John had no children, the bequest would still be a valid bequest to the testator's nephew, for the person intended to be benefited was quite certain, while the erroneous description of him as the son of a certain brother, being merely description, would be innocuous. Or, if the bequest was to my nephew William, 'residing in Queen Street' whereas the residence of the legatee was in George Street, this again being merely erroneous description, would not void the legacy. Again, where the false description is of the thing bequeathed, the same rule holds. A bequest of 'my diamond ring, which is locked up in my desk' is a good bequest of the ring, although not found as described; and a conveyance of 'my house in Queen Street occupied by AB', would be a good conveyance, although the house was not occupied, and had never been occupied by the tenant named ....

Falsa demonstratione legatum non perimi - A legacy is not rendered void by a false description. 'For instance, if the testator were to say, I give as a legacy Stichus, born my slave, the legacy is effectual, although the slave had not been a born slave, but bought, if it is clear as to the slave meant. And so if the slave be pointed out thus: 'Stichus, my slave, whom I purchased from Seius', the legacy is effectual, although he had been bought from some other person, provided there be no doubt as to the slave intended to be given'. Just. Inst. B.2, T.20 § 30. See also what has been said under the preceding maxim".

[20 ] A more recent example is Adamastos Shipping Ltd v Anglo-Saxon Petroleum Co Ltd [1959] A.C.133, where a clause in a charterparty referred to "this bill of lading". The House of Lords held that the words "this bill of lading" should be read as "this charterparty". This was later described by Lord Diplock as "an elementary textbook example" of the application of the falsa demonstratio maxim (Miramar Maritime Corp v Holborn Oil Trading Co Ltd [1984] A.C. 676, 687). A recent Scottish example is provided by Macdonald Estates plc v Regenesis (2005) Dunfermline Ltd 2007 SLT 791, where a contract under which services were to be provided by the pursuers ("you") to the defenders ("JV Co") stated:

"In supplement of the foregoing JV Co shall free and relieve you on demand of all outlays reasonably required to be made by it as an incident of the performance of its obligations hereunder and the provision of the Services".

In my opinion in that case, I said (at paragraph 114):

"The words 'it' and 'its' must be a mistake: the defenders could not sensibly be undertaking to relieve the pursuers of outlays which the defenders had themselves made. Those words must be understood as meaning 'you' and 'your'".

In both the Adamastos Shipping case and Macdonald Estates, as also in the examples given by Lord Trayner and in the Institute, it was clear what must have been intended.

[21] As well as construing a document in such a way that a word may be understood as if another word had been used, or in such a way that words which are plainly inept are disregarded, the court can also construe a document as if it contained words which have been omitted from it. Scottish examples can readily be found in the law relating to wills. In McLaren on Wills and Succession, 3^rd ed., for example, it is said at para. 654:

"Where it is apparent from the language of a will that the testator has not accurately or completely expressed his meaning by the words he has used, and it is also apparent what are the words that have been omitted, the necessary words may be supplied by construction in order to effectuate the intention as collected from the context".

[22 ] What the court is doing when it construes a document as if it contained words which are not there - just as when it construes "John" as meaning "Mary" (Wilson v Wilson (1854) 5 H.L.Cas 40, 10 E.R. 811) - is properly described as construction, and is to be distinguished from rectification. The court cannot, as a matter of construction, alter, add to or subtract from the words of a written instrument: as Romer L.J. said in Re Sassoon [1933] Ch. 858 at page 890, that can be done only by rectification. When the court construes a document as if it contained words which are not to be found there, it is performing the same exercise as is involved in any other aspect of the construction of a document: it is "ascertaining the meaning which the document would convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed" (The Starsin at para.73 per Lord Hoffmann). We all from time to time read letters, emails, and other documents in which a word or a phrase has been omitted; but we do not throw up our hands and say "I can make nothing of this", if the context enables us to infer what was meant. It is also to be noted that, just as in everyday life, the construction of documents so as to correct mistakes is not confined to mistakes which are apparent from the terms of the utterance itself. It is inherent in the contextual approach to interpretation that mistakes in a document which are apparent in the light of the surrounding circumstances can be corrected through the process of construction in the same way as mistakes which are apparent on the face of the document: the classification of mistakes as "patent" or "latent" is no longer determinative of the court's power to cure mistakes by construction.

[23 ] The technique of correcting mistakes by construction (if it may loosely be so described) has been vigorously applied by the House of Lords in the recent decisions which I have mentioned. In Charter Reinsurance a term referring to sums "actually paid" was construed as meaning sums "actually payable". In Mannai Investments a tenant who had served notice under the lease purporting to bring it to an end on 12 January, when the lease permitted termination only on 13 January, was held to have successfully communicated his intention to terminate. In the Investors Compensation Scheme case itself, the syntax of the provision in question was altered, so that "Any claim (whether sounding in rescission for undue influence or otherwise)" was construed as meaning "Any claim sounding in rescission (whether for undue influence or otherwise)". The decision in The Starsin is discussed below.

[24 ] The court will not, of course, interpolate words or substitute one word for another merely because the result might appear to be fairer or more commercially sensible. One of the parties may simply have made a bad bargain; and the court is not entitled to impose on the parties some other bargain, under the guise of construction, on the basis that it might be thought to be fairer or more sensible. It is also necessary to heed the warnings which have been given, not least by judges with commercial experience (e.g. The World Symphony [1992] 2 Lloyd's Rep.115, 117 per Lord Donaldson M.R.; Capital Land Holdings Ltd v Secretary of State for the Environment, 16 May 1995, per Lord Penrose, cited in Ben Cleuch Estates Ltd v Scottish Enterprise [2006] CSOH 35 at para.139), against excessive confidence that a judge's view as to what might be commercially sensible necessarily coincides with the views of those actually involved in commercial contracts. As Lord Mustill said in Torvald Klaveness A/S v Arni Maritime Corp (The Gregos) [1994] 1 W.L.R. 1465 at page 1473:

"Naturally no judge will favour an interpretation which produces an obviously absurd result unless the words drive him to it, since it is unlikely that this is what the parties intended. But where there is no obvious absurdity, and simply assertions by either side that its own interpretation yields the more sensible result, there is room for error".

[25] Equally, in attempting to ascertain what the parties must be taken to have meant, it is necessary to have regard to the positions of both parties. As the Court of Appeal said in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd [1990] 1 Q.B. 818 at page 870:

"It is nonetheless important, in attributing a purpose to a commercial transaction, to be sure that it is the purpose of both parties and not just one. If the purpose of the transaction is seen through the eyes of one party only an unbalanced view of the transaction may result. Many contracts represent a compromise between what one party wishes to obtain and the other is willing to give".

[26 ] In the discussion in the present case, attention focused on three recent decisions in which words were interpolated into a document as a matter of construction. The first was Folkes Group plc v Alexander [2002] 2 B.C.L.C. 254, where an amendment to a company's articles which referred to shares "owned by a member of the Folkes Family Company" was construed as meaning "owned by a member of the Folkes Family or by a Folkes Family Company". The decision was an application of the fifth principle of interpretation set out by Lord Hoffmann in the Investors Compensation Scheme case. A literal interpretation of the amendment led, in the view of the judge, to "an absurd result". Comparing the amendment with the unamended version of the articles, the interpolated words had "obviously been mistakenly omitted". In those circumstances, the amendment could be construed with the addition of those words.

[27 ] In the second case, The Starsin, one of the issues concerned an apparent omission in a Himalaya clause. The House of Lords accepted that the missing words were to be found in a standard form of bill of lading, on which the clause in question had been modelled, and that the form had been inaccurately copied. Lord Bingham of Cornhill said (at para.23):

"I take it to be clear in principle that the court should not interpolate words into a written instrument, of whatever nature, unless it is clear both that words have been omitted and what those omitted words were ....In the present case there is agreed to be an omission. It is also plain, in my opinion, for the reasons which Mr Gee gave, what words were omitted and how they came to be omitted. I would accordingly construe the clause as if the words 'acting as aforesaid and for the purpose of all the foregoing provisions of this clause the carrier' appeared in place of the square brackets I have inserted".

Lord Millett did not consider it essential that the court be certain of the precise words which were missing, observing (at para.194) that it was impossible to identify the particular precedent from which the clause had been taken, but that all the relevant precedents contained a similar provision in identical or nearly identical words. His Lordship said (at para.192):

"It is not necessary that the court should be certain precisely what words have been omitted; it is sufficient that it knows their gist. The process is one of construction, not rectification; this is evident from the fact that the Court of Chancery not infrequently supplied omissions in wills at a time when it had no jurisdiction to rectify them".

In Scots law, also, it appears to me that it is sufficient to know the substance of the missing words. I also observe that the process in Scots law is equally one of construction, not rectification: Lord Millett's observation about the Court of Chancery is also true of the Court of Session, as the discussion in McLaren on Wills and Succession (at paras 654 ff, "of supplying words necessary to complete the sense") demonstrates.

[28 ] The third case, KPMG LLP v Network Rail Infrastructure Ltd [2007] Bus. L.R.1336, concerned an apparent omission in a commercial lease. Read literally, the clause did not make sense. By comparison with an earlier agreement, it could be seen that a number of words had been omitted. The omission had been noticed by one party to the lease, who had assumed (mistakenly) that it was deliberate, and had contracted on that basis. In those circumstances, the lease could not be rectified under English law, since there was no common intention that the omitted words should be included, and the party who had noticed the omission had been acting in good faith. The Court of Appeal however held that the omitted words could be inserted as a matter of construction, so as to give the lease the meaning which it would convey to a reasonable person aware of the background circumstances. It was not argued that there was no contract. The decision is a striking illustration of the distinction between the parties' actual intentions and the common intention, objectively ascertained, which the process of construction assumes to exist. The case was cited in the present case for a passage in the judgment of Carnwath L.J., in which the other members of the court concurred, in which his Lordship considered (at para.64) what had been said in The Starsin by Lord Bingham and Lord Millett:

"I think it would be wrong to apply too literally Lord Bingham's reference to the need for clarity both as to the omission of words and 'what those relevant words were'. As Lord Millett said, it is sufficient if the court is able to ascertain 'the gist' of what has been omitted".

I respectfully agree with that view.

[29 ] In the present case, clause 3 of the guarantee begins with the words:

"In respect of the period from 1 January 2003 to 31 December 2004".

Clause 3.1, read short, then provides:

"....if the Tenant shall make any default in the payment of the ....rent or any other sum....or....in.....performing the said obligations (viz 'the obligations .....contained in the Lease and the Amortised Payment Agreements') ...then ....the Guarantor will pay, perform ....on demand".

Stopping at that point, the argument for the pursuers was premised on the proposition that what had to occur by the deadline of 31 December 2004 was merely a default by the tenant: the opening words of clause 3 were construed, in effect, as meaning:

"In respect of the Tenant's obligations during the period from 1 January 2003 to 31 December 2004".

It was common ground, however, that clause 3.1 requires two events to occur before the guarantor comes under an obligation: first, a default by the tenant, and secondly, a demand on the guarantor. The opening words might therefore be construed as meaning that the obligation is to arise in the event that both conditions are satisfied at any time during the period from 1 January 2003 to 31 December 2004.

[30 ] The opening words also govern clause 3.3. That is a complex provision, but for present purposes it can be stripped down to its most basic elements:

"....if the Tenant shall be wound up....and if the Landlord shall...by notice in writing require a Guarantor to accept a lease....then....the Guarantor shall accept such new lease .....".

Like clause 3.1, clause 3.3 requires two events to occur before the guarantor comes under an obligation: first, the winding up of the tenant (or one of the other specified events), and secondly, the service of written notice on the guarantor. Although it might perhaps be argued that the opening words of clause 3, in their application to clause 3.3, required only the winding up to occur by 31 December 2004, counsel for the pursuers accepted that both events had to occur by that date: in other words, that the opening words meant that the obligation imposed by clause 3.3 was to arise in the event that both conditions were satisfied at any time during the period from 1 January 2003 to 31 December 2004. If that is so, then one would expect the same words to have the same meaning, mutatis mutandis, in their application to clause 3.1; a meaning which might be expressed as:

"In the event that the conditions precedent to the Guarantor's liability are satisfied at any time during the period from 1 January 2003 to 31 December 2004".

[31 ] Clause 3.4 is concerned with the guarantor's "obligations under these presents": in other words, its obligations under both clause 3.1 and clause 3.3. Clause 3.4 can be paraphrased:

"The Guarantor shall be deemed to be released from its obligations under [clause 3.1 and clause 3.3] on 1 January 2005 save in respect of any antecedent breach of [clause 3.1 or clause 3.3]......"

Such a provision might be said to be superfluous; but the guarantee is replete with superfluities (e.g. "due, punctual and full", "observe, perform and implement", "obligations and conditions", "losses, damages, costs and expenses"), as counsel for the pursuers acknowledged, reflecting a lawyer's caution, or possibly the use of a style which has gathered verbiage over the years. The provision is not however nonsensical. There would be an antecedent breach of clause 3.1 if the tenant had defaulted on a quarterly payment (the last such payment prior to the end of 2004 being due on 28 November), or if the premises were not in the state of repair required by the lease, and a demand had been served on the guarantor before the end of the year (the guarantor being in "breach" under clause 3.1 if he failed to make the payment or to carry out the necessary repairs "on demand"). There would be an antecedent breach of clause 3.3 if notice had been served on the guarantor, requiring it to accept a new lease, and it had not done so.

[32 ] If clause 3.4 were to be construed as suggested by counsel for the pursuers, it would be unworkable in relation to clause 3.3. It does not make sense to say:

"The Guarantor shall be deemed to be released from its obligations under [clause 3.3] on 1 January 2005 save in respect of any antecedent breach by the Tenant for which the Guarantor is liable.....",

since the obligation of the guarantor to accept a new lease under clause 3.3 does not arise in consequence of a breach of the lease by the tenant, but rather in consequence of the occurrence of one of the specified events. Counsel for the pursuers acknowledged this point, and argued that clause 3.4 therefore had no application to clause 3.3; but the difficulty with that argument is that clause 3.4 is expressly concerned with the guarantor's "obligations under these presents", which include the obligation imposed by clause 3.3.

[33 ] Even in relation to clause 3.1, the pursuers' construction of clause 3.4 causes a difficulty. So construed, clause 3.4 can be paraphrased in its application to clause 3.1:

"The Guarantor shall be deemed to be released from its obligations under [clause 3.1] on 1 January 2005 save in respect of any antecedent breach by the Tenant for which the Guarantor is liable .....".

As explained earlier, it is common ground that the guarantor does not come under an obligation under clause 3.1 merely by virtue of a breach by the tenant. For the guarantor to be under an obligation on 1 January 2005, from which it could be released, there would have to have occurred both a breach by the tenant and a demand on the guarantor. The proviso ("save....") is presumably intended to preserve an obligation which existed on 31 December 2004. Accordingly, even if construed as the pursuers would wish, clause 3.4 would not achieve the result which they desire: namely, to enable them to serve a demand on the guarantor after 1 January 2005 in respect of a breach by the tenant which occurred prior to that date, thereby triggering (for the first time) an obligation on the part of the guarantor. The difficulty for the pursuers, in other words, arises not only from the words "antecedent breach of the Guarantee", but also from the earlier reference to the guarantor's being "released from its obligations under these presents".

[34 ] Counsel for the pursuers however relied on the commercial purpose of the guarantee to overcome these difficulties. It was pointed out that the tenant's repairing obligations were capable of applying to latent defects. It was argued that, unless it were possible for the guarantor's obligation under clause 3.1 to be triggered by serving a notice after 31 December 2004, the guarantee would fail to cover breaches of the lease of which the landlord was unaware on that date.

[35 ] On behalf of the defenders, on the other hand, it was pointed out that the guarantee was intended to cover only two years of a 25 year lease. Those two years were close to the commencement of the lease. Extensive works had just been carried out, at a cost (spread over the term of the amortised payment agreements) of more than £2.5m. In those circumstances, it was submitted, the obligation which the parties would have had at the forefront of their minds, when entering into the guarantee, was not the tenant's repairing obligation, but the obligation to make payments of more than £500,000 per annum. There was no difficulty, if there was a default in payment, in serving a demand under the guarantee prior to 1 January 2005. Even if the landlord decided to prepare a comprehensive schedule of dilapidations, it could be served on the guarantor before the guarantee expired. In the present case, the landlord had served a schedule on the tenant during 2004, and the only reason the present argument was being advanced was because no demand had been sent to the guarantor before the end of that year. The guarantee was not intended to impose a liability on the guarantor for an indeterminate period, limited only by prescription, which would be the result of the pursuers' construction of clause 3.4.

[36 ] It appears to me that the commercial considerations on which the pursuers rely come nowhere near the standard set by the authorities. This is not a case in which it can be said, in the language used by Lord Hoffmann in the Investors Compensation Scheme case, that "something must have gone wrong with the language", or that the natural reading of clause 3.4 would "attribute to the parties an intention which they plainly could not have had". If the pursuers are not protected against disrepair which was latent when the guarantee expired, that is not, in Lord Diplock's words in The Antaios, "a conclusion that flouts business commonsense". Nor is this a case where "it is clear .....that words have been omitted" (The Starsin at para.23 per Lord Bingham). A passage in Lord Hoffmann's judgment in the Jumbo King case appears to me to be apposite (at para.59):

"If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible - and has no way of knowing whether a clause which appears to have an onerous effect was a quid quo pro for some other concession. Or one of the parties may simply have made a bad bargain".

[37 ] In these circumstances, the commercial background does not lead me away from the starting point: that one would ordinarily expect the parties to a formal document to have chosen their words with care, and to have intended to convey the meaning which the words they chose would convey to a reasonable person.

[38 ] I have reached that conclusion without referring to the various traditional canons of construction to which counsel for the defenders referred, such as the contra proferentem principle and the principle that guarantees should be narrowly construed. Canons of that kind require in my opinion to be reconsidered, and in some cases reformulated or discarded, in the light of the modern approach to the construction of contracts. As Lord Hoffmann observed in the Investors Compensation Scheme case at page 912,

"Almost all the old intellectual baggage of 'legal' interpretation has been discarded".

I note what was said by Arden L.J. in Egan v Static Control Components (Europe) Ltd [2004] 2 Lloyd's Rep.429, rejecting (at para.37) a submission that a guarantee should be construed contra proferentem:

"There is no reason of public policy why guarantees should not in general be construed in accordance with the principles enunciated in Prenn v Simmonds [1971] 1 W.L.R. 1381 and the ICS case."

[39 ] My conclusion on the first issue is therefore that the pursuers' contention should be rejected. It follows that their action, so far as based on clause 3.1 of the guarantee, depends on establishing that a "demand" was made on the defenders prior to 1 January 2005. That takes me to the second issue.

The second issue: was the letter of 30 April 2004 a demand?
[40 ] Although the pursuers' pleadings refer to a number of items of correspondence which passed between the parties during 2004, it is a matter of agreement that, if a demand required to be made under the guarantee prior to 1 January 2005 (as I have concluded), the critical question is whether a letter dated 30 April 2004 which was sent to the defenders by the pursuers' solicitors, enclosing a copy of a schedule of dilapidations, constituted a demand within the meaning of clause 3.1 of the guarantee.

[41 ] On 30 April 2004 the pursuers' solicitors sent three letters by recorded delivery, each of which enclosed a copy of the schedule of dilapidations. One letter was sent to the tenant, Callpoint Europe. A second letter was sent to the tenant's parent company, Callpoint Ltd. The third letter was sent to the defenders.

[42 ] The letter to the defenders stated:

"We act on behalf of Credential Bath Street Limited who is the current landlord under the Lease between Credential Charing Cross Ltd and Pertemps Callpoint Limited dated 14 June 2001 and recorded in the Books of Council and Session on 17 July 2001 in respect of the premises at 349 Bath Street, Glasgow under which you are guarantor.

We refer to clause 3.13 of the above lease and enclose the interim schedule of dilapidations prepared by CB Richard Ellis Limited detailing additional services works that are to be carried out within two months of the date of this notice.

Please acknowledge safe receipt".

The letter to Callpoint Limited was identical terms. The letter to the tenant omitted the words "under which you are guarantor", at the end of the first paragraph, but was otherwise identical.

[43 ] The schedule of dilapidations itself stated that it had been prepared pursuant to the lease, and quoted clauses 3.5.1, 3.5.2, 3.7, 3.8, 3.9 and 3.13, together with other relevant provisions relating to cleaning, tidying, paying the landlord's costs and observing statutory requirements. The preamble to the schedule stated:

"The following works require to be carried out by the tenant to make good defects and wants of repair to the premises, all in the terms of the aforementioned documentation".

[44 ] During July 2004 a response to the schedule of dilapidations was prepared by Mackinnon & Co, a firm of chartered surveyors. The cover of their document bears the words:

"Prepared on behalf of:

Pertemps Group Ltd [i.e. the defenders]

c/o John Chivers Commercial".

The body of the document states:

"1.1.1 We were instructed by John Chivers Commercial to prepare a formal response to the Interim Schedule of Dilapidations prepared by CB Richard Ellis .....

......

1.4.1 Our response has been prepared under the terms of the lease between Credential Charing Cross Ltd, whose interest is now vested with Credential Bath Street Ltd (the landlord) and Pertemps Callpoint Ltd, whose interest is now vested with Callpoint Europe (the tenant) ....."

[45 ] It was common ground between counsel for the parties that the question whether the letter of 30 April 2004 (read with the schedule of dilapidations which was enclosed with it) constituted a demand, within the meaning of clause 3.1 of the guarantee, turns on what the reasonable recipient in the position of the guarantor would have understood from those documents.

[46 ] In that regard, counsel for both parties referred to Mannai Investments, where the construction of notices (in that case, a break notice under a lease) was considered by the House of Lords. The objective nature of such construction was made clear in the speeches. Lord Steyn, for example, said (at page 767):

"The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene."

Like Lord Hoffmann (at page 780), Lord Steyn considered that the correct test for the validity of a notice was that posed by Goulding J. in Carradine Properties Ltd v Aslam [1976] 1 W.L.R. 442 at page 444:

"Is the notice quite clear to a reasonable tenant reading it? Is it plain that he cannot be misled by it?"

Lord Clyde also cited that dictum (at page 782), and continued:

"Delta Vale Properties Ltd v Mills [1990] 1 W.L.R. 445 concerned a vendor's notice to complete ....but I see no reason why any different principle of construction should apply. Slade L.J. observed at page 454:

'In my judgment, notices to complete ....if they are to be valid, must be sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate.'

The standard of reference is that of the reasonable man exercising his common sense in the context and in the circumstances of the particular case. It is not an absolute clarity or an absolute absence of any possible ambiguity which is desiderated.....

The text is an objective one. In circumstances where an estoppel might arise the actual understanding of the recipient may be relevant, but in general the actual understanding of the parties is beside the point."

[47 ] Applying that approach, counsel were in agreement that the relevant question was whether the letter of 30 April 2004 brought home to any reasonable recipient that the landlord was demanding performance under the guarantee. In other words, the question is whether the reasonable recipient of the letter would have said to himself, "I am being called on to do the work specified in the schedule".

[48 ] In my opinion that question must be answered in the negative. Three factors in particular lead me to that conclusion. First, neither the letter nor the schedule anywhere called on the guarantor to carry out the necessary works. Secondly, the schedule stated that the works "require to be carried out by the tenant". Thirdly, the letter refers to clause 3.13 of the lease, which gives the landlord a right (as against the tenant) to enter upon the premises and carry out repair works itself in the event of the tenant's failing to do so within the stipulated period (here, two months), and then to recover the cost of the works from the tenant. Although clause 3.13 does not apply unless the tenant is already in breach of one of its primary repairing obligations (such as the obligation imposed by clause 3.7), the tenant is not in breach of clause 3.13 itself until the expiry of the stipulated period. Thus, in the present case, the tenant would not be in breach of its obligations under clause 3.13 as at the date of the letter of 30 April 2004. Counsel for the pursuers described the reference to clause 3.13 as "clearly inept" if the letter was understood as a demand under the guarantee. Although this factor is not in my view as significant as the first two (since a reference to clause 3.13 implies an antecedent breach of the primary repairing obligations, and those obligations were referred to in the schedule), nonetheless one would not expect a demand under the guarantee to refer solely or principally to an unexpired notice under clause 3.13. I also note that the letter was sent on the same date as almost identical letters to the tenant and to the tenant's parent company, but I do not rest my conclusion on that fact, as it is not apparent from the pleadings, and is not agreed, that that is a fact which would have been within the knowledge of a reasonable recipient of the letter addressed to the guarantor. The statement in the schedule that the works "require to be carried out by the tenant" would however lead a reasonable recipient to expect that a similar schedule would have been sent to the tenant.

[49 ] Given the terms of the letter and the schedule, it appears to me that the natural construction of the letter is as a copy to the guarantor, keeping it advised of the position in circumstances where the landlord is seeking in the first instance to have the tenant comply with its obligations, failing which it will carry out the work itself and then recover the cost from the tenant (or, in the event of default by the tenant, from the guarantor). Putting the matter at its lowest, and adopting the language of Slade L.J. in the Delta Vale Properties case, the letter is not in my opinion "sufficiently clear and unambiguous" to leave a reasonable recipient "in no reasonable doubt" that he is being called on to carry out the repairs detailed in the schedule.

[50 ] As against these considerations, counsel for the pursuers sought to rely on Mackinnon & Co's description of their response to the schedule of dilapidations as having been prepared on behalf of the defenders. It was argued that that demonstrated that the defenders had in fact understood that the letter of 30 April 2004 was a demand under the guarantee. That contention is in my opinion irrelevant. Since the question whether the letter constituted a demand is to be determined objectively, it follows that, as Lord Clyde observed in Mannai Investments, "the actual understanding of the parties is beside the point". No argument is presented on behalf of the pursuers on the basis of personal bar.

The third issue: the implication of a term

[51 ] The pursuers maintain in their pleadings that they presented a petition for the insolvent winding up of Callpoint Europe (the tenant) on 12 July 2004. In the petition, the pursuers stated expressly that they sought the winding up of Callpoint Europe in order to be able to enforce the defenders' step-in obligation under clause 3.3 of the guarantee. The petition was presented on the basis that Callpoint Europe were unable to pay their debts as they fell due, in terms of section 123(1)(e) of the Insolvency Act 1986, and in addition on the basis that the value of their assets was less than the amount of their liabilities taking into account contingent and prospective liabilities, in terms of section 123(2). Answers were lodged on behalf of Callpoint Europe. They maintained that all sums due to the pursuers had been paid, that the pursuers had collaborated with a debtor of Callpoint Europe in order to create difficulties for the company with a view to triggering the "step-in" obligation in the guarantee, and that the petition was an abuse of process. It appears from the pleadings in the petition process (which are incorporated into the pursuers' pleadings in the present action) that there was then a protracted procedure during which the parties' pleadings underwent substantial alteration: the pleadings produced in the present proceedings include two substantial notes of adjustments to the petition, a note of adjustments to the answers, and answers to a minute of amendment of the petition. One of the questions raised was whether the future liabilities of Callpoint Europe as tenant under the lease should be taken into account when (it was said) the pursuers were unlawfully withholding their consent to an assignation of the lease, that alleged breach of contract being the subject of separate proceedings in which a hearing was due to take place on 13 December 2004. The petition and answers eventually came before the court for a hearing on 16 and 17 December 2004. The hearing was not completed within the time which had been allowed. The pursuers admit that the hearing was mainly taken up with their own submissions. It does not appear from the present pleadings whether any date was fixed for a continued hearing. It is averred that, in the event, the petition was granted in April 2005, by which time the guarantee had expired.

[52 ] In the present action, the pursuers maintain that the grounds of opposition to the petition were "unjustified in fact and in law". In support of that contention, the pursuers maintain that Callpoint Europe were in fact unable to pay their debts within the meaning of section 123(2) of the 1986 Act, in the sense that the value of their assets was less than the amount of their liabilities. In that regard, the pursuers maintain that Callpoint Europe's management accounts for the period ended 30 September 2004 reported a surplus of assets over liabilities on the basis that a material value was placed on their shareholding in another company, and on a debt due to them by the latter company. Since the latter company presented a petition for its insolvent winding up on 2 December 2004, it is contended that the shareholding and the debt were worthless, and that Callpoint Europe were therefore insolvent. The pursuers also maintain that the present defenders "caused Callpoint Europe to persist in its opposition". They maintain that the defenders' conduct was in breach of an implied term of the guarantee. That implied term is pleaded as follows:

"that the defender would not, by any voluntary act, impede the rights which the pursuer would have had under the Guarantee but for the defender's act".

In argument, however, counsel for the pursuers departed from that contention. The implied term, in the form in which it was finally advanced by the pursuers' counsel, was as follows:

"that the defender would not cause Callpoint Europe to oppose any motion for its winding up when it knew or ought reasonably to have known that the opposition was unjustified either in law or in fact (or in both)".

The pursuers maintain that, but for the defenders' breach of that implied term, they would have obtained a winding up order before 1 January 2005 and would have enforced the step-in obligation. In response, the defenders maintain that such a term cannot be implied, and that the winding up petition was in any event opposed on the advice of responsible senior counsel and solicitors and for proper reasons, and on the instructions of the sole director of Callpoint Europe acting in that capacity. The issue which the parties seek to have determined at present is whether the term in question can be implied into the guarantee.

[53 ] The nature of the implication of a contractual term, and the basis upon which such a term can be implied, were authoritatively considered by the House of Lords in Equitable Life Assurance Society v Hyman [2002] 1 A.C. 408. In a speech with which the other members of the House expressed their agreement, Lord Steyn said (at pages 458-459):

"The critical question is whether a relevant restriction may be implied in [the provision in question]. It is certainly not a case in which a term can be implied by law in the sense of incidents impliedly annexed to particular forms of contracts. Such standardised implied terms operate as general default rules: see Scally v Southern Health and Social Services Board [1992] 1 A.C.294. If a term is to be implied, it could only be a term implied from the language of [the provision in question] read in its particular commercial setting. Such implied terms operate as ad hoc gap fillers. In Luxor (Eastbourne) Ltd v Cooper [1941] A.C.108, 137 Lord Wright explained this distinction as follows:

'The expression "implied term" is used in different senses. Sometimes it denotes some term which does not depend on the actual intention of the parties but on a rule of law, such as the terms, warranties or conditions which, if not expressly excluded, the law imports, as for instance under the Sale of Goods Act and the Marine Insurance Act ....But a case like the present is different because what it is sought to imply is based on an intention imputed to the parties from their actual circumstances'.

It is only an individualised term of the second kind which can arguably arise in the present case. Such a term may be imputed to parties: it is not critically dependent on proof of an actual intention of the parties. The process 'is one of construction of the agreement as a whole in its commercial setting': Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co Ltd [1997] A.C. 191, 212E, per Lord Hoffmann. This principle is sparingly and cautiously used and may never be employed to imply a term in conflict with the express terms of the text. The legal test for the implication of such a term is a standard of strict necessity ....

The enquiry is entirely constructional in nature: proceeding from the express terms of [the provision in question], viewed against its objective setting, the question is whether the implication is strictly necessary."

[54 ] As Lord Steyn made clear in that passage, and as Lord Hoffmann had earlier emphasised in the Banque Bruxelles Lambert (or SAAMCO) case, there is a close affinity between the interpretation of express terms of a contract and the implication of terms which have not been expressed. At the same time, the implication of a term is a more far-reaching exercise in construction than the interpretation of the express terms of a contract, as Sir Thomas Bingham M.R. explained in Philips Electronique Grand Public S.A. v British Sky Broadcasting Ltd [1995] E.M.L.R.472 at pages 481-482:

"The courts' usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power.

There are of course contracts into which terms are routinely and unquestioningly implied. If a surgeon undertakes to operate on a patient a term will be implied into the contract that he exercise reasonable care and skill in doing so. It is inconceivable that any patient would in any imaginable circumstance commit his bodily well-being to the ministrations of a surgeon who did not undertake that obligation, or that a surgeon could hope to remain in practice without professing to discharge it. Again, quite apart from statute, the courts would not ordinarily hesitate to imply into a contract for the sale of unseen goods that they should be of merchantable quality and answer to their description and conform with sample. It is hard to imagine trade conducted, in the absence of express agreement, on any other terms.

But the difficulties increase the further one moves away from these paradigm examples. In the first case, it is probably unlikely that any terms will have been expressly agreed, except perhaps the nature of the operation, the fee, and the time and the place of operation. In the second case, the need for implication usually arises where the contract terms have not been spelled out in detail or by reference to written conditions. It is much more difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully-drafted contract but have omitted to make provision for the matter in issue. Given the rules which restrict evidence of the parties' intention when negotiating a contract, it may well be doubtful whether the omission was the result of the parties' oversight or of their deliberate decision; if the parties appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur."

[55 ] Like the interpretation of express terms, the implication of a term is an objective exercise. It involves asking what the reasonable person (who sometimes appears, in this context, in the dubious guise of the officious bystander) would understand the parties to have intended to be the terms of their contract. That process of construction is based, as Lord Steyn explained in Equitable Life, on the express terms of the contract, viewed against their objective setting.

[56 ] As with the interpretation of express terms so as to "correct" mistakes in expression, as discussed above, it is the objective approach to intention which fundamentally distinguishes this aspect of the construction of a contract, so as to insert into it a term which the parties have not expressed, from the process of rectification of a document. As Mason J. observed in Codelfa Construction Prop. Ltd v State Rail Authority of New South Wales (1982) 149 C.L.R.337 at page 346:

"The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties' actual intention; the implication of a term is designed to give effect to the parties' presumed intention".

[57 ] In some cases, particularly in a commercial context, the objective setting of the contract may include an established usage which a reasonable person would understand the parties to the contract as having intended to apply (Liverpool City Council v Irwin [1977] AC 239 at page 253 per Lord Wilberforce). In the present case, however, there was no established usage which went without saying. In such a case, the test which has to be satisfied, before the reasonable person will presume the parties to have intended that their contract should be understood as including a term which they did not express, is one of necessity. A classic statement of the test is that contained in the speech of Lord Wright in Luxor (Eastbourne) Ltd v Cooper at page 137:

"But it is well recognised that there may be cases where obviously some term must be implied if the intention of the parties is not to be defeated, some term of which it can be predicated that 'it goes without saying', some term not expressed but necessary to give to the transaction such business efficacy as the parties must have intended. This does not mean that the court can embark on a reconstruction of the agreement on equitable principles, or on a view of what the parties should, in the opinion of the court, reasonably have contemplated. The implication must arise inevitably to give effect to the intention of the parties."

As appears from that passage, necessity is to be understood in this context in a practical rather than a logical sense. That is consistent with the underlying basis of the implication of a term, namely to give the contract the effect which the parties would reasonably be understood as having intended. The test of necessity was reaffirmed in Equitable Life, following the earlier decision of the House of Lords in Liverpool City Council v Irwin.

[58] The term sought to be implied must therefore be one which is necessary, in addition to the express terms, in order to make the contract work as the parties can be taken to have intended. Putting the matter differently, a term will not be implied if the contract is effective without it. Furthermore, it follows from the criterion of necessity that a term cannot be implied where there are a number of different terms to which the parties might have agreed: Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 W.L.R. 601; Philips Electronique Grand Public SA v British Sky Broadcasting Ltd at page 482 per Sir Thomas Bingham M.R.

[59 ] The test of necessity is not of course the only condition which must be satisfied before a term can be implied into a contract. A clear statement of the relevant criteria is contained in the judgment of the majority of the Judicial Committee of the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1978) 52 A.J.L.R. 20, in which Lord Simon of Glaisdale said (at page 26):

"In their [Lordships'] view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that it goes without saying; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

The requirement that the term must be capable of clear expression is illustrated by Shell UK Ltd v Lostock Garage Ltd [1976] 1 W.L.R. 1187, where the Court of Appeal rejected an implied term that a supplier of petrol under a solus agreement would not discriminate abnormally against the buyer. Ormrod L.J. said (at page 1201):

"The second obstacle is the difficulty in formulating the proposed terms, as demonstrated by the vagueness and ambiguity inherent in such words as 'discriminate' and 'abnormality'".

[60 ] In the present case, it appears to me that the first, second, third and fourth of the conditions listed by Lord Simon of Glaisdale in the BP Refinery case are not satisfied. Considering first the question whether the proposed term is necessary to give business efficacy to the contract, it was argued on behalf of the pursuers that the court should imply a term which would prevent one party from playing a "dirty trick" on the other: Alpha Trading Ltd v Dunnshaw-Patten Ltd [1981] Q.B. 290 at page 306 per Templeman L.J.. In any case, it was said, a party to a contract is not entitled by a voluntary act to impede or prevent performance of a term of the contract: Mackay v Dick & Stevenson (1881) 8.R. (H.L.) 37 at page 45 per Lord Watson. In the present case, it was argued, without such an implied term the guarantor would be free to take deliberate steps to cause liquidation to be postponed beyond the expiry of the guarantee, even on grounds which the guarantor knew were unjustified in fact and law. The result would be that the step-in obligation would be evaded.

[61 ] Mackay v Dick & Stevenson was a case in which performance of the contract could not take place without the co-operation of both parties. Lord Watson said at page 45:

"The passage cited by Lord Shand from Bell's Principles (section 50) to the effect that 'If the debtor bound under a certain condition have impeded or prevented the event, it is held as accomplished. If the creditor has done all that he can to fulfil a condition which is incumbent on himself, it is held sufficient implement', expresses a doctrine, borrowed from the civil law, which has long been recognised in the law of Scotland, and I think it ought to be applied to the present case".

Lord Watson's approach in that passage was not based on the concept of an implied term. The dictum from Bell's Principles would not apply in the circumstances of the present case, since it could on any view be proper in some circumstances for the defenders to "impede or prevent" their subsidiary's liquidation, for example by enabling it to pay creditors or to oppose an unjustified petition for winding up.

[62 ] Lord Blackburn, in the same case, rested his analysis on the concept of an implied term, but expressed the relevant principle (at page 40) in terms which are narrower than the proposition advanced by counsel for the pursuers in the present case:

"I think I may safely say, as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect".

That dictum has no application to the facts of the present case: the parties did not agree that the tenant was to be put into liquidation. Although clause 3.3 of the guarantee is conditional, this is not a case (unlike Nissho Iwai Petroleum Inc v Cargill International S.A. [1993] 1 Lloyd's Rep. 80, to which counsel for the pursuers also referred) in which it could be, or is, maintained that the parties impliedly agreed that neither party would do anything to prevent the fulfilment of the condition.

[63 ] The decision in Alpha Trading Ltd v Dunnshaw-Patten Ltd appears to me to be an application of the "business efficacy" test: the Court of Appeal implied into an agency contract, under which the sole source of the agent's commission was the purchase price paid by a buyer procured by the agent, an implied term that the principal would not deprive the agent of his commission by committing a breach of contract which released the buyer from his obligation to pay the purchase price. Reference to that decision does not resolve the question how the test of necessity applies in the present case.

[64 ] In considering that question, it is important to consider matters as they would have appeared to a reasonable person at the time when the contract was concluded. As Sir Thomas Bingham M.R. said in the Philips Electronique case at page 482:

"The question of whether a term should be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong. For, as Scrutton L.J. said in Reigate v Union Manufacturing Co (Ramsbottom) Limited [1918] 1 K.B. 592 at 605,

'A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, "What will happen in such a case", they would both have replied, "Of course, so and so will happen; we did not trouble to say that; it is too clear". Unless the Court comes to some such conclusion as that, it ought not to imply a term which the parties themselves have not expressed....'

And it is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred."

[65 ] When the parties to the present case entered into the guarantee, they envisaged in clause 3.3 the possibility that the lease might come to a premature end during the period of the guarantee, through its being disclaimed by a liquidator (or a receiver, administrator, administrative receiver or trustee in bankruptcy), or through the tenant's being wound up or ceasing to exist, or through an irritancy. If the tenant was in default of its obligations under the lease, the pursuers had the power to irritate the lease, thereby triggering the guarantor's step-in obligation. If the tenant was in default of its obligations under the amortised payment agreements, it could be put into liquidation under section 123(1) of the 1986 Act. That option was also available in respect of arrears due under the lease. If the tenant was not in default of its obligations towards the pursuers, but was put into liquidation by a third party, the pursuers were protected both by their power to irritate the lease (unless the liquidator undertook responsibility for the performance of the tenant's obligations), and by their ability to enforce the guarantor's step-in obligation. I am inclined to doubt whether a reasonable person would have envisaged that the pursuers would have sought to place the tenant in liquidation under section 123(2) of the 1986 Act for the purpose of enforcing the guarantor's step-in obligation. In the event that the pursuers elected to do so, however, it does not appear to me that clause 3.3 of the guarantee could only work if there was some implicit contractual restriction on the ability of the guarantor to support the tenant's opposition to the application for its winding up.

[66 ] In that regard, it has to be borne in mind, in the first place, that the procedure in an application for winding up is controlled by the court. As a general rule, such applications are dealt with promptly (as counsel for the pursuers acknowledged), for the reasons explained by Oliver L.J. in Re Boston Timber Fabrications Ltd [1984] B.C.L.C. 328 at pages 332-333. The delay which occurred in the proceedings brought by the pursuers was on any view unusual: the information placed before me in the present case does not explain why it occurred, although it appears that the court must have allowed a significant period for adjustment of the pleadings, and that the parties under-estimated the time required for a hearing. As a general rule, however, the parties to the guarantee could reasonably have expected that an application for winding up would be dealt with promptly, and that there would be little opportunity for the proceedings to be delayed by opposition, whether meritorious or not, to the extent that occurred. In that regard, it also has to be borne in mind that proceedings for winding up are not adversarial in nature: something which may be overlooked when an application is as fiercely contested as that of the pursuers appears to have been. A person who petitions the court to wind up a company is not however enforcing a right against another party, but is asking the court to initiate a procedure which affects not only the parties to the proceedings but the public at large. It also has to be borne in mind that a company has to be professionally represented in legal proceedings, and that those representatives are bound by codes of professional ethics which prevent them from presenting legal arguments which they know to be unstatable or from making factual allegations which they know to be unfounded. The Guide to the Professional Conduct of Advocates published by the Faculty of Advocates, for example, states:

"4.3.9 An advocate may not accept instructions to act in circumstances where, in his professional opinion, the case is unstatable in law or where the case is only statable if facts known to him are misrepresented to, or concealed from, the court. If such circumstances arise after he has accepted instructions, he should decline to act further ...

.....

9.2.3 Pleadings. An advocate must have a proper basis on precognition or in the light of consultation with his client for stating a fact in any pleadings."

[67 ] If, notwithstanding the court's control of the procedure and the professional responsibilities of those acting on behalf of the tenant, an application for its winding up was nevertheless delayed by unmeritorious opposition beyond the point in time at which the guarantee expired, that would not demonstrate that the contract was unworkable. It would merely be one of several circumstances in which the pursuers would be unable to enforce the step-in obligation: the guarantee might, for example, expire during the period allowed for answers to be lodged or, in the event that answers were lodged, during the further period which would then elapse before a hearing. It was open to the parties to eliminate the risk of such circumstances, and thereby strengthen the pursuers' position: for example, by making the step-in obligation conditional solely on the lodging, or service, of an application for winding up. They did not do so.

[69 ] The most obvious difficulty with the proposed implied term, however, is its lack of clarity. As I have explained, the implied term for which the pursuers' counsel finally contended in argument was materially different from the implied term set out in the pursuers' pleadings (and would, as counsel acknowledged, necessitate an amendment of the pleadings): something which in itself indicates the lack of obviousness of the proposed term. In its final form, it reads:

[70 ] The lack of clarity of such a term is apparent. In the first place, whose knowledge is relevant? Counsel for the pursuers argued that "it" meant the defenders (rather than Callpoint Europe), but that the knowledge (actual or imputed) of the defenders' legal advisers could also be attributed to the defenders. Thus the implied term would apply, it was argued, if the defenders' legal advisers made an "undergraduate error" as to the law. That is one possible interpretation, but it is not the only one. Secondly, what is meant by the word "unjustified"? I understood the argument of counsel for the pursuers to be that opposition is "unjustified" in every case in which the defender or respondent is ultimately unsuccessful. That is one possible interpretation, but not in my opinion the only one. One might hesitate, for example, to describe Mr Stevenson's defence of Mrs Donoghue's action as "unjustified", merely because a majority of the House of Lords ultimately found in her favour. Equally, the lodging of answers to a petition for winding up in order to preserve the position, while detailed consideration was given to the matter, might not in all circumstances be regarded as unjustified, even if the answers were subsequently withdrawn. If, however, one adopts that interpretation, how does one then decide whether the party in question "knew or ought reasonably to have known" that the opposition would be ultimately unsuccessful? The prospects of success in any litigation can rarely, if ever, be predicted with certainty. Counsel generally resort to some such formula as "reasonable prospects of success", without attempting to quantify more precisely the probability of success or failure. Would the test be satisfied if the prospects of success were (or ought to have been) known to be nil, or 49 per cent, or somewhere in between?

[71 ] In short, it appears to me that the proposed implied term is not clearly expressed, and on that ground fails to meet the fourth of the conditions listed by Lord Simon of Glaisdale in the BP Refinery case. If the implied term were to be made more specific, so as to reflect the submissions of counsel for the pursuers, it might be re-formulated along the following lines:

"that the defenders will not cause Callpoint Europe to oppose any motion for their winding up when the defenders, or the solicitors or counsel acting on their behalf, know or ought reasonably to know that, on a balance of probabilities, the opposition is unlikely to be successful".

The fact that that is only one of the possible terms which might be devised demonstrates that the test of necessity is not met. In addition, such a term could not be said to be "so obvious that it goes without saying". Furthermore, such a term would not appear to me to be reasonable or equitable: it would be liable to prevent a winding up petition from being opposed in circumstances in which opposition would otherwise have been appropriate in professional and commercial terms; and it would be difficult to apply in practice, both by the defenders as a party to the contract, and by any court which required to enforce the term.

Conclusion

[72 ] Since I have decided all the legal issues in favour of the defenders, it follows that neither the pursuers' claim for payment under the guarantee, nor their claim for damages for breach of the guarantee, can succeed. The action should accordingly be dismissed.